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L&M (L and M) Cigarettes

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LM Cigarettes Mixx Slims packed in 10 packs with 200 cigarettes within 100mm box. Information about the ingredients: 3mg of Tar and 0.4mg of Nicotine. Manufactured in Europe.

L&M Cigarettes One

LM Cigarettes One data of packaging: 10 packs include 200 cigarettes in 88mm box. Cigs ingredients are 1mg of Tar and 0.1mg of Nicotine and made in Europe.

L&M Cigarettes Red Label

LM Cigarettes Red Label packing: 10 packs, 200 cigarettes, 88mm box. Cigarettes contain 10mg of Tar and 0.8mg of Nicotine. Discount cigs are produced in Europe.

L&M Cigarettes Silver Label (Super Lights)

LM Cigarettes Silver Label (Super Lights) packed in 10 packs with 200 cigarettes within 88mm box. Information about the ingredients: 4mg of Tar and 0.4mg of Nicotine. Manufactured in Europe.

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LM Cigarettes Vibe Slims data of packaging: 10 packs include 200 cigarettes in 88mm box. Cigs ingredients are 5mg of Tar and 0.6mg of Nicotine and made in Europe.

L&M Cigarettes Blue Label (Lights)

LM Cigarettes Blue Label (Lights) data of packaging: 10 packs include 200 cigarettes in 88mm box. Cigs ingredients are 6mg of Tar and 0.5mg of Nicotine and made in Europe.

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L&M Cigarettes Lights Menthol

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The list of countries, where L&M cigarette brand is the most popular (in alphabetical order): Australia, Austria, Argentina, Belgium, Brazil, Canada, China, Czech, Denmark, Finland, France, Germany, Greece, Iceland, India, Ireland, Israel, Italy, Japan, Mexico, Moldova, Netherlands or Holland, Norway, Poland, Portugal, Romania, Russia, Turkey, Saudi Arabia, South Africa, South Korea, Spain, Sweden, Ukraine, United Kingdom or UK, United States of America or USA or U.S.
L&M cigarettes are manufactured in following countries: Argentina, Belgium, Brazil, Czech, Finland, Germany, Japan, Malaysia, Russia, Switzerland, Ukraine, USA.

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L&M Cigarettes. Advertising in 1955

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"Little Marlboro" Comes Of Age


Executive Summary

L&M volumes have grown from 8 billion in 1990 to 69 billion in 1995, making it the world's second largest and fastest growing International brand. An average annual growth rate of more than 50% from 1990-1995 is unrivalled in the IB segment which grew on average by just 7% per annum (although value IB's grew by 17%). Even Marlboro has only managed a 6% average growth rate during this period.
The main reason for this phenomenal growth is the successful launch across the developing Central/Eastern European and Central Asian markets, which now account for just over 70% of total volumes (from 0% in 1990). L&M is a key element of PM's marketing strategy for these regions; the objective being to deliver to the consumer an international brand at an accessible price point which will be a "stepping stone" to premium priced brands. Within just 2/3 years L&M has become a leading brand in many of these markets.
In Western Europe, L&M has also proved that it is an appealing consumer proposition for price sensitive but value conscious consumers downtrading from premium brands, following a series of high real price increases. In providing this value/quality alternative, PM aims both to keep existing PM consumers and capture new consumers downtrading from other premium brands. The intention being to ensure that when these smokers eventually trade back up, it will be to Marlboro.
Sales outside the European/Central Asian markets account for just 14% of the total, mostly generated in Brazil and Argentina, where the brand is in decline due to irrelevant consumer positioning or its price position being better occupied by an alternative brand (normally a local one).
L&M continues to grow and current performance indicates that volumes could reach 85 billion (+20%) in 1996.
Brand earnings (before marketing spend) are estimated at US$220-280 million or $3-$4 per mille - therefore making a meaningful contribution to PM tobacco profitability. A key factor in this profitability is low cost sourcing (increasing use of Brazil and local factories in Eastern/Central Europe to replace US/Westem European exports to the new lower margin markets). Despite the high volumes, L&M's profitability is undermined to a large extent by the significant margins offered to the distributive and retail trade in key developing markets (e.g. in the region of 40-60% in Russia). By implementing regular price increases, L&M should begin to achieve profitability more in line with its brand positioning and volumes while maintaining attractive margins for the trade. In managing its future pricing, P.M. will focus upon the price gaps between L&M and Marlboro and between L&M and local brands.

L&M Success Factors
The key factors behind the L&M growth explosion are:
Price – an effective and highly flexible pricing strategy to exploit both uptrading (Eastern/Central Europe) and downtrading (Western Europe) environments. Competitive advantage via effective price/value positioning on a market specific basis is a fundamental success factor.
PM also pursues a strategy of "portfolio" pricing i.e. using L&M to support its longer term growth objectives for uptrading to Marlboro and in so doing are prepared in specific instances to forego short term profitability while building up critical mass in a market (e.g. Russia).
Distribution – a strategy to secure widespread distribution both geographically and across channel. This has paid off particularly in Eastern/Central Europe where availability of supply is a critical success factor. A key element of this successful TM&D strategy has been to use the power of trade support for Marlboro to secure shelf space for L&M (Marlboro incentives to encourage the trade to stock and promote L&M). PM has also demonstrated more effective space management at POS, positioning L&M and Martboro together. This reinforces the "PM link" and promotes the perception of quality for L&M.
Price, distribution and promotions have been the impetus behind high levels of trial and early volume building i.e. short term performance factors. PM's ability to build on this early success is due to a number of additional factors:
Product - quality and consistency. R&D product analysis (in terms of delivery, blend and cigarette design) has also identified very similar characteristics to other PM products including Chesterfield, Bond Street and Marlboro. Excellent product and smoking quality, comparable with Marlboro, combined with a highly attractive price offer represents exceptional value to the consumer.

There are differences in packaging from market to market to meet local consumer preferences. However, in all markets the visual aspect of the L&M pack is very consistent. The simple, clean and impactful design serves to enhance the brand's core values (good value, accessible and modem) which are applicable to all L&M's key markets. Moreover, any inconsistency does not appear to diminish L&M's association with Philip Morris and Marlboro.
The ongoing role of Communications is less clear. Consumer feedback in this area appears to indicate that whilst the brand's advertising does seem to communicate positive values/imagery, it has relatively low recall (both spontaneous and prompted). There is also little overall consistency in ATL creative with 3/4 different campaigns.
The "Route 66" ATL campaign is the core image campaign used in most markets (Eastern Europe and the Middle East) with strong YAUS / American themes, but other ATL creative used in Spain and Belgium/Germany has a more tactical feel with price/value as the central message. An entirely different campaign has been used in Argentina with a different positioning - aspirational, romantic, upmarket and sophisticated - reflected by an older consumer profile. L&M has no major direct marketing or sponsorship activities (other than local sponsorships). Pack redemption based competition promotions are used widely to build volumes. The different ATL approaches reflect the different positioning of L&M across the world (uptrading or downtrading) plus the relative freedom given to end markets to develop a market specific communications execution.
The flexible approach to communications activity is backed up by an apparently tactical spend strategy. Not only is spend relatively low, estimated at US$ 50-60 million (bearing in mind the size of the brand), with low share of voice in many markets, but there is also evidence that this is restricted to burst activity to support launch/price initiatives as necessary. This is in sharp contrast to Marlboro - continuous and progressively increasing spend to build and reinforce high quality brand values.
However, spend for L&M in many of its key markets remains higher than that for competing BAT brands. Moreover, in specific instances (e.g. Russia and Belgium), L&M has benefited from limited advertising restrictions which allowed up to two years of uncontrolled communications exposure free of effective competition.
(The L&M brand mix is analysed fully in Section 3 of this report).

The Role of L&M in PM's Brand Portfolio
Marlboro is PM's global priority, but it also has a strategy to dominate over the long term all key smoker segments. It therefore has a brand for each major price segment:
Marlboro - Premium
Chesterfield - Mid/High (where relevant)
Regional & national brands (e.g. Bond Street) - low/value
PM is happy for L&M to evolve into a strong brand for the long term, but its overall objective is to grow premium brands. This therefore implies that PM sees L&M's role primarily as one of support - to facilitate uptrading to Marlboro over the long term in both emerging and mature markets. In price sensitive markets such as Finland and Belgium, we believe it is PM's objective to catch and keep consumers who are downtrading from Marlboro but will eventually return to Marlboro when the pricing environment is more favourable. The evidence for this support role strategy for L&M is:
Considerable flexibility with L&M prices ranging between 50% and 97% of Marlboro's price with the objective of building volumes over the short term.
Initial product analysis suggests blend similarities between Marlboro and other PM brands (Chesterfield and Bond Street) which may promote smooth consumer transfer between these brands. PM may be using the brand portfolio to move smokers up to Marlboro, with Bond Street as the brand closest to the local taste requirement, L&M tending more towards USIB, and with Marlboro being the eventual destination brand for consumers as they trade up; the common link being "all products from PM". This hypothesis will, however, need further analysis. These blend similarities also allow for production/cost efficiencies.
Relatively low key communications activities with a brand world/personality which does not challenge the strong image characteristics of the Marlboro campaign.

Implications for SAT's Value International Brand Strategy
What is L&M?
L&M is the affordable US blended international brand or put another way, the "poor man's" Marlboro. To smokers in the emerging markets it is "Little Marlboro" (literally the "alternative Marlboro") - the brand that they can afford which most closely reflects the values of the most aspirational brand in the world, Marlboro. This therefore implies that when economies improve and spending power rises, these smokers will trade up to Marlboro.
In the mature markets, a large proportion of L&M smokers are former Marlboro (or other premium price USIB) smokers who have become sensitive to price following high real price increases in recent years. Switching data shows a strong association between Marlboro and L&M suggesting that it is PM's objective to ensure that over the longer term these smokers eventually return to Marlboro. In this context, L&M performs a defensive and sourcing role, providing the value/quality alternative to Marlboro.

The implications for BAT are:
L&M will remain a PM brand priority - L&M is already a large and well established brand both in mature and emerging markets. It will benefit from further growth potential in the emerging markets of Eastern/Central Europe and Central Asia. PM will also look to better exploit the brand in Latin America as part of its objective to grow regional share. Furthermore, there is significant potential to launch/exploit the brand in other regions of the world.
L&M has significantly moved Philip Mom's into the lower price segment in many markets, thereby attacking the significant BAT business with both local and regional brands or occupying the ground that such brands normally occupy.
The challenge for BAT is to respond with a flexible but clear brand portfolio strategy on a regional or market specific basis for this mid-price segment This strategy should address whether we are in an uptrading or downtrading market context what the role of local and international brands is, and which IB is most appropriate e.g. Pall Mall.
The roles of distribution, point of purchase communication, media advertising, trade margins and the product synergy with our higher priced brands are all critical elements within our strategy for this segment Above all; this is a mass volume segment opportunity where significant sales and market share should remain the main objective.

The Next Opportunity
Philip Morris will continue to support L&M and launch it into new markets where Marlboro remains too large a price jump for local brand smokers. Its role will primarily be that of an intermediary stepping stone to Marlboro. In some markets, there may be a second intermediary step at a price point between L&M and Marlboro with Chesterfield performing this role. The implication for BAT is to quickly establish a global, regional and market specific price segmented brand strategy with clear brand roles for both local and international brands (many markets already have this strategy).

Overall performance
L&M has experienced significant volume growth, particularly over the last 3 years, growing at a much higher rate than both the total International and the value sub segment Bond Street, PM's low price regional brand in Central/Eastern Europe has grown at a similar rate to L&M. BATs Viceroy, JPGL, Hollywood and Pall Mall have all grown more slowly than the overall value IFB segment
In Western European markets, L&M Lights appear to be driving the volume growth of L&M, following a similar trend to Marlboro, where Lights growth is outstripping that of the parent. Initial data from Moscow suggests early signs of a similar trend for both brands in Russia, although Lights volumes and the trend are more evident for Marlboro Lights. However, Full Flavour still represents around 90% of L&M sales. This is due to the substantial full flavour volumes in L&M's largest markets in Russia and Central / Eastern Europe. The decline in overall Lights sales is primarily the result of volume falls in Brazil.

Central/Eastern Europe
Most of the brand's; growth is as a result of launch from 1992 onwards into Central/Eastern Europe and Central Asia. In Russia, L&M is now the largest International Brand following launch in 1993 (volumes appear to be stabilising and are expected to plateau at around 25 to 26 billion sticks in 1996). The launch in Turkey in October 1994 has been particularly successful with volumes reaching over 3 billion in 1995. The size and potential of other markets in this region means that L&M still has significant growth opportunities in the short to medium term.
Western Europe - L&M has also made strong progress in Western Europe, particularly in Spain where it was repositioned in the VFM segment in 1994, as well as Belgium and price sensitive Finland. However, in the less price conscious German market, L&M is in decline and has been outperformed by Reemtsma's mid price West which has a strong share of the YAUS segment PM will continue to use L&M to exploit pricing opportunities in Western European markets. L&M Lights is a key contributor to this growth in Spain, but the full flavour version remains the major seller.

Other Markets
Elsewhere, the brand's performance has been less spectacular, although good growth has been achieved in Arabia where the brand is targeted at the price conscious smoker.
The L&M formula has been less effective in Latin America. In Brazil, where it is positioned as a lights brand (full flavour was withdrawn after an unsuccessful launch in 1995), PM was forced to put the brand in a higher price category when government action was taken in 1993 to prevent an escalation in the price war. Although a lower price soft cup version was subsequently launched, the brand's market share has declined  from a peak of 5.7% in 1992 to 3% in 1995.
PM was also forced to pull a new ATL campaign in 1995 because of similarities to Souza Cruz' Free campaign. In Argentina, the brand is in decline in a pricing environment (prices fixed since 1991) which favours uptrading to higher priced brands.
L&M's current relative weakness in Latin America will not prevent PM from using the brand in the future as one of its weapons for attacking BAT stronghold markets. Whilst it currently has a very small presence in the Asia Pacific/America Pacific region, PM will look to exploit the L&M trademark where appropriate in these markets.

Consumer profile/switching
Available GCS data suggests that L&M has found consumer support with smokers from a wide range of age categories, but all with the same value conscious characteristic. Depending on the positioning of the brand and pricing structure of the market, L&M's profile is stronger for different age groups; it is clearly YAUS in Russia and Belgium; slightly older in Spain, although retaining a reasonable YAUS share, and appealing to all age groups in Finland. Similarly, L&M's socio-economic profile is broad, although tending towards the C/D's. In general, FF has a predominantly male profile and Lights is clearly more feminine. With such broad consumer profile and pricing flexibility, PM are able to alter the positioning of L&M to suit the specific characteristics of each market.
The switching data indicates that L&M benefits largely from uptrading in the emerging markets, whereas in the mature economies it attracts mainly down-traders. It also indicates a high proportion of switchers from and to Marlboro.

Analysis of The Brand Mix
Product/Product Sourcing

A US blended cigarette with Full Flavour and Lights available in most markets. Other key versions available in selected markets;
- Ultra Lights (Finland, Saudi Arabia and France)
- Menthol (Ukraine, Belarus, Saudi Arabia and Finland)
- Lights Menthol (Finland, Hungary)
- 100mm (Ukraine, Belarus, Turkey, Saudi Arabia, Argentina)

Full flavour range generally from 13-15mg tar (except Saudi where FF is 10mg due to local tar maximum regulation and Poland where FF is 16mg) and lights from 6-9mg tar (except Argentina where it is 11 mg due to less well established lights segment). Deliveries of L&M within each market match the deliveries of the equivalent Marlboro.

Identical cigarette design (filter pressure drop, tip, ventilation, paper permeability, citrate levels in the cigarette paper) tend to be used for both L&M and Marlboro with possibly one or two exceptions (Saudi Arabia and Spain)

R&D product analysis has demonstrated consistency of product across markets and in some cases with other PM brands. In most markets the blend chemistry suggests that L&M tends to have a slightly more flue-cured bias than the equivalent Marlboro - the exception being Saudi Arabia where it is believed that L&M and Marlboro use a common blend. In Russia, the shift away from Marlboro was greater (L&M closer to Bond Street).
Product similarity with Marlboro could be deliberate to facilitate switching between PM brands and particularly switching up to Marlboro (the ultimate objective) - thus preventing switching out to competitor brands. Product cost/manufacturing source synergies are also more likely in this scenario.

Product Quality
Blind testing and consumer research (but limited data) indicate that the L&M product benefits from the same high quality characteristics as Marlboro.

Sourcing - main sources appear to be US, Brazil and Western Europe (Germany, Netherlands, Switzerland). But two trends are emerging - a shift towards lower cost production sources where possible (e.g. Brazil) and increased local sourcing in Eastern/Central Europe as production technology/processes improve (L&M and Bond Street production has started in Turkey, Lithuania, Czech Republic and Hungary and most recently in Kazakstan).


Pack Types
Generally comes in 20s format (exceptions: 25s in France and Belgium and 18s/10s in Finland) and mainly available in hinge lid Soft cup versions for lower price options in Brazil, Argentina, Turkey and Bulgaria. The pack type strategy is highly market specific according to smoker needs.

Although the graphics are not universally consistent, sufficient similarities do exist across markets, - red/white for full flavour (but 25s format in Belgium/France is red and blue), blue/white for Lights and green/white for menthol, plus the familiar L&M lettering (although in some Eastern/Central European markets this contains a gold stripe). See appendix. This demonstrates the relatively high degree of autonomy given to end markets when managing this brand.
Pack Impact - the packaging is simple, bold, impactful giving high shelf standout and consumer appeal. Research in Belgium indicates that packaging is one of the core values of the brand - consumers see it as young, confident, good taste, simple and American..

Availability - one of the key elements behind L&M's success, particularly in Central/Eastern Europe where wide distribution has been secured in a very short time scale. This has given PM a critical competitive advantage - allowing it to establish a mid price/value international brand before the competition. TM&D activities include;
- Using the power of Marlboro to get trade support (Marlboro supply guaranteed if L&M is stocked, plus joint trade promotions).
- POS space management, positioning L&M with Marlboro.
- Trade hot-line for emergency ordering.
- Free gifts/product supply if POS material is taken.
- Favourable discounts, credit terms and bonus points systems.
- High call frequency to ensure no stock outs.
Channels/Geographic - all channels, plus selected HORECA coverage. Focus on cities/towns then roll out to rural areas. HORECA coverage for L&M is typically higher than for directly comparable competing BAT brands, increasing incidence of trial.


Above the Line
"Route 66" is the core advertising campaign used widely (TV/cinema, print, outdoor) across Eastern/Central Europe, Brazil and the Middle East The central theme is groups of young people travelling across the famous East-West Route 66 Highway in the US (see appendix). Key characteristics are American, travel, youth, independence, adventure, sociable groups, fun, not taking life seriously. The 'Made in USA/Real American' copy lines are used to reinforce the US imagery with price often integrated into the creative. Because only the lights version is available in Brazil, the copy line is "Low tar with an American Flavour".
Limited GCS data on advertising awareness (Ukraine, Belarus) indicates that both spontaneous and prompted awareness are very low, although brand awareness is significantly higher. This would appear to indicate that whilst advertising may assist in communicating the core brand values, the Route 66 executions are not particularly memorable or distinctive.

Other Campaigns
Belgium has the "25s Box" campaign with the pack as the central theme (local advertising regulations only allow pack visuals) and with the focus on the brand's 25s value positioning. American "retro" icons (jukeboxes, sports gear etc.) are used to reinforce the brand world. Consumer research indicates the following consumer takeout; youthful, simple, ordinary, relaxed, individual "knows his own mind", sociable, friendly, American, the "90s brand for me". Consumers say L&M does little advertising or that they do not remember any, although this was not a negative comment, more a reflection of the brand's share of voice and the simplicity of its approach. The "25s Box" campaign is also used in Germany.
Spain has recently run a campaign focusing on price with a series of visuals showing groups of people enjoying each other's company (see appendix). Key characteristics are youth, happiness, sharing, and sociability, fun - reinforced by the copy line "Share your happiness". However, unlike the other campaigns, this is not American (but "American Blend/Imported American Blend" is included in the copy).
Argentina has a completely different campaign (aspirational, holiday locations - see appendix) and hence an older consumer profile.
ATL activity is typically undertaken in bursts (e.g. launches/price changes etc.), but overall share of voice is generally low (see Brand Spend section). Media vehicles are chosen to reflect the target audience. ATL support and communications occupy a lesser role within overall marketing spend, with trade, promotions and trade incentives playing a larger role.

L&M has no major international sponsorship programme, although there are a number of local activities in the sports/music areas:
- Russia - L&M Ice Hockey League plus sponsorship of the Soviet Wings team. This is strongly supported across Russia with high level of branding presence at matches, celebrity endorsements and sponsored sports magazine articles.
- Lebanon - Backgammon.
- Belgium - "My Way" Concerts, CD Music collections and Rock Club. This is supported by ATL coverage.
- Bulgaria - Music events.
Sponsorship activities are therefore market specific and therefore driven by end markets.
Promotions - a number of key promotions have been run across several markets, linking in the themes from the Route 68 creative. These include competitions to win trips to the US/Hartey Davidson motorbikes (via pack redemption's). Other promotional activities include sampling and give aways (T-shirts and lighters) to secure trial and build volume.

Brand Spend
Market data indicates that 1995 L&M spend was at a level of US $43 million as can be seen on the chart. However, given that some markets were unable to supply complete data, we estimate that spend was actually higher at between US$ 50-60 million. Many markets expect spend to increase in 1996. However, bearing in mind the size of the brand this is still relatively low, although it is PM's second spend priority brand behind Marlboro in Central/Eastern Europe. Contrast this with estimated spend for Marlboro (outside the US) of approximately US$ 650 million. L&M spend is also typically higher than tor competing BAT brands.
Share of voice in most markets is also low and often heavily focused on the launch period or at times of significant pricing activity (a good example of this was the relaunch in 1994/5 in Spain where spend hit US$7 million).
Spend reflects the brand's regional focus, although within regions it is well spread and is concentrated in ATL and promotional activities.

L&M is a mid/value price USIB. PM's pricing strategy is to allow maximum flexibility on price positioning in order to stimulate trial and build volume in different market scenarios. Successful pricing is fundamental to L&M's growth.
Absolute Price Levels - price varies as follows:
Below US $1 in Eastern/Central Europe and the Middle East
US $1-2 in Spain, Portugal, Argentina and Brazil
Above US $2 in France, Finland, Belgium and Germany.
(Note: These are retail prices and therefore include excise).
Price Relativity to Marlboro/Other PM Brands - against Marlboro (index 100), L&M's price varies between 50 (Middle East) and 97 (Argentina), with Russia, L&M's largest market, at 65. Again, the evidence demonstrates considerable flexibility in price positioning according to different market scenarios. In general, Western European markets are categorized by a narrow price range, whereas in the free pricing developing markets, the price gap is wider. Chesterfield is usually priced between L&M and Marlboro while Bond Street is priced below (although where L&M is positioned in the VFM segment, Bond Street is not present e.g. Spain and Germany).

CIF Pricing
An analysis of CIF prices in Russia shows that L&M gives significantly greater margin to the trade than BATs comparable brands, such as Pall Mall. This makes it difficult to compete with L&M while maintaining profitability.
Portfolio Pricing Strategy - the two key determinants are the Marlboro price and the price of Local Brands. In a downtrading context, L&M is positioned either at the same price point as local brands or between these and Marlboro, the exact positioning being determined by the size of the gap. In an uptrading context, L&M is positioned between local and Marlboro. Absolute prices and price gaps are highly market specific, which supports the view that pricing decisions are taken on a market specific basis with a high degree of flexibility.
Reactive versus proactive pricing - in markets where PM has a dominant position, it will rarely initiate price wars (e.g. Western Europe), but will respond quickly and effectively to competitor activity. In markets, where it wishes to build share quickly or challenge the competition (e.g. Eastern or Central Europe), it will use price more aggressively to achieve its objectives. This is most clearly demonstrated by its pricing strategy in Hungary last year.

L&M represents exceptional value to the consumer, a good quality international offer at a reasonable price. It therefore has universal appeal in a broad range of markets, benefiting from PM's excellent distribution and a strong association with Marlboro. Given the brand mix, PM is able to adopt a flexible marketing strategy for L&M to meet the differing needs of specific markets.

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