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M. Mahan Speech

Marlboro: National Marketing and Sales Meeting

August 1999

Run Video "Run Wild, Run Free"?? (1 minute)

For those of you who don't know me, I am Michael Mahan and it's my pleasure to speak to you today about the greatest brand in history, Marlboro. Since the Marlboro Country campaign was first introduced in 1964, it has come to represent freedom, independence, and flavor. The images you just saw in that 60 second spot, combined with the quality of our product, its superior packaging, the consistency of our communication to consumers, and your efforts in establishing leadership at retail, drives more than 1 out of 3 adult smokers in the U.S. to choose Marlboro as their regular brand. Indeed, Marlboro?????s sales ????? in just the United States, from a revenue perspective, would make it as big as the entire Goodyear Tire and Rubber Company if it were a stand-alone enterprise.

Today, I'll discuss Marlboro?????s strong performance, the current business environment, the key issues that we face, and the actions we are taking to ensure Marlboro?????s continued success.
Marlboro?????s performance is, in a single word, remarkable. The brand's share has already reached new highs in 1999, building on a history of record-breaking growth. This long term trend is unparalleled by any other brand.
Marlboro leads the industry with a share of the market that is greater than that of the next five brands combined ????? and it's strength is universal.
????? Demographically, Marlboro is the number one brand across all adult age, gender and income segments. We are also number one among White and Hispanic adult smokers. The only exception is among African Americans, where we are number three.
????? As we all know, Marlboro is the number one brand in all regions, sections, and markets. In 60% of districts represented in this room, our market share is three times as large as our nearest competitor. And in no district in the country is the number two brand within 15 share points of Marlboro.

????? Across all trade classes, Marlboro is number one, and in the largest trade class, convenience stores, Marlboro has over a 40% share.
????? Finally, at the packing level, Marlboro is number one in full flavor, in lights, in box, in soft pack, in kings, and in 100s ????? and ????? following our national launch and your tremendous efforts at retail in support of Ultra Lights, we are also the Number 1 brand in that segment with a three percent share of market. Significantly, cannibalization has been kept to a minimum and Marlboro Ultra Lights has added over a share point to the franchise. Even in Menthol, where Marlboro is the number four brand, we have the fastest rate of growth of any major player in the segment, up 22.7% from a year ago ????? and I'll talk more about Menthol in a few moments.
The bottom line is that Marlboro?????s performance remains strong. Our task, and responsibility, is to ensure Marlboro?????s continued growth and viability for the years to come.
Now let me talk about the challenges we are facing in the current environment.

Since early 1998, Marlboro?????s average retail price during non-promoted periods has increased 73??? to $2.89 in the second quarter of 1999 and the price of the lowest discount products in the marketplace has also increased, up 62???. As a result, Marlboro?????s average net dollar gap with lowest discount widened 10??? to 77??? while the relative gap narrowed 8 percentage points to 36%.
The Discount category's rate of decline has slowed following these pricing actions. In the second quarter the category's share was unchanged from a year ago at 26.9%.
Since Marlboro Friday, Marlboro and other Premium brands have sourced business from an eroding Discount category. As that erosion has slowed, we have seen an increase in competitive activity in the Premium segment. In the second quarter of this year, promotion levels among Newport, Camel and Winston were more than three times as high as they were in the first quarter of 1997. In addition to price off, we have seen an increase in product promotions for these brands as well.

The Menthol category has started to grow again after remaining relatively unchanged since late 1994. We have also seen a resurgence of menthol among young adult smokers, legal age to 24, over the past few years.
Importantly, Newport and Marlboro are the primary drivers of growth of the Menthol segment. While we have seen activity from Kool and Salem over the past year with the launch of Kool Natural Menthol and the Salem slide box, their shares have not responded.
While there is little question that we will periodically face competitive threats from cheap cigarettes and aggressive discounting from established premium brands, the greatest long-term threat to Marlboro is Newport. This formidable competitor has several strengths.
First, Newport is on a long-term growth trend ????? and ????? we, given our success with Marlboro know what that can do for a brand's momentum.
Second, over the past twenty years Newport has built a loyal base of adult smokers in its established markets in the Northeast. This loyal core of smokers in the brand's geographic stronghold provides the resources for expansion and recently, we have seen Lorillard aim its efforts on developing Newport in new markets.
A third strength Newport has is its demographic profile. The brand's large and growing share of young adult smokers portends years of growth which will potentially come at the expense of Marlboro. Newport has already achieved the number two position among young adult smokers nationally and in four regions and it is growing young adult smoker share in all five.

So as we enter the second half of the year, the business environment Marlboro finds itself in, is a mixed bag of strengths and threats, as well as opportunities, which we'll cover in a few minutes.
Within this environment, I'd like to discuss four key issues we must address to continue Marlboro?????s momentum into the future.
First, we have become, and for the foreseeable future, we will remain reliant on promotion to meet our goals. We have advantages, in this regard not least of which is, the largest and most hard working sales force in the industry. With your help, we have been able to successfully execute national price promotions in over 120,000 stores around the country.
However, the success of our promotions rest on our ability to "hit the window" and to seamlessly transition from promotion to promotion. This has become more important as our promotion calendar has increased with alternating Marlboro price and Marlboro Menthol product promotions.

In 1999, we are promoting 48% of our volume, up from 37% last year. Marlboro will be on price promotion for 210 days during the year, and has a price promotion budget approaching a billion dollars. While our performance clearly indicates that we have been successful in utilizing price promotions to grow our share, we must remain ever vigilant in ensuring that our offers reach the consumer. Each day our price promotions fail to reach adult smokers because they are not passed along at retail, we have wasted about five million dollars. Put another way, the cost of a lost day of price promotion is about equal to the cost of one month of Marlboro advertising.
We've also struggled with our product promotion execution. We too often miss our penetration goals and we have yet to get a handle on the appropriate allocations. A major concern of ours in maintaining a 12 month promotion calendar of alternating promotions is overlap. Multiple promotions running simultaneously in the same stores is not only inefficient but conveys an appearance of cheapness.

We recognize the degree of difficulty given the aggressive promotion schedule on Marlboro as well as the other brands. A group of employees representing a broad collection of disciplines under the leadership of Steve Piskor, our Vice President of Marketing Services, is working on this issue. We are absolutely committed to constructing an improved promotion process in 2000.
A second issue of increasing importance ????? especially in an environment in which our advertising opportunities are becoming more limited ????? is the need to strike a balance in our communications among promotional, "red roof," and equity messages.
Marlboro advertising in print will continue to convey the timeless images of Marlboro Country, the heroism and independence of the cowboy, and the importance of flavor in his cigarette. Here is an ad ????? that we will run at the end of the year and at the beginning of the millennium. While much of the country focuses on a time of change and uncertainty defined by the calendar ????? we'll deliver the reassuring message with the enduring majesty of Marlboro Country. But regardless of our effectiveness in print advertising ????? the ability to communicate a balanced menu of brand messages at retail is critical to our long-term success.

During 1999, we utilized a variety of communications at retail in point-of-sale. Some like Marlboro "Ranch Party Continues" and Marlboro Racing School are umbrella themes for price promotion that deliver high impact presentations of consumer sweepstakes. We also pushed the boundaries of Marlboro communication with graphic images of the Cowboy and Marlboro Country in point-of-sale that supported our Menthol initiatives. Each of these communications portray Marlboro in a fresh and contemporary way. Our new Uniflex fixturing prominently features the "red roof" as a default graphic. Individually, each of these creative looks play a role in Marlboro?????s communication mix, and in 2000, we will continue to present Marlboro in new and interesting ways at retail. For example, a Cowboy's Place theme will act as a communication platform for price promotion and a new sweepstakes early next year ????? and it is our goal to dress up retail in support of this exciting promotion.
However, as important as these promotional communications are ????? taken collectively, and in the absence of the presentation of the more traditional themes ????? such as those we have historically featured on billboards ????? we run the risk of losing the essence of Marlboro to a collection of promotional messages and graphics that lack the foundation provided by the core campaign.

In December, the Cowboy will return to retail in a heroic fashion ????? and we will strive in 2000 to work against a more balanced presentation of creative in point-of-sale. Our Plan includes:
???? Utilization of fixture graphics to act as a campaign anchor at retail.
???? Modification of fixtures where possible to provide dimensions for header cards and art that are more accommodating to a variety of creative executions.
???? Increased customization to work with ????? rather than against -the systems for point-of-sale placement used by our key accounts.
I can't emphasize enough the important role that you and your organizations play in the communication of the core values of this Brand to consumers.

A third key issue that we must address is a need to ensure that Marlboro remains relevant to adult smokers. And while advertising and promotion play an important role ????? there is no substitute for more personalized interaction and the establishment of one-on-one relationships with our consumers.
We have expanded our relationship marketing efforts over the last few years. While most of you think of Party at the Ranch and Racing School as retail sweepstakes, they serve primarily as the main attraction in many of our Bar Nights where a winner is selected on the spot ????? not at some clearinghouse in the distant future ????? and for those lucky enough to be selected, it is no exaggeration to say that they've won the trip of a lifetime.
We introduced "The Ranch" in 1998 and expanded the program this year. The winners and their adult guests experienced Marlboro Country where they went horseback riding and white water rafting or participated in a cattle drive. Participants responded that they had an experience they will never forget. Comments made in a survey following each trip included:
???? "This is a once in a lifetime experience and a memory that will last forever."
???? "Thank you for the opportunity to be part of the Marlboro family."
???? "To sum it up in one word ????? awesome."

As I said, we increased the capacity of the Ranch for 1999 to include over 1,200 winners and in 2000 and we will make the ranch an all season experience and will include Winter trips, where snowmobiling and cross-country skiing will be featured.
Also, in 1999, we created a new and exciting program, the Marlboro "Racing School" in which 250 adult smokers and their guests will "get a ride" in a real race car. They will have the opportunity to step behind the wheel of three types of race cars ????? a stock car, an open wheel and a street car. We introduced the program earlier this year through direct mail and in bar programs ????? and ????? this month, as you all know, we are running a racing school sweepstakes promotion at retail.
We have expanded the Marlboro Bar program, broadening market penetration in 1999 to 53 markets while focusing on improving the program in existing markets. We use these adult-only venues to interact with smokers and introduce our other relationship marketing programs I've just described. We actually categorize the Bars and structure our programs accordingly. We have programs in event bars where we draw winners for Ranch and Racing School, clubs where music is featured and we also have programs for neighborhood and trend bars.

Marlboro Continuity programs offering gear for Miles will continue in 2000 ????? for consumers who have grown accustomed to the gear program, however, we are also updating our Rewards programs behind Marlboro Miles. As some of you may have noticed we have already begun to test some new ideas in select markets.
We offered a program called Miles for Admission where young adult smokers can use their miles to get in special bar parties in Chicago and St. Louis. Without ever announcing it, we feature a major musical act surprising our consumers and exceeding their expectations. These parties were very successful among young adult smokers and attracted many new participants to the Miles program. We will be expanding the parties to 18 markets this year.
We are also experimenting with an Auction using miles. Last year adult smokers in Tennessee were able to place silent bids through an 800 number for a 1930 National guitar. The winner bid 80,000 miles. In 1999, we have already expanded the auction to Illinois for a Wurlitzer Jukebox and later in the year we will be testing a live in bar auction.

Another new miles initiative is Party-in-a-box, which we offered in San Diego and New Orleans earlier in the year. This program offers adult smokers an opportunity to pool 5,000 miles with four of their friends for a Party Kit. The kit includes a Weber gas grill, a Sony hi-fi system, a Canon video camera, a Coleman cooler, five Polaroid Spectra cameras, five 100 dollar gift certificates for Omaha steaks plus 200 dollars for whatever we missed. Just last month we expanded this program to 8 more markets.
No discussion of relationship marketing would be complete without a discussion on Direct Marketing. Our goal here is not merely to deliver coupon offers but to develop a more personal message to our adult smoker base. Our efforts include mailings about cooking, which reinforce Marlboro?????s dedication to flavor, birthday mailings personalized to the consumer and Unlimited Magazine ????? a quarterly publication that talks about action, adventure, and good times.

Our marketing programs create excitement surrounding the brand, particularly among young adult smokers and to create talk value at the grassroots level.
The fourth issue I'd like to discuss is the importance of continuously finding new avenues of growth for Marlboro. Early in my remarks, I talked about the breadth of our success across demographic, geographic, and flavor segments ????? but ????? complacency is a killer of big brands and Marlboro must find and exploit every possible opportunity for growth. I'll spend my remaining time talking about three opportunities that we have been ????? or ????? will be taking advantage of ????? Metro, Menthol, and New Products.

Historically, Marlboro has underperformed in metro markets. Those of you with urban districts know that the metro environment involves a different kind of call and sales mission, in 1997, we began testing a metro program in Region 1 and, in 1998, we roiled out the program nationally. While we can undoubtedly improve the program, the good news is that Marlboro?????s share of young adult smokers has remained relatively stable in Metro markets after declining in 1996, and, more importantly, Newport's share has also been relatively flat as opposed to growing.
Visibility is a key factor for Marlboro in metro markets. We will continue to offer special point of sale and displays for use in this environment. But, here again promotion penetration is an issue. While the most recent Buy 2 Get 1 Free promotion showed improvement, we still did not reach our goal. We understand that there are issues with executing metro product promotions and want to help. Working with Sales, we developed and tested an incentive program for Non-Direct Distributors in New York and Los Angeles and penetration improved in both of these markets. This month we expanded the program to five markets, one in each region, and hope to roll it out nationally later in the year. We also will expand our price promotions to metro accounts through the New Plan PM. These additional promotions should improve our visibility in metro markets and will allow us to remain competitive in the current environment. Speaking for the Marlboro Brand group, we also welcome all suggestions on how we can improve this important program.

The Menthol category perhaps represents the greatest opportunity for Marlboro in both metro markets and throughout the U.S. Over the past year we have accelerated our efforts behind Marlboro Menthol as we have seen a resurgence in the Menthol category. Almost entirely as a result of your efforts, our share has responded ????? growing to a new high of 2.2% and, as I mentioned earlier, Marlboro Menthol has the fastest rate of growth of any major Menthol brand. Share is growing across all age groups, with the strongest growth among young adult smokers.
In 1998 we supported Marlboro menthol with three Buy 2 Get 1 Free promotion in select menthol markets, in 1999 we have expanded our efforts to offer five national product promotions, including two Buy 1 Get 1 free offers. Along with Marlboro?????s mainline price promotions, these product offers will ensure that Marlboro Menthol is visible at retail throughout the year.
New product introductions have also fueled Marlboro Menthol's growth. Over the last 12 months we have introduced three new Menthol packings. In July 1998 we launched a Full Flavor 100s box and more recently we launched Marlboro Ultra Lights Menthol. We have met our objectives with these packings. Marlboro Ultra Lights Menthol has achieved a three tenths share and is available in 60% of stores.

Historically, new products have played an important role in growing Marlboro?????s share.
????? In 1972 we introduced Marlboro Lights, which has become the number one style for Marlboro with a 15.8% share.
????? Marlboro Menthol was first introduced in 1966 and was relaunched nationally in 1988.
????? Marlboro Medium was launched in 1991 and has a 1.6% share today.
????? Finally, Marlboro Ultra Lights, launched in 1998, has already become the leading Ultra Light brand and has been a driver of Marlboro?????s growth in the last year.
And, as this chart indicates, without New Products ????? Marlboro would be a brand in decline.

In October of this year, we will introduce Marlboro Milds into test markets in Atlanta and Pittsburgh. At 12 mg tar and a slightly less menthol flavor than our other Marlboro Menthol packings, Milds will provide adult smokers a new taste dimension within the menthol category and fill a gapping hole for Newport smokers that may switch between full flavor and lights. Marlboro Milds' distinctive name and blue packaging convey, and the blend offers, a mild menthol taste unavailable in the marketplace today. This product is positioned as close as possible to being a free-standing Menthol without actually being one. Our research suggests we have a potential winner but we plan to carefully monitor the product in market -and when and if we are convinced through a host of measures of Milds success ????? we'll launch.
In summary, Marlboro is a fantastic brand, in fantastic shape ????? but, it's also one that requires great care and effort. I hope to see you in our booth at the trade show later today and tomorrow to get your insights on what we can do to grow Marlboro next year and beyond.


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