_ · A STROCW~D C~T~VITY G~OP A Tresentation Gi~en by J, M. ~~SEB Bealieu, Baqshire 26tb June 1984 O O U1 O u BMCo doelmlnt rDr Lagd gonkes : H,J~L hl~~ i~ Y11 II)) CURRENT TOBACCO MARKETING SCENARIO A, ECONOMIC Retail_prices for cigarettes have escalated in an accelerated way as a result of manufacturers underl taking stiff price increase policies to offset both inflationary pressures and large excise tax increases, Consumer purchasinq_power has diminished as most of the free world has been facing a severe economic recession with continuously high levels of unemployment and high interest rates, As adverse economic conditions have brought about a more rational approach in consumers' ways of otpimising their purchasing power, manufacturers have responded by moving away from orthodox marketing practices and into the frontiers of value for money offers ranging from heavily discounted "branded products" to "own label" and "generics", The ability and determination to either pIe-empt or react promptly and decisively in the price-cutting and value for money scenario has given manufacturers the competitive edge in different markets, B, SOCIAL Pressures from the wHO and the anti-smoking lobbies have brought about an ever increasing awareness of the Smoking and Health issue both to the consumer and to the so-called "passive smoker", The social unacce~t- ability of smoking has also emerged as a more delicate issue and a difficult one for the cigarette industry E, to tackle, as more guilt is brought into consumer L1 behaviour, O BATCo document for Legal Services : Health Canada 21 May 1999 Product innovation has become a key opportunity area as cigarette manufacturers respond to the challenge for nsafer" products borne out by consumers' health concerns, The clever and opportunistic manipulation of League Table publications has also proven to work to competi- tive advantage in most instances where this has taken place, C, LEGISLATIVE A more restricted commercial environment has crippled the cigarette industry's ability, through the use of traditional and more effective communication vehicles, to increase overall volume by inducing mote consumption, or taking volume away from competitors by increasing share of market, Government i_mposed restrictions have als6 been bring ing to light the issue of social unacceptability of smoking, as consumers are now either prohibited from smoking under given circumstances or confined to specific areas, Official League Table publications are another key ele- ment in arousing consumers' awareness of the S & H iss- ues, Creativity and innovation in communicating product bene- fits and building or sustaining Prand imagery within restricted advertisi?p environments represents one of the biggest challenges that the cigarette industry is facing, and an opportunity henceforth, Manufacturers' ability to anticipate and~ptaperly deal with government's initiatives to introduce or expand on restrictions continues to be an opportunity area for downplaying the final impact of those measures when ;jl finally put into effect, BATCo document for Legal Services : Health Canada 21 May 1999 D, COMPETITIVE Faced with declining volumes everywhere as a consequence ~ of a reduction in the incidence of smoking, cigarette manufacturers have become more desperate and therefore more eager to undertake aggressive actions to prevent own volume declines even at the expense of short and medium term profitability, O O U1 Q ,, P BATCo document for Legal Services : Health Canada 21 May 1999 FUTURE MARKET TRENDS AND DIRECTIONS The economic recession will bottom out and a period of re- I covery and growth will soon materialize in the industrial- ised world, followed by under-developed countries where re- covery will take place later in time and with a lesser im- pace, Consumer concern over the Smoking and Health issue will co~- tinue to increase in the short term and will eventually be downplayed as pressures upon the cigarette industry should move away to other products and manufacturers, However, the concern will remain present, It is the pressures brought upon the consumer by the Social Onacceptability of smoking that will become a much more intense issue as we move further in time, Government legislation will further restrict the commercial activities of cigarette manufacturers, thus reducing even more the industry's dynamism and ability to manoeuvre from the present levels, Despite a mid-term gloomier economic outlook, which should release some of the current pressures on consumers' purchasing power, the decline in both incidence of smoking and the average daily consumption will continue mainly as a result of the Wealth and Social issues, Thus overall cigarette volume will continue to decline in the short~term and it is more likely that this trend will not be reversed in the medium to long-term, More severe financial pressures will be ~brought upon cigarette manufac- turers who will struggle to make diminishing resources avail- able to fend off fierce competitive activity and to invest in technological development that the future outlook demands, BATCo document for legal Services : Health Canada 21 May 1999 OPPORTUNITIES a, Anticipating consumer Needs The in-depth analysis of past and present consumer be- haviour and well structured actionable research will be decisive in providing us with a better understanding of the changes experienced in consumer values, attitudes and buying patterns, thus enabling us to detect and anti- cipate future behaviour and needs, b, pursuing a Creative and Innovative Product Development Policy As we become more knowledgeable on consumer behavioural trends, it is of paramount importance that technological changes take place to allow for greater flexibility in pursuing a creative approach to Product Development, Product innovation will be a key feature in reacting to consumer needs timely and properlyl c, Effective Exploitation of Non·Traditional Communication Vehicles Effective communication of product benefits, as we move into the product innovation era, will demand from manu- facturers the discipline to continue to explore for more effective communication vehicles within the already rel stricted advertising scenarios, The fostering of brand imagery to sustain and expand on existing consumer fIan- chises will also demand a continuous effort on this line, BATCo document for Legal Services : Health Canada 21 May 1999 d, Operating More Productively Opportunities for productivity exist along the many facets of the cigarette business, From high technology in the agricultural and manufacturing fields, to squeezing sup- pliers' margins, or rationalisation of materials and com- ponents, manufacturers could benefit immensely by optimi- sing resources that can in turn be applied to Innovative Product Development, or to compensate for profit shott- fall due to volume loss, e, Anticipating Competitive Moves and Leading the way The opportunities that the future environment will bring to us require the need to anticipate competitors thoughts and plans and to be adequately prepared to lead the way or to react promptly and decisively, BATCo document for Legal Services : Health canada 21 May 1999 CONSUMER NEEDS, ATTITUDES AND SEGMENTS "Value for Money" is an element that we have became familiar within the present market scenario and one that is very likely to stay with us for a long time, Consumers have be- come accustomed to getting more for their money and more so as manufacturers have proven their willingness to sacrifice their own revenues as they struggle to retain consumption, Added value offers, smaller pack contents, price cutting branded products, unbranded products, and generics will con- tinue to represent an important segment of the cigarette mar- ket and a glowing one, Consumer demand for "safer products" will continue to rise but not at the Dace experienced in recent years, Although it is a recognised fact that the cigarette industry itself has overplayed the need for health reassurance brands in the market place, some dissonant smokers obsessed with their health concerns but unable to cut down or give up altogether will comfort themselves by sticking to low delivery products, The growing concern over the Social Unacceptabili_ty of smoking will draw consumers' attention to product offers that can com- pensate, at least psychologically, for the guilt emerging from the supposed threat brought to the health of others. Side stream smoke and the unpleasant smell of ash add cigarette butts will gradually emerge, among others, as key tangible elements that can be dealt with to a certain extent to a~lel viate smokers' guilt, Some consumers will also become sensitive to alternatives to conventional cigarette smoking to obtain some of the pleasure and benefits of the smoking habit in physiological terms, but without facing the pressures that emerge from the Health and Social aspects, O BATCo document for Legal Services : Health Canada 21 May 1999 The core of the smaking~p_opulatian will, however, remain unchanged in the medium to long-term, Those consonant smokers that truly value the pleasures of the smoking habit will survive the pressures from the Economic, Health and Social fronts and will stick to cigarette smoking and to the fundamentals of it, That is, those consumers that smoke simply because they enjoy their smoke and they enjoy the physiological and psychological dependance that smoking creates for nicotine, BATCa document for Legal Services : Health Canada 21 May 1999 PRODUCT TRENDS a, CONVENTIONAL low tar/nicotine with taste, or taste with low tar/nicotine expanded tobacco multiple packs content (smaller and higher than 20's) un-branded, generic products b, NON-CONVENTI ONAL short, satisfying cigarette low sidestream smoke reduced ash and reduced cigarette ends reduced unpleasant aroma of cigarette smoke, ash and butts extruded cigarettes c, ALTERNATE snuff nicotine aerosol nicotine chewing nicotine puffers (refillable or disposable) BATCo document for Legal Services : Health Canada 21 May 1999 PR~JECT ORION EIARKETIWG Oa3ECTIVE : To pre-empt/avoid potential volume decline from consumers pressed by the uncomfort and distress caused to non-smokers in social and work environments, BRAND POSIT~ONJ~NG An offer that provides mature, dis- cerning adults with a low tar product alternative that brings comfort and reassurance to smoking in social/work environments, whilst delivering good taste and satisfaction, TARGET CONSUMER Demographic · Middle class and upscale smokers, 25 to 40 years old, predomi- nantly male (?O$)I Psyehographic - The guilty smoker obsessed with the pressures brought upon himself by the negative impact of his smoking upon others, Both the socially insecure individual highly sensitive to personal rejec- tion provoked by his individual be- haviour, and the self~conscious ma- ture smoker genuinely concerned with possible harm to others caused by his actions, O BATCo document for Legal Services : Health Canada 21 May 1999 PR~DUCT ATTRIBUTES A conventional low-tar cigarette that provides a well balanced, satis- fying smoke, plus: low sidestream smoke reduced ash reduced unpleasant aroma CONSUMER PLATFORM Copy Headline Keep your friends around and ,,~~~ SMOKE AT EASE Copy Body With new ZENITH cigarettes you can lay back and enjoy a good smoke, Puff by puff, without disturbing your surroundings, Only new ZENITH delivers the perfect blend of advanced cigarette techno- logy with low tar taste satisfaction, A delightful atmosphere of pleasant aroma with nearly visible smoke and minimum ash residuals, ZENITH K,S,P, A new generation in smoking techno~ logy BATCo document for Legal Services : Health Canada 21 May 1999 PROJECT QURRTZ MARKETING OBJECTIVE To capitalize on the potential down- fall of the smoking habit as the only means to achieve nicotine satisfaction by presenting an alternative way, free of Social/Health concerns, BRAND POSITIONING A product that offers complete nicotine satisfaction through a revolutionary method of application, for hardcore smokers desperate to quit the smoking habit because of Health/Social pres- SUEeSI TARGET CONSUMER Demographic - Middle and upscale smokers, 30 to 50 years old, both male and female, Psychcgraphic - Hypcchondriacs and social paranoic adults desperate to quit the smoking habit, BATCo document for Legal Services : Health Canada 21 May 1999 PRODUCT ATTRIBUTES Small spray can with mouthpiece that releases nicotine aerosol into respiratory system, COMMUNICATION PLATFORM Copy Headline Forget about smoking ,.~...~~ GO FDR A QUICKEEK 1 Copy Body How can you say no to cigarette smoking and yes to nicotine? Presenting New QOICKEEK nicotine aerosol, Instant personal relief without the smoke, ash or odour ,,,,, and with fresh mouth aftertaste, NEW PUICKEER1 No tar with nie, is what makes the body kick, BA'TCo document for Legal Services : Health Canada 21 May 1999 r' r. STRUC~I~P QIEATIVrr"rl Paper for Discussion I G,O, Bro3ks a~ ~~~ Tcbac~ Marketing ~a~ CCnstraint8, ~lg~8 d0~0Ttllt~iti~~ The principle m~straint ~m will inhibit grzwth in d nari(ets is Pricel stia largely ~o increased 8~m of a fcrm or a~c:~ Rlthcugh ~ balance is veri fine, Coverrm~ appear to h faud the nltinate ~t term policy which will s~sb both the e~~r and the 6 c a 1~ ~ ~ fonn ot ever ~b·g$ taxaticn an d~e~s~ i say short ~ because there will mrre a ~ ~ cigarettes ~a too expensive br the ordinary m to ~~ to ~~ in this pleasure at his present le~l~ ~ danger area, with soft ad ~ drug prices Bll~, will h when the ~ a equivalent; unfortutlatelY, drug traffic is not controlled in the a way a d~~~· I~ever, this topic is tqand the s~ of the current semi~arl MB~ismg restrictions will ~, in thense~sr affect the total ~21 ~ will inhibit nr h~ activity at a mnppni level, calling for eame ingenious metjods of comwnicatim· I suppcct this stater;ent ~ be survey a advertising restrictions ~i6 derro~s~ts increasing sales in ~$1~ s~a~~sl slroking and Health ~gess will increase, but as in be pastl will b little effect (e~g~ pack Haming Clauses bemre part d the pad( deia in a ~B ~~ period) because Df the long tenn ·W d the cL~ health me sccial ~~e~n~ of srroking because of environrrental ~1~~ will be a rmch bigger pr~le ard althcu(/l largely irsoluble, will be a rrajcr challenge to the I~st4~ Bse then very briefly are the ~n factors in the current xeMric: Constraints Mlqr and OpFe~t~n~i,r increasing tdxation ~a~ products Wv~ restrictiMs Bett~ldiffer~ c~mru~icati~ s~t4 ~ial/~sm~ntal prd3lems Sihstr~l~~ srroke reduction Sc B publicity S r B research h) Future~I~e~s Oirections, Ccnstraints and qpartunities me free lJorld cigarette ~~ grew at a avera~ rate of II between ~18 and 1980~ ~cwev6, g~wt~ in 1981 slewed to 0.61 ~~a sales have declined in 1982 and 1983 B II and 1,29 respectivelyl ~ gain reasors ~ this are the inpact of ~ ndd ~esr~ and ~ M~ price increases in key rarkets~ Ihe wtlmk to l9B8 is one of sara recovery froo the recession lxlt with continuing pressure fmn price ~asel and ~okinq issues. Marketing Departnent's forecast to lg88 is for graJth to 0,5% per anmm O is a forecast ed recovery as cppcsed to real gra~thl vl III Ila BATCo document Sr Legal Services : Health Canada 21 May 1999 12- On the evidence of trends ard past perfonrance, Marketing Department's fo~cast is for a further but rraroinal. decline in sales, plus a a3ntinued decline in our Free World s~e t~ ls.l%, anj share of the Big Fo~ to 35.6%. The inpllication of this forecast is tt~at ~Fnilip t~rris could overtake B,A,TI as the ~o,l CcerpaJy in the early 1990'sl In terms of the product itself, the followin5 extract frcm t~ tnarket E~ansion Lbc~ent succinctly decribg the pwiticn as I see it: in the face of escalating prices, c~w~rs will ~ieed to justify their habit and their c~d~ice of brand, an1 they will increasingly dermrd product quality in laoking tens, seeki~g better t~sting and rrore satis~ing products at all de!iverl le~ls, The fell flavour segmrzt will continue to acccen~t for the IMj3r ~OP3Ttioc Oi sales in rest narkets, and the deliveries of full flavwr brands will stabi~ise at or above a threshold of 12-14m3 P~NF bela~ ~iuh arrent ~111 fla~ur ~okers will ~ reluctant ta m~ 'Ihis threshold IMY t~ Of penranent significance as consumers seek value for tmney in terr~ of srpking pleasure ard hence satislactionl Duriru~ the five year perio~, the mild and/or Ic~er tar [0-9ne P~WT~F) segrmnt will ~ensre mue significant in scae n~kets and t~ ultm b tar (O-frg RaJE~F) segr~it will reahin a rdnar se~nt in rrost rrarkets~ In both d these sear~nts, technical inr~vaticn wd careful product design, air~d at producing rr~re satisfying Icwer delivery prcducts will be(xme increasingly irrportant in gaining se~nent share. The constraints will be similar to thase mt~ined in the first section but there will be ro technical constraints m manufacture or inmvation since the industry ~s dan3nsCJated in the past that it ~n adapt with ir~3vatia~s su~ as e~anded tobaecol hit speed rrakers, linked rrakers/packea ard t~ use of lasers and ccnputers early in their develcFmntl I~e opp3rtunities are there if we take then and will largely involve jsm9vations based m the a3nverrticral cigarette f~rrrat, We rmst rraintdin satisfaction (ilel nicotine), good Ir~wlic; and appropriate snoke fla~ur, against a backgrolnd of slck~ly decreasirg 'moking rachine' deliveries (forced by Go~n~nt in scr;e countries) ard the need to be innovati~ in terr~ of product appearance and possibly Kwel tastes, Constraints OpForttn~ities Ueclini~ or static narkets Bridging the l~rg threshold Ibndatory delivery reduction InnoMtive product desi~ and appearance Be-classification of tar bands Novel tastes I~dvettising restrictions Social nuisance ps~lerrs BATCo document for legal Services : Health Canada 21 May 1999 -3- A FREE WORLD CICdRETTE ~U~ET BXCatrGBTS ~AR~TINC DElbRTME~ TREYD FORECASTS B iii io os :978 !982 1983 r988 ~1 annual CrD~I~ Act, Esr~ F'east 78-32 83 83-88 oral Free World 2723 2831 2798 2870 1,02 (1,22) 0,52 vebped Uarkets !654 lb8(] 1666 1614 O,IX (0,82) OllX eloping Harkets !069 1151 1132 1196 1l91 (1172) 1,1X Group 566 574 546 ~36 0,3X (5t0X) (o13X) ~Vlp ~or:is 370 i~B ~iO 52S 5,5Z 0l41 2.7X ynolds 272 290 213 260 1t6r (5,92) (0,9Z) /licirandl 166 183 ~80 182 2,51 (116!) O~?X IC FOUR - Sales 1?74 1505 1419 1j03 2,3: (3.i!) 4,62 - 2 Free World .I 50,52 1 53 ,22 52,11; 32,42 g g a T POSITION.~J1K~TINC OEPARTWEKI TREND FORE~UTS I I I - ------ Billions 1978 1982 1983 1988 Annual Crovth Races Act, Acrl Acr, F'cast 78-82 83 1 83-88 oral Group 566l1 57412 545l7 536,4 0t4; (5,09) (0,321) ree World Share 20t8X 2013X 19t52 1847X a[ aia Four 11l22 38,11 31l6X 35,52 B.il. T~ Co ~ '.td, 378~6 398.4 590,4 403,0 (2,02) 0~6f: ,a~T~ Induscries" 187,5 17518 15513 133.4 (3,02) C B,AIT, POSITION I OPERXTIIC COMPANY FOREC~ISTS Billions 1978 1982 1983 1988 Annual Grovth Races Aet~ Act, Act, F'cast 18s82 83 83-88 oral Group 566.1 574,2 545.7 588 ,1 0,4t (5,02) 1,52 rec World Share 20,82 20.32 1945r 20.52 Pi Big Four 41t2: 38tU 37,42 39l1X ,h~T~ Co. Itd~ 378,6 39814 390lb 1l0X (1,OX) 2,02 .d.T~ Industriesf 18715 175,8 155t3 !58l1 0,42 O n L1 ~ B,I11TI Industries includes, BATUS, Imasco, ~aefl, and Interversal O BATCo document for Legal Senrices : Health Canada 21 May 1999 -6- c) Qlrrent and F~ture Cevelonrent of Corsuner Needs, ktit~es and Se9nents --- ~ of ~B has been toucfid on in section (b) but I wwld like to reinforce y ~~ on conswrer needs ~e~ It mnnot h ddd ~t im3ge and packaging play the irajor role in cigarette sales ard ra IMttttr ~ good the pr0~u~l these features nust be the driving mm behind ~n?ind success but it is the product ~~ is ~ foutldaticn and sustaining f~Q behird ~ success, especially the satisfa~o element of d~g~ mis is not necessarily related to delivery levels, bearin! in mird ~ total deliveries q not he a reliable ~s~e of irrpact d satisfactico a Perceived B the de a individual puffs of the cigre~e~ We rmst therefore avoid judging the mddng quality of orr cigarettes a total delivery since m consurrer is able to assess Ms experience other than (r a Puff B ~ basis ad aid probably assess a 8 puff cioarette as m3re ~J4$ than a 16sl 10 pff d~e~e~ Rlternatively, ~ 1$ cigarettes with the sane Puff nm~er would he judged dissimilar in strength if m had a bigber nicotine 6U*V (i.e~ a nicotine r~io)~ In the end we dst recognise that it is satisfaction ard tie pleasure of sr~o~ng ~~ den se4 ard if mil were llot st the ~le world would quit or DR O ultra b delivery ci~~tss~ me he that ay dcn't reinforces the inpartana of produciq atiaQ~, I~ to ~c' products ~i~ the ~smr requirel~ At full flaKwr delivery levels this should be a very mg taskl but w d3 not appear to achieve it often ~~~ At ~ delivery levels it is rmch rrore difficult, but when it is achieved as it is with Barolay, whirh retains these easy ~, ~ i1P3actl MB navw characteristics, a a~ssful launch is rmch easier. It must be arphasla~ that ~gs a not the end of the Product Developrent task, that with the increasing loss of cormuni~~ rredia the product will bn to supp3rt ~e bra7d nore and more and above all, sroking ~~ be a pleasurable e~im~ where satisfaction is gained with the minirnrm cf$~~ Atutudes will mt ~~ regarding be basic Iq~~ fiDm dgarettes ~ consumers vill ~~ increasinoly inhibitd bj social nuisance aspects, especiallY 1 other peoples ba ad in n plblic pses~ ~ever, m could forsee an eventual backlash to this scenarior prcducts ad pckings with ~d they are able to "stand up and be canted~ Innovation here in tenrs of appearance will be an opportunity, enmnpassing pmp, cheaper prcducts, lower sidestra and scm dsnP i~o~ of difference alg~ 1~ ~~er~e~ Intenrs of se~, thelnderlyingtrend for ~~~t~lsnb is cplar$ ard 8~ to 1988 10 forecast at 1~81 per annum ~~ is three tim3s the rate of g~ for ~ total free bid market. Anl acceleration ~ th, rate of recwery fron recession will benefit the segrrent ne than local brands 1 a BATCo document for Legal Services : Health Canada 21 May l899 -5- Within this, the USI~ subsegmnt is forecast to grtw at twice the rate of the UK Va s~-s~gnent and hence I believe all pro3ucts should rrove in the directicn of US blended cigarettesl Frcm a desi~ point of view t'lis can only be g~d news since it is rmch easier to rraintain satisfactica~ and flavw with this style of product where Burlej tDbac~ gi~ n~re taste and irrpact mnpared to Va products at the sane delivery level~ In delivery terrns, trerd data ~wld indicate an increase in lar delivery products but this picture is confused by delivery ote93rl, league table classification and butt length differenees~ In general, if delivery data is rot se~nted, the trend is tpJards a threshold at 12-15rrg of tar for 'full flat~ur' brands with Icw tar brands j~lC~nl grcwi~ very slc~ly and ultra ~k~ tar products static m c~clining (except where Barcla~ confuses the pattern) hence t~s threshold will be a key c~llen3·e far the future~ Cigarette length will be g3verned largely bj local circ~arstanees but ~h~ere Fossible the trend will be towards longer length. ~e rcenthol segrrent appears to be static but has always shown potential for greater thingsl d) Olrrent and Future Products Trends E·luch of this secticn develops ~om the assla~tio~ in the previous sections and is best slmnarised under the folleJing options: 1) C~npensatible Cigarettes The idea of a cigarette ~i~ will resFmd in hliverj terrs to increased dT~d~ effort is not new but is still an opportunity which wwld satis~ the need to bridge the threshold between ~n~ine lDw tar and full flavwr produ~ts~ Hcyever, we should strive to achiet~ this effect without appeasirq to have a ci~8sette that heats t~e league table~ Ideally it shwld appear to he rr, different fmn a no~al cigarette thus reducing the likliho~ of a cx~npetitive ch;lllenge. It should also be capable of delivering up to 100$ nrre t~n its machire delivery. I have chosen this ratio because I believe anything rrr,re than this ~wld lack cr~dibili~j fmn a conswers FokB of view. ~I"nus an 8nq product capable of delivering 15-1Q~ would allow the current full f~vwr srroker to continue to s~d~e with reassuranae but n, loss in tenrs of pleasure~ 2) L~ Cost Prcducts Whether in the form of 1008 expanded tobacco or ultra-slim cigarettes, this will be a them ~uhi~ will continue to be of inFartance e~n if Isrld e~3ncc~cs mre art of recession, since as previously ~ntioned, taxation all continue to fuel price inaeases~ ifnether these la,rost benefits are passed on to the ccrs~ie~ or used to increase rmrgj~ on a srreller sales ~bnre will deperd cn the relativity between taxaticn and selling price, rS BATCo document for Legal Senrices : Health Canada 21 May 1999 3) Visually Different Products In this area, int~vaticn in decorative effects, dimensicns and rwJ structural flter technolo~ will all have a role for ne~ pt~ducts~ Indeed they may lead to solving so~re cb our btl~er problens such as co~pensatible lar mst c~ kw envirc~Yrental polluti~ produ~ts~ 4) Menthol Alternative Fs stated before, there should be a viable alter~tive to nwthol, especially dien cne aawiders the popularity of Kreteks (euger~li in Indonesial ~hny ideas Iray have been atta~gted before in this field but we should try to get the Jrnle brard packaa in its m~st acceptable form as was d3ne for Iccol when it was in i~s early days. I 4irb;rtij I have not so far touched on this s~je~t sine I hold little rppe of finding a solution short of negli~ble retention of RP~F ror~ined with Icklgas~f~se~ If this were possible it ~xlld be a useful inrovation~ The c~nces I fear are very saall~ 6) ~ ~viroanent~l Pollution Cigarettes Whilst I believe sorre progress has been made, the solutions to room haze, srrell, irritaticP1 and general cigarette debris elude us and I believe are largely irsoluble~ In order to slibke one rust create sloke even ii this is restricted to that which is e~aled, we will still have the problas outlined above, me possibilities cutlined above are hX devastatingly creative ~wt they are practical ard to ny view, of irportance~ I ~ve selected the follc~ring as my prpject proposals for discussion: i) A fully ampensatible c~garette As described above, I: see this as a 6-Bpg product which delivers 12-16rng when extra dr~ effort is applied. The effort should not be excessive. 'IZlere sh3uld be little or no visual difference between this and a Mnral ~S filter product an! nrtainly ro cpFalumi~j for cwpetitive atc~ack, It should be a blenj~ed prcduct cc heavily Irodified Va~ in appropriate narkets~ Its appeal will be to full flavour srmkers and should ~t therefore ~ave a Icw tar irrage~ It should rat rrajor an ter~310Fn, but shculd ~ve "the pleasure is Q back" t~e reassurance. U1 Its rmtinuing sale will depend ~ trial and therefore it rmst ii ~ P ~a tLe ~o~se. C .111/7 BATCo document for Legal Services : Health Canada 21 May 1999 I -7- Whether trough Govenment pressure to reduce deliveries la fm cons~mer reassurance, this product could bridge the threshold which I believe will be a rrejcr problem for the I~ustrj in the rv3ar futurel ii) A menthol alter~tive 'Ihis product ~oul~ be a ronral 1(5 cigarette, of the rrenthol style but using either ariseed or ~nt~ plus aniseed as an overt ~odifier~ It ~ould be a full flaMur product at the outset with a ~od quality US type blerd to support the flavour~ Its platform could be as a menthol alter~tive or menthol plus the extra spice~ 'Ihere nay be sw~ benefit in clean aftertaste, freshness, and health~ It may Mturally ~ve a feminine F~ofilel GOB/JS 19th June 1984 BAfCo document for Legal Services : Health Canada 21 May 1999 THE DEVELOPMENT Of THE TOBACCO MARKET - A PERSONAL VIEW 1960's ~S~RKEIS AUTHORITIES CONSUMERS ~------------e MANUFACTURERS j A CLASSICAL STRUCTURE NAT1ONAL ~RKETS 1980'5 MARKETS -- PRODUCT FLOWS - INFORVPITION FLOWS - CONTROLS AUTHORITIES CONSUMERS ~HlliACTURERS I A CONTROLLED MARKET WITH STATUTORY REPUIREMENTS, PAN NATIONAL BATCo document for Legal Services : Health Canada 21 May 1999 PRINCIPLE CHANGES IN THE MARKET STRUCTURE a) AUTHORITIES STAGE f (M1D '50'5 - MiD 60'5) ~RMBION / PUBLIC INFORMATION ~ Rational, informative campaigns - smoking causes lung cancer. Result: Tobacco market continues to grow, smoking incidence unaffected. · Miniscule share of voice vs, tobacco advertising. ~ Rational argument vs, physjalagical and psychological habit, STAGE 2 (MID SO's - MID 70'5) ~ Advertising restrictions on both media and content. ~ Smoking presented as a dirty, anti-social habit, Result: - Beginning of polarisation in smoker/ non smoker opinions. - Total market still growing, inefficient media-~greater visibility for tobacco advertising, not less. Physiologicall psychological dependance governs smqker behavior. STAGE 3 (MIO 10'5 - MID 80'5) · Delivery limits, O ~ Advertising bans, Ln · Smoking restrictions, Results: · Punitive tax increases;declining markets. Y - Switch to ~ow tar ~ increasing markets (compensation) W · Smoking restricted to a minority habit. Growth of non-smokers rights movements, I 'Soft' advertising/ offshore media, · Low tar a blind alley, BA'TCo document for legal Services : Health Canada 21 May 1999 STAGE 4 (MID 80's - ? ) ! aasio:nclM / REGULATED ~~DUSTRY ~ Tobacco treated as an ethical drug ? · Mu~tinationsl approach - WHDIUNtTADIEEC etc, · Packaging limitations · commodity style~ I No endorsement of low tar, ~ Pharmacological approach for existing smokes, Results: - Declining markets - Switch back to satisfaction amongst remaining smokers. - Growth of smokeless tobaccos 1 - New brand launches increasingly difficult, BATCo document for Legal Services : Health Canada 21 May 1999 b) MANUFACTURERS 1960's ~ GROWING DEMAND I NATIONAL MARKETS I MU1TIFARIOUS PRDDUCT SPECIF~CA~IONS 1980's ~ CLASSIC MATURE INDUSTRY I NO MAJOR PRODUCT INNOVATION IN 80 YEAAS~ OVERCAPACITY ~ STANOARDISED PRODUCTS I PAN NATIONAL MARKETS BATTLE FOR MARKET SHARE - BENDING THE RULES - SHORT TERM STRATEGIES (PRICE WARS) - PRESSURE ON PROCESS INNOVATION - CENTRALISATION I RAIIONALISATION BATCo document for legal Services : Health Canada 21 May 1999 ci TRADE KEY CHANGES: i. TRADE CONCENTRATION AND COMPETITION HAVE INCRERSEO. 2. TRADE IS IMPORTANT TO TOBACCO INDUSTRY AS INFORMATION AS WELL AS SUPPLY CHANNEL TO CONSUMERS. TOBACCO INDUSTRY INCREASINGLY SEEN AS A SUPPLIER WHICH MUST CONFORM TO TRADE'S MARKETING OBJECTIVES, ~ PRICE COMPETITION. PRESSURE ON ~GRG~NS~ ~ MARKET POLARISATIDN: ESTABLISHED IMAGE BRANDS VS COMMODITY BRANDS BATCo document for Legal Services : Health Canada 21 May 1999 d) CONS~S UMER HABITS & ATTITUDES FACTORS INFLUENCINI; CONS 1, SMOKING ~ HEALTH · Traditional disposition to believe smoking ii harmful was offset by the widespread bel ief that it war a majority habit. --,Heaith question seen as little more than an occupational halard. · Widespread anti·imoking propaganda has destroyed the consensus between smokers and non·smokers and exposed the myth of the majority habit. i Non·smokers have become proselytizing anti·smokers~ Smokers have become increasingly defensive · the only resolution ii to quit, iEffect most marked in upper socio-economic groups) 2, PRDDUC'I IBRAND RANGE · The shift away from smoking quality: Plain Brands i Product quality principle factor in brand choice. Filter Brands · Product differences less marked. image factors become principle factor in brand choice~ Low Tar Brands~ Smoke constituents become principle factor in brand choice. · But the shift to Law Tar is only partial and has lost momentum: · Uneasy compromise with both smoking quality ~ image projection - Uncertain health benefit - compensation. · Highest penetration amongst those under lort pressure or pre-disposed to accepting compromise, - OECD r~rkets - Higher socio·economic groups Women O BATCo document for Legal Services : Health Canada 21 May 1999 3, SOtID/ ECONOMIC Cigarettes are the cheapest form of making a personal image statement, But,ln some countries use of any cigarette is now a negative image statement, Cigarette prices are generally lower in real terms whilSt purchasing power has risen dramatically. But The economic accessabilitY of cigarettes coupled with increased consumption per smoker has led to consumers becoming more price sensitive, looking at the total cost of a commodity product rather than the unit price of an image brand. the search for the "risk free" society has closed off liner of defense of the smoking habit, Under this pseudo philosophy the benefits of any product which lan potentially cause harm are irrelevent, BATCo document for legal Services : Health Canada 21 May 1999 C THE FUTURE MARKET SCENARIO No directional shift in the Situation/ strategies of authorities, manufacturers or trade, Smokers will become an increasingly beleagured minority, particularly in OECO larkets, whilrt the social cachet bestowed by accessible status symbols such as cigarettes will delay this development in the Third World. Smokers wilt become increasingly disillusioned about the health benefits of reduced deliveries, The only justification to keep on smoking will be the pleasure it affords, albeit with a recognised long term risk, A RETURN TO SMOK~NC QUALITY The following project proposllr are designed to live a clear quality advantage to our products in two distinct market types· BATC6 document for Legal Services : Health Canada 21 May 1999 DAVID CR~IGHTON FRONT ENO 1IFI 1. Strategic Objectives' To improve the taste and flavour oi i~e iirst few puffs on cigarettes~ most likely to make II It is assumed that smokers are j,bgement~ about the ·i$3rette quality in the first Tew puf~sl 21 IL ii assumed that "oeed" Tor smoking is nighest when a cigarette is lit. 2, Constraintsi iiople do not smoke like machines~ It is understood ~~~' they j, lake lone~r puffs at the bsginnine 3~ which will give an ef~ective front cn~ lift. Rny aldiiivel 'front end lift' shsuld be notes; to remain crediblel People will not want to change tneir normal' smoking iatternsl Front end lift is lineiy to disturb no~mal smoking patterns, Smokers may have to learn ~ow to smoie these prPducts~ 3~ Product Sp~: Can be applied to all cigarettes, hut not effective on low delivery products~ 4, Technical How: -- O Several ideas in R & 0: 1~ alanced normal continuation with ventilatior~· C13 ,.I,, BATCo document for Legal Services : Health Canada 21 May 1999 CC)NFE~ENCE ~WI~itr(fTI~G - WENT -"Wj~.lIGiiTS" NEi, iiRANO LEVEL First 3i ail I snould point nut mit our market ccntains Rajor oppaIrunities that, uiinin tne context al:hii paper, 1 nrve cnosen not ts cover· Tningr ii~e price or;nds are really less a result oi wnat reaction to very speciiic people Hant to soKe than they are a envi:cnner,:ai greiiuns. It i nor tha::hey are no; valio, it ii iinpiy that taey are not truly tied to the long term evolution a; rckersl needs, ihereiure, I'193ing to pretend for the Inomen: in;; tnese poue:iJi contenoeri oon't EYil:. Moreover, i intend to De Fairly oo3mat-c aacut tne overall direction oi neldeveiapnl ;)oortunitiei clearly axis'. for brans wni:h go "agaim the flow" or im~erl?ing cmsllie: needi. This Fiper reflects a view on the criteria oi new developments directly a~ta~ned to longer term consuer neao~, New oianj development nas the cnana to go all wrong for people like us as we s;:uggle in the ware of a major cmvulsion like ii;rfL ciga:'~res. There are tour tempting bur dangerous rwtes: ;~ 13 oecvne procuct instead of Draod developers · asslming that trmnoiogy holds s;n~e Mgic key to the future, 4nclcers have, do and will always ally orands. Forcing new $and jevelo~nenr into a p:enature PaIriage rirn product tecnnolopy li;l puiaiy see us selling knai we can make instead of what people want to buy. ,,,12 ul BATCo document for Legal Services : Health Canada 21 May 1999 2. To say "nOw:ne parry's ovt~r" and in conjurcti0n lith a proouclitechnoloEy oriented mentalitp awiotl today's aaT~et in favour of s~ne vague notion of desi~ning for me "lonC tin" - as if the future coulo oe separated from next week, 3.;e succume to:ne "wha; haven't we tried yet" scoooi of orand development, "nas anyone tried a blue dot on tne filter?" 4. io refuse t3 Se! me last Convulsion - light cigarettes - as a fact of life ins:eao of an opportunity thereoy drainio4 valuaole time ano resources into seller and increasingly less relevant nicnes on the tar scale, ihe real chalieqe oi new orano development is the next convulsion - or next series of lini convulsions. In Pnada, and I'in Sure in many developeil markets, light brands nave significantiy changed the underlying motivations of smokers. We must understand these changes, To do so we mus: understana wny the pnenomen0m occurred, in what context - wnat cnips are left on me ~aol: and in what form, and then turn this underaanciq of new needs into relevant, a~ke~ao~e orands, her Orano develoFmen; canno~ occur in isoladon from the past. LICHTS·NEGATIVE PHESSIRE P~~ M NEED FSR "LESS" Possibly more than in any other industry, cur ma~et Jevelwment is g~ided by negative pressures. Whether it is scientifically valid or not, O tne sinple la~cetirvJ truth is that YnGerS believe that smming oc~ BATCo document for Legal Services : Health Canada 21 May 1999 je:siijires their personal re.l-oeinj, me propo;rlsn If s;olxe:5 wno a?re:? wi:n tne narecnl "Eclting is dangerws for anyone" (ve:sus neavy users 31 oea,ie who uZr' unwellj rose I;eadilv fro 48X in 1971 to 67% in 1976, Tnzy ci1 nor indic; s~ecifit brands, products or iMnoaereia use. Tney irsiel~ smcriog, imos; one in two (46%1, when aslced how many ciFanttes a day :Jd oe safely smoKed, answered - none. Pr:-;iah~s, these cancled consuin2rs had a l~nited range of op:isns asen ;i~ tnem · essentially pcit or cut down. ay tne middle sf the decade, tne mij:rity of Cana~ians uno smoited were trying or inte~dine no try these aiter~atives: 1976 "EMOKING IS URNCEROUS FOR ANYONE" 67% r#iGV3 ro $UIT 26X INTEND r0 CUT DOWN IOIAL INT~ED TO li~OIFY 5R iillEi) TO PUIT - PAST YEAR Ilf TRIED TO Ci)T DOWN - PRST YEAR 5~X fortlnateiy for the tooacco industry, neither of these two approaches proved very successful for smelters. In 1976, although llw had tried to auit ano 2~ were ready to give it another go, the actual rate of cuittinS "within t~a past 6 months" was fairly stable at a little less ,,,/4 O BATCo document for Legal Services : Health Canada 21 May 1999 tnan $, Fewer tnan:nis sa0e it to a yea:~ Dagire the vaSI numoers of smol(ers crying ant intenoing to cut down, the claimeo rate ~f daily uage rose from 20~5 to 21.1 eilant:cs a day (1971-76), Our calculated aaiiy usage rose from 2!~1 to 2).8 cigarettes per day (1971-763. Yeg simply put · pecple who were s;noKers incIeasinoly wished that tney wer~n~~, in the lace of houn:ing iniormatin on smoking ano health - out couid not find a means of dealing with their concern, li3"t?' sranos were already availaale - tcey lere tilter things that old women jmokeo - dul Ine product solution was availa~le for interestco DOkelS. Altnougn these brands snored modest development in ~he early 1970's, it was not staggering and generally, was not well un0erstood ~y tne mart~eterr : 197! 1972 1973 1974 1975 ~iCH DELIVERY -19r,3 t iil·2 40,8 lg~g 38.9 37,6 MrO OE1IYiRY - !I-i8 mg 38,2 J7, 4 57.8 38,5 13W DELIVERY - i0-IJ mo 7,6 7.7 8,3 a~4~ 8~B VErlY 10W OI1IVEitY · 5 rng ,3 .1 ,f .J M~T~I 6,4 6.5 6,8 6.9 7~2 OT~RS 6,3 7,3 6.9 7~0 7.0 SMOKING IS DANGiROUS FOR PSJYOEJE 18% 59% 5636 64% O O ,,,15 BATCo document for Legal Services : Health Canada 21 Pay 1999 "L13":S" in hnaoa w~S a 9:anC n0i a oroduct revolution. ine induslri triea fiinrs, cnrcoai, tocacco lienos, advertising claiss atiempling, generally unsucczssiuily, io solve ;he health proolem in pnduc~ arms while virtually ignorine In2 paraeoxical nature of tne smokers' dilerma. Rltnouan they lisned tney ~eren'l, they were and virtually every efhri fo:cec tnen to cive J3 tne things :ney continued to smd(e ic:. Telling smolce:5 enat you hao a ~;sduct was not the proolel, reliiq:na ehey could smoke it witn nonour waS~ In iY74, manu~a;tur!rs ajreed to plil tar and nicotine numoers on the Sites Oi paCk3gE5. Smo~~rs whC irisned to to so could now rate orands on a scale Gi "oanger". ii3niness, instead of oeing an aosoiule, became a reialive thing. Close on tne heels of this key piece of information and the even more iqortant foundation of relative mildness that it created, manufacturers aegar to introduce lighter brands instead of products. "Lignte:" was successfully le~ineo in language smck2rs could understand as "All the experience of Player's in a lignter cigarette · Player's Lignt," Alteougn we remain coraitted to making good products, it would oe incorrect to su~3~5; that corporate success in mis hard f3Ught oa~tle has really had mucn to Co with who made the lest cigarette at a given level of strengtn, winning has been predicated on good brano marketing. Companies with strwlg, dear, well definae trademarks and the courage to introduce them in a ray that war tNe to their essential nature won, Companies with lesj relevant or indistinct tradanarks, and con~anies who tried to twist ;ne oasic rationale for tne trademark, 1DSt - and lost ~adly~ O BATCo document for Legal Services : Health Canada 21 May 1999 rnds speaks for itself. Ne~ ~ranes The c0mnereial success of lignt o were nichiY successiL!, are mere tare Icts of tnem: B~A~S LAUNCHED 1974 -1984 1981 SHARES (12 MOS, "AY) 11.7 ITL - P1AYW'S LIGiiT EXTRA LIGHT 2,7 i~S~ - EXPORT d M31UM 2~j LIGHT MILD EXTRA LIGHT ,4 ROTH- ROT~~ SRCIRL MILD 2·8 U(T;1A 1I~iT .6 ITL .DU ~JRIU S~EClm MILD 2.72~4 LIGHT ROT H- CilAVEN SPEtrb #IU] I.I ULTR1 LIGil5 ,3 ViN~HOL SP~ MIID ·S IT1- MTINEE EXTRA MILD 2,1 BErt·I-BEIyUERE EXTRA MILD ~ 1ItHr 1·4 ITL - PETER JACKMN EXTRA LIGHT :~ ROTH- N0,7 1ICL1T B~H - B ~ H LIGHT ,7 TOTUL EXTENSIONS8 IT1 - C~O EXTRA MILD BE~H - \IrSCCI]NT iii PS~ 100'5 ,6 R~R-YANTACE ,5 H3R - VRNTRGi LIGHT .9 IT1 -MEDA1IION ,6,5 i~e) 86H - ACCORD TOTAL NEW H~-SE1ECT TOTAL 41,5 BATCo document for Legal Services : Health Canada 21 May 1999