sample="quota" bates="506044286" isource="pm" decade="1980" class="ui" date="19840823" External Forecast 8/23/84 The Marketplace Industry Volume After losses in 1982 and 1983 due to the January 1, 1983 8¢ Federal Excise Tax increase, Industry volume is expected to decline slightly in 1984 and show further slight declines throughout the forecast period. Industry volume is unlikely to return to its pre 1982 growth rates due to: more aggressive state tax increases, more intense efforts to make smoking socially unacceptable, continued restrictive smoking legislation, and continued unemployment, especially among blue collar workers. In this environment, competition to hold or gain volume through share increases is likely to be intense. Smoking Population The total number of smokers over the forecast period is expected to remain about flat. A population increase of about 8 million people (18+) during the next four years will be offset by a decline in smoking incidence. This decline in smoking incidence is a continuation of the long term trend. Rate per day over the forecast period will resume a slow long term increasing trend, as the smoking population ages into heavier consumption age groups. These factors -- lower incidence, a stable smoker population, and a slow increasing usage per smoker -- will continue to enforce intense competition for the key smoker groups. Other smoker demographic trends during the forecast period show: - The smoking age population will continue to grow with all of the increase occurring in the 25 and older age group. The number of males and females 18-24 will actually decline. The 35-49 age group will increase at the fastest rate (+3.6%/year average), followed by the 25-34 year olds (+1.7%/year). The 50+ group will increase only .7%/year. - Geographically, growth in population will continue in the South and Southwest, with declining or no growth population in other areas of the country. Smoking incidence should remain highest in the Northeast, North Central, and Southeast. The Pacific/Mountain area will have the lowest smoking incidence. - Among the minorities, Hispanics will increase 34% from 1980 to 1990. This is considerably faster than the projected Black growth (+17.1%) and overall population growth (+9.7%) over the same ten year time period. As a result, Hispanics will comprise 7.8% of the total population by 1990 - up 1.4% from 1980. It should also be noted that the growing Hispanic population is becoming less concentrated regionally than in the past. Market Segmentation Background One of the most dramatic changes affecting strategic planning at RJR in recent years was the adoption in 1980 of a Brand Family marketing philosophy. As a result of the adoption of the Brand Family marketing philosophy, in 1981 a new approach was taken to understand the structure of the Domestic cigarette market. This approach utilizes behavioral data to define segments and consumer attitudinal research to understand the consumer and brand dynamics within each of the segments. As a result of this approach, a better understanding now exists of why brand families cluster as they do and therefore what benefits they offer smokers. Definition of Segments It was determined that a segment of brands should consist of those brand families in competition with each other for attracting consumers with similar wants by providing relatively similar end benefits. Segment Formation Switching behavior was analyzed to determine which brand families have high degrees of switching interaction. If two brands have high switching interaction, then they tend to provide similar end benefits. Based on these interactions, and judgements regarding brand positioning, the segmentation listed in the following section was developed. With the completion of customized segmentation research, the driving motivations were determined. This information along with external, Industry and competitive information aids in developing RJR marketing strategies. Market Segments Seven brand family segments have been defined using the approach described above. These segments and the major brand families within them are noted in the following table: Traditional Segment The Traditional Segment is the oldest of the seven segments -- in terms of both the ages of brand families within it and of the smokers it attracts. The Traditional segment is the sixth largest segment, accounting for 6.1 percent of the market. This segment has declined over the past three years, having lost 1.2 share points in that period, and is projected to decline even further in the future. Analysis of key style preference trends shows the following: - Non-filter brands will continue to decline in share of market, representing 5.4% in 1987. Share of filter styles will increase slightly from a 1983 share of 93.2% to about 94.6% in 1987. - Among filters, the trends over the forecast period will tend to be stable. Brands with tar levels of 16 mg.+ accounted for about 41% of cigarette volume in 1983 and are expected to remain at about that level throughout the forecast period. Brands with tar levels of 7-15mg. accounted for about 42% of sales in 1983 and are expected to increase slightly over the forecast period to 45%. Should one or more of the larger brands (e.g., SALEM Kings) reduce tar back into the 15mg. range, the size of this tar range could increase dramatically. The stability of the 0-6 mg. tar group (at about 10%) reflects the slowing of new brand introduction in this tar range. - Share of 100 mm cigarettes is expected to grow from a 1983 share of 38.1% to a 1987 share of about 42%. Share of 85mm cigarettes is expected to decline from a 1983 share (55.1%) to a 1987 share of about 52%. - Menthol brands will continue to hold a relatively stable share level at about 28% of the market. The non-menthol filter market will grow slightly. Competitive Environment In 1980, RJR halted a two-year decline in share of market and gained share in 1981 and 1982. In 1983, however, RJR experienced a share loss, down 2.08 share points to 31.47%. This decline can be traced to the following causes. First, RJR experienced a disproportionate amount of quitting and reduced consumption in response to higher cigarette prices. The demographic profile of our franchise is such that they tend to be somewhat more price sensitive than other smokers. In addition, RJR's share loss appears to have been disproportionately affected by the trade adjusting inventories downward in response to reduced consumption levels. In 1983 share loss also reflects the effect of intensive competitive new brand activity, specifically Players, Satin, and Benson & Hedges Deluxe Ultra Lights. Finally, the most significant single factor impacting our business has been the price related growth of Generics. Although 1983 was a difficult year for RJR, we expect our share to increase in 1984 and to increase moderately in the future. Philip Morris Philip Morris remains the greatest long-term threat to RJR. In 1983, the company's share was 34.41%, up 1.56 share points versus 1982. This compares with a gain of 1.02 share points ton 32.85% in 1982. Philip Morris' increase was due almost entirely to Marlboro and the introduction of Players. The 1983 share for Marlboro (20.16%) was up .93 share points versus 1982 as compared with a ten year average share point gain of .71 share points. However, part of Marlboro's growth came from the introduction of Marlboro Lights 100 Box. Benson & Hedges 1983 share (4.93%) increased .21 share points versus 1982 due to the introduction of Deluxe Ultra Lights styles. The gain compares with a ten year average share point gain of .13 share points. Merit's 1983 share (4.36%) was down .14 share points in 1983 as compared with a five year average share point gain of .28 share points. Merit's losses occurred despite a dramatic change in their advertising campaign. The 1983 share for Virginia Slims (2.52%) was up only .03 share points versus the previous year. This compares with a ten year average share point gain of .12 share points. Players generated .66 share points for Philip Morris in 1983 although its current performance is considerably poorer. All remaining Philip Morris brands (Parliament, Cambridge, and Saratoga) lost share. Demographically, Philip Morris is strongest among younger adult smokers. In terms of segments, the company's strength is in the Virile, Stylish, and Moderation Segments. Geographically, Philip Morris has a strong share of market in each of RJR's five sales areas. The company's performance is weakest in the North Central and South Atlantic sales areas. The South Atlantic is RJR's strongest geographic market. Philip Morris is highly developed in metro markets and least developed in rural areas. Philip Morris has accelerated sales force activity toward converting competitive smokers and has taken several steps to improve its persistent out-of-stock and distribution problems. Given Loew's (the parent company of Lorillard Tobacco) corporate philosophy of viewing its operating subsidiaries as investments that must deliver a satisfactory return, Lorillard will probably continue to emphasize profitable share growth and will continue to watch the Savings Segment for possible opportunities. If Lorillard decides to enter the Savings Segment, it will probably extensively test market the brand prior to national introduction to ensure that the brand will meet profit objectives consistent with Loew's expectations. Rather than looking extensively to new brands for share growth as in past years, Lorillard has recently concentrated on revitalizing declining or flat established brands. In early 1984, Satin's packaging and advertising were changed to depict a more upscale image and in mid-1984 True's advertising campaign was dramatically changed. Additionally to capitalize on the strength of the Newport brand, Lorillard nationally introduced Newport 100's Box and Newport 100's Box Lights in mid-1984. American In 1983, American slipped to fifth place among the six manufacturers as Lorillard moved into the fourth position. American's 1983 share (8.64%) was down only slightly (-.15 share points) versus 1982. This compares with a ten year average share point loss of .68 share points. Higher cigarette prices in 1983 caused by the Federal Excise Tax increase had a negligible impact on American due to their less price sensitive demographic profile. For the same reason, Generics have also had a limited impact on American. Lucky Strike was the company's only brand showing a share gain, due to the expansion of Luck Strike Low Tar Filters. All other major American brands continued to decline in share. Lucky Strike's 1983 share (1.04%) was up .11 share points versus 1982 due to the national expansion of Lucky Strike Low Tar Filters. This gain compares with a ten year average share point loss of .10 share points. The 1983 share for Pall Mall (4.15%) was down .13 share points versus 1982 as compared with a ten year average share point loss of .47 share points. With Pall Mall, American accounts for 85% of the Traditional Segment. Carlton's 1983 share (2.01%) was down .07 share points versus year-ago despite heavy promotional activity and the test market introduction of Carlton Slim Deluxe 100's Box Filter and Menthol. Tareyton's 1983 share (1.22%) was down .04 share points versus the previous year. This compares with a ten year average share point loss of .20 share points. Since 1966, American has focused most of its attention to diversification away from the cigarette business. In 1983, non-tobacco acquisitions represented 42% of American's operating income. Reduced media expenditures and little new brand activity in the cigarette business indicate that the company is not willing to make a substantial commitment to reverse the company's long-term decline. Rather, American is "milking" its tobacco operations to finance its diversification program. Because of their "milking" strategy, American is unwilling to enter the expensive and risky new brand arena. Their last national introduction was in 1975 with Talls. In 1983, the company continued to focus on the less expensive introduction of line extensions rather than launching new brand families. Liggett & Myers In contrast to American, Liggett has exhibited a renewed interest in the cigarette business since being acquired by Grand Metropolitan in 1980. In 1981, Liggett gained share for the first time in 17 years. The growth continued in 1982 with the company gaining .32 share points to 2.87%. In 1983, the trend continued, increasing 1.95 share points to 4.28%. This increase is almost entirely due to the growth of Generics, sustained by the gradually increasing price differential -- upwards of $2 per carton at retail -- between branded and generic products. All other Liggett brands showed share losses, except Eve. With a 1983 share of 2.99%, Generics' were the tenth largest brand and accounted for 87% of the Savings Segment. Generics' share increased 1.97 share points versus 1982 and continued to grow in 1984. Eve's 1983 share gain (+.10 share points) to .37% may be partially due to heavy promotional activities throughout 1983. L&M, Chesterfield, and Lark continued to show share losses despite promotional activities during the year. Since 1980, Liggett has concentrated on producing products for market niches that it felt were too small or unprofitable to interest its much larger rivals. Consequently, Liggett was focused on Generics and private label brands (Epic and Bronson), as well as brands targeted at Hispanic populations (Dorado and L&M Superior). Additionally, Liggett introduced an intermediate priced brand, Stride, into its test market in June, 1984. Furthermore, to implement its market niche strategy, Liggett is using a regional marketing approach.