THE UKCIGARETTE MARKET

- AN OVERVIEW

January 1999

COP

CONTENTS

N Scope of this presentation

The Market

" Marketing and Advertising

Summary

COP SCOPE OF THIS PRESENTATION

This presentation is designed to give an overview of what's beenhappening in the cigarette market over the last three years .

It covers trends and movements in terms of advertising andcommunications, highlights some of the key issues and attempts to makesome predictions for the future .

It's worth bearing in mind that media spends are sourced through MMSand Portland who provide estimates based on Ratecard and can onlygive a broad indication of spend levels . Tobacco Companies arenotoriusly secrative about their media spends .

THE MARKET

COP THE CIGARETTE MARKET OVERVIEW

" Mature market, in slow decline due to increases on duty (-3%)" Duty increases prompting customers to shift from premium into mid and

low price sectorsIncreasing threat from cheaper illegal imports

" Increasing awareness of health issues also influencing low tar sectorgrowth

" Uncertainty over date and nature of ban has made (and continues tomake) forward planning difficult

" Gallaher have maintained number one market position (howeverImperial closing in - now only 0.9% behind)L&B has overtaken B&H as No 1 brand (UK Sales - RAL)

COP CIGARETTE MARKET SECTOR PERFORMANCE

Premium (£3.45+)

0 Accounts for 40% of the total market

M Sector has declined by 17% since 1995

Mid £3.25 - £3.44

0 Accounts for 29% of the total market

0 Sector has declined by 24% since 1995

Low (£3.24-)

0 Account for 41 % of the total market

M Sector has increased by 57% since 1995

COPCIGARETTE MARKET SEGMENTATION

L&B UltraMayfair Ultra

B&H Premium B&H LightsRothmans Price Marlboro LightsEmbassy Embassy Lights Silk Cut Silk cutDunhill silk cut E.M . UltraKensitas Club Dunhill LightsRegal Camel LightsMarlboroCamel Dorchester SK

JPS LightsRafflesBerkeley

Superkings Lights LOWSuperkings

Berkeley MildB&H Superkings Strength

B&H Superkings LightsJPS Raffles Lights

L&B L&B LightsDorchester Sovereign LightsCraven Mayfair LightsMayfair Dorchester EMSovereignRoyals Cheap Royals Light

Price

COP

FullStrength

GALLAHER BRANDS

BerkeleyB&H Superkings

PremiumPrice

Berkeley MildB&H Superkings

Lights

B&HKensitas Club

MayfairSovereign

CheapPrice

B&H LightsSilk Cut

Sovereign LightsMayfair Lights

Silk CutE .M .

Silk CutUltra

LowStrength

Mayfai r U I tra

COPIMPERIAL BRANDS

EmbassyRegal

SuperkingsJPS

PremiumPrice

CheapPrice

JPS LightsSuperkings Lights

Embassy Lights

L&B Lights L&B Ultra

LOWStrength

ROTHMANS UK BRANDS

FullStrength

DunhillMarlboro

Royals

Raffles

PremiumPrice

CheapPrice

Raffles LightsCraven

Marlboro LightsDunhill Lights

Royals Light

LowStrength

FullStrength

REYNOLDS BRANDS

Camel

Dorchester

PremiumPrice

CheapPrice

Dorchester SK

Camel Lights

Dorchester EM

LowStrength

Note - these figures are taken from RAL uptohave adopted Omnimas data (this data tends

L&B 9.2B&HSuperKingsSilk CutRegalMayfairRoyalsEmbassyBerkeleyM'boro LtsSovereignSCUL

MARKET SHARES - X

& including Sept 1998, since then Gallaherto be more sympathetic to 'parallel imports')

Sept '9711 .1

Sept '98JPSpecial

Sept '971 .7

Sept '981 .8

12.3 10.7 Marlboro 1 .5 1 .46.4 5.8 Raffles 1 .5 1 .46.0 5.4 Club 1 .3 1 .35 .6 4.9 B&H SK 1 .1 0.93 .1 4.6 Rothmans 0.9 0.93 .7 3 .8 SCEM 0.7 0.63 .9 3 .5 Dunhill 0.5 0.43 .7 3 .2 Craven 0.4 0.42.8 3 .0 Winfield - 0 .12.0 2.92 .1 2 .1

THE ADVERTISING

000's

COP

25,000

20,000

15,000

10,000

5,000

1998 - IMPERIAL OUTSPENDS GALLAHER FORFIRST TIME

isCo

0

1995 1996 1997

Press

pPoster

1998 (to Aug)

Source: MMS/Portland

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- asCD 0 .0 (z (1) 0 -0 0

E >, ca m E >, co is a >, ~a 79 >. m~ 0 C7 E ~ C7 c g

Ir Ca Q m Cr Ca Cr

0 0 0 0a: ¢ as oC

COP AD SPENDS DECLINING YEAR ON YEAR

Prior to ad ban, one would perhaps expect that spends

would increase in order to establish longer-lasting brand

equity

Decrease in spends possibility due to funds being deployed

elsewhere (e.g . Sponsorship, below-the-line activity, gift

schemes)

Alternatively, to support declining margins due to increasedreliance in low price brands

SHIFT IN ADVERTISING PRIORITIESREFLECTING SECTOR MOVEMENTS AND COMPETITIVE THREATS?

CUP

Number of BrandsAdvertisied

GALLAHER

1995

15

Priorities

B&H 39%(% of ad budget)

Silk Cut 32%Berkeley 7%Other 22%

1996

17

Sovereign 32%Silk Cut 19%B&H 18%Ultra 7%B&H Lights 5%Other 19%

1997

1998 (to Aug)

B&H 31 %

Ultra 36%Ultra 24%

Sovereign 33%Sovereign 22% Amber Leaf 6%Other 23%

Other 25%

Source : MMS/Portland

COP

Number of

17BrandsAdvertisied

IMPERIAL

Priorities

Embassy 26%Superkings 23%Regal 13%Superkings Lt 6%Gold Virqinia 5%Other 27%

1995 1996 1997 1998

20

Superkinq 26%

Embassy 26%

L&B 43%Embassy 22%

L&B 18%

` Embassy 25%Reqal 13%

Superkinq 15% Regal 13%Embassy Lt 11 % Reqal 14%

Superkinq 7%Other 28%

Other 27%

JPS 6%Embassy Lt 5%Other 1

Source : MMS/Portland

REYNOLDS & ROTHMANS

1998

0

Source : MMS/Portland

Advertised 15 12 11 11

Prioerities Marlboro 41 Marlboro 35% Marlboro 38% Marlboro 44%Rothmans 15% Dunhill 18% Royals 18% Royals 24 12%Royals 25 13% Royals 13% Marlboro Royals 11Royals 9% Royals 24 11 Lights 10% Marlboro Lights 10%Dunhill 7% Other 23% Marlboro Marlboro Medium 10%Other 15% Medium 9% Other 13%

Royals 20 8%Other 17%

1995 1996 1997Number of BrandsAdvertisied 1 1 2

Priorities Camel Kingsize Camel Lights Camel Lights 93%Camel Kingsize 7%

Number of Brands

COP IMPERIAL MARKETING STRATEGYOBSERVATIONS

" Total advertised brands reduced from 20 in 1996 to 12 in1998 in an effort to focus funds more efficiently

" Likely to continue to focus advertising investment on furtherstrengthening L&B position and protecting premium brands(Embassy/Regal/Embassy Lights)L&B growing beyond expectations - L&B Ultra Lightslaunched to capitalise on consumer trend downwards inprice and tar - will no doubt continue high investment toprotect brands position

" JPS decline in recent years has forced Imperial to hold theprice, meaning shift in category from premium to low price- future advertising likely to reinforce price position

COP IMPERIAL MARKETING STRATEGYOBSERVATIONS

" Attempts to attract younger audience via media selection" posters in pub/bar washrooms (Al size)"

back-lit moving 6-sheets in universities"

editorial sponsorship of young male titles with Embassy Light" May look to extend advertising campaigns into packs post ban in attempt

to maintain brand saliencyReduced advertising support behind Superkings suggests desire to treatbrand as cash cowEmbassy Lights increased support (in excess of share) suggests attempt toestablish brand prior to ban

PREMIUM SECTOR ADVERTISING

COP EMBASSY ADVERTISING

"

Poster holdings and national press split with Regal in the North" Brand advertised on posters and in national press 2 or 3 times a

year" Embassy positioned as down-to-earth, unpretentious, 'laddish'

brand" Lack of consistency in advertising approach over last three years : 4

different campaigns in this time, all broadly attempting to capturethe personality of the Embassy smokerIn 1995, 'Thespian' campaign attempted to epitomise attitude ofEmbassy smoker, but it was felt to be too old-fashioned

" Launch of Focus Points gift scheme received heavyweight poster andpress support with surreal campaign

COP EMBASSY ADVERTISING (cont.)

However, brand values not communicated and campaign

was replaced by 'Number 1 in a series of 1'

~ This was designed as a short-term (Pre-ban) series of one-offs using basic humour (in keeping with the brandpersonally)

'Looking after Number 1' launched in 1998 to further

establish the 'laddish' character of the brand

COP EMBASSY LIGHTS ADVERTISING

Embassy Lights aimed at younger male smokers, bringingthe down-to-earth character of Embassy Number 1 into thecontext of 'lad-culture'

" Heavyweight presence in 1998 in broader range of stylepress titles than previously used5 consecutive pages taken in June followed by 1 page permonth for 4 months

" Change in expression of same execution more recently, withthe 'Tar, but No Tar Very Much' stamp

" Editorial sponsorship throughout this period in tune withstrategic thinking, with advertorials in young, brash titles :Loaded and Sky (initially not requiring ASA approval,however this type of activity now does)

COP REGAL ADVERTISING

Positioned in the North as the down-to-earth 'smokers'mate'

Hugely successful 'Reg' and 'AI' campaign withdrawn dueto alleged youth appeal

Replaced by 'Something Blue' campaign - an attempt toown a colour a la B&H, Silk Cut and Marlboro

The executional style and subjects reflect the down-to-earthpositioning

COP MARLBORO ADVERTISING

Heavyweight use of press and posters" '94 saw the end of the 'Red' campaign, with a move back to more familiar

Marlboro territory: American heritage" Enforcing authenticity and traditional values of Americana, much like

Marlboro Man of yesteryear" Strongest executions are those combining a striking visual with a witty and

powerful headline" Lights variant doubtless benefits from the masculine heritage of the brand,

and the recent, more edgier expressions of Marlboro Country would seemto suggest the brand is beginning to acknowledge the dominance ofMarlboro Lights amongst the trendier young adult smokers

COP OTHER PREMIUM ADVERTISING

Camel

" No activity in 1998

" Brand positioning as quirky choice for younger upmarket smokers, with

variety of executional styles

" Use posters and style press

" Funky packs launched for limited period in 1996 - much media critisism

lucl Strike

" Niche brand targeted at young urbanites, turning limited availability into apositive : exclusivity likely to appeal to this group

" Use press and postcards in bars/restaurants

"

Pushing limits of voluntary code (e.g . postcards)

MID-PRICEAND CHEAP SECTORS

COP LAMBERT 8 BUTLER ADVERTISING

" Brand success could be attributed to a number of factors - e.g . style ofadvertising, premium heritage, 'stylish' pack, more masculine character -which possibly make the brand more acceptable than other cheap brands

" Moved away from price-only ads to more image-based, price advertisingin 1997, possibly in response to Sovereign

" Price removed completely from ads in 1998 (L&B Smokers do not like toreminded that the cigarettes they smoke are cheap)

" Advertising investment increased yearly - £210k in 1996, £1 .8m in 1997and £4m in 1998, accounting for 43% of Imperial ad budget

" As well as price, more masculine image could be a further factor in thethreat L&B Ultra poses to SC and SC Ultra

COP ROYALS ADVERTISING

" Four different campaigns since 1995 suggest lack of direction

" The Royals launch campaign (93/94) aimed to communicate

key point of difference - 25 in pack

" Communication focus changes to price/value message in 1995with 'want something extra' - possibly trying to communicate

more cigarettes for same price

" Number of sticks reduced to 24 in 1996 - straight forward

communication of 24 cigarettes for the same price as 20

" 20's launched in 1997 with "Royals give you more' campaign

" Range advertising introduced in 1998 communicating

price/value

COP JPS ADVERTISING

Relied on Formula One Heritage in the past* to support premiumpositioning, however the brand is now seen as out-dated andpast efforts to update it have failed (matt black pack etc)

Brand has moved into mid-price sector - if price held further, willdrop to low price sector

Current advertising focuses on a price message and borrowsfrom the old 'Black' campaign

* In Feb 1998 Spontaneous Awareness of JPS being 'in racing' was higher than B&H (who hadbeen 'in' for 3 years @ £15-£20m pa) 19% vs 18%

COP WINFIELD ADVERTISING

Launched as mid-price with press and poster executions inAugust 1998

~ Too early to really pick up levels of spend, but will havelivery of one of the BAR F1 Cars (probably)

M Brand firmly positioned as Australian

NON-CIGARETTE ACTIVITY

COP NON-CIGARETTE ACTIVITY

~ Marlboro and Campaign both have a range ofclothes/shoes/accessories which they advertise

~ Allows them to use images (e .g . Marlboro Cowboy) andmedia (e.g . 6 sheets/ bus-sides/ postcards) not currentlyavailable to cigarette advertisers

m Will not be allowed to continue advertising post-ban

COP

More than £100million will be spent in the next three years to reducesmoking

The E.U . Directive

THE GOVERNMENT'S WHITE PAPER

30 July 2001 -End most forms of tobacco advertising including billboards30 July 2002 -End tobacco advertising in the press30 July 2003 -End tobacco sponsorship except specified global events allowed to continue30 July 2006 -End all tobacco sponsorship

Posters and Print" The Govt. will introduce secondary legislation to end all tobacco

advertising on billboards / printed media at the 'earliest practicableopportunity, and well before the deadline required' .

" They 'see no reason to grant the printed media the additional yearpermissible .' They want to deliberately avoid a situation where themoney now spent on billboards moves into printed advertising for thefurther year .

COPTHE GOVERNMENT'S WHITE PAPER

Promotion and sponsorshipM The regulations will allow time to phase out tobacco sponsorship of sports

and other events'Specified global events' e.g . Formula 1 will be given the additional timeto find alternative means of sponsorship

Direct Marketing" All direct and indirect tobacco advertising and promotion will be phased

out, including the distribution of free cigarettes, cigarette coupon schemesand other brand loyalty incentive schemes

" Any form of commercial communication which has the aim or effect ofpromoting a tobacco product will be outlawed

COP THE GOVERNMENT'S WHITE PAPER

Point of Sale0 Because the Directive does not apply to "advertising aimed at

purchasers in the locations where tobacco is actually sold", theGovt. intends to define what this means in such a way as to limit itstrictly to the gantries displaying tobacco products themselves andtheir prices

AdvertisingPress & postersIt is likely that press and posters will be banned at the same time,before the deadline of 30 July 2001

" Radio and Cinema (ie Cigars)

SUMMARY

COP SPEND CONCLUSIONS

Counter-intuitive, in that we might expect a last-gasp "bigbang" prior to Ad Ban - continued uncertainty over bandate probably to blame

Massive movement of advertising funds to other areas pre-ban

"

sponsorship, gift schemes, point of sale" returned to bottom line given decreasing profitability

from the growth of cheap brands