PRICE VALUE STRATEGY STUDY AG E N DA 5/30/91big.assets.huffingtonpost.com/Bain91.pdf · philip...

PHILIP MORRIS U .S.A.PRICE VALUE STRATEGY STUDY

AG E N DA 5/30/91

• Review study objectives

• Elements of the strategy

• Implications for PM USA performance goals

• Competitor dynamics & reaction

• Timing & implementation priorites

CO ,i9 ® l,.i ¢ TV© t7 5/24 PMF263 CMC

http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


KEY ISSUES ADDRESSED IN STUDY

• What are the underlying drivers of price value growth?

• How can Philip Morris manage the end-game such that Marlboro longterm profitability is maximized?

• How much should Philip Morris increase full margin prices?

• How can Marlboro be promoted without damaging the brand image?

• Can Philip Morris use size, resources and brand strength to createbarriers against PV development?

O,r ra O,-w- -r V® y 5/23 PMF193 CMC


PHILIP MORRIS U.S.A .PRICE VALUE STRATEGY STUDY

PHILIP MORRIS U .S.A./BAIN 6- MONTH WORKPLAN (11/30/90)

100%

80

(n

U=30 60Cna )~0~UL

40a

20

December January February March April May• Fin4nciAl analysis • Financial modeffing'

- product line profitability ~ segment growth & share- market size growth & - price levels

segmentation - sensitivity analysis 0 Strategyinte rationg

0 Distribution value chain • Distributor/customer merchandisinganalysis and promotion -evaluation- distribution/trade

interviews - trade incentives & profit drivers of PMoptions

- logistics flow - point of purchase adverlising- channel segmentation - retail store profit model

-consens0 ' Analogous industry experience • Competitor assessment building

- PM international interviews - relative market/financial strength- liquor, food industries - vulnerability to P/V growth - translation- P/V penetration curve - likely reactions to PM moves into specific'~

• Review of • Regionaff plans

existing mkt • Conduct additional market research micro niktresearch - perceptual b rand mapping analysis ofp/V

- micromarketing

-internalstudies - understandi ng of "switching" behavior -demographics plan

-channel-industry' effectsacademic -promotionalstudies effects

TT V ® i1.+ Tr ' " " 5/28 CMC581 KGV


PHILIP MORRIS U.S.A.PRICE VALUE STRATEGY STUDY

BAIN & COMPANY ANALYTIC PROCESS

• PM management interviews • All PM USA senior executives• All brand managers• Field sales force• Market, consumer research• PM Europe (Germany, UK)

• Trade interviews

• Market research

• 17 wholesalers• 66 retail accounts• 8 PM sections visited

• 1989, 1990 Shifrin U&A study (segmentation)• 1991 prime prospect study• 1991 low tar, full flavor mapping

• Analogous brands • Beer industry analysis• Leading consumer product brand strategies

(pricing, promotion, PV strategies)

• Economic models • Competitor profitability by brand• Price elasticity model• Competitor cash flow models• Retail trade economics

(j {- v tJ0 {- 1 Q(f 28879W010 PMF



CONSUMER PRODUCTS INDUSTRIES MARKET SHARE VS. PROFIT SHARE(1989)

Philip Morris U.S.A .

100% 100%

Anheuser Busch

100%

Frito-Lav

85%

80 80 8073%

~~. ~~~0 0 0~ 60 ~ 60 ~ 600 0 0

~ ~~c C 50%aD a)0 46% UL. U~.a) 4) 0 4)a 42% a 42-A a

40 40 40 ~

20 20 20

0 0 0Volume Operating Volume Operating Volume OperatingProfit Profit Profit

Source : Wall Street Journal, Fortune, Beverage Industry,Annual Reports, Bain Analysis

5/20 pmf221 cmc

£T604TIVOZ


PHILIP MORRIS U .S.A. +PRICE VALUE STRATEGY STUDY

CONSUMER PRODUCTS INDUSTRY STRUCTURE(1989)

50%

~ 40~0m~: r-° 30a~~ccdLQ 00~~°' 10a

0

(10)0 .05 0.1 0.2 0.5 1

Relative Market Share (RMS)

Source: Annual Reports, Industry Literature, Bain Modeling

2 5 10

5/23 PMF237 CMC


0Liggett



PRICE EXPERIENCE CURVE(1944-1989)

$50

(U2

$10

1960 ~c**

* *

* * 1950 19750

1 I

3,000 5,000 10,000 20,000 30,000

Accumulated Experience (Billions)

Source: USDA Specialty Agriculture Branch ; Agriculture StatisticsNote: Excludes state and federal excise tax

Bain Slope= 94%R-squared= 51 .1 %

116mnc1 pmf

9T SOtM oZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


SOURCES OF INDUSTRY PROFIT GROWTH (1986-90)

a12%

10

t~~0~a

I (2)

(4)

(6)1986 1987 1988 1989

Note: Excludes Philip MorrisSources : Annual Reports ; MSA; New Nielsen ; Bain Analysis

1990

28879W017 PMF

4T so0 F f o Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PM USA PRICE/COST EXPERIENCE CURVES(1980 - 1990)

$50

40

30

~ ~~ 20c~000T

1 10

80

Full Margin Price (85's)

Branded Generic Price (85's)

B & W (85's)

Sub-Generics (85's)

8281 83 84 85* Manufacturing Cost

7~Ca) *n. 80 814-U)0U

1 124,000

82 86 87 89 88 90

1 1 ~26,000 28,000 30,000

Accumulated Experience(Billions of Cigarettes)

Source: Philip Morris 5-Year Plan1/20 PMF021 CMC

81604 {-FYQ(f



PM U.S.A. LONG TERM VISION

Outcome of Successful Strategy

• Maximize cash flow of PM U .S.A.

• Stable of strong brands in year 2000,

• Favorable industry structure for PM U .S.A .

- high percentage of industry profit

- competitors with stable, but flat profits

Levers to pull achieve to strategy focused on capturing volume

• Pricing

• Capturing the trade

• Flanking the price value brands

U F GO ~ 6 T V V g 5/28 PMF272 CMC


PHILIP MORRIS U.S.APRICE VALUE STRATEGY STUDY

U.S. CIGARETTE MARKET - VOLUME(1963 -1990)

m

CAGR83-90

(1 .9%)(.2%)

64.6%

(7.2%)

RJR Full Margin Brands (5 .5%)

Source: FTC report to congress for 1988, Philip Morris share of market reportsPhilip Morris strategic plan ; Business Week 1/23/89, 12/23/85 5/23 PMFO12 CMC

MOLTIfiOZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


MANAGE THE "SWEETSPOT"

Full MarginVolumes Decrease '~

Price War

r•

Investmentin Price Value

Full Margin

Optimal Industry Structure/Profitability

T (sUtl0 1- V 0 9

Prices Increase

5/24 PMF269 CMC



FM PRICE INCREASE REQUIRED TO OFFSET VOLUME LOSSES

1990 Volume Losses Pricing Required to Offset Volume Loss

10%~ 10%r - - - - - - - - - - - - - - 10%

- ~~, .0 c0) a)0) ULv 5 a)aaD ~E:3

a)Cn0 coa) 6 .0%> U 5.5%c_a)

ca) 5.0% 5%~ 0

CU.~

(o~ Ia

0 c

~ (2-2) ~aD ~ 3 .0%U ~L

a. (5) (4.9) ~

1 .3%

(8 .4)(10) ~ (9.4) RJR B & W American Lorillard PM USA

BrandsRJR B& W American Lorillard PM USA

Brands

5/20 PMF246 CMCSource: New Nielsen March 1991 Brand Share Reports

99004TIf0ghttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf

PHILIP MORRIS U .S.A .PRICE VALUE STRATEGY STUDY

CIGARETTE MANUFACTURERS VS . RETAIL TRADE INCENTIVES

~w-iaU)~

100%

80

20

randedGerTeric

` B & W

a~mc~r

Full Margin

Full Margin

PM U.S.A. Liggett Group

Direct Product Profitability35.8%

30.0%

20.7%

15.1%

Full Branded Sub Black &Margin Generic Generic White

Absolute Profit Dollars

$2.49

Full Branded Sub Black &Margin Generic Generic White

40%

30

20

10

E96 5/29 PMF282 CMCO'~ T ~~ O~http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PM USA STRATEGY TO INCREASE SHARE OF INDUSTRY VOLUMEFortress Full Margin• Pricing• Promotion• Product positioning• Trade programs

Bid For All Industry Black & White Volume

• Remove source of competitor growth

• Pressure on sub-generic from the low end

Increase Cost ofAccess to Trade

• Bid up trade cost,convert to FM

• Pricing• Trade programs

28879wmnc PMF



STRATEGIC OPTIONS FRAMEWORK

I

Discontinuities :• Product innovation• Environmental• Barriers toparticipation

•"Dramatic" competitivemove

Foreseeable Evolution :• PV inflection point• Competitor dynamics•Trade dynamics

Current:•Customer segments•Competitors•Trade incentives• Price valuepenetration

Risk Management

Flexibility torespond to changingmarket conditions

Foreseeable Opportunities/Threats

Maximumshort termrofitabili

Current MaximizeFull Margin

Profits

Maximummedium term

value

Optimize FM, PVMarket Position,

Profitability

PM U.S.A. Approach

PotentialBreakthrough

Philip Morris U .S.A .changes the rules

of the aame

Change theRules

52801 PMF.LW

~ 9 UV(-+FFV®ffhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PM USA STRATEGY TO INCREASE SHARE OF INDUSTRY VOLUMEFortress Full Margin• Pricing• Promotion• Product Positioning• Trade rograms

4j;

9"04jn0ghttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


1990 U.S. CIGARETTE INDUSTRY PROFITABILITY

Black & White and sub-generic

100%

80

~~0

60~00~C 40UL~Q_

20

0 2 4 6 8 10Philip Morris RJ Reynolds Brown &

Williamson

:Branded

Branded generic and 8ner+cBlack & White

c

Full margin Full margin Full Full czmargin margin

F_Z)U_

Net Contribution (Billions of Dollars)

(NET CONTRIBUTION)Branded generic

$12.3B° as_0 ~~ U 0)C3)

m JJO EQ

~ Full margin

~ Price value

Black &White

Sub-generic

randedgeneric

N Fullmargin

28879W019 PMFSource: Bain Brand Profitability Model

ZZ 60LM oZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


U.S. CIGARETTE MARKET BY AGE BRACKETS - 1990

100%

80

60

40

20

18-21

Source: PM USA Tracking Study

RZ604TTfoz

22-24 25-34 35-44 45-54 55-64 65+

[:] Other

M Liggett

® American

~ Lorillard

E3Brown & Williamson,~;; ~ R.J. Reynolds

Philip Morris

12/4 CMC605 KGV



NET BRAND SWITCHING - MARLBORO FRANCHISE

5%

4

..F Full margin

brands

D Price valuebrands

0

2

(3)

3

r

r

(4)

(5)

EM

New smokers New smokers New smokersNew smokers

Inswitching

~---------~

Full margini'

Price value

1988

~1 .3)~r - - - - - - 1(1.3) - - - - - - - - -

1989 1990

.'

--- ------Outswitching

1991

Note: Excludes quittersSource: PM USA Consumer Tracking Study 28763R12a PMF

sZsoLTTVOZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


U.S. CIGARETTE MARKET DEVELOPMENT(1980 - 1990)

100%

80

Non-Filter

Ultra Low Tar Menthol-J Light Menthol

Full Flavor Menthol

Change inhar

(4.8%).9%

3.1%

(6.1 %)

20

Ultra Low Tar Non-Menthol

Light Non-Menthol

Full Flavor Non-Menthol

0 1 1 1 1 1 1 1 1 1 1 11980 81 82 83 84 85 86 87 88 89 90

Year

3.7%

7.4%

(4.3%)

5/29 PMF280 CMC

QE6O4TTfi®Z



LOW TAR ATTRIBUTE MAP

Brown filter

A bra

Well established -., Marlboro

Popular

1• vVinstan

Fits my personality Has advertising I like --+ .

Good image --• B&H

Hard box •Unique filter

Virginia Slims

Stylish

Merit

•

d friends/relatives smoke

• Strong tasting

Has high quality tobacco*1 Enriched flavor

Parliament

---_-_•

/

~Cattqn~True

Do

ram

•_-- Lowest in tar & nicotine

~ ry tar\Vetow ' Very low nicotine

Ite filter

Longer cigarette

Sources : PM Market Research ; Bain Analysis

Offers couponsJrefun s/~ refunds/discounts

os less than mostpopu brands•

Generic price

28886.)001 PMF

T GL? 0L } T !/ oghttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


LOW TAR USER PERCEPTIONS MAP

Macho•

Aggressive Camei1 Marlboro Out-

A leader • 1going

Popular Merit ~onfident-•

rB&H

Successful • •Weii traveled

Slim

Flirtatious • •Romantic

•Weli dressed/styiish

• Sophisticated

• Creative

Kent:;

• Outdoorsy• Stubbom

•Likes big partiest-Casual/carefreeI • Risk taker

Vnntgnp Home and famiiy oriented

M~itbuLogical 41 1~~r1tOr~•

•r~eservecusenous

Store BrandTrue

•Choosy• Vain

• Insecure

Source: PM Market Research, Bain Analysis 2asasnoo3 PMF

ZCGOLM ® Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


FULL FLAVOR ATTRIBUTE MAP

Virginia Slims

• Slimmer

• Longer •1 White filter

Low in tar• • Low in nicotine

B&H More flavor than other brAnds

• StylishWell established Good image Malibu ~

ntr4mifCambridgeAdvertising I like Brand friendslrelatives s oke1/1Cer r ~'Yta~rtf~~~o ~a~ ristol

Popular High quality Ri~l~nd .... . .. ood value • Generic pricer-- ! Pall Maif ` • Rich tastin Offers cou ns/discoun •, .. ...~ ...._, 9 Po Costs less than

Available in hardbox ~hsMn IWuOcY -6t_nxe I Fits my pe onality I popular brands

Marlboro ~'Mo~re'~flavor than other br nds

Carne['

• Strong tasting

Budcs

• Brown filter

28886J004 PMF



FULL FLAVOR USER PERCEPTIONS MAP

Macho

Intelligent•

•Successful

B&H

Status conscious

•Weildressed/stylish

Aggressive•

Competitive IndepoVdent AII11%.

Marlboro

'*• Likes- ,_biq_parties

• • Ame7;an~ Ambitious •

A Leader

Choosy •

Home and fami y onen ed~.,~'~Affectionate ~~

•• OutgoingInsecure •

Exercise/eat carefully

IV. Slims

Source: PM Market Research, Bain Analysis

Stubborn••

Vain

CasuaV ApproachableCarefree

•

~ii 1` ~ saA

A

Budcs

•Smart Shopper • Prefer small gatherings

Malibu ~ Mature

LOW

•Cheap • 1

CostConscious

29888.)005 PMF

r E 6 O'4 T 1p O zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PM USA FULL MARGIN BRAND PORTFOLIO - VOLUME GROWTH

Share Gain/Loss(3/90 - 3/91)

2%

0 .4%

0>C

0

(1 .3%)

(3.8%)

(4.7%)

(6)(6.1%)

(6 .9%)

(8)

Source : New Nielsen

SE6OLTTVOZ

Marlboro Virginia Slims Merit B&H Parliament Total industryFM brands

28879W016 PMF



PM U.S.A. FULL MARGIN BRAND STRENGTH

Advertising Investment Unaided Brand Awareness

$350MM 75%75%

300 CAGR~ Benson &U)C:2 250

Hedges

~ (4.4%) -ia 50~ 0

1--nz 200 Merit ~0 (.3%) 0

0 c~~ 150r

a )UVirginia Slims a )

12.3% a 0%aD>~ 25¢

100 19%

50Marlboro 1 .4%

10%

0 ~- I I I ~" 01986 86 88 89 90 Marlboro Virginia Benson & Merit

Slims Hedges

Source: PM Advertising Data5/29 PMF276 cmc

92604TTV09http://legacy.library.ucsf.edu/tid/ryp96e00/pdf

PHILIP MORRIS U .S.A.PRICE VALUE STRATEGY STUD Y

REGIONAL VOLUME GROWTH OF PM USA BRANDS

B&H

Merit

6%

4

2

0

(2)

(4)

(6)

(8)

(10)

(12)

Source : New Nielsen

Region 1

4 .52

Region 2 Region 3

3 . 6

Region 4

Im Marlboro

Q Virginia Slims

(10 .21 )

Region 5

LE6OLIIfOghttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


REGIONAL CIGARETTE CROSS PRICE ELASTICITY(1988 -1990)

1 8

1 7

1 6

1 5

1 4

1 3

1 2

1 1

1 0

9'-50

I

60

I

70

I I

80 90

Full Margin Market Share

Source : New Nielsen Share Data, IRI Pricing Data

I

100

5/20 PMF181 CMC

~E~O'~I un



FM PRICE INCREASE REQUIRED TO OFFSET VOLUME LOSSES

10% ..

1990 Volume Losses Pricing Required to Offset Volume Loss

10%r--------------- 10%

~,..0 C0') a)0) U

- 5 a)aaD

E:3 U)

0 c liaD 6 .0%> U 5.5%c

0cm 5.0% 5%

0) UC

`(l~~ a

CU(2 2)

~c .

co 3 0%a>9 ~

.

a (5) :3(4.9) U- .1 .3%

(8.4)(10) ~ (9.4) RJR B & W American Lorillard PM USA

BrandsRJR B& W American Lorillard PM USA

Brands

Source : New Nielsen March 1991 Brand Share Reports5/20 PMF246 CMC

OEOOLTTVO9http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


VALUE OF CAPTURING FULL MARGIN VOLUME

Incremental Profits to Philip Morris U .S.A.

$500MM

00

2

100

0 I I I I I I I I0 1 2 3 4 5 6 7 8%

Increase in Volume(Percent)

M0LTTMhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


DEFEND FULL MARGIN BRANDS WITH RETAIL TRADE POLICY

Elements of Trade Program :

• Growth incentive programs

• Bid up cost of prime shelf space, fill displays with full marginproducts

- equal fixture fees for all competitors

• Full margin promotion calendar

• Limited placement/emphasis of PV value centers(geodemographics)

5/28 PMF274 CMC

"600TV09



FREQUENTLY USED SALES PROMOTION TACTICS

Temporaryprice discounts

Manufacturercoupons

Mail-inrefunds/rebates

Free newproduct samples

Tradeincentives

Feature anddisplay

Premiumoffers

Sweepstakes

Brandextensions

Eventsponsorship

r r r r rr r r r r r

r r r r rr r r

r r r r r r r rr r r r r r r

r r r r rJ J J J

J J J J J J J JJ

~oJC>

~~\\

Price

•

Image

*Begun 10/89SOurces:Mry.,A([If$; P&.A 28855B001 PMF



1991 ANHEUSER-BUSCH PROMOTIONAL CALENDAR

April

May

June

July

August

September

October

November

December

Budweiser Bud Dry Bud Light Michelob Busch NaturalLight

KingCobra

Bud Baseball Baseball Natural Light "Jack theEarth Day '91 greats fishing House"

Bud Summer BaseballMemorial Day '91

Bud Summer Michelob Mountain Natural LightBarbecue "Hot Waves" Man Barbecue

Bud Summer" " "Cash for

July 4th Hot WavesCaps"

Bud SummerLabor Day

Monday Night ' Big Game BlueJean College King CobraFootball Football Jacket Grid-iron Fever Holiday

Bud Halloween"Fright Night"

Bud FamilyHoliday Season

Bud FamilyHoliday Season

28838R004 PMF

EV60LTIVOZ



IMPACT OF POINT OF PURCHASE FEATURE AND DISPLAY(BEER INDUSTRY)

900%

125

ED 75

a

2515%

40%

125%

Advertisement Price Display Ad/priceonly only only display

Source: IRI Infoscan ; AC Nielsen Scantrack 28838r017 PMF

Y V U® 4 / { V o tf



EFFECT OF CIGARETTE FEATURE AND DISPLAY

Cambridge Allpine

50%~ 300%48%274%

275

25040 37%

225aD aDE E 205%~0 0 200 ~> >~ 30 27% ~ 175 .,..c ..cE

mE 150~ W~

UC;. 20

U~ 125

c`

c~ 100 ..

a a)o_75

10 9%46%50

25 .

0 0Cambridge Cambridge Cambridge Cambridge

$2.00 $4 .00 "Bag-it" $2 .00 VSNCoupon "Smart Display with

Shopper" Display

Alpine$2.00BonusCoupon

Alpine$2.00with

Display

Alpine$3.00with

Display

41501PMF.LW

qV so 4TTf o ghttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PM U.S.A. FULL MARGIN PROMOTION SCHEDULE (SAMPLE)

Marlboro

March

April

May

June

July

August

September

October

November

December

January

Merit Benson &Hedges

Virginia Slims Cambridge Bucks OtherBrands

5/29 PMF278 CMC

MO0TVU9http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PM U.S.A. FULL MARGIN PROMOTION SCHEDULE (SAMPLE)

March

April

May

June

July

August

September

October

November

December

January

Marlboro Merit Benson & Virginia Slims CambridgeHedges

Jean Jacket Offer Duffle Bag Umbrella Sports WatchFree MerchandiseSweepstakes

Indy 500

Sweepstakes Cooler BBQ Offer Wimbledon " as acSweepstakes Instant Win

Sunglasses

Sunglasses_ Summer Getaway Cooler Water Bottle Coffee MugBeach Towel Swee stakes

_Sunglasses _

Beach TowelWorld SeriesSweepstakes Umbrella BMW Sweepstakes Umbrella Sweepstakes

Monday NightFootball

Nerf Football Coffee Mug Holiday Cook Book VacationSweepstakes Cotton Gloves

SuperbowlSweepstake s

Valentine's Day +

(Price Value)

4f '(D 00Tf095/28 PMF268 CMC



FULL MARGIN PORTFOLIO DEFENSE - SUMMARY

• Limit price increases to 5 to 7% in 1992, future increases basedon competitor volume declines

• Re-establish positioning for full margin brand portfolio- attack competitor niches- re-inforce PM USA demographic advantage

• Move from passive to aggressive merchandising

- display emphasis, trademark development

- growth incentives

- full margin news through innovation

5/24 PMF 265 CMC

SV6OLTIVOZ



PM USA STRATEGY TO INCREASE SHARE OF INDUSTRY VOLUME

Bid For All Industry Black & White Volume

• Remove source of competitor growth• Pressure on sub-generic from the low end

28879W006 PMF



PRICE VALUE MARKET SHARE(1984 - 1990)

L«s

Source: PM share of market report

CAG R86-90(units)

36.1 %

(16.3%)Other BrandedGeneric 41.4%

Cambridge

Doral 17.4%

(8 .3%)

5/23 PMF050 CMC

0 ~VO L F Tf Q z



SMOKER BRAND CHOICE BY SEGMENT

0Segment size :

Classic Pack Smokers

r%/

OtherFull Margin

Image/Brand UpscaleBargain Price

Image/Brand Downscale Hunter Sensitive

22%20 40

35%60

24%80

8% 11%100%

0

0

Z~2

Black & White

Branded GenericOtherFull Margin

Marlboro

T~,, OL -,r TL O ,y 5/24 PMF216 CMC



BLACK & WHITE BRAND PERCEPTION

"Has More Flavor Than Other Brands"

100%

80 .83%

L42%

37%

100%

80

m 60EmL

0

20

0

48%

r

Marlboro Doral Montclair Black &

"Has a Good Image"

82%

52% 52%

37%

Marlboro Doral Montclair Black &White White

20

Source: Full Flavor Brand Mapping 28879WO27 PMF

z~se0TV o Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


RETAIL/WHOLESALE BLACK & WHITE INCENTIVES

Retail Profit Wholesale "Push"

40%

35.8%

30

10

20.4%

15.1%

FixtureFees

E3aSc~Marcin

Generic PrivateLabel

30.0%

5.0%

4.0

aDE0 3.0>0mLc~sC~n 2.0

1 .0

5.0%

2.5%

Full Margin Branded Sub Generic Kroger 1988 1990

Source: 1990 Kroger DPP AnalysisBain Cigarette Profitability Model

CoremarkBlack & White Program

5/24 PMF254 CMC

M0LM0Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


BLACK & WHITE CIGARETTE ECONOMICSPM USA Price/Cost ExperienceRelative Cost Position

L ~ FixedManufacturing

$25

20 $19 .70 $19.23U0.75

0

$17.90

VariableManufacturing

Cnc:D000T

$5040

30

20

10a D 'n. 804-Cn0UaUi

81

81

Manufacturing CostSlope = 101 .5%

11 1 1 1

24,000 26,000 28,000 30,000Philip R .J. Brown & LiggettMorris Reynolds Williamson

B & W (85's)

. u7

WholesalePrice

013g 85 86

8283 84 85

82.T~86 87 8988 90

Accumulated Experience(Billions of Cigarettes)

5/29 PMF267 CMC

f~60LTTV®Z



PHILIP MORRIS LOW END STRATEGY - BLACK & WHITESCurrent Trend

Brown &Williamson

~

Liggett

i

RJR

PM USA

1990 199510%

($1 .0MM) $35.2MM$7.4MM $63 .3MM

$16.9MM $52 .0MM

$9.1 MM 144.9MMWilliamson

q~60LTTV0Z

100%

CDE0>

80

6

m

a)a

20

0

..

. .

Price Growth :

Profits :

PM USARJR

Liggett

Brown &

100%

80

20

0

Proposed

Brown & / ~Williamson / /

II

LiggettIII II II I//

RJR /

PM USA

1990 1995

$80.5FM7]$29.OMM

$17.1 MM)

$0.0MM5/29 PMF281 CMC



BLACK & WHITE STRATEGY - SUMMARY

• Aggressively bid for all industry Black & Whitevolume

- offer custom packaging/benefits

- tie-in to PM U .S .A. promotion/incentive programs

• Achieve low cost producer status

- target 70 - 80% cost experience vs . current 101 %slope

- de-bottleneck manufacturing capacity

• Use Black & White pricing to set industry price floor

- set price increase at level of inflation (4-5%)

5/29 PMF279 CMC

9~ 6 0'4TIVO9



PM USA STRATEGY TO INCREASE SHARE OF INDUSTRY VOLUME


• Bid up trade cost,convert to FM space

• Pricing

• Trade programs

28879W005 PMF



PROJECTED PV PENETRATION BY YEAR 2000

- Actual -

60%

50

404-m~L~0 30~caDPaDa

0

10

U

- Projected -

,. -60%

20%

1981 82 83 84 85 86 87 88 89 90 91 E 92E 93E 94E 95E 96E 97E 98E 99E 2000E

Source : PM Share of Market Reports 5/28 PMF255 CMC

B~OO41TfOg



U.S. CIGARETTE RETAIL DISTRIBUTION CHANNELS(1981 -1990)

100% ~

80 ~Cncs(nCv 60c~a~0~~0,-.c°; 40

a

20 ~

0

Other

Mass merchandiser

Vending

Drug store

Grocery

Convenience store

.--

r~

L ,-

~~

-

.

CAGR1981 - 90

1 .9%

(0 .4%)

(4.8%)

2.6%

19901981



CIGARETTE MANUFACTURER SHARE GAIN LOSS(1990)

Supermarkets

PV Brands

FM Brands

Source: New Nielsen U .S. Totals 1989/1990

09soLTTVoZ



EFFECT OF PLANS R AND C ON PM PACK SHARE

Philip Morris RJ Reynolds

20%

15

(5)

(10)'-

20%

15%

8.5%~U(Sfaca)0)ccuLU

3 .4%

15

(1 .9%) (2 6%)(5) (4.5%)

(6.3%)

(10) ~Food Food Kroger- Smitty's- Food Kroger- Smitty's- Fry's :Lion- Lion- Louisville Phoenix Lion- Louisville Phoenix Phoenix

Charlotte Raleigh Raleigh

Sources: Key Account Merchandising Evaluations (Jan 91); 28763R011 PMFKroger-Louisville Merchandising Evaluation (June 90)

T96QLTTVOZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


czii

10%

0 6

0

8.5

Food Lion - Raleigh Smitty's - Phoenix

Total PM Marlboro 10% j Total PM Marlboro

5.6

0.9

Pack Carton Pack

0.3

Carton

In0

Schnuck's - St Louis

. .

4

0.2 0.2:E

r

00.3 (0 .8)

Pack Carton Pack Carton Pack Carton Pack Carton

Source : Key Account Merchandising Plan

10% 10%Total PM Marlboro C,

as 8ccu~V r_m -L

u) 4~

2.2 ~ 2

3 .1

0 .51 .4

-L-Pack Carton Pack Carton

Kroger - Louisville

Total PM Marlboro

3.4

1 .6

0415SR06.PMF

V99O,14TB VOZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


40%

30

10

1 .7% (4)

Total Full PriceKroger Margin Value

PM Actions

Source : Kroger

IMPACT OF PV MERCHANDISING PROGRAMS

Total Store Volume Manufacturer Share Changes

36.1 %

PM RJR B&W American Lorillard Liggett PrivateLabel

• Replaced RJR fixtures with PM carton and value centers (Plans A and AV)• Placed RJR on bottom row of carton fixtures, Liggett and Generics on 3rd and 4th

rows• Added 3 FM checklanes and 1 PV checklane

0415sr08.PMF

E960LTTI0Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PHILIP MORRIS CARTON MERCHANDISINGKROGER - LOUISVILLE

Winsbn

Before Fixture Change

CartonPrfces Winsbn (:arton

Prices Win3bnCartonPrices

R .J. Reynolds

R.J. Reynolds

B&W

PM Ell S W,

Philip Morris

Philip Morris

R.J. Reynolds

R.J . Reynolds

B&W

Lorillard

American

Philip Morris

Source : Key Account Studies

R .J. Reynolds

P

B&W CI

Lorillard I Liggett

Ail~,!n,~n

Philip Melrris

Cartan3Marlboro Pr~s

Philip Morris

Philip Morris

B&W

Lorillard

American

R. J. Reynolds

R . J. Reynolds

Price Value~ Facings

P .r .

Cambr idge i~

~CambridgelAI ine

Cost Cratter

~ Vicerov'R~~ileigh - ~

Pyramid

American

Dorzl

5/13 PMF205 CMC

After Fixture Change

® Canon3Marlboro Price3

Philip Morris

Philip Morris

B&W

Lorillard

American

R . J. Reynolds

R . J. Reynolds

® Cerbn3Marlboro Prices

Philip Morris

Philip Morris

B&W

Liggett

American

R . J. Reynolds

R . J. Reynolds

f9604YI1,O9http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


REVISED MERCHANDISING PLAN - KROGER LOUISVILLE

Full Margin Facings Price Value Facings

% Increase % Increase300 296 Rows 80

Liggett 225% 76 Rows

Brown & 25%Williamson 50% /

/Lorillard 24% 60 // 150%

//200 American 144%~ 150%

cU

162 Rows 42 Rowsasu` 40 .. Cost 100%-a R . J . Cutter0 Reynolds 29%t-- Liggett (17%)/ B&W

100American

20 // R. J . /

/ Philip Morris 159% Reynolds / 190%V V

Philip Morris0 0

Before Fixture After Fixture Before Fixture After FixtureChange Change Change Change

Source : Field InterviewsKey Account Studies

99J®LTUOh



PM USA IN-STORE TRADE COST VS . LIGGETT-SUB GENERIC(SUPERMARKETS)

Bristol Pyramid(PM U.S.A.) (Liggett Group)

50%

44%

50%

40 40

to Cn29 8%~ 30 . ~ 30U) 07~ ~0c

Bristol gross °margin=21 1% ~aD

~ 20.

CD 20 Pyramid grossa 1 7.7% 17.5% a margin = 16.5%

10 10 7.8%

6%3 6%5% 33. . .n l~ 0% 0% 1 10c W L Cn ~ o ~' C (n ~ Cn~

O ~, L U U U O(~~

a0

i00 0_o c

>,tf

Q) t 4) O O QO QC 1- LW rcu

U X C._ U U ~~0 0-0 O U)U U U U U Z706

~ ~ i~ Q Q. a~ ~ Q- a ~0 0

Source : Bain Cigarette Profitability Model28879W029 PMF

9950 aTTfOZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PROPOSED PHILIP MORRIS TRADE POLICY - SUPERMARKETS

Re-designPlanograms

Raise Costof Trade

DominateIn-StorePromotion

• Prime placement of PM USA,RJR full margin brands

• Placement of PM USAPV "value centers" basedon local market demographics

496 oLM 4.14.1

• Competitors all pay equallyon both carton & pack fixtures

• Bid up cost of floor/counterdis lays, shift real estateto full margin

• Full margin growthincentives

• Emphasis on full marginfloor displays & endcaps(where possible)

• PM USA promotionalcalendar of events

• Full margin growthincentives

5/23 PMF251 CMC



PROPOSED SUPERMARKET FIXTURE FEE SCHEDULE

Plan R Pack Fixture

$1 .0

0.8 $0.75~0ifv 0.6L

a~ 0.400

0.2

$0

$0.75

PM USA Current Proposedcompetitors competitors

$4.00$4.0

3.030CcL

(Da 2.0U)L...~V

00

1 .0

0PM USA

Source: Bain Cigarette Profitability Model

Checklane Pack Fixture

$1 .50

0.25

$1.28 $1.28

$0

PV Carton Fixture

$2.70

Currentcompetitors

PM USA Current Proposedcompetitors competitors

$4.00

Proposedcompetitors

28879W023 PMF

3960LITPpZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PROPOSED CARTON MERCHANDISINGKROGER - LOUISVILLE

arlboroCartonsPrices

Philip Morris

Philip Morris

B&W

Lorillard

American

R.J. Reynolds

R .J. Reynolds

Current Planogram

CartonsPrices

Philip Morris

Philip Morris

B&W

Lorillard

American

R .J . Reynolds

R .J . Reynolds

Source : Key Account Studies5/13 PMF217 CMC

CartonsPrices

Philip Morris

Philip Morris

B&W

Liggett

American

R.J. Reynolds

R.J. Reynolds

h

c,3n~n~,t~a vr,4ne

coSt C utte,i"

ViCerovlRaleigh

Pyramid

American

Doral

CartonsPrices

Philip Morris

Philip Morris

R.J. Reynolds

R.J. Reynolds

Lorillard

B&W

American

Proposed Planogram

arlboroCartonsPrices arlboro

CarlonsPrices

Philip Morris

Philip Morris

R.J. Reynolds

R.J. Reynolds

Lorillard

B&W

American

Philip Morris

Philip Morris

R.J . Reynolds

R.J. Reynolds

Liggett

B&W

American

Price ValueEl Facings

Ca rnbridgo,* . :

',amhridgc

Doml

Doral

Cost Cutter

Ra leigh.~Viceroy

Ih, 'fK~ln

Limited placementof value center

69s00TV09http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


BUILDING IN-STORE SCALE WITH GROWTH INCENTIVES

$1 .60

~~0

34 .9%

1 .2031 .2%

0.80

25 .9%

Competitor Matching Rebate*

$1 .60

$0.87

$0.54

0.40

0

$0.20$0.26

$0.56

PM RJR B&W A-B Lorillard Liggett

'Rebate per carton requircd to match PM USA potential gross profit dollar offerSource : PM Sales Planning Department; Bain Cigarette Merchandising Model

40%

0

(KROGER - LOUISVILLE)Rebate Cost (Percent of Profit s)

15.6%

4.3%6 .5%

PM RJR B&W A-B Lorillard Liggett

28838A007 PMF

046 a4TIV 0 9http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PHILIP MORRIS BREAKEVEN WITH GROWTH INCENTIVES(KROGER - LOUISVILLE)

20 er carton rebate$0

$10,000

_ . p$0.50 per carton rebate

$9,5008,000

C i~$7 000° 6,000

:3

~ ,~

~ ~cU 4,000

/ ~•i

• ~a)Z •~ 2,000-

••»c ~m •E •~L°' 00 iC ~~ 10% 20% 30% Incremental Full Margin

($1,300) ,-~- Volume Growth(2,000)

~•i

. i($3,300)

(4,000)

($6,000)

Source : Bain Cigarette Merchandising Model 5/13 PMF226 CMC

T4604TTP0Z



EXPECTED IMPACT OF REVISED CONVENIENCE STORE PLAN

EDFull Margin

i e

Ca 2 F- I : I Lorillard~Ua)~:30 0 1 ' ` .- ..-rr. :, .:::-r . I - American

Brands¢

M Branded Generic

Sub Generic8.1 ~ Black &

Wh'tt

Competitor Profitability by Price Category

FM BG SG B&W

59.3% 1 .9% (1 .3%) 3.8%

55 .9% (1 .0%) NA 19 .9%

59.4% NA NA NA

55 .8% 6 .9% (29 .5%) NA

59.5% 21 .8% 1 .4% 30.4%

59.9% NA 4 .2% 24.2%

Z4600Tf0Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


U.S. CIGARETTE RETAIL DISTRIBUTION CHANNELS(1981 - 1990)

i100% ~ F - - - - y

Other.~ .-- .~Mass merchandiser -

r- --

80 ~ Vending- --

coD t

~

Cq rug s oreCn ~~ ~ ~c~~ 60 Grocery

~.... . r. .~ .r

~0.-~0

40 ..Supermarket

20iiii

A R1981 - 90

1 .9%

(0.4%)

(4 .8%)

2.6%

0

Source: Progressive Grocer

1981 1990

ELMMOZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


CIGARETTE MANUFACTURER SHARE GAIN/LOSS(1990)

Convenience Stores

FIPV brands

Eli FM brands

0)eD~T

(6>0rn0)T

0

(2)

(3)

Source: New Neilsen

Bucks

3 1& W~ .. ....,~. ...,- .~Cambridge

Brtstol

Merit

V-wMagna

; Ca fl`le l

&W

Newport

Kent

Salem

Other FM

-r-- ----Montcieir

CarltonPall Mall

>_RetaTr{PV)Ralelgh Extra

Vi,yarc,y (P1C)

KoolViceroy (FM)

Othe FM

Pyramid

Philip RJR Lorillard American Brown & LiggettMorris Brands Williamson

28838R016 PMF

'64600TV0Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


CURRENT C-STORE CIGARETTE DISPLAYCounter Displays (CIRCLE K - TAMPA)

Marlboro

Doral $1 .00

D D D

D D D

Doral

Buck theS stem$y1 .00

Bucks Bucks Bucks Bucks

Full Rlch Flavor Not PAce

C C C CIs h the ce

A A A A

RetreshtorLess

Marlboro

M M M MCome to Marlboro Co uni

M M ML L L

ML

Madboro Li hts

erit Merit Merit erit

Enriched Flavor

V V V V

S S S Svir rua Slims

BH

B BH H

BH

B&H

Raleigh ExtraLi hts $0.85

R R R R

R R R R

R R R R

R R R R

Camel

C C C

C C C

Floor Displays

Cambridge Pyramid Misty Montclair

C C C C C P P P P P M M M M M M M M M M




~ L U® 4 i- U 1,l Z



IN-STORE EXPOSURE (SUPERMARKETS VS. C-STORES)

2,145 Facings 246 Facings100% Black & white

•Sub generics Black & white

.80 Branded generics .•

Cn.. Sub generics

0) ~ .C ~ ~U(d

.tt `

LL ~aD 60 ~.D ~

M ~~

~ ~~0

mca 40

ul I' m~t`t~i 1 Branded generics

~ ~~

U ~a) ~

~d ~

20

Full mnrgirl

Supermarket C-Store(Kroger - Louisville) (Circle K - Orlando)

Sources : Trade Interviews ; PM Sales Planning Department28838A014 PMF

94GOLTTV0Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf

Cn0c

cD

r0S Permanent(n:5 . Counter (FM)cD~~~' PermanentaID Counter (PV)F~

Dollars Per Month_ -64

0 0 N) O O O

01) a5. Floor DisplayN (Carton) c (D

-nPack Floor

Display j x

~

Pack Counter ~Display

Pack Overhead r8

Dollars Per Carton Per Month

PermanentCounter (FM)

PermanentCounter (PV)

Floor Display(Carton)

Pack FloorDisplay

Pack CounterDisplay

0

W

K Pack OverheadTNW~

nK

~0 0 0 0 -•N A a) 00 O

O O O CD O O

cn~

rn~

0c~~

V

j

O0



PROPOSED C-STORE MERCHANDISING PROGRAM

Proposed Monthly Charge

$100

80

$70

0 60ii

$24

20$12

QIncremental

QCurrent

$25

Permanent Pack Floor Floorpack counter display display

display display

Source : Bain Cigarette Profitability Model

9460,11 3 f-YO g

Per Unit Trade Cost

$1 .00

.80 $0.75$0.78

$0.70

.20

0Pack Pack Floor Floor

counter counter display displaydisplay display

28838S013 PMF



Current DispLay

ounter

Marlboro

arlbor

e.

Floor

Marlboro

Merit

PROPOSED CIRCLE K CIGARETTE DISPLAY

Proposed Display

Coun er

Floor

Vir~iniaSlims

GL 60 0Tf09http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


EXPECTED IMPACT OF REVISED KROGER PLAN

10%

88.3%

6".

.

. .

(2)

(4) V

Share Change (1991-92)

1 .0%

(0.5%)

(3 .3%)

(1 .8%)

(3.0%)

PM RJR BW AB LOR LIG

∎FullmarginBrandedgeneric

~Subgeneric

n Black &white

Competitor Profitabilitx(Net Contribution)

FM BG SG B& W

PM U.S.A . 54.2% (8.5%) (29.5%) (7.7%)

RJR 54.2% (1 .5%) NA 14.8%

AmericanBrands 43.3% (3.6%) (33.3%) NA

Brown &Williamson 51 .8% 16.7% (3.3%) 24.2%

Lorillard 49.5% NA NA NA

Liggett 44.1 % NA (6.6%) 18.8%

28838rmnc PMF

Q R 'J 0 h F\~v© g


G)0c~CZ)

0

Little Rock

LouisvilleNashville

Kansas CityMemphis

St. Louis

Phoenix

Indianapolis

Salt Lake City

Charlotte

DenverCincinatti

BuffaloPittsburgh

Birmingham

Dallas/Ft. Worth

New OrleansRaleigh/Durham

Portland, ME

ClevelandHouston

ColumbusSeattle/Tacoma

AtlantaLos Angeles

Baltimore

Chicago

Philadelphia

Providence

Boston

Hartford

New York

Price Value Penetration%

c°n o c~n o cNi, o c.Wii

I1I

I

II

I1

II

II -i

I

I

Ca~ m

~ z~ M

M

0z

I~ <

M.. mtocflp~ Z


Category Development Index

\n

v~Trncr)d~~~

Grain BeltBack-Country Folks

Coalburg & CorntownShare Croppers

Agri-BusinessNorma Rae-VilleHard Scrabble

Blue-Collar Nursery

New HomesteadersMines & Mills

Tobacco Roads

Golden Ponds

Middle America

Shotguns & Pickups

Single City Blues

Towns & Gowns

Blue-Chip BluesGod's Country

Smalltown DowntownLevittown, U .S .A .Heavy Industry

Hispanic MixNew Beginnings

Young Suburbia

Downtown Dixie-Style

Rank & FileGray Power

Pools & Patios

Old Yankee Rows

Furs & Station WagonsYoung Influentials

Public Assistance

Emergent Minorities

Bohemian MixNew Melting PotsTwo More RungsBlack Enterprise

Blue Blood EstatesMoney & Brains

Urban Gold Coast

0

.I

Q

I

I

:1

r

,T

E]0

0

0

Ln0

I

I

A

~Ln0

33

I 3I

j

00

i

I

II

I

II

3

I

N00

I

rm



U.S. PRICE VALUE GEODEMOGRAPHIC CONCENTRATION

Q Lowest

® Low

Q Medium

High

® Highest

Source: Prizm Database, Bain Analysis

Eg60'4TTV09http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


®

Mississippi River

Source: Prizm Database

+ t8 e 90TV 0 9

tST. LOUIS GEODEMOGRAPHIC PROFILES

PV unlikely

Zip 631 XX

28875W003 PMF


+

401300112

* Stores visited

0109

0132'•141

01800190

0139

0121

01830104 01$90149 0143

0136 0107 ~

40193"0103 46137

0124

0105 0118



SCHNUCKS ST. LOUIS GEODEMOGRAPHIC PROFILEGeodemographicalCluster Definition

1 Blue Blood Estates2 Money & Brains3 Furs & Station Wagons4 Pools & Patios5 Two More Rungs6 Young Influentials7 Young Suburbia8 Blue-Chip Blues9 Urban Gold Coast10 Bohemian Mix11 Black Enterprise12 New Beginnings13 God's Country14 New Homesteaders15 Towns & Gowns16 Levittown, USA17 Gray Power18 Rank & File19 Blue-Collar Nursery20 Middle America21 Coalburg & Corntown22 New Melting Pot23 Old Yankee Rows24 Emergent Minorities25 Single City Blues26 Shotguns & Pickups27 Agri-Business28 Grain Belt29 Golden Ponds30 Mines & Mills31 Norma Rae-ViIle32 Smalltown Downtown33 Back-Country Folks34 Share Croppers35 Tobacco Roads36 Hard Scrabble37 Heavy Industry38 Downtown Dixie-Style39 Hispanic Mix40 Public Assistance

U.S. Pop. St. Louis Store 182Percent Market 63033

1 .3% 1 .4%1.0% 0.8%4.2% 4.1 %3.5% 3.9%0.7% 0.7%2.7% 1.5%6.5% 10.6%6.8% 11.3%0.4% 0.1 %0.9% 0.5%0.8% 1.2%3.7% 4.2%3.2% 0.9%4.6% 1.8%1.9% 0.1 %

8.9%

4.4%5.9%

2.9% 6.2% .5%2.8% 3.0% -1.3% 1.5% -2.4% 5.7% -3.2% 4.2% -1.9% 2.1 % -0.8% 0.0% -1.4% 0.9% -1.7% 2.9% -3.0% 1.9% -1.9% 1.4% -2.1 % 0.4% -1.3% 0.3% -4.7% 1.3% -2.9% 3.6% -2.4% 0.2% -2.0% 6.3% -3.3% 1.0% -3.8% 0.2% -1.2% 0.0% -1.5% 0.1 % -2.3% 3.7% -3.0% 4.9% -1.8% 0.0% -2.5% 5.1 % -

Store 132 Store 102 Store 106 Store 19363114 63141

28.0%13.5%

2.2%

8.8%

50.8%

7.7%

20.4%

6.8%

16.4%

5.8%

2.0%1 .6%

16.8%

15.7%0.1 %

63011

66.7%

7.9%11 .3%5.2%

5.6%

3.3%

63123

0.1 %13.4%

3.6%10.3%

21 .9%

44.4%

2.8%

2.0%

1 .5%

5/21 PMF211 CMC98 6 01.~ TTV 0 9http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PM USA TRADE STRATEGY - SUMMARY

• Develop retail trade programs that build scale advantages for PM USAand incent retailers to promote full margin brands

- volume growth incentives

- equal fixture payments for all competitors

- co-existence with RJR on planograms, de-emphasize PV

• Displace competitor point of purchase PV promotion with Philip MorrisFM promotions

- bid up cost of feature & display space

- PM USA calendar of promotions

• Selectively promote price value through micromarketing

- limited placement of PV value centers

- unique store-by-store planograms

- PV/FM price promotion based on local market demographics

5/23 PMF257 CMC

Z ZSM,O 4T 1-V VC+



PM USA STRATEGY TO INCREASE SHARE OF INDUSTRY VOLUMEFortress Full Margin• Pricing• Promotion• Product positioning• Trade programs

89604Ttf0g

Bid For All Industry Black & White Volume• Remove source of competitor growth

• Pressure on sub-generic from the low end


• Bid up trade cost,convert to FM

• Pricing• Trade programs

28879wmnc PMF



IMPACT OF PM USA STRATEGY

Base Case Price War Manage IndustryStructure

P/V Share Total PV 45% Total PV 29% PV share peaks at 30%@ 2000

Pricing Close price gap: Cut FM pri cing to Initial FM price increases of 6%,Strategy FM up 10% branded generic levels increasing to 10% by 2000

SG up 12%

Trade Policy Same Same - Increase trade cost ofB&W, sub-generic category

Advertising Same Cut FM brands by 50% - decrease PV advertisinginvest in Merit, B&H,Virginia Slims

Promotion Increase FM coupon, Increase FM coupon, - FM promotion calendarrebate promotions rebate pro motions tied to trade spending

- growth incentives

a6R60411f0g

Weak Brand Positionin Year 2000

De-stabilize Industry Hit "Sweet Spot"

5/29 PMF200 CMC



PHILIP MORRIS 10 YEAR NET PRESENT VALUES

$40B$37.5B

$31 .8B

$26.9B

45% PV

0 10T

0

f70% PV

1990 StrategicPlan

ScenarioI

$13.4B

ScenarioI I

ScenarioIII

Note: NPV based on pre-tax operating income5/29 PMF259 CMC

Source: Bain Brand Profitability Model

®660411r0z



INDUSTRY PRICING (1991-2000)

$100 $100

~~ 80 U) 80-50 00 FM a0 0rnrnT

-0 60

rnBG rn

T

60~..~caVU)n

lU

U):3

0 0L~

Lf--

iU)d 40

iQ)

4°W0 SG U

~a~

( >cc cc:

20BW

0u ~ ~ . I I1990 92 94 96 98 2000

0 L+,-1990

FM

BG

SGBW

92 94 96 98 2000

28879W013 PMF

J s 6 0 4TTf d g



INDUSTRY VOLUME MIX (1990-2000)

I 11 III

100% 100% 100%BW ~ew BW•

80SG

80SG

80~ -%, SG

BGBGa)

Lco2 60

aLCa:E 60

a~Lca2 60

0 ~9 ~0 0

H~ H~ H~0 0 0

40~ ~ 40 40FM CDUL.a)a-

20

M

ULNd

20

ULU(L

20

M

. . . . . . . . . . . .'

. . . . ~0 0 01990 92 94 96 98 2000 1990 92 94 96 98 2000 1990 92 94 96 98 2000

• Current projected PV penetration

ZGG lJ tTT V Q Z

• Sub generic penetration reaches 25% • Limit PV penetration at 30% ofof total market total market with significant Black

& White market share

28879W014 PMF



i

Likely Competitor Reaction

• Follow price increases

• Market PN brands

COMPETITOR PROFITABILITY (1990 - 2000)

I

• Further price cuts

• Decline of full margin brands,collapse of price tiers

in

• Increase trade spending

• Follow price increases

E6„0

41Ivo~ 28879C031pmf



NET CONTRIBUTION BY PRICE CATEGORY (1991 E)PHILIP MORRIS

1 11 III

60% r 58.4% 60%60% 60% r 57 4%.

50 50 5044.4%

40 40 40

(T 30 'an) 30 can) 30cUU)~

caU)~

(ZU)~

° 20 ° 20 ° 20c 1_6.314 C: caDp

aDUi Ui 11 .4%

a 10 a 10 a 104 .9% 4 2%

1 .8%.

~ I0(0.8%) 0

(5 .2%)(10) (10) (10)(10.0%)

(20)L (20)L (20)

Full Branded Sub Black & Full Branded & Black & Full Branded Sub Black &Margin Generic Generic White Margin Sub Generic White Margin Generic Generic White

28879W024 PMF

f s 60LTTf ® Zhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


PM U.S.A. LONG TERM PRICING STRATEGY

$200

Cn

CU 150 Full MarginCn:30

-r-F-LaDn.CnL~ 00~00) Branded0)T

50

Generic

Black & WhiteSub Generic

1 1 1 1 1 1 1 1 1 1 1 101990 91 92 93 94 95 96 97 98 99 2000

5/29 PMF275 CMC

WOLTTM



RECENT PV MARKETING ACTIVITY (1990-1991)

R.J . Reynolds

• Cut PV advertising from $11 MM in 1989 to $1 MMin 1990

• Double Winston and Camel advertising budget

• Reduce Winston and Camel coupons from $2.00to $1 .00 (average)

• Pay carton fees on PM racks in Louisville

Liggett

• No outdoor advertising for Pyramid

• Aggressive promotion of Pyramid atconvenience stores with floor displays

American Tobacco

• Misty introduced as price-off brand in 1990

• Increase image spending behind sub-generics(Bull Durham, Montclair)

• Increase PV advertising from $4MM to $7MM

• PV strategy focused on image advertising andin-store display

Brown & Williamson

• Add four Belair packings in 1989

• Raleigh Extra intro in 1989, expandednationally in 1990

• Richland advertising budget expandedfrom $1 MM to $11 MM in 1991

28879W004 PMF

9 s 6 o0TMhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


CIGARETTE OUTDOOR PV ADVERTISING(1986 - 90)

20% a-

17.7%

Other

4.4%

Other

PM i

Percent18.8% of PV

Other 43%

. ~i.

~ R SF F'

'

4.9% ~4.0% ~ /

OtherOther / PM

/p

.6 -- PM

0 1986 1987 M 1988 1989

' Based on September-end data

Source: BAR/LNA, PM USA

PM

1990*

5%

52%

5/2 PMF195 CMC

46604XTV09http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


R. J. REYNOLDS VOLUME MIX(1980 - 1990)

250%

AGR A R84-90 89-90

200

(naDsraDLCa_ 150U0Cnc0

100m

50

randed G_ e- ner c

Full Margin

Genefic 426.4%36.5% 9.5%

(6.2%) 1 .7%

0 .

L.

L

L I 1 11980 81 82 83 84 85 86 87 88 89 90

Years

Note: Year shown reflects previous 12 months' moving average1990 figures are as of September

Source : FTC Report to Congress, Business Week, PM USA(Share Analysis Report, Share of Market Report, Strategic Plan)

2/21 PMF139 CMC

O G llti LT 4 V 09http://legacy.library.ucsf.edu/tid/ryp96e00/pdf


R.J. REYNOLDS CASH FLOW(1987 - 90)

Operating Cash FlowR Operating

0 income® Non-cash

expense

0 Cap Ex

Taxes paidChange inworking capital

Net Profit Impact of FM Volume Loss(1991)

46%\ % of RJR FMvolume switched to PN

1987 1988 1989

' Excluding extraordinary items or one-time accounting orrestructuring charges

1990

Source: RJR Nabisco 10-K, Bain Estimates, Morgan Stanley Investment Research5/29 PMF033 CMC

66601aTTVUZhttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


AMERICAN BRANDS VOLUME MIX(1980 - 1990)

70

60

50

40

CAGR CA R84-90 89-90

OtherSub Generic (14 .8%) 0.3%

1002.9%

30

20

10

0'-1980

Full Margin

81 82 83 84 85 86 87 88 89 90

Year

Note: Year shown reflects previous 12 months' moving average1990 figures are as of September

Source : FTC Report to Congress, Business Week, PM USA(Share Analysis Report, Share of Market Report, Strategic Plan)

(41 .7%)

(7.2%) (2.8%)

2/21 PMF142 CMC

0OQ }41A-V ©(i


PHILIP MORRIS U.S .A.PRICE VALUE STRATEGY STUD Y

AMERICAN BRANDS GROWTH STRATEGY (1988-90)

$50-1

40-i

30 -

20

10

0 10

~48 .79

Net contributio n

arketina cos t

Manufacturing cos t

Full margin

20

$21 .42:X,

30 ($3 .68)

'enereic~ Generi c

1988-1990 CAG R

Volume (11%) 27% 15%

Price 10% 10% 10%

1

40

28879WO1Note : Branded generic excludes coupon price off

8 PMF

T OOT LT T V O 9



COMPETITOR NET PROFIT CONTRIBUTION BY SEGMENT

120%

100

C° 80~.fl.~~C

~j 60~z4-04- 40

Uia)CL

0

(20)R .J. Reynolds

Source : Trade Interviews; PM Merchandising Reports

AmericanBrands

I -16

Brown &Williamson

.

*4

N

v

Liggett

A

5/23 PMF1 72 CMC

Z0014-~Jf0ghttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


COMPETITOR SUB GENERIC DEVELOPMENT BY REGIONQ (1990)

20TX CA FL NC 3 KY

0 20

}zZ PA

40

z

J

O2 TN

60

y0~~Q

>0~U0w0

UU)

~Q

80 100%14.4 Billions Cigarettes

£00ILITfO9



PM U.S.A. IMPLEMENTATION PLAN - SUMMARY

Pricing Product Retail Trade Promotion

• 1991-92 up 5-7% • Accelerate new • Growth incentives • Dominate in-store

Full margin product innovation•

feature and display• 1993-95 depending Coexistence with

on volume loss • Invest, reposition RJR on planogram - continuous eventMerit, B&H calendar

• Bucks to full price• Bid up shelf space

cost - deal back rice inpselect regions (3,5)

Branded generic • 1991-92 up 8-10% • Slow new • Micromarketing by• Limited price value

advertisingSub-generic product introductions region by trade class • Aggressive PV

• Combined price tiers promotion incompetitor regionalstrongholds

• 1991-2000 up by • Unique store specific • Offer best overall • Promote aggressivelyBlack & White 2-5% packaging B&W package to against sub-generics

wholesale, retail- limit sub-generic on

- highest DPP planogram

28879W003 PMF

1' 11+U T411f O(f



IMPLEMENTATION SEQUENCE

Step I Step II Step III

Implement Trade Policy:

• Clear signal to RJR

• Micromarketing PV by region bytrade class

• Convenience store blitz- growth incentives- full margin promotion calendar

• Measure impact on competitorvolumes

June - December 1991

<3- speed

- surprise

- optimum coverage

~00 14 1 I f 0 g

Full Margin Pricing andPositioning :

• December prices basedon volume loss rates

• Aggressive bidding forBlack & White business

• Attack American Brandsfull margin niches (Merit,Commander)

• FM margin brandpositioning

December 1991 - June 1992

<~r- clarity of message

- consistency

- speed

Sustainable CompetitiveAdvantaae :

• Strategic use ofinformation systems

• Low cost producerin U.S.

• Full margin portfoliomarket coverage

• Scale advantage

1992 - 95

- consistency

- continuous monitoringof the dynamics

- "writing the rules of the game"

28879W002 PMF



Section 1

Supermarketchains

Independentgrocers

Conveniencestores

Drug stores

Massmerchandisers

Section 2,_.. . .., . . ..i

55 sales sections, 4,500 sales staff250,000 retail outlets

COMPLEXITY OF TRADE MICROMARKETINGSection 3 Section 4 Section 5

55 PM Sections

.,..•-. .,, . .,, . ..,-

•..

For Top 3 Chains in Section :

• Local market geo-demographicsand unique store-by-storeplanograms

• Growth incentive program

• 1991-92 promotion calendar

• Salesforce "selling tools" andtraining

• Measurement and trackingsystem

Vendingoutlets

9 00 1411fog 28879W001 PMF



IMPLEMENTATION PLAN - NEXT STEPS

• Identify top supermarket, convenience store accounts for initialphase of trade program

- 50% volume coverage

- key regional market coverage

- timing of convenience store & supermarket actions

• Develop prototype trade package to be tailored at each topaccount

- growth incentives

- fixture fees

- promotion schedule

- measurement & tracking system

• Work with two key PV growth regions to develop selling tools &training materials

- California

- Louisville

5/24 PMF260 CMC

4001olfioghttp://legacy.library.ucsf.edu/tid/ryp96e00/pdf


STRATEGIC OPTIONS FRAMEWORK

Discontinuities :• Product innovation• Environmental• Barriers toparticipation

•"Dramatic" competitivemove

Foreseeable Evolution:• PV inflection point•Competitor dynamics•Trade dynamics

rr nti•Customer segments•Competitors•Trade incentives• Price valuepenetration

9 Flexibility torespond to changingmarket conditions

Foreseeable Opportunities/Threats

CurrentNNIMM ®MaximizeFull Margin

Profits

Maximummedium term

value

Optimize FM, PVMarket Position,

Profitability

PM U.S.A. Approachg00TLTTfi99

PotentialBreakthrough

® BEI ®Philip Morris U .S.A .changes the rules

of the aame

Change theRules

52801 PMF.LW


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