SEC"iION 1 - SUMM I ARY BATCo FIVE-YEAR PLAN : 1994 - 1998 0 F - F 1.1, Tobacco Industrv Developments Id Market Trends I Tables 1. 1 and 12 highlight a number of sigruricant features within the overall grow-4- cf 6me %orid cigarette market and the share performances of BATCo. BAT Industries and :he GroL-.*s -orincipal competitors, which are important to BATCo. These include:- I rate of growth of the world cigarette market over the Plan period _-!c%,,wer than (i) The overa I previously projected (0.6% p.a. v. 1.01/6 p.a.), with that for the aggregate of =rk=-ts in "iiich BATCo competes (i.e. excluding the USA, Canada, Brazil and Germany) also sbghmtly Io%vr (1.0% p. a. v. 1.4% p.a.); (ii) Rapid raEts of growth expected in the Sub-Continent (3.0% p.a-), which is str=gc=- than previously projected; (iii) Reasonably strong growth in the Asia-Pacific region, albeit at a slower rate th= pr--eviously projected; (iv) Moderate rates ofgrowth in Latin America (1.0% p.a.). Aftica/Middle East j' 3114 , p.a.)-, and Eastern Europe (0.5% p a.). (V) Continued decline in volume in the developed economics of Western and Nor-"m E-Europe; (vi) Growth in the International Filter Brand (IFB) segment, ofabout 3.5,'G a %ea: -witim the segment's share rising from 12.3% in 1993 to 14. 1 ~10 in 1998). a slower rate c~zrmo%-Lh than the 4.7% p.a. previously projected. (Vii) Continued market share growth for PW[ip Morris, but slight declines for BATs omner major private-sector competitors. (viii) Over the forecast period, BATCo's volume is projected to rise at an average -= cz; 4.6% p.a. Excluding the BAT Industries' domestic markets ofthe USA, Canada. Braz:a ind CGermany, BATCo's overall market shaxe, aflcr having declined by 0.2 percentage poin-_ ja 11993 to 6.30/0, is expected to rise progressively throughout the Plan period to 7.8% by 1998. 1. 2 Another significant trend in Elie market is the developing Lights segment. in which B1,T is:s currently under-rep resented. This segment accounted for about 25% of world IFB volume in :392 -and is growing sigrtificantly faster than the full-flavour IFB segment. in 1. 1. 0.3 The international tobacco industry has become increasingly competitive recent ~ e=. -Ibis situation is expected to intensify during the Plan years, with increased pressure from both dx ---ai=r international cigarette manufacturers and regional.Aocal operations, and will affect d= lev!vels of performance which can be expected. 1. 1.' -4 These pressures are reflected in:- (i) Dovimtrading in some markets. in response to relatively weak economic con,~E=cns..s. and uptrading in others where prices are being held down. (i i) Aggressive pricing moves by the major manufacturers, for example b% Phd~- Nloorris in Argentina and Costa Rica and RJ Reynolds in parts of Europe and in the ---East. (iii) Continued pressures on domestic market performance and profitability aris-=-z 5razm border business and, in some markets, from exciseltax evasion. In 1993. it is estimated that nearly 6% ofthe total world cigarette sales of-5 1 :,-i-:1iioQ were DNP sales. Eastern Europe and the Asia-Pacific region (c85blln each) acc==l for the majority ofthis volume, though Western Europe (c5Oblln) was also signift= linrelationto total market sales. DNP volumes are largest in Eastern Europe (cl3*1,;) and A~5=a/M.. East (cl2%), but are also sigruficant in Latin America (c9%) and Western Euro;e (c7,711c). A key C:) C:) I r1J is BATCo document for Legal Services : Health Canada 21 October 1999 iss-c ror SAT is to ensurc that the Group's s~stem-%%ide Objectives and performance are giv,_n tl~,: necessary prionty through the active and cffcctive management of such business. (iV) rn! tffCCt$ Of COniLnu-;d up-,~ard pressure in excise rates on consumer demand. (V) Tne anticipated increase In industry capincay (par ticularly Ln Enstem Europe). significantly ahead of projected demand levels. (vi) 7-- trend to fewer. larger and mace e(Ticient plants. 1. I.L5 These factors are likely to mean that there N% Ill be little or no scope foc increases In real cigarette prices (e i. the Plan projects average real per-mille prices. including mix changes, for BATCo s saLes failing b~ about I% p.a.) and. possibly. greater variability in pt-forimance in terms of profit. cash flow and -olumes. This %%ill put a premium on securing substantial and sustained improvements efficienc:,, both to ensure that BATCo is czpable of competing effectively and to counter downwa:d pressure -.n profitability. 1.13.6 There are. hove,,er, significant industry developments which offer BATJBATCo major opportuni= for imprc.-,irig both share and profits. These include:- (i) T`C opening-up of new market opportunities, including the privatisation of state cigarette mcnopolies), particularly in Easteni/Centrai Europe, the Far East and Latin Amer~ica. (ii) n.e continuing trend towards lower-deliycr)~ products. (iii) .1_-, underlying shift in demand to international cigarette brands at the expense of locaUreg4cial '-=ds and, within that, the faster overall rate of growth of USIBs compared to that for UKI B s. 1. t.2 Compe-tor Strategies 1.1.2.1 In mid '.993, the Tobacco Strateg~ Group carried out a thorough revimv of the strategies likely ta be pursued by the major tobacco companies and BATCo supports the general conclusions of tha; rriiew. In sLr-.=y these were as follows. 1.1.2.2 Philip Morris will continue to be the primary competitor of concem to BATCo. The primary fo=s %41 be z:n Marlboro full-flavour as long as growth is attainable, but lighter extensions and odw brands will also be used (targeting low-tar, female and VFM segments separately). PM's ceritr;~ stmiezy will be to protect and drive Marlboro, seeking to secure brand share leadership in as many mark::--- as possible. Other key strategies include- development of pricing on a market-by-market basis. Whilst Marlboro will generally -_4 ;,:sitioned in the premium-price segment, pricing NOR be used where necessary as a tool to maintain Marlbords momentum. Tactical brands, such as L&M and Chesterfield, will be :riced *2 2aract value-oriented consumers. continued lowering of production costs,wiLh f1mver and larger 6cilities; dedicated fAcEties f.-r the production of Marlboro and regional production of other key brands; and lower J _~cnsities in some markets. . Aggressive use o(direct distribution, using the strength of Marlboro to pull other produc:s 'nrough the distribution chain. and alliances vdth food-relamd operations. . :~isproportionate spend behind Marlboro. Spend will fi~C-JS on traditional media where pcsstble, --triflorced through dominant POS presence. sponsorship ofevents wi(h globaLlregional ANI -xposure, and TMD advertising. 1.1.2.3 PM _S expected to continue (a protect its strong position in Europe (particularly Germany, Ital~ and Fm.=), focusing on Marlboro but building other brands in support toles in growth segments ruch as Lig~z and VFM (with Chesterfield and L&M being used in the latter category). Whilst they arc un.!,_-k:1y to initiate a pricewar in the region, minimal price adjuscments will be used to gain cormeatitive advantage. In Asia-Pacific. PM will continue to seek dominant share positions in all U17 J ma.~kcts: the focus will be on Marlboro, with increasing emphasis on Marlboro Lights. In Uza N) .J U14 114 r1_J NJ BATCo document for Legal Services : Health Canada 21 October 1999 3 Amcnca FM is sccking to erode BATs position, both by establishing Marlboro and positioning tactical USISs (e 3 U.M) to capitalise on downtrading from other international brands and uptrading from mediurriflo%%cr priced brands. PNI is focused on bccominS the lowest-cost producer and marketer of cigarettes in the region and has sho%%n its willingness to use price as a tactical weapon (e.g. Argentinaand Costa Rica). 1.1.2.4 R J Reralds' international tobacco strategy is to expand rapidly in existing and erricisins tobacco markets. exploiting individual brands based on regional preferences, RJR!s intemational brand portfolio has shown signs of faltering (though Salem is reasonably successful in the Far East), and RJR is willing to promote these (other than Salem) and local VFM brands aggressively on a price basis to generate volume. Although RJR will invest disproportionately behind its premium brands in an attempt to revitalise them. this is unlikely to be successib I and. as a result of the financial pressures on Rll;~ may not be sustained. RJR %%ill continue to emphasise low-cost manufacture. in order to be in a pos . ition to compete effectively in VFNI segments. 1.1.2.5 RJR will for-us on new markets through join( ventures in Eastern Europe and elsewhere. In Western Europe, where Camcl is still an effective contender. R.JR. will fbcus on price competition to secure growth. In the Nfiddle East, RJR will also continue to compete aggressively on price. However, in the Asia-Pacific region, although lower-priced brands %vill be used, the primary focus will be on 7 supporting Salern and building share in Japan. V 1-1.2.6 Rothmans is re-ancrZing as a significant fac-or in the global tobacco business. Although its brand portfolio contains some significant intemational brands, their key weakness remains the USIB segment, where they have virtually no presence at the premium-price level. There mill be increased focus on the key inter-national trademarks and drive national brands. I'he two global UKIB brand priorities will continue to be Rothmans and Peter Stuyvesant. Durthill will remain a secondary international brand (with an Asia-Pacific fbcus plus selective markets in Europe), with Craven used as a tactical brand and Cartier, Vogue and St Moritz as niche premium brands targeted at selected export and duty-free markets. Rothmans Royals, Golden American and Holiday will continue to be used se!ectivcly as VFM propositions. .-4 1.1.2.7 Western Europe will continue to be the most important region for Rothmans, focusing on its three key international brands supported by WIM entries such as Golden American and Rothmans Royals. Rothmans is, and will remain. a iey competitor in the Asia-Pacific region, where there is a willingness to invest heavily behind the premium brands (particularly Dunhill) and to exploit growth opportunities. RethmansiRembrandt, which is the largest of the major international tobacco companies in Africa. has recently demonstrated a willingness to invest and could pose a threat to BAT. 1.1-2.9 JTI's priorities are expected to be to defend its position in the domestic Japanese market and to seek volume: growth internationally. It's intemational focus will continue to be on Taiwan, Korea and China, though it will also target other markets with good opportunities for volume growth. Mild Seven (which is premium priced other than in Korea and Hong Kong) will be the primary brand focus internationally, with disproportionate spend in the Far East. Outside of Japan, JTI vill ;lso compete -.vith aggressive pricing and promotion in the lower-price segments, as is cNidcnced by its exports to Lhe'.Ndiddle East. 1.2 BATCo's Key Strenoths and Weaknesses 1.2.1 It is BATCo!s intention to build on its key strengths and eradicate weaknesses in order to take advantage of the main industry trends and to strengthen the business in order to widistanid and overcome the anticipated increase in industry competitiveness- t-n 1.2.2 The key business strengths which BATCo will seek to re-enforce include:- C) (i) A competitive UKIB portfolio. CD I IQ INJ N3 ..-NJ BATCo document for Legal Services : Health Canada 21 October 1999 Table 1.1 World Cij!nrctte.N1w*ew Volumes - Re2ignaliSezment Trends 1992 1993 t 944 GrON41h % 1999 COR % pa. (Imal LE ul-n. LELI~il 1993-1994 umm 1989- 1993 1993. 1999 North America 555 533 !13 -36 466 -3.0 -2.6 Latin America 347 341. 1.1 361 -1.5 1.0 Europe Fast/Central 663 669 671 0.4 696 -0.2 0.5 West/North 751 7i I -A) 4) 5 719 4.6 .0.4 - Total 1416 14C.- 14,)l -01 1405 -0.4 0.1 AfficatMiddle East 314 )16 1 3 333 0.1 10 Indian Sub,-Continent 139 1 _12 147 6.9 160 0.4 3.0 Asia-Pacific China Imports 72 61 67 10.0 104 17.2 11.4 China Other 1554 1586 1599 0.9 1661 0.6 0.9 Ctlw A/P 873 Ill! 901 2.0 94 1.9 1.2 Total 2504 2532 z_%9 1.5 2705 1.3 1.3 Total World 5274 526' . 52% 0.6 5429 0.1 06 International Filter Br-,Lndsfl) 611 64- 679 S.2 766 6-9 3.5 ("Esdudint ~he:z VS. L-< AnJ lre!and V T2ble 1.2 Warrid Ggraretie NfiLrket - Nlaior Manufacturer$ Sales (BlIns) Share Growth Rate (% p.&) --J 1992 1993 1994 J~a 199Z 1993 1994 1998 1988-1993 1993-1998 TOTAL WORLD BATCo 300 294 305 1-:-69 j1 5.6 59 6.8 2.5 4,6 :. N . BAT Industries 290 254 291 33 il Ll 60 t.4 4.9 BAT Group 580 548 596 6~692 110 10.4 11.1 12 8 0.6 4.9 Philip Morris 635 650 672 236 12.0 t2.4 12.7 13.9 4.4 3.1 R I Reynolds 290 299 290 90 5~5 5.7 5.5 5.3 0.9 -0.6 I - Rerribrandt, 176 163 161 '.t:160 3.3 3.1 3.0 3.0 -1.6 -40.3 TOW 5274 5262 ~ 5296 ,-;429 0.1 0.6 WORLD EXCLUDING USA, CANADA. BRA71L --It GERMANY BATCo 300 294 303 .._Z69 6.7 6.5 6.7 78 2.5 46 BAT Etidustries 65 64 97 __2~6 14 1.4 L.2 L9 15.6 16.1 BAT Group 364 332 391 9.1 9.0 9.6 10 7 4.2 7.1 z - Philip Morris 352 380 4Ul -.44 79 9.4 9.1 10.3 8.3 5.0 R J Reynolds 131 135 137 .. 134 2.9 3.0 3.0 3 3 12.2 2.6 - Rembrandt 159 149 t4 .-;49 3.6 3.3 3.2 12 .1.0 0.1 Total ~7 T496 ;76 1" 0.9 t.0 L 7 U1 jr C) C:) Q L,4 -4 PQ Nj U-4 BATCo document for Legal Services : Health Canada 21 October 1999 0 Table 2.1 Volume/Value Shares M) (Dornestic DP Shares)t') 1992 2-r) 1994 1995 t996 Europe - Value % 22.8 22.7 23.2 23.2 22.7 - Volume % 15.9 13.0 15.9 16.3 16.6 Asia Pacific- Value % 29.0 29.9 30.0 301 31.5 - Volume % 29.8 3 1.5 32.4 33.2 34.1 Africa - Value % 36.3 35.8 35.7 35.7 36.0 - Volume % 44.6 44.2 45.0 45.7 46.4 Sub-Cont. - Value % 740 72.1 -12.5 J7.9 7 2.9 - Volume % 58.1 36.3 576 593 60.6 Latin Aax - Value% 58.7 56.3 54.9 55.2 54.5 - Volume% 63.5 63.2 62.4 62.1 61.8 Total BATCo Domestic NjarlgeLs - Value% 32.4 32.6 32.7 32.6 32.3 - Volume % 35.6 36.0 36.3 17.6 38.3 Ln MExch4ing associates rz:) C:) P J .P- BATCo document for Legal Services : Health Canada 21 October 1999 14 SECTION 2: BATCo's MARKETING OBJECTIVES & 13PLAND STRATEGIES 2.1 BATCo Mirketins Obiectives 2.1.1 The main BATCo Marketing objectives are a continuation of those agreed in last year's Plan. The key objectives are:. i. To improve the quality of BATCo's volume and market share, by raising the Group's share of the premium-priced segments and, in particul2f, of the fasier-agrowing IFB segment in order to build value share ahead of volume share. ii. To seek in overall volume growth rate of at least 5% p.s. iii. To achieve progressive increases in BATCo's share of the world IFB segment (excluding the USA, Canada, Brazil, Germany, UK and Ireland) to over 141/:% by 1996. iv. To build a 96orld-class ConsumeriTrade.Nfarketing oraganisation. 2.2 Key BATCo Marketina Strrite(pie 2.2.1 BATCo's overall marketing/s3les strategy is based on developing those key brands, markets and market segments with the best prospects of long-term profitable grov~ih concentrating particularb. :n international brands. focusing on brand shares but balancing this with the need for critical mass and coverage of all pnce segments. and building brand goodwill (particularly for the key international dri,ve brands). 2.2.2 Marketing resourcts will be concentrated behind BATCo's key international drive brands. This will be SE355 primanl% in Asia. but also aggressive deva!opment of new markets: B&H in those mark-cis where it is ov-med. POL in the Sub-Continem. Africa. Middle East and Far East; Lucky Strike worldwide; Kent in die Far East-. Barclay mainly in Europe. In each operating company and export market these brands .%ill be developed as (he basis for achieving market leadership for the key BATCo international brand in each market. 2.2.3 Support will be focused on no more thar. three drive brands per market in the short-to-medJurn terra. though over the lonellr term. it is BATCo's objective to secure worldwide market leadership on the back of one or Mo dominant brands. The primarv focusaill be on SES55 and Lucky Strike ( and possibly POL) in th.- Ul-flavour segment. %vith ~cnt and Barclay competingin :he Lights sector. 2.2.4 Local or regional brands %vill be supported and de%eloped %%here they are capable of sustaining significant consumer franchises over the long term. and where they complement international brands. 2.2.5 The strategy of directing brand resources at full-rc%enue market segments (in order to drive value share at a faster rate than vo[ume share) mill be continued. Table 2.1 shows the projected progression in BATCo's volume share and value share by region and appendix E shows the shares relating to individual subsidiaries' domestic markets. These indicate that in many markets this objecti%e is not expected to be acl~.-.ecl over the next three years. parily reflecting responses to VFN4 brand needs. and BATCo %%ill address %%ays in which the objectiNe can be secured. 2.2.6 Brand values %vill be built through improved product quality. sustained and consistent brand management across all aspects of the marketing mix. and. v here available, a greater emphasis on above-the-line rather than betow-the-line support. As much as possible of marketing budgets is being spent against the consumer. 2.2.7 BATCo will also develop strategies which will enable profitable exploitation of emerging NTM segments. International and regional VFM bmnds ha,,c been identified for doing this and they N%iU be L:n developed on a consistent basis. tD_ CD N) kilt ___J N) N~ U-1 BATCo document for Legal Services : Health Canada 21 October 1999 2.3 Trade Mancketin? & Distribution 2.3.1 The objecivuvts of BATCo's Trade tMarketingLnd Distribution Plan are to provide consumers with higher valur;i bi improving the cost effectiNeness and service levels Of the distribution process. The physical .9c.,ow of products from the finished pr,,duct warehouse to the point of saleAill be optiniised in each maarkc:= in order to provide BATCo %%ith a strategic advantage over its competitors. 2.3.2 A retail ouu-_1;:t ctrsus and classification is bemg carried out in all established markets and in key arms of new mar"=s. The information will be used to determine call frequency. trade marketing rep. profiles, m=rchandising and promotion investment strategy 2.333.3 Value addc=d b% BATCo's trade marketing fic:-4 forces %%ill be improved significandy in the areas of sales and smm= gro%Nth in defined priorit~ trad-- channels. in the share of shelf space secured for our internationanJ brands in defined priority trade c-arinels, and in the share of in-store merchandising actiwies azz uc% ed for our international brandiz m defined p rioriEy trade channels. 2.3.4 The producLrivitY and eflectiveness of trade m.::keE1ng and distribution organisations \%ill be improved significancu,... M=sures are in the process of ~,ding developed covering regular retail outlet coverage-. the daily c-11 rate. and orders per call, 2.3.3 The qualin-.-- of Lrade marketing and distribunc.- organisations will be improved significantly through both train=- and recruitment. 2.3.6 Studies to i-tnalyse cost- smice levels. produc: freshness (stock leNels) in the entire supply chain from BATCo's =_~nished product marchouses to the consumer are being undertak-en in Chile, Switzerland and Tai,.,w. ..in these three test markets. distribunm cost per mille will be reduced by 5% in 1994 compared - voth 1993. Performance criteria fc. the process will be established covering the total cost of distribu:.,tion (logistics) in Dmille (from BATCo warehouse to customerk the total investments in fJmille, --m-nd the cost of the total supply chainboth in ZImille, and in % of RSP net of taxes and excise. A study is:3 a1so being undertaken to anal~ se ca:.-Sory and brand profitability to the trade in petrol fon=urt - outlets in se%en BAT markets around the %,.orld. 2.4 Internatictonal Filter Brands 2.4.1 The I==ational Filter Brand (IFB) segment :s expected to grow at a &ster rate than the total cigarette =L-Aet. The total IF1B segment (comencionally defined to exclude the USA- UK and Ireland) is forecasi::: to g0v- at 3.5% p.a. over the Plan period. from 645biln to 766blin, reaching 14. 1% of the world ma:ark-_-t in 1999. Table 2.2 shows the p-.zijected growth of IFBs excluding also the BAT Inclustriems domestic markets of Canada. Brazi*. and Germany. and the relative grovih rates of the UKIB anci USIB segrrients. 2.4.2 B.ATCo's s kc~ objecti--es for this sector are:- i. T-_ 2 a:hi,-.e progressive increases in B.kTC&s share of the world lF`B segment (excluding the Canada, Brazil, Gcniiany. the UIK and Ireland), and in particular to secure a share of ovr.-_7 14'/z% b,.- 1996. -L_ -, increise the attributable brand earr-rigs from BATCo's total IFBs from f502m in 1993 to at-' itast f 7 10m by 1996. with that from the six drive brands reaching at least f 630m in the S rnd 1% tar. 2.4.3 A critical issue for BATCo for success is %vhr67,-r the Group's key existing USIB products (Lucky Strike acr- i Kent) are currently competitive cnou!gh to secure and sustain the desired levels of profitable market shxares in the kery full-revenue USIB sepent. BATCo will continue to work closely with the brand cwivm.-rrs to ensure that the products and communications packages of these brands are developed to the leve-:1s ne=sary to compete effectively in this sector. N) ILA BATCo document for Legal Services : Health Canada 21 October 1999 16 14-4 1, should be noted that the lFB shar. target is lo%%er than projected in last year's Plan, and the Guideline. (14.3% by 1996 compar:d %%ith 1616 previously) principally as a result of the price re- ;ositioning of Luck-.- Strike. the loss of B&H sales in Europe (Project Talisman) and the weaker ,crformance of Kent Combined Exports. 2.4.5 Table 2.3 summarises the volumes and aaributable brand earnings -.vhich are projected for BATCo's :mcmational drive brands. 2.5 UK Intern2tion3l Brands 2.5.1 The primary BATCo objectives in the LXIB sector are:- i. To secure total product superiority for each brand against directly competing brands. ii. To increase BATCo's share of the UKIB segment from 38.9% in 1993 to over 46% by 1996. 6i. To increase the total aniribuuble brand eamings from BATCo's UKIBs from L4 l8m in 1993 to over f5 7 5 m by 1996. 2.5.2 Table 2.4 sununarises the recent and projected volume. share of the UKIB segment and attributable brand earnings figures for BATCo's U-MBs. 2.5.3 The primary focus %vill be on SE335 %,.hich. as BATCa's strongest and only trademark capable of being Zlobal, %%ill play the lead role in the UK] B premium-segment portfolio. supported in appropriate markets by PGL. Benson & Hedges %%ill be exploited in those markets %%here BAT owns the -zrademark. S(ate Express 555 2.5.4 The brand vision is for SE555 to b-.comc the leading intemational brand across Asia in terms of volume, share and profitability, and also to become the leading UKIB in the world via new market launches. S E 5 5 3 is positioned as a premium-quality intemational offer, which represents superior smoothness and satisfaction. The target consumers are single males aged 25-35, primarily urban, white-collar, relatively well educated and career oriented. 2.5.3 SE555 is BATCo's and BAT Industries' largest intemational brand. ltisBATCo'sprimaryUK1Ban4L where appropriate. %%ill be given priority over other MlBs. Mie brand is progressive in all markets ,.%-here SF.553 is the drive incematiorial brand. including China, Taiwan, Indochina and Bangladesh. The roll-out of the ne~v line extensions are increasin,a the appeal of the brand and generating trial amongst new and younger consumers. 2.5.6 The main action points implemented during 1993 vere:- (i) SE55.4 Lights launched in T31,.%an. DF and Hong Kong, %viith encouraging initial results. (ii) SES15 FK launched in Mosco%i (%% ith full ATL support) and in the UK (on a showcase basis). Ptefiminary research has been conducted in Japan. South Africa and Germany. . (iii) A complete eNploitation package has been de% eloped and implemented to support the SES35 Subam World Rally Team k%hich has generated significant media exposure and consurner awareness. (iv) A seasonal promotion programme %%ns developed. with consistent consumer and trade exploi(ation- (V) A consumer benchmark for the SE555 product has been established to guide future product improvements. A product quality taskforce has succeeded in improving Southampton quality and all licensee product has beten compared against the Southampton product (and,%vhere appropriate. action plans established). (JI (vi) The SE555 family line-up has been finalised. C:) C) N) (A BATCo document for Legal Services : Health Canada 21 October 1999 17 (vii) Thc markets %%here SE335 is belo%% m3jr.~crearyVprcmitim pricing (Malaysia, Singapore aal &,c Middle East) ha%e bicen identified and ac-ion plans cstablished to increase the price. 2.5-7 Particular objecti-ics for dh~- brand are - to ensure the continued inomenturn or ihc brand aniong ethnic Chinese consumers. - to widen the consumer franchise among non-e(hnic Chinese and younger smokers. . to upgrade product quality constantly and in particular to achieve perceived 'smoothness' superiority. - to raise share of the LKIB segment from 17 6% in 1993 to about 22% by 1.996. - to increase attributable brand earnings From 03-33m in 1993 to over 1270m in 1994 and at I= 1340m in 1996. 2.5.8Table 2.3 indicates the recent and projected %olume. share and financial figures for SE355. 2.5.9 The key strategies being pursued for the brand arei. (i) ~o fbcus on the Asian region. (ii) To test the SES55 proposition in new mankets. (iii) To increase brand and advertising wNarcness significantly through:- - allocating at least 70% of expenditure towards image building activities in ail markets (due to restriction in some markets, this support may need to be partially or fUlly behind TMD or sponsorship activities). . utilising the new Planet campaign to reinforce or establish SE555s unique brand positi--n- - ensuring that e%er~- consumer contact is consistent. v6hether ATL or BTL, TN4D or sponsorship based. . seeking to impravc (rclativc to competition and previous ratings in existing markets, amocgst tar t consumers) the kev GCS ima2e-aaribute ratings of "high quality% "conternporay'. ge *international". and "Image appeals to me". and to achie, elmaintain superiority relati%_- :0 competition (amongst target consumers) on the image attribute of "prestigiousness (iv) To maintain or establish Premium pricing. (V) To deliver consistently a superior product quality with the taste signature of the SE553 prc6ict positioning. (vi) To increase the appeal of SE355 through the roll-out of the SE555 line extensions with particular emphasis on SE555 Uahts and test marketing of Utra Lights. (Vii) To protect the trademark and associated d,-% ices (viii)To manage the change from using the Rc~al Warrant. Benson & Hedges 2.5.10 The brand vision for B&H is that it should become the leading international Virginia cigarette in 4 current key markets, where appropriate, capitalising on growth opporturtitics in new markeu whem BATCo owns the trademark. The brand positioning for Benson & Hedges is as a premium qualky international offier. with the target consumer being urban. ABC I mates, predominantly aged 25-34 and relatively well educated " ith abo%e-average income. 2.5.11 The projected sales volumes. shares and financial figures for B&H are shown in table 2.6, wherc:Se figures are sho,,%m net of Talisman volumes in all ! cars to aid comparison. The main action points implemented in 1993 were:- i) The three major markets where the revised marketing mix have been implemented (Nigeria. Malaysia and European Duty Free) haw all shown share growth. ii) The development and establishment of an integrated communications package (Tum to Gold) based on the consumer proposition of a golderdmellow product offering the dynamism azbd t_n energy of a modem brand. Golden Tones was successfully teu marketed, researched and C3 repeated in Nigeria. A below-thc-line graphic device was also developed and implemented. CD iii) The family and packaging items %,. ere redesigned to benefit from the core brand property (egcld). rQ r\3 CC) BATCo document for Legal Services : Health Canada 21 October 1999 19 iv) The brand faniil~ %%as ratiorinlised to a core portfolio of king size %ersions of Special Filter. Golden Mild. Lights. Ultra Lights and 100s %ersions of Special Filtr and Lighu V) Successful expansion of B&H Lights. vi) Voluntary health warnings on packs were introduced in the majority or required markets, and plans to do so established for the rcmatnine markets. 2.5.12 Particular objectives for Benson & Hedges are to:- . improve both the brand's share of the UKIB segment in those mark-cis where BAT oN~Ils the trademark, and the brand's overall LIKIB searritnt share. . increase artributable brand earnings from El 29m in 1993 to about El 55m in 1996. 2.5.13 The key 1994 strategies for Elie brand are:- i) Continuingwith the full implementation of the revised brand mix. to revitallse the brand in current key markets (Malaysia, Australia. Nev, Zealand, South Africa. Nigeria and European Dury Free). ii) T'he inLroduction of Lights into further dom,-stic markets and all Dury Free outlets. while developing Ultra Lights for test =rketing. Players Gold Leaf 2.5.14 'Me goal is for PGL to build on its dominant position in the high-pricc local-brand scgr,':nLs in key third-world markets in the Sub-Continent. Africa. the Middle East and Far East. The brand will continue to offer the consumer international qualir~ and imagery. BATCo %%ill continut to ten the new 'Sea' marketing mix. %%hich will become Elie basis for the brand to have a consistent platform in all its markets and provide it N%ith a sustainable positioning. The target consumers are urban. "hite-collar males (primarily those under 33 ~ cars old) in socio-economic groups B and C 1. 2.5.15 The new pack and communication package for PGL is being put through simulated tes% markets in five major markets. Assuming successful results. the ncv. package will be introduced prcercessively into existing markets. New markas %%ill go straight to the new package. 2.5-16 The key objectives for the brand are:- 1. to increase UKIB share from 8.7% in 1993 to about tO% by L996. ii. to incrmse attributable brand camings from E46m in 1993 to about t60m by 1996. 2.5.17 "Me primary strategies which are being pursued for PGL are:- i. Focusing on the key markets of Bangladesh. Pakistan. Sri Lanka- Nigeria and the MiddJc East export markets but also seeking opportuniti.-s to extend the brand into new markets. ii. The aim is for PGL to achieve uniformity in product presentation and positioning across all its kev markets. 2.5.1% In all domestic markets PGL %%ill be priced as the highest-priced locally-made brand. In Arabia it is positioned as the leading value-for-mow UKIB. A mid price point "I'll be considered for new markets with an established/gro%%ing in(emationai brand sezrient. 2.5.19 Table 2.7 sho%~s the recent and projected performance for PGL. covering Nolumes, market share, gross contribution- and attributable brand earnings. The marginal decline inauributabie brand earnings in 1994 arises because of the investments behind the nerw brand package. John Player Special 2.5.20 Followiing approval by the TSG in late 1993. the 19G is developing JPS as a unique, ultra-prerniurn r&he UKIB offier, targeted at occasional gift purchase in selected markets. starting %ith international Duty Free. This is scheduled for testing at London airport in mid 1994. Elsewhere, especially in the r"J __10 BATCo document for Legal Services : Health Canada 21 October 1999 19 Far East, IFS remains a Eactical to,,%-pncc high-%olumc offer t%tala~sia. and from mid 1994. ThaLand). 2.6 US 1--ternational Brands 2.6.1 BATCo's primary focus in Ow USI B segment -,%ill be on Lucky Strike in the dominant full-flavour seg;=t, suppor~d by Kent and Barclay in the groi%ing Lights* segment. However, as noted above, a majzr concern is %hethcr ihe existing product and communications packages for Lucky Strike and Kent are a:pable of securing and sustaining the desired progress in the all-important fult-revcnuc USIB sect:r. BATCo %%ill thus give the highest priority to working %vith B&W to develop %vorld-class mafuting strategies and programmes for both Lucky Strike and Kent. 16.2 BA7 Co vvill focus resources behind no more than t,.%o USIBs per market. 2.6.3 BATCo's key objectives in this sector arei- i. To raise BATCo's share of the US I B segment from 5.0% in 1993 to at least 6.0% by 096. ii. To increase the total attributable brand eamings from the USIBs from 184m in 1993 to over.E I 33m by 1996. 2.6.4 Tab*-- -7.8 surrunarises the volume. share of the USIS segment and attributable brand earr=,,,s figures for BATCo's USIB portfolio. Lucky Strike 2.6.5 Luci:. Strike Filter is the Group's nunib~r one priority brand and is critical to the Group% long-_--term success. 2.6.6 The -,-,sion is to establish the brand as the leading US international Ifull-flavour brand acrcss all BATCo markets. The brand is positioned as the top quality, American original blenLad cigarette for independent young adult males, and the main thrust is into the key you:~;-adult. urban smoker segment. Parity pricing %vith Marlboro is a strategic objective over:he longer term. 2.6.7 The xzy issues facing LSF in BATCo's markets are: i. Lack of sustained product superiorit~ vs Ivlarlboro. ii. Need for an integratcd through-the-line communications package %%hich is distinctive and has a greater appeal than 1% larlboro among 3 oung adult male consumers. 2.6.8 Spez5c objectives for the brand are:- i. To out-perform the world-%%ide gro%%th in the USIB segment. %%ith USIB share rising from 1.3% in 1993 to at least 1.8% by 1996. ii. To increase the price of Lucky Strike relative to the key competitor brand (Marlboro), %%ith the longer-term goal of matching 'Marlbor6s price. iii To secure rapid and sustained increases in gross contribution and to increase attributable brand eamings to about Orn in 1994 and about E20m by 1996. iv To re-estabiish LSF in China~ IV. To consolidate the position of LSF in Spain and the rest of Europe. Vi. To build on the initial share base that has been established in Latin America. 2.6.9 'rbe ::cent and projected volume, share. gross contribution and attributable brand eamings perf.rmances for Lucky Strike are shown in table 2.9. The main reasons for the sig=icant decline in volumes last yew are the revised pfice positioning of Lucky Strike, CD CD rI_J LN C) BATCo document for Legal Services : Health Canada 21 October 1999 20 the effects transit volunics into Spain (about I blin) and the .%ithdratial of the brand from the C--rnbined Exports niarket in anticipation of rc-launching at a higher price. 2.6.10 The primar, strategies %,.hich %%ill be folio%% ed to achie%e the objecti%es are: - 1. T'hecurrent results of Project World Wide Best %%ill be applied in markets "here this improves the curr,:nt product perforniance Once Project W`WS achieves product superiority vs Marlboro (on consumers outside the US), the specifications v%ill be used as the basis for further product improvement in all markets. ii. BAT Co will assist the brand owners in the development of a distinctive coirinunications package %% hich is relevant to. and outperforms. Marlboro among key %oung adult male consumers. iii. The price advantage versus Marlboro %%ill be narrowed, iv. LSFF %%ill be re-iniroduced in China in 1994 using the improved mix (product and ccr--nunications) at a price position close to or equal to Nfarlboro. V. A LSF Wides variant (at a price premium over the standard KS product) %kill be dc-..-!oped and tested in Spain. Chile and Argentina. vi. A LS F Ultra Lights line e..,aension %,~ ill be developed and tested in S%%,iEzerland in 199-1. vii. LSF will remain the strategic priority across Central and South America, where it is :c.-ritified as the Group's longcr-term challenge to P1,11's current success in the US~B segment. ne key to success in the region will be the development ofa su:erior product and a re% ised communications mix - which are vital to sustain the brand. The brand %%ill be heavily supporied. recognising the long-term investment narure of the brand build. Lights %,.ill be developed as a means to expand the brand*s firan6ise in the region. Viii. The successful Team Lucky Strike Suzuki sponsorship will be heavily exploited in 1924 to build brand awareness among young adult mate consumers. ix. L,--ckN Strike 10s (in the standard HL and twin fi%es format) %\.ill be marketed in m-arty BATCo's markets to enhance trial generation and increase shelf-presence in restricted communications environments. Barclay 2.6.11 The visic-i for Barclay is for it to be the leading free-standing ultra low-tar international birand. initially in Europe but longer-term on a global basis. The brand is positioned to appeal to smokers of Wer-flavour USiBs who want to switch to a lower-delivery product. Target cznsumers are predominantly disceming. urban dwelling. younger (21-35i professicnals. with a male bias. Barclay %% ill continue to be positioned at price parity to fWl-revenue mainstream US competition brands (principally'Niarlboro). .6.12 Specific objectives for the brand are:- i. T a cut-perform the %%orld-%%idc: growth in the ultra lov- tar USIB segment, at least maimaining overall share ofthe USIB segment .%hiist securing improved USIB segment shares in the brand's existing European markets. ii. To increase attributable brand earnings from E26m. in 1993 to about L34m by 1996. iii. 7 o Further develop the brand in France in 1994 and launch in Spain in 1995. 2.6.13 Volume. share, gross contribution. marketing support expenditure and attributable brand eamines for Barclay are shown in table 2. 10. 1 2.6.14 The str3tegic priorities for Barclay include:- U-3 i. To continue to grow share in all existing markets in Europe. Chile and Argentina; to implement a national launch in France: and to test the brand in Spain in 1995. rQ LN I BATCo document for Legal Services : Health Canada 21 October 1999 ii. To inccasc brand and advenising a%%arcness b~ building upon the "Couch' campaign and Further ;xtendiag it to all BTL ac,.% itiess (assuming that quantitative research confirms its success). iii. To implement the newly deviscd brand logo in all BAT Co markets. iv~ To develop a modified mix for markets %Oicre there is little a%iareness of deliveries and/or S&H issues. A strong product claim (such as 99% tar-free) will be utilised. V. To ldaritjf~- the potential of the su=ssful "Num&-r One." variant in each sting Barclay market. Kent 2.6 15 BATCo's vision for Kent is that it should become the leading Lights brand r il am The brand is uniquely positioned to capitnlise on the gro" ing damand for Lights cigarettes by offering a satisf~lniz and'pure'taste. The new strategy is designed to attract current smckers of FF USTBs N%hom are disceming younger professionals (under 30). Kent pric,ng %%ill be at parity to fuil-revenue mainstream US competition brands (principally Ma.iboro) 2.6,16 The key issues facing Kent in BATCo markCES are:- i. ne currcnt "perceived Lights" positioning creates zonfusion among consumers given the brand's FF deli%,er-%-. ii. The ne.-d for a Superliglits -variant to replace the red Lights variant which created confusion about its delivery level among consumers. iii. The cur-.enE copy needs to be revised. It is seen as aspirational in BATCo markets but not particularly distinctive. compelling or rcle,, ant to the target consumer. 2.6.17 A rietv communication platfiann and copy strategy has bzen developed by BATCo and recommended to the brand ownurs. It will tested alone %% ith BWI's proposed improvements of the current platform in China. Hong Kong. Japan and S%%itzitriand in early 199-1. BATCo's objectives and strategies assume that one of tl~;, mo ne%,L packages will prove sue-c-,ssful and can be implemented in 1994. 2.6. IS The primar.% objectives for the brand are:- i. to re-build share in the US I B segment. ii. to increase attributable brand earnings from E26m in 1993 to about E40m by 1996. 2.6.19 The strategic priorities for Kent are to:- i. ToesE the "Pure Taste" communications packw: and strateg~ developed b,. BATCo in China. Hong Kong. Japan and Skkitz:rland in early 1994. ii. To ~%cirk %NiEh the brand oL%ncrs to reduce the delj%,,-n_s of the Parent variant in markets %%here there is awarencss of delivery lc% Js or tar bands. iii. Develop and launch a Superlights variant in con * :uncton %vith the brand owners in Hong Kong 3nd China. The variant should ha%.- a de!ivery level of 7mg and offer sigjeficantl~ more taste than competitive 7m& pr,-ducts. iv. The Kent Leisure Holida~s programme %%Ill be c,)ntinued in 1994 as a mearts of enharcing core brand values outside the tobacco tradernark. 2.6.20 Vclumc. share. 7ross contribution. marketing support znpenditure and attributable brand earnings for Kent are shown in table 2.11. BATCo document for Legal Services : Health Canada 21 October 1999 Table 2.5 State Exvress Sales (brts) Croulh CGR C/.P.a.) 1092 093 IY94 93 .94 1996 1993. 1996 Sharc of [FB (~‚)' 3.9 4.0 41 4.8 Sharc of LXIB (4 - 1- Il 16-U k 7.6 [9 4 22,4 Europe 0-2 0.1 0 ~ 1319 0.5 58.6 Latin AmericaMi 0.4 0.4 04 19.8 0-5 11.1 Africfflddle E3si 1.5 1.5 t‚ 10.5 1.7 5.7 Asia Pacific 18.9 20A 22.9 14.3 27.8 11.3 fndian Sub-contitIcat 0 3 9.13 ~L::5 10.7 0-6 6.5 Total iLl L2. 5 LI -3 14.8 -31.2 11.5 Key BATCol~trk.,ts:- HK expotisc2~ - Volume (bn) li.i 14.0 167 18.8 20.5 D.4 SUTL - Volume (bn) 1.7 1.7 1 1 -2.7 2.0 5.5 T~dwart - Volume (bn) 1.3 2.1 14 14.2 2.9 10.9 Cross Contzibu—ea (imn) 203.1 2j t.9 304.3 21.4 382.0 14.9 Attr. Brand Fartucgs (fmn) 199.8 232.7 2?13 t®7.2 343.3 13-8 ("F-,t.ludiftt BAT lhc USA. Cmud& BraZil. Gclinam. Lix 0( aM Irclud -'Imludint BAT chuba Table 2.6 Benson & Hedges Saks~I_Lbmnal Giowth (6/6) CGR (% pa.) 1992 1993 1994 93-94 1996 1993- 1996 Share of IFB (%)(2) 2.6 2.5 2.3 2.3 Share of UKIB 0.0) LO.9 10.9 11.1 11.4 Europe 1.7 1.8 1.9 3.2 2.0 4.0 Latin AmericaiWH 0.2 0.2 0.3 16.4 0.3 10-4 AfricalMiddle East 5.2 3. 31 5.3 9.1 6.4 6.9 Asia Pacific 7.3 6.6 63 3.2 7.1 2.4 Man Sub-continent 0.0 0.0 00 0.0 0.0 6.3 Total 14.4 14.0 t7s 5~7 L5 A 4.5 Key BATCo Marixts:- South Africa - Volume(bri) 2.9 2.7 2.1 3.6 3.0 3.7 - share(1/0) 9.7 9.3 9.S 10.1 Australia -Volume0n) 3.0 2.8 2.- -3.7 2.6 -2.7 -Share(%) 92 3.9 9 it 9.2 Malaysia -N*olu=(bn) 2.0 t.6 I.S 13.0 2.0 9.0 - Sbarc(%) 10,7 11,6 11 3 12.3 unitsl&II -%olume(bn) 1.1 1.0 1. -. 23.8 1.4 11.6 Gross Contribution (Imn) 151.3 168.7 173.1 2.6 200A 5.9 Attr. Brand Emnings Umn) 117.9 129.3 13 LT L9 155.9 6.4 MFigures exclude Tafism= volumes in all Ye= (21E%cludinS the usA. Canuda. Brazil, Gemany, UK and Ireland CD CZ) r11j t/4 1-4 NJ UP4 ~.A I BATCo document for Legal Services : Health Canada 21 October 1999