Rrown & Williamson
A CEC meeting to discuss the key issues exising Ln the Brown & Williamson 1996-1998 Plan
was bold in Louisville on 19th October 1995.
Present: Lord Cairns.Mr M F Broughton. Mr U G V Herter, Mr D P Allvey,Mr E E Enedgui.
Mr N I Brookes, Mr R Bexon. )& D Brown, Mr A I Burke. Mr E E Kohnbom
Mr M McGraw, 'Ar E Pe7ples, Mr
C Schoenbachler, Mr T WhitchLir.
Miss H C 3anon.
Mr J Winebrenner was present for items I to 2 1. Mr G Greenier and Mr N Wilkerson
for items I to 15, 'VEr R Green for items 16 to 21, and Mr A Sponsier and
Mr M Walter for items 22 to 26.
US Domestic Market
I . 'Me market continues to decline at 2.51 a to 3% P.L. pricing and discounting we stable, and
VFM is declining at reduced rates. 'roe recail of Mariboto has had winiza-1 impact, and
Philip Morris' market share is back above 45%. P.\4 at believed to be investing S1.9bn
behind their brands, including S163m in Marlboro Unlimited. They appear to be aiming to
dominate at retail.
2. B&Vs vision is to be number two in the market by 2003. OPC is now clearly the number
two brand in the market. B&W are pr=raring a market segmentation based on a sample of
3000 smokers. The plan objectives are to grow Kool, Calton, Capri and Misty, to test
marke, Lucky Strike, and to achieve modest growth for GPC while budding brand equity.
3. Koo[: B&W is no%v successfully defe--ding -.he Kool franchise, and both share of market
and share of segment are up slightly. 7he inDows are limited due to the old. harsh image
of the brand. B&W Dow aims to continue to defend the franchise by keeping the
advemsing unchanged, but also to take several steps to atuse additional szookem
including the sponsorship oflody can -.o strengthen die appeal to young adult smokers. Lm
consumer testing, the product is no longer found to be harsh. and the current c lip.
coupled with trial Stimulating PTOMOti=5 should help ameliorate the ling mg olcOmh
intage.
4. GPC: Voltune. share of market and sham of segment am all increasing. Distribution is
also increasing and is now at 73%. GPC, Dorai and Basic now account for over 50% of
the segment. which is becoming more branded. 35% of the spend on GPC is an
discounting. The plan assumes that discounting is reduced ftorn S1.60 to $1.50 in 1996.
B&W is beginning to evaluate a number af approaches for building equity in GPC, to
reduce the brsnds dependency on discounting.
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CONSENT Juwum DATED 518/98 IN STATE OF ANNNESOTA, ET AL. V. PMLIP MORRIS, ET AL. CASE No. CI-94-M5
5. As different means of building equity are tested, the CEC suggested that one variable be
tested at a time to assum a clear rt--dial; of the test. In g , a value-adding chap
should be established before a reduction in the level of discounting is considered.
6. When discounting is reviewed, the CEC suggested that volume, market sham and profit
sensitivities for different levels of discounting be considered in selecting the level of
discounting to be implemented. These sensitivities should be set out in the plan.
7. B&W made it clear that if the level of discounting were to increase, they would wish to
respond. but not at the expense of strategic brands, rather at the expense of another pan of
the business, or of the bottom line.
8. Carlton: Carlton's share of market and sham of segment am both increasing. Carlton is
positioned at the lowest TAr level, big the 4-6mg segment is much lager thm the 0-3mg
segment Therefore B&W is planning to evaluate the launch of an extension of Carlton at
Smg tar, in the third quazur of 1996. for 9mg smokers who am gradually reducing their tar
levels. It was questioned whether this would fit with Carltods image. and whether the
e=asion should not at least be at the bonom of that segment, i.e. 4mg.
9. Misty: Although a VFIM brand, Misty is showing many equity attributes of a premium
band. 'vIisty will receive targeted national support, and reliance on discounting will be
reduced.
10. Capri: Capri has strong switching inflows and loyalty. A ten market will be carried out
in the third qua= of 1996 of a SILms version. Again the CEC warned about extending a
brand "backwards".
11. AVA: The plan is to grow share of segment. although volumes will decline. The products
are supported through masta distributors-not B&Ws salesfbree.
12. Poll Mail: Fall Mall is an ageing brand in long term decline with little current opportunity
to reposition. It has a profitable franchise and is a candidate for direct marketing. It was
agreed to concentrate on Lucky Strike but the CEC did not accept that we should ignore
Pall NUU's potential for ever.
0. Merchandising and Trade Marketing: Philip Morris is continuing its efforts; to establish
a dominant position in the US wholesale and retail trade. B&W %ill focus *n Koo[ and
OPC in retail with one of Carlton, Misty or Capri wbere it makes sense. B&Ws
Performance Plus is Uncompetitive With P-M and RJP- It will be impmved in 1996 to be
closer to RJR on silver, a match on gold and better on platinum. Field systems are bcing
improved to strengthen competitiveness and improve marketing effectiveness.
14. Young Adult Smokers: Young adult smokers (over age 2 1) account for I I% of all
smokers. They are 53% male. 7811/6 white, 82% employed. less than half with college
education and about half blue collar. B&W have 6.1% segment &hare compared with 67%
for PM (mostly Marlboro). Lucky Strike will be evaluated for this segment Itaircaclyhos;
7% unaided awareness even though it is unsupported (ItMarlbom has 96%). The successful
characteristics of a brand for this segment am believed to be strong twe. joad quality,
masculine. contemporary. leading brand. keeping up with the trends. Growth among YAS
is also one of Kool's priorities. CD
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B.A.T INDUSTRIES P.L.C. - MINNESOTA DEPOSITORY COPY - PRODUCED PURSUANT To VILD. OF
CONSENT JUDGMENT DATED 5/8/98 IN STATE OF ARAWESOU, ET AL V. PHILP MORRO, ET AL., CASE No. C1-944W5
15. Regulatory environment: The alleged "Youth access" regulations proposed by the FDA
were outlined. B&W will review the possibility of printing tar and micatine levels on all
packs, either in conjunction with the rest ofthe industry or alone if appropriate.
Japan
16. The total market is flat. but the import segment is growing. At the end of the third quaner
of 1995. B&W had 5.2% share of the market and volurnes were up 15.8% over the prior
year. Kent, Lucky Strike and Kool are all growing.
17. PNI's largest brand. Lark. is declining, as am Next and Ment. PWs gro-Aih is coming from
Philip Morris I and Super Lights. RJR's Salem is growing as a result of line cictensions.
its other brands are declining. Rothmans only growth is frim Carlton. Over the pan year.
JTj market sham has fallen by 2-2% to 79%, including Marlbow which has 2.5% market
share. and is growing.
18. B&%Vs strengths are that it is focused, it has strong imaigery, SCAT is sggmsive in
increasing distribution. and the vending progranunt is strong. The wealconses we am it
is dependent on Kent and Lucky Strike. that only 40% of sales am low tar compared xith
60% for P.M. the female franchise is underdeveloped, and it has fewer salesmen. TIse
. porrunitics are for Kool and Capri, a low or ultra low tar family for 1997, branded Kent
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shops. more Sumitomo salesmim and B&Ws own fleld orgattisation. The threats are the
deregulation of price and retailers, which could lead to increased cosL
19. B&Ws field organisation will be it parallel marketing services strucrum to tailor marketing
programmes alongside SCAT's tradksig-oriented salesforce.
20. B&W believes that there is an oppominiTy profitably to invest mom in Japm It is
believed that an increased investment of SISm should be made on vending machine
upgrades. TV advertising for Capri, sponsorship for Kent. BTL spending for Lucky Strike
and Kent. xid an increased SCAT salesforce. This would result in a flat contribution in
1996. but e=a contribution from 1999 onwards. and in market share growing to 7. 1 % by
1998. The CEC asked for an analysis of the separate impact of each of the five proposals.
and also for an analysis of why 2bn additional volume in 1996 only leads to S 13m extra
Concributior..
21. T*zc ultimate market share potential of Kent is believed to be 5%. for Lucky Strike :!IQ.
Kool and Capri I % each. Therefore mother brand will be needed in reach the objective of
104,1. -narke, share in ten years. A new brand costs about S30m to launch but can be self-
funding very quickly.
Kern
1_1 ne impor. segment has grown from 6.8% to 0 ).3% in the past two years, but most of the
growth has been achieved by Mild Seven from M. as there are strong anti-US sentiments.
23. B&-%Vs target is to achieve 20% ofthe import segment by 2000. For distribution. B&W is
using telesales. where the retailer is called every week. with ricx% day deliver! by a
mer-chandi3er. It is focusing on Kent and Finesse.
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B.A.T INDUSTRIES P.L.C. - MINNESOTA DEPOSITORY COPY - PRODUCED PUR81JANT To VILD. OF
CONSENT JUDGMENT DATED 5/8/98 IN.STATE OF A*NAIESOTA, ET AL. V. PWLAP MORRIS, ET AL. CASE No. Cl-94-8565
24. The contribution in 1995 will be negative instead of the budgeted break-even as a result of
the increased advertising in the summer &"3d of the marketing restrictions, which has
resulted in an increase Ln market share. A sinall profit is planned in 1996. It is assumed
tW there will be price increases; in 1996 and 1997 but not in 1999, and that there will be a
50% tax increase at the beginning of 1996.
2S. The CEC agreed tha: the business was being developed on a sound footi;tg, but the@v asked
that a strategy should be developed during 1996 to increase Syntly B&Ws projected
market share over the long term.
Mexico
26. S&W has been importing Kent through Can .*,;:=v but making little progress. Two
options were presented: & 50/50 joint venture hith La lAodemat; and setting up an
assembly plant and establishing own distribution. It was agreed *a E&W should work
option 2 into a full proposal. It would need a local pzrmer and some additional volume to
support a salesfarce of 400. Option I will be reconsidered only if option 2 fisils. The
current operation is not vizole.
openitions
27. The Macon expansion is on targm but the continuous work schedule is still to be agreed
with The unions. The box fore= has incnosed again, and B&W will shortly come
for.vwd with a proposal for two mom machines.
28. The Reidsville closum will cause problevis as it will be necessary, to build up stock and
there will be no back up for the primairy. However an ouuuzding job has been done of
getting the synergies out of the acquisition of American Tobacco.
29. :Off L consolidation year in 1995. productivit@v is projected to improve strongly over the
pion period. and product cost is projected ca increase more slowly than astion.
Financial Plan ?rrview
30. Domestic profit contribution is forecast to grow by 21% p.a. on a Rkewrith like basis. The
published figures will look worse than this because of the pro6t from the consent order
brands in 1995. Price increaws of S 1.50 in mid- 1996 and S2 in alld 1997 and 1998 am
assumed. 7he contribution of full revenue bmads is projected to pow at 1% p.a. while
that of VFM brands is growing at 9.4% P.L Intemr4onal profit contribution is projected
to grow at 13.3% p.a. with 10.71's p.a. from Japari and a rurnamund in Kores. Common
costs am projected to fall by P.L. giving total Vowth im Tobacco trading profit of
9.2% P.a.
31. Operating cash flow is projected to increase by P-L from 1996. against a target Of
i Zile, but 1996 will be lower than 1995.
32. The CEC will respond to the plan numbers as presented and to the request flot additional
investment aAer they have seen the consaiidated Group figures.
ILC. Banco
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B.A.T [Noumws P.L.C. - MINNESOTA DEPOSITORY COPY - PRODUCED PURSUANT To VILD. OF
CONSENT JUDGMENT DATED 518198 IN SrATF OF ARANWSOTA, ET AL. V. PHILIP MORRX, ET AL. CASE No. Cl-944MS