THE

UK

CIGARETTE

MARKET

-

AN OVERVIEW

17Y9

COP CONTENTS

Scope

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 andlow price sectorsIncreasing threat from cheaper illegal importsIncreasing awareness of health issues also influencing low tar sectorgrowthUncertainty over date and nature of ban has made (and continues tomake) forward planning difficultGallaher 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+)Accounts for 40% of the total marketSector has declined by 17% since 1995

Mid £3.25 - £3 .44Accounts for 29% of the total marketSector has declined by 24% since 1995

Low (£3.24-)Account for 41 % of the total marketSector has increased by 57% since 1995

COP CIGARETTE MARKET SEGMENTATION

B&HRothmansEmbassyDunhillKensitas ClubRegalMarlboroCamel

L&BDorchesterCravenMayfairSovereignRoyals

PremiumPrice

FullStrength

RafflesBerkeleySuperkingsB&H SuperkingsJPS

B&H LightsMarlboro LightsEmbassy LightsSilk CutDunhill LightsCamel Lights

Dorchester SKJPS LightsSuperkings LightsBerkeley MildB&H Superki ngsLightsRaffles Lights

L&B LightsSovereign LightsMayfair LightsDorchester EMRoyals Light

Silk CutE.M.

Silk CutUltra

LowStrength

L&B UltraMayfair Ultra

COPGALLAHER BRANDS

FullStrength

B&HKensitas Club

BerkeleyB&H Superkings

MayfairSovereign

PremiumPrice

CheapPrice

B&H LightsSilk Cut

Berkeley MildB&H Superkings

Lights

Sovereign LightsMayfair Lights

silk cutE.M .

LowStrength

Silk CutUltra

Mayfai r UItra

COP

FullStrength

IMPERIAL BRANDS

EmbassyRegal

SuperkingsJPS

L&B

PremiumPrice

CheapPrice

JPS LightsSuperkings Lights

Embassy Lights

L&B Lights L&B Ultra

LOWStrength

COP ROTHMANS UK BRANDS

FullStrength

DunhillMarlboro

Royals

Raffles

PremiumPrice

CheapPrice

Raffles LightsCraven

Marlboro LightsDunhill Lights

Royals Light

LowStrength

COP

FullStrength

REYNOLDS BRANDS

PremiumPrice

Dorchester SK LowStrength

Camel

Dorchester

CheapPrice

Camel Lights

Dorchester EM

COP MARKET SNARES - %

Note - these figures are taken from RAL upto & including Sept 1998, since then Gallaherhave adopted Omnimas data (this data tends to be more sympathetic to 'parallel imports')

L&B 9.2Sept '97

11 .1Sept '98

JPSpecialSept '97

1 .7Sept '98

1 .8

B&H 12.3 10 .7 Marlboro 1 .5 1 .4

SuperKings 6.4 5 .8 Raffles 1 .5 1 .4

Silk Cut 6.0 5 .4 Club 1 .3 1 .3

Regal 5 .6 4.9 B&H SK 1 .1 0.9

Mayfair 3 .1 4.6 Rothmans 0.9 0.9

Royals 3 .7 3 .8 SCEM 0.7 0.6Embassy 3 .9 3 .5 Dunhill 0.5 0.4Berkeley 3 .7 3 .2 Craven 0.4 0.4

M'boro Lts 2.8 3 .0 Winfield - 0 .1

Sovereign 2 .0 2.9SCUL 2.1 2 .1

THE ADVERTISING

000's

COP

25,000

20,000

15,000

10,000

5,000 -

1998 - IMPERIAL OUTSPENDS GALLAHER FORFIRST 11111E

1995 1996 1997

N Press

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1998 (to Aug)

Source : MMS/Portland

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COP AD SPENDS DECLINING YEAR ON YEAR

Prior to ad ban, one would perhaps expect that spendswould increase in order to establish longer-lasting brandequity

Decrease in spends possibility due to funds being deployedelsewhere (e.g . Sponsorship, below-the-line activity, giftschemes)

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

SHIFT IN ADVERTISING PRIORITIESREFLECTING SECTOR MOVEMENTS AND COMPETITIVE THREATS?

COP GALLAHER

Number of BrandsAdvertisied

Priorities(% of ad budget)

Source : MMS/Portland

1995

15

B&H 39%

1996

17

Sovereign 32%

1997

12

B&H 31 %

1998 (to Aug)

10

Ultra 36%Silk Cut 32% Silk Cut 19% Ultra 24% Sovereign 33%Berkeley 7% B&H 18% Sovereign 22% Amber Leaf 6%Other 22% Ultra 7% Other 23% Other 25%

B&H Lights 5%Other 19%

IMPERIAL

Source : MMS/Portland

Number of

1995

17

1996

20

1997

19

1998

12BrandsAdvertisied

Priorities Embassy 26% Superking 26% Embassy 26% L&B 43%Superkings 23% Embassy 22% L&B 18% Embassy 25%Regal 13% Regal 13% Superking 15% Regal 13%Superkings Lt 6% Embassy Lt 11 % Regal 14% Superking 7%Gold Virginia 5% Other 28% Other 27% JPS 6%Other 27% Embassy Lt 5%

Other 1

COP

Number of BrandsAdvertisied

Priorities

Number of BrandsAdvertised

Prioerities

REYNOLDS & ROTHMANS

1995

1

Camel Kingsize

1996

1

Camel Lights

1997

2

Camel Lights 93%Camel Kingsize 7%

1998

0

Source: MMS/Portland

15 12 11 11

Marlboro 41 Marlboro 35% Marlboro 38% Marlboro 44%Rothmans 15% Dunhill 18% Royals 18% RoyaI s 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%

COP IMPERIAL MARKETING STRATEGYOBSERVATIONS

Total advertised brands reduced from 20 in 1996 to 12 in1998 in an effort to focus funds more efficientlyLikely 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 positionJPS 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 selectionposters in pub/bar washrooms (A1 size)back-lit moving 6-sheets in universitieseditorial sponsorship of young male titles with Embassy Light

May look to extend advertising campaigns into packs post ban in attemptto 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 NorthBrand advertised on posters and in national press 2 or 3 times ayearEmbassy positioned as down-to-earth, unpretentious, 'laddish'brandLack of consistency in advertising approach over last three years : 4different 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-fashionedLaunch of Focus Points gift scheme received heavyweight poster andpress support with surreal campaign

COP EMBASSY ADVERTISING (coot.)

However, brand values not communicated and campaignwas 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 brandpersonality)

'Looking after Number 1' launched in 1998 to furtherestablish 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 monthsChange in expression of same execution more recently, withthe 'Tar, but No Tar Very Much' stampEditorial 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 due

to alleged youth appeal

Replaced by 'Something Blue' campaign - an attempt to

own a colour a la B&H, Silk Cut and Marlboro

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

positioning

COP MARLBORO ADVERTISING

Heavyweight use of press and posters'94 saw the end of the 'Red' campaign, with a move back to more familiarMarlboro territory : American heritageEnforcing authenticity and traditional values of Americana, much likeMarlboro Man of yesteryearStrongest executions are those combining a striking visual with a witty andpowerful headlineLights 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

CamelNo 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

lucky StrikeNiche 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)

MlD-PRICEAND CHEAP SECTORS

COP LAMBERT & 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 brandsMoved away from price-only ads to more image-based, price advertisingin 1997, possibly in response to SovereignPrice 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 budgetAs well as price, more masculine image could be a further factor i n thethreat L&B Ultra poses to SC and SC Ultra

COP JPS ADVERTISING

Relied on Formula One Heritage in the past* to support premium

positioning, however the brand is now seen as out-dated and

past efforts to update it have failed (matt black pack etc)

Brand has moved into mid-price sector - if price held further, will

drop to low price sector

Current advertising focuses on a price message and borrows

from 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 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 1995

with '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 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 F 1 Cars (probably)

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

Will not be allowed to continue advertising post-ban

COP THE GOVERNMENT'S WHITE PAPER

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

The E.U. Directive30 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 PrintThe Govt . will introduce secondary legislation to end all tobaccoadvertising 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 .

COP THE GOVERNMENT'S WHITE PAPER

Promotion and sponsorshipThe regulations will allow time to phase out tobacco sponsorship of sportsand other events'Specified global events' e.g . Formula 1 will be given the additional timeto find alternative means of sponsorship

Direct MarketingAll direct and indirect tobacco advertising and promotion will be phasedout, including the distribution of free cigarettes, cigarette coupon schemesand other brand loyalty incentive schemesAny 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 SaleBecause the Directive does not apply to "advertising aimed atpurchasers 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 2001Radio and Cinema (ie Cigars)