THE INDUMY
(SLIDE 01) 1989 IS GOING TO PROVIDE PIVOTAL CHALLENGES FOR
IMPERIAL AND THE CANADIAN TOBACCO INDUSTRY.
CANADA HAS ALWAYS BEEN AT THE FOREFRONT OF THE INTERNATIONAL
ANTI-SMOKING EFFORT. HEALTH GROUPS AND SOCIAL ACTIVISTS HAVE
EFFECTIVELY COMBINED TO PLACE TOBACCO USE SOMEWHERE NEAR THE TOP
OF THE "PROBLEM" AGENDA.
TWENTY YEARS AFTER THE CANADIAN VERSION OF THE SURGEON GENERAL'S
REPORT, THE NAVERAGE CANADIANO:
- BELIEVES TOBACCO USE WILL HAVE A REAL IMPACT ON HIS
PERSONAL HEALTH.
- SEES TOBACCO AS INCREASINGLY SOCIALLY UNACCEPTABLE.
- BELIEVES THAT AMBIENT SMOKE MAY HARM THE NON-SMOKER AND
SHOULD BE LEGISLATIVELY CONSTRAINED.
THE EFFECT OF THESE BELIEFS HAS BEEN TELLING.
00
BAT Industries document for Province of British Columbia 22 April 1999

3
A YEAR TO YEAR DECLINE OF 3%. THIS IS THE LARGEST RATE OF LOSS
OF ANY OF THE TOP 20 INTERNATIONAL MARKETS.
THE DECLINE HOWEVER, CANNOT BE ATTRIBUTED PRIMARILY TO THE
SMOKING AND HEALTH ISSUE.
CANADIAN GOVERNMENTS HAVE SEIZED ON THE PERCEPTION OF TOBACCO
USE TO JUSTIFY TAX INCREASES THAT WOULD BE CLEARLY UNACCEPTABLE
ON MOST OTHER PRODUCTS.
TEN YEARS AGO TOTAL GOVERNMENT REVENUES FROM TOBACCO PRODUCTS
STOOD AT $1.4 BLN. WITH THE RECENT ROUND OF INCREASES IT IS
ESTIMATED THAT THIS STREAM OF REVENUE WILL SWELL TO
APPROXIMATELY $6 BILLION.
(SLIDE # 3) GOVERNMENT STATISTICS ON TOBACCO PRICES VERSUS
OVERALL CONSUMER PRICES INDEXED TO 1980 PROVIDE A GRAPHIC
ILLUSTRATION OF THE ENVIRONMENT. As OF MARCH, THE TOBACCO PRICE
INDEX STOOD AT 254 COMPARED TO 148 FOR THE OVERALL BUNDLE OF
CONSUMER GOODS AND SERVICES. THE SOLE CULPRIT HAS BEEN
TAXATION.
ON APRIL 27TH THE FEDERAL GOVERNMENT INCREASED TAXES BY WHAT
WILL AMOUNT TO OVER $5.00 PER CARTON OF 200 CIGARETTES - THE
BIGGEST SINGLE TAX HIKE IN THE HISTORY OF THE CANADIAN
INDUSTRY. WHILE WE WILL HAVE TO WAIT FOR THE ACTUAL FIGURES TO
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BAT Industries document for Province of British Columbia 22 April 1999

4
COME IN, WE ESTIMATE THAT THIS INCREASE ALONE WILL PUSH THE
TOBACCO PRICE INDEX ON THIS CHART OVER THE 300 MARK. WITH
BUDGETS YET TO COME IN OUR TWO MAJOR PROVINCIAL MARKETS, WE FACE
THE DAUNTING PROSPECT THAT THIS WILL GO EVEN HIGHER,
WE MUST ANTICIPATE THAT THIS SPIRALLING OF TAXES WILL CONTINUE
AS DEFICIT REDUCTION PUTS FURTHER PRESSURE ON GOVERNMENT
REVENUE NEEDS AND AS PRICE INEVITABLY BECOMES AN INSTRUMENT OF
SOCIAL AND HEALTH POLICY.
(SLIDE f 4) 1988 BROUGHT ANOTHER MAJOR CHALLENGE WITH THE
FEDERAL GOVERNMENT'S PASSING OF THE TOBACCO PRODUCTS CONTROL
ACT.
SINCE 1971 THE INDUSTRY HAD BEEN GOVERNED BY A VOLUNTARY CODE
WHICH HAD ELIMINATED ELECTRONIC MEDIA: LIMITED MARKETING
SPENDING TO A GRADUALLY DECREASING FIXED TOTAL, AND PLACED TAR
NUMBERS AS WELL AS GENERAL HEALTH WARNING ON PACKAGES AND
ADVERTISING.
THE NEW ACT GOES FAR BEYOND THIS.
FIRST OF ALL, WE HAVE LOST WHAT WE VIEWED AS A DESIRABLE
SITUATION IN THAT PREVIOUSLY VOLUNTARY RESTRICTIONS ARE NOW
LEGISLATED. THERE ARE SEVERE PENALTIES FOR VIOLATIONS. @THE'RE IS
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BAT Industries document for Province of British Columbia 22 April 1999

5
A LOT LESS TEMPTATION TO STRETCH THE RULE D. THERE IS A LOT LESS
ROOM FOR NEGOTIATION AND INTERPRETATION,
(SLIDE #5) THE MARKETING AREAS THE LAW NOW REGULATES ARE!
1. ALL PRINT ADVERTISING is BANNED. THIS LS NOT A
TREMENDOUS LOSS. THE LAW HAS PROBABLY SERVED ONLY TO
ADVANCE THE INEVITABLE, AS AN INCREASING NUMBER OF
PUBLICATIONS, LED BY THE DAILY NEWSPAPERS, HAVE BEEN
HEADING TOWARDS VOLUNTARY SUSPENSION OF TOBACCO
ADVERTISING. ON THIS ISSUE THE BILL IS LARGELY A
GESTURE SINCE AROUND 2/3 OF PRINT EXPOSURES TO
CANADIANS ARE ACTUALLY FOR AMERICAN PRODUCTS IN U.S.
PUBLICATIONS. THE GOVERNMENT HAS CHOSEN NOT TO ACT ON
THIS EXPOSURE AND THIS FACT, IN CONCERT WITH FREE TRADE
MAY HAVE SIGNIFICANT EFFECTS ON OUR HISTORICALLY
*CANADIAN'* NON-BLENDED 14ARKET OVER THE MID TERM.
2. OUTDOOR ADVERTISING IS PROGRESSIVELY BANNED. IN 1989,
WE ARE ALLOWED 2/3 OF OUR 1988 EXPENDITURES IN THIS
MEDIA. BY 1990 1/3 AND BY 1991 - NONE. SINCE OUTDOOR
SIGNS USED IN THE TRANSITION MUST CARRY WHAT WE SEE AS
AN UNACCEPTABLE HEALTH WARNING WE HAVE VOLUNTARILY
WITHDRAWN FROM OUTDOOR AS OF NOW,
3. By 1992, SIGNAGE OR PROMOTIONAL MATERIALS ARE BANNED
FROM STORES. MERCHANDISING OR EXPOSURE OF PRODUCT IS
PERMITTED,
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BAT Industries document for Province of British Columbia 22 April 1999

6
4. SAMPLING IS BANNED.
5. SPONSORSHIPS CAN ONLY BE CARRIED OUT UNDER CORPORATE
NAMES., THIS CONCESSION WAS LEFT TO SILENCE OPPOSITION
TO THE BILL FROM SPORTS AND CULTURAL GROUPS IN CANADA,
MANY OF WHOM RELY ON SPONSORSHIP REVENUE FOR THEIR
EXISTENCE. IT IS REALISTIC TO CONSIDER THIS A "W I NDOW"
AS OPPOSED TO A LONG TERM GUARANTEE.
6. (SLIDE # 6) PACKAGING MUST CARRY 4 ROTATING HEALTH
WARNINGS THAT HAVE TO BE CLEARLY LEGIBLE ON 20% OF
MAJOR PACKAGE AND CARTON PANELS, ALREADY THERE ARE
STRONG INDICATIONS THAT THE GOVERNMENT PLANS TO GO FROM
4 TO 8 MESSAGES IN THE NEAR FUTURE AND THERE IS SOME
TALK OF AN INFORMATION LEAFLET IN ALL PRODUCTS. (SLIDE
# 7)
7. THE PRESENT STANDARD FOR TAR MEASUREMENT HAS CHANGED.
WHAT USED TO BE A 30- MM BUTT LENGTH IN THE SMOKING
MACHINES HAS BEEN ALTERED TO ISO STANDARDS. THIS WILL
MEAN A GENERAL INCREASE IN DECLARED TAR LEVELS. IN OUR
MARKET, STRUCTURED LARGELY ON DELIVERY LEVELS, IT MAY
CAUSE SOME CHANGES IN BRAND PERCEPTION.
IN ADDITION TO THIS CARBON MONOXIDE NUMBERS WILL HAVE
TO BE REPORTED ON ALL PRODUCTS FOR THE FIRST TIME- A
STEP THAT COULD HAVE A SIMILAR LEVEL OF IMPACT TO THE
EARLY 70's ADVENT OF TAR DELIVERY NUMBERS. FINE CUT
TOBACCOS, FOR THE FIRST TIME WILL HAVE TO REPORT
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DELIVERY LEVELS. CD
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BAT Industries document for Province of British Columbia 22 April 1999

7
8 THERE ARE A FEW GENERAL CATCH ALLS. THE INFORMATION
THE INDUSTRY MUST REPORT TO GOVERNMENT ON SAI VS,
PRODUCTION AND PRODUCT CHARACTERISTICS HAVE BEEN
SUBSTANTIALLY INCREASED. THE USE OF TOBACCO TRADEMARKS
ON NON-TOBACCO ITEMS IS PROHIBITED. AND SO ON.
FROM THE PERSPECTIVE OF ITS INTENT, IT IS A COMPREHENSIVE AND
WELL WRITTEN BILL THAT WILL SUBSTANTIALLY CHANGE THE MARKETING
OF TOBACCO PRODUCTS IN CANADA.
ON THE OTHER HAND, IT IS NOT LIKELY TO HAVE A MAJOR COMPETITIVE
IMPACT, By ITSELF, IT IS UNLIKELY TO ACHIEVE ITS STATED
OBJECTIVES,
IMPERIAL ANTICIPATED THIS LEGISLATION FOR SOME TIME NOW AND HAS
BEEN QUIETLY GETTING ITS HOUSE IN ORDER. IT'S KEY TRADEMARKS
ARE PROGRESSIVE AND WELL POSITIONS. MANY OF THE REMAINING
AVENUES OF CONSUMER INFORMATION - PACKAGING, PRODUCT SENSORY
CHARACTER, SYMBOLS, MERCHANDISING ARE ALREADY ACTIVE C014PONF-NTS
OF THE COMPANY'S STRATEGIC PLAN.
i-rL,
8) WE KNOW, FROM OBSERVATION OF OTHER HIGHLY I- OTA
ICTED MARKETS LIKE FINLAND AND NORWAY, THAT IF THE CRITERIA
BILL'S SUCCESS IS VOLUME PERFORMANCE, THE BAN WILL BE
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BAT Industries document for Province of British Columbia 22 April 1999

- 8 -
JUDGED A FAILURE. LOGICALLY, GIVEN THE INTENT OF THE SOCIAL
PLANNERS WE HAVE TO EXPECT THAT THIS WILL STIMULATE NEW
INITIATIVES IN THE FORM OF MORE RESTRICTIONS,
MUCH SUGGESTS THAT OUR DISTRIBUTION NETWORK MAY BE NEXT.
PHARMACIES AND DRUGSTORES ARE INCREASINGLY TALKING ABOUT Ml
STOCKING OR PROMOTING TOBACCO PRODUCTS. THE UNENFORCEABILITY OF
THE "AGE OF PURCHASEO LAWS WITHIN OUR PRESENT RETAIL ENVIRONMENT
IS COMING UNDER PUBLIC SCRUTINY. AT LEAST ONE POSSIBLE OUTCOME
IN THE LONGER TERM IS A CONTROLLED DISTRIBUTION NETWORK, SUCH AS
THAT USED FOR ALCOHOLIC BEVERAGES IN MUCH OF OUR COUNTRY,
PRICE AND TAXATION WHICH HAVE ALREADY CHALLENGED THE INDUSTRY IN
THE PAST YEAR, ARE LIKELY TO CONTINUE TO DO SO.
TWO ELEMENTS OF GOVERNMENT TAX POLICY WILL SIGNIFICANTLY CHANGE
THE FUTURE. (SLIDE # 9) THE FIRST HAS TO DO WITH THE OVERALL
RATE AND STRUCTURE OF CANADIAN TOBACCO TAX. TODAY TAX IS
COLLECTED AT TWO LEVELS OF GOVERNMENT AND REPRESENTS A TOTAL OF
'707, =9 OF THE FINAL CONSUMER PRICE. ON AN ABSOLUTE BASIS, THESE
PRICES HAVE MADE SMUGGLING A VIABLE CANADIAN INDUSTRY. TODAY
THE PRIMARY PROBLEM IS CANADIAN DUTY FREE PRODUCTS REENTERING
THE MARKET TAX FREE. THE CONCERN THAT THIS HAS CAUSED THE
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- 9 -
FEDERAL GOVERNMENT IS MATCHED ONLY BY THAT OF THE PROVINCES WHO
EXERCISE A RIGHT TO TAX TOBACCO PRODUCTS WITHIN THEIR OWN
GEOGRAPHIC AREAS. DIFFERENCES IN TAX RATES, BETWEEN PROVINCES
MAKE EASY PICKINGS FOR SMUGGLERS SINCE THERE ARE CURRENTLY NO
REAL MARKINGS ON CANADIAN PRODUCTS TO INDICATE THE MARKET
DESTINATION.
THIS IS LIKELY TO CHANGE. PROVINCES ARE ACTIVELY PRESSING FOR
UNIQUE MARKINGS AND WHEN THESE COME TO PASS THEY CAN BE EXPECTED
TO INCREASE THE COMPLICATIONS OF OUR OPERATING SYSTEMS AND
STYLES.
THE CANADIAN MARKET WILL IN EFFECT BECOME TWELVE CANADIAN
MARKETS.
FROM A CONSUMER PERSPECTIVE THE HIGH COST OF TOBACCO HAS CREATED
A HUGE NEED FOR LOWER PRICE ALTERNATIVES. (SLIDE 0 10) THE
GROWTH OF FINE CUT USAGE FROM 15% OF SMOKERS TO OVER 25% IS AN
EXPRESSION OF THIS AS WAS THE RAPID GROWTH OF DISCOUNT BRANDS
DURING THE 1986/87 PRICE WAR.
To DATE THE COST STRUCTURE OF CIGARETTES HAS LED TO PRICE BEING
USED PROMOTIONALLYo TAX IS SUCH A BIG PIECE OF THE FINAL
CONSUMER PRICE THAT IN ORDER TO GET MEANINGFUL LEVELS OF
CONSUMER DISCOUNT A MANUFACTURER MUST TAKE UNACCEPTABLE CUTS IN
HIS MARGINS,
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BAT Industries document for Province of British Columbia 22 April 1999

- 10
THE FLY IN THE OINTMENT IS THE RELATIVELY LAX DEFINITION OF
TOBACCO PRODUCTS WITHIN THE TAX ACTS. THESE HAVE BEEN PRIED
OPEN BY ROTHMANS, BENSON AND HEDGES. WHO HAVE RECENTLY INTRODUCED
THIS PATENTED PRODUCT, (SLIDE # 11) THE TOBACCO STICK
EFFECTIVELY SIMPLIFIES THE PROCESS OF ROLLING YOUR OWN
CIGARETTE, ELIMINATES THE MESS AND INCONSISTENCY ASSOCIATED WITH
THE PROCESS AND DOES SO AT AJAX RATE EQUIVALENT TO THE FAVORED
LEVEL GIVEN TO FINE CUT TOBACCOS IN SPITE OF THE FACT THAT THE
PRODUCT, IN EFFECT, IS A HIGHLY VENTILATED PLAIN END.
IT IS A SIGNIFICANT THREAT. IT IS ONE WE ARE PRESSING
GOVERNMENTS TO DEAL WITH BY CLOSING THE LOOPHOLES THAT CREATE
ITS ADVANTAGE, THEY TOO STAND TO LOSE A LOT OF THEIR CURRENT
REVENUE To IT, HOWEVER QUITE CLEARLY, EVEN IF THE GOVERNMENT
DOES ACT ON THIS ONE EXPRESSION THE DAYS OF A WELL ORDERED AND
PREDICTABLE PRICE ENVIRONMENT ARE COMING TO A CLOSE. IMPERIAL
WILL HAVE TO AND 11 LEARNING WHAT IT NEEDS TO KNOW TO NAVIGATE
SUCCESSFULLY IN THESE NEW WATERS.
(SLIDE 0 12) ALL IN ALL, IT IS OBVIOUSLY AN INDUSTRY THAT IS
BECOMING INCREASINGLY CHALLENGING. IT IS ONE THAT CLEARLY is
CHARACTERIZED BY EXTERNAL PRESSURES. UNLIKE MANY TOBACCO
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MARKETS INTERNATIONALLY THE GROUND RULES ARE CHANGING RAPIDLY
AND SIGNIFICANTLY AND THE KEY AREA OF COMPETITION WILL LIE IN
THE ABILITY TO RAPIDLY AND EFFECTIVELY EXPLOIT NEW OPPORTUNITIES
AS THEY EMERGE.
THE COMPANY
ON THE OTHER HAND THE COMPANY IS UP TO IT. (SLIDE # 13)
IMPERIAL'S SHARE OF THE TAILORMADE MARKET 12 MONTHS TO MARCH
1989 STANDS AT cc up 1. 1 SHARE POINTS OVER THE PREVIOUS
TWELVE MONTH PERIOD. THIS REPRESENTS THE 13TH CONSECUTIVE YEAR
OF SHARE GAINS. IN SPITE OF THE ADVERSE INDUSTRY CLIMATE AND
THE INDUSTRY VOLUME DECLINES, IMPERIAL'S MARKETING EFFORTS
ALLOWED THEN TO ACHIEVE VOLUME GROWTH IN EACH OF THE PAST THREE
YEARS. THE COMPANY'S TRADEMARKS CONTINUE TO DOMINATE THE TOP
TRADEMARK LIST IN CANADA WITH PLAYER'S AND DU MAURIER NOW
REPRESENTING ALMOST 46% OF ALL THE CIGARETTES SOLD IN CANADA.
MATINEE, A RECENT ADDITION TO THE STRATEGIC PRIORITY LIST OF THE
COMPANY IS SHOWING ENCOURAGING PROGRESS.
IMPERIAL ALSO DOMINATES THE LIST OF THE TOP 10 BRANDS IN CANADA
WITH SIX ON THIS LIST.
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12 -
PERHAPS MORE INDICATIVE OF-THE FUTURE OF THE COMPANY IS THIS
PERSPECTIVE ON HOW THEIR BUSINESS IS CONSTRUCTED. (SLIDE
14) f. T. L. HAS ALWAYS FOCUSED ITS EFFORTS ON NEW SMOKERS
BELIEVING T14AT EARLY PERCEPTIONS TEND TO STAY WITH THEM.
THROUGHOUT THEIR LIVES.
I. T. L. CLEARLY DOMINATES THE YOUNG ADULT MARKET TODAY AND STANDS
TO PROSPER AS THESE SMOKERS AGE AND AS IT MAINTAINS ITS HIGHLY
FAVORABLE YOUTHFUL PREFERENCE,
INNOVATIONS, LIKE THE ROTHMANS BENSON AND HEDGES CUSTOM CUT WILL
COME AND GO BUT THEY WILL INEVITABLY SUCCUMB TO TRADEMARK
EQUITY. IN A VERY REAL SENSE C-51 PROVIDES A MAJOR ADVANTAGE TO
A COMPANY LIKE IMPERIAL THAT HAS ITS TRADEMARK HOUSE IN ORDER.
IN TERMS OF DEVELOPMENT PLANS AND ACTIVITIES, THE COMBINATION OF
THE COMPANY'S TWO BASIC CREDOS - TRADEMARK VALUE AND CONSUMER
RESEARCH HAVE PRODUCED SOME FAIRLY EXCITING PROSPECTS. ALTHOUGH
(EX PRICE) THERE IS A BASIC LACK OF DYNAMISM IN THE MARKET
IMPERIAL HAS CONTINUED TO INTRODUCE A SERIES OF SUCCESSFUL NEW
ENTRIES.
(SLIDE #15) DU MAURIER EXTRA LIGHT, CAMEO SPECIAL, PLAYER'S
MEDIUM AND MATINEE SPECIAL MILD HAVE ALL SUCCESSFULLY SUPPORTED
THE DRIVE FOR "NEW PRODUCT" BUSINESS.
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BAT Industries document for Province of British Columbia 22 April 1999

13
AT THE CORE OF THIS PORTFOLIO, CONSUMER INFORMATION ON EMERGING
PERCEPTIONS HAS ALLOWED IMPERIAL TO MAKE SOME FAIRLY BOLD
MODIFICATIONS TO EXISTING FAMILIES IN ORDER TO PREPARE THEM FOR
THE FUTURE.
DU MAURIER IS THE NUMBER TWO CANADIAN TRADEMARK AFTER PLAYER'S.
IT IS STRATEGICALLY POSITIONED TO REFLECT 'CONTEMPORARY CLASS"
AND QUALITY, (SLIDE # 16) NOTWITHSTANDING A GROWING FAMILY
SHARE OF 211 AND A CONTRIBUTION OF 37% To OUR SALES VOLUME, WE
WERE ABLE TO ISOLATE THE NEED FOR SOME SIGNIFICANT UPDATING IN
BOTH PACK AND C OMM UNICATIONS POSITIONING.
THE INITIAL RESULTS FROM TEST MARKET SUGGEST THAT BEYOND
CONSOLIDATING OUR FUTURE PERFORMANCE WE ARE LIKELY LOOKING AT
IMMEDIATE SHARE IMPROVEMENT IN THE 1-2% RANGES.
THE CONSISTENCY OF THE OVERALL DESIGN WAS STRUCTURED IN SUCH A
WAY THAT IT WOULD FACILITATE THE LEAST INTRUSIVE APPLICATION OF
C-51 WARNINGS AND PERMIT THE GREATEST POSSIBLE DEGREE OF
TRADEMARK CONSISTENCY WITHIN THE COMING MARKETING RESTRICTIONS.
THE 14ATINEE FAMILY HAS ALSO BEEN MODIFIED. (SLIDE # 17)
HISTORICALLY MATINEE HAS BEEN ONE OF THOSE BRANDS KNOWN
PRIMARILY FOR PRODUCT CHARACTERISTICS IN THIS CASE, MILDNESS.
Pk.)
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BAT Industries document for Province of British Columbia 22 April 1999

- 14 -
THE MARKETING EFFORT AIMED PRIMARILY AT CREATING POSITIVE AND
APPROPRIATE FEMALE IMAGES AROUND THE BRAND HAS LED TO THIS NEW
PRESENTATION.
ON MANY BRANDS, I.T.L. HAS TAKEN ADVANTAGE OF THE CHANGES
NECESSITATED BY THE PACKAGING COMPONENT OF THE BILL TO MAKE
SMALL BUT NECESSARY GRAPHIC COURSE CORRECTIONS,
THE PLAYER'S FAMILY (SLIDE 18) - SOME - 44% OF OUR BUSINESS
HAS BEEN ADJUSTED SLIGHTLY. THE CAMEO FAM I LY,LWHICH IN THE
NORMAL COURSE OF EVENTS WOULD NOT MAKE THE CUT FOR RESOURCE
.@HAS
BENEFITTED THROUGH A MUCH NEEDED FACE LIFT.
THESE CHANGES IN CONJUNCTION WITH ONGOING MARKETING EFFORTS ARE
EXPECTED TO PROVIDE FOR CONTINUED SHARE GROWTH.
(SLIDE # 19) THE 1. T. L. FORECAST SEES MARKET SHARE EXPANDING
TO 58.8% BY 1993. THE COMPANY OBJECTIVE IS SET AT 62% AND
DEVELOPMENT PROJECTS HAVE BEEN ISOLATED TO FILL THIS GAP.
INDUSTRY VOLUME IS EXPECTED TO CONTINUE ITS DECLINE WITH
TAXATION LEVELS CONTINUING TO PLAY THE MAJOR ROLE.
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BAT Industries document for Province of British Columbia 22 April 1999

- 15 -
THE COMBINED EFFECT OF THIS WILL BE MARGINAL ANNUAL VOLUME
LOSSES FOR THE COMPANY,
(SLIDE # 20) THERE IS AN EXTENT TO WHICH THESE PLANS SEEM. TO
IGNORE THE REALITY OF THE LAWS THAT HAVE RECENTLY BEEN IMPOSED
ON THE COMPANY. THIS IS ONLY APPEARANCE. IN A VERY REAL SENSE
THE COMPANY'S EXPECTATIONS ARE THAT C-51 WILL NOT END TOBACCO
MARKETING, BUT WILL BRING ABOUT VERY MAJOR CHANGES IN HOW THAT
EXERCISE IS CONDUCTED.
IN THE SHORT TERM, WE DO-NOT EXPECT THAT MUCH WILL HAPPEN; WITH
THE SINGLE EXCEPTION THAT CO WILL INCREASE IN VISIBILITY AND
LIKELY BRING ABOUT AN OPPORTUNITY FOR CO REDUCED PRODUCTS. THE
COMPANY'S SHORT TERM PRIORITY WILL BE ON REORIENTING RESOURCES
TO BE EFFECTIVE IN THE CONVENTIONAL AVENUES THAT ARE LEFT OPEN
TO US.
THERE IS A PRIORITY ON EFFECTIVE PACK DESIGN INCLUDING THE
EXTERIOR CARTON OVERWRAP WHICH WILL BE RECONFIGURED TO PROVIDE
MORE IMPACT.
IMPERIAL'S EXTENSIVE SPONSORSHIP PORTFOLIO IS BEING RESTAGED
UNDER NEW CORPORATE NAMES THAT WILL ALLOW THEM TO CONTINUE
EXPLOITING THE HUGE EQUITY IN THEIR INVESTMENTS IN THIS AREA.
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BAT Industries document for Province of British Columbia 22 April 1999

- 16
THE RETAIL ENVIRONMENT WILL CONTINUE TO BE EXPLOITED. WE HAVE
INVESTED HEAVILY IN DEVELOPING THE EXPOSURE OF OUR BRANDS AND
WILL AGGRESSIVELY DEFEND WHAT WE HAVE GOT. WHERE NEW BRANDS ARE
REQUIRED, THEY WILL CONTINUE TO BE INTRODUCED.
CONSUMER RESPONSE IS EXPECTED TO EMERGE IN THE MID TERM. C-51
IS EXPECTED TO REDUCE THE INDUSTRIES ABILITY TO CREATE FINE
POINTS OF IMAGE DIFFERENTIATION. THERE WILL STILL BE BRANDS FOR
MEN AND BRANDS FOR WOMEN, BUT WE WILL LOSE THE ABILITY TO
ARTICULATE THE SMALL IMAGE DIFFERENCES THAT SEPARATE, FOR
EXAMPLE CAMEL AND MARLBORO IN MOST INTERNATIONAL MARKETS.
To-FILL THIS VOID WE EXPECT NEW POINTS OF EMPHASIS WILL EMERGE.
PRODUCT AND SENSORY CHARACTERISTIC9 WILL HAVE TO BE MUCH MORE
FULLY EXPLOITED. THERE IS A LOT OF WORK PROCEEDING TO BETTER
UNDERSTAND HOW CONSUMERS SEGMENT TASTES AND FORM PREFERENCES.
QUALITY WILL BECOME A KEY ISSUE - NOT QUALITY AS WE INTERPRETED
IT AS THE ABSENCE OF DEFECTS, BUT QUALITY ARTICULATED IN
CONSUMER TERMS - TERMS WE ARE BEGINNING TO INVESTIGATE WITH
SMOKERS IN ANTICIPATION OF THIS.
PI= WILL INEVITABLY BE AN ISSUE, AS WILL U.S. BRANDS AND
TRADEMARKS IN PARTICULAR AND INTERNATIONAL CREDENTIALS IN
BAT Industries document for Province of British Columbia 22 April 1999

17 -
GENERAL.
ALL OF THESE ARE CURRENTLY UNDER ACTIVE INVESTIGATION AT THE
CONSUMER LEVEL IN ORDER TO PROVIDE A WELL ORDERED, CONSUMER
DRIVEN FRAMEWORK INTO WHICH WE CAN FIT OUR TRADEMARKS.
IN THE LONGER TERM IT IS OUR FIRM BELIEF THAT C-51 WILL BRING
ABOUT REAL TECHNICAL INNOVATION.
IT IS NOTEWORTHY THAT THE BILL ACTUALLY HAS A PROVISION FOR
APPROVAL OF ADVERTISING -OF PRODUCTS THAT ARE SAFER, IN SPITE OF
THE FAILURE OF PREMIER AND PASSPORT AND LIKELY VANTAGE ExCELL
AND (CHELSEA), THESE PRODUCTS DQ REPRESENT REAL TECHNICAL
INNOVATIONS THAT ARE WANTED AND WANTED BADLY BY MOST OF OUR
CUSTOMERS.
TO ASSUME THAT BECAUSE THESE EXAMPLES HAVE FAILED, THAT FAILURE
IS INEVITABLE WOULD HAVE BEEN EQUIVALENT TO ASSUMING THAT LIGHT
PRODUCTS WOULD NEVER BE COMMERCIALLY VIABLE BECAUSE THE MAJORITY
OF EARLY ENTRIES DIDN'T GET IT RIGHT.
THE TECHNICAL AND CONSUMER RESEARCH CHALLENGES THAT PRODUCTS,
AIMED AT PERSONAL HEALTH AND SOCIAL ACCEPTABILITY WILL POSE ARE
FORMIDABLE. ON THE OTHER HAND, THE REWARDS THEY WILL BRING WITH
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BAT Industries document for Province of British Columbia 22 April 1999

SUCCESS. ARE HUGE. THE PUNPSHMENT THEY WILL INFLICT ON THE
UNPREPARED WILL BE PAINFUL.
THEIR DEVELOPMENT HAS BEEN GIVEN A SIGNIFICANT LEVEL OF
RESOURCES IN BOTH OUR R & D AND MARKETING DEPARTMENTS.
ULTIMATELY, IN SPITE OF OUR CHALLENGES WE REMAIN OPTIMISTIC
ABOUT THE FUTURE OF TOBACCO.
ACTUAL PERFORMANCE IS REMARKABLE FROM ANY POINT OF VIEW AND
PLANNED PERFORMANCE BUILDS ON THIS STRONG BASE. (SLIDE 0 21).
WE SEE 1988 OPERATING PROFIT OF $308 MILLION BEFORE INTEREST AND
TAXES GROWING AT A COMPOUND RATE OF 7% TO $431 MILLION IN 1993.
CASH FLOW WILL GROW 8% PER YEAR FROM $211 TO $304 MILLION.
(SLIDE 22). TO ACHIEVE THESE RESULTS NET TRADING ASSETS WILL
INCREASE FROM $503 MILLION IN 1988 TO $645 MILLION IN 1993.
RETURN OR NET ASSETS WILL INCREASE FROM 61.2% IN 1988 To 66.9%
IN 1993.
WE LOOK TO IMPERIAL NOT ONLY FOR FUNDS TODAY BUT ALSO TO ENSURE
THAT WE ACCESS THE MARKET POTENTIAL THAT IS LATENT IN THE
FUTURE.
67
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BAT Industries document for Province of British Columbia 22 April 1999