22 RJR Graves Marketing
The Menthol Market
Tobacco Products Scientific Advisory Committee July 15, 2010 Monica J. Graves
Introduction
• Question: Do marketing or menthol levels explain the recent trend in the menthol category?
2
Background – Smoking Trends
• Government data shows positive trends in tobacco public health factors: Lower smoking prevalence Lower consumption levels Lower/stable initiation rates
3
Background – RJRT Guiding Principles
• No tobacco product has been shown to be safe or without risks • Quitting cigarette smoking significantly reduces the risk for serious diseases • The best course of action for tobacco users concerned about their health is to quit • Minors should never use tobacco products and adults who do not use or have quit using tobacco products should not start
Background – RJRT Marketing Practices (continued)
• The marketing of tobacco products is not directed at minors, non-tobacco users or former users, and we exclude them from all marketing research • We market our brand portfolio to all adults who choose to smoke regardless of smokers’ ethnicity
Analysis Overview
• RJRT performed an analysis of industry data Menthol volume trends Menthol inclusion levels Menthol marketing spend
6
Summary of Menthol Analysis
• Approximately 70% of cigarettes consumed are nonmenthol
• Fewer menthol cigarettes are sold and consumed each year
• Recently menthol cigarette sales have declined slightly slower than non-menthol
• Recent softening in decline is not driven by menthol inclusion levels or marketing efforts 7
Menthol Shipment Volume •
Like the US cigarette market, in total, the menthol segment has experienced volume declines for 25+ years •
Menthol has declined 53%
•
Non-menthol has declined 49%
Shipment Volume
Cigarettes (in millions)
700,000
600,000
500,000
400,000
300,000
200,000
100,000
Total Industry Shipment Source: MSAi Shipments to Wholesale
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
1931
0
Menthol Shipment 8
Menthol Share of Shipments • Menthol share of shipments (SOS) relatively stable for 25+ years ranging between 24%-29% Menthol SOS declined slightly for the first 15 years, stabilized and then has grown slightly thereafter 35. 35%
Menthol % of Industry Shipments
30% 30.
29 29 28 28 28
25%
25.
Menthol Shipment Share 26 26 26
25 25 25 25 25 25 25 25 24 24 24 24 24 24
27 26 26
20% 20.
15.
15%
10. 10% 5% 5.
0.
0%
Source: MSAi Shipments to Wholesale
9
Relative Declines – Menthol vs. Non-Menthol
• Overall development of menthol has not changed appreciably in 25+ years
• Slight differences in recent menthol decline rates vs. non-menthol Menthol has declined 21% since 1999 Non-menthol has declined 28% since 1999
• Result is a menthol relative to non-menthol preference shift Menthol share of shipments increased slightly - 24% to 27% since 1999 Non-menthol share of shipments decreased slightly - from 76% to 73% since 1999
10
Menthol Inclusion Levels • Menthol inclusion levels remained relatively stable during the period of menthol preference shift 350+ different menthol cigarettes in the market today Menthol levels range from 0.3% to 2.3%
Weighted Menthol Inclusion Level 26 26
0.9 24
24
0.8
24
24
24
24
30 30% 27
25
25% 25
Menthol Inclusion Levels, as available, for the major styles of the following brands: Kool Salem Newport Camel Menthol Marlboro Menthol
Menthol Inclusion %
0.7
20 20%
0.6 0.5
15 15%
0.4 10 10%
0.3 0.2
55%
0.1 0
% Industry Vol Represented:
00% 2000 56%
2001 56%
2002 58%
2003 60%
2004 60%
2005 62%
Menthol Shipment share
2006 64%
2007 63%
2008 64%
Menthol % of Industry Shipment
1
2009 62%
Menthol level 11
Source: RJRT R&D Specs and competitive analysis
Menthol Marketing
• Menthol preference shift coincides with the MSA Cigarette marketing activities substantially constrained Unlikely that menthol preference shift can be attributed to increased marketing activity Menthol “advertising” has changed little in message and medium during this time frame
12
Menthol - Advertising • Total industry cigarette advertising declined significantly (newspapers, magazines and billboards)
Menthol specific advertising trend followed FTC Total Cigarette Ad. Spend
$600,000 $400,000 $200,000 $0 1999
2000
2001
2002
2003
2004
2005
2006
3.2 3.1 3 2.9 2.8 2.7 2.6 2.5 2.4
Ad. Spend ($MM)
50 40 30 20 10 0 1999
2000
2001
2002
2003
Kool Ad Spend
2004
2005
2006
2007
Kool Share of Market
Kool SOM
• KOOL brand share, for example, declined in spite of advertising spend
2008 13
Menthol – Pricing • Pricing strategy not a factor in the shift towards menthol Menthol products sell at a slightly higher price than non-menthol Menthol products follow industry pricing trends Average Price Paid per Carton 49 46
$/Carton
$ 47
47
$37
37 $27
29 28
31 29
32 31
2000
2001
2002
32 31
32 31
2003
2004
34 33
35 34
2005
2006
37 37
40 38
2007
2008
27
Menthol
2009
Non‐Menthol
Source: RJRT Marlin
14
Menthol – Promotion • Price promotion also not a driver of menthol preference shift Menthol cigarettes receive less price promotion than non-menthol Menthol share of shipments were flat from 2000-2004 while menthol promotional levels increased Menthol share of shipments were growing from 2005-2009 when menthol promotional levels were relatively stable
% Volume Promoted %PV
70 26
36
35
47
55 62
60 66
59 65
61 65
61 63
70 74
52
67 71
2002
2003
2004
2005
2006
2007
2008
2009
42
20 2000
2001
Menthol
Non‐Menthol
Source: RJRT Marlin
15
Conclusion
• Among adult smokers our analysis shows 1) Menthol cigarette sales are declining 2) Non-menthol is still preferred approx. 3:1 3) Preference for menthol is slightly
increasing in a declining market 4) Trend is not explained by marketing or the amount of menthol in the product 16
Tobacco Products Scientific Advisory Committee July 15, 2010 Monica J. Graves
Introduction
• Question: Do marketing or menthol levels explain the recent trend in the menthol category?
2
Background – Smoking Trends
• Government data shows positive trends in tobacco public health factors: Lower smoking prevalence Lower consumption levels Lower/stable initiation rates
3
Background – RJRT Guiding Principles
• No tobacco product has been shown to be safe or without risks • Quitting cigarette smoking significantly reduces the risk for serious diseases • The best course of action for tobacco users concerned about their health is to quit • Minors should never use tobacco products and adults who do not use or have quit using tobacco products should not start
Background – RJRT Marketing Practices (continued)
• The marketing of tobacco products is not directed at minors, non-tobacco users or former users, and we exclude them from all marketing research • We market our brand portfolio to all adults who choose to smoke regardless of smokers’ ethnicity
Analysis Overview
• RJRT performed an analysis of industry data Menthol volume trends Menthol inclusion levels Menthol marketing spend
6
Summary of Menthol Analysis
• Approximately 70% of cigarettes consumed are nonmenthol
• Fewer menthol cigarettes are sold and consumed each year
• Recently menthol cigarette sales have declined slightly slower than non-menthol
• Recent softening in decline is not driven by menthol inclusion levels or marketing efforts 7
Menthol Shipment Volume •
Like the US cigarette market, in total, the menthol segment has experienced volume declines for 25+ years •
Menthol has declined 53%
•
Non-menthol has declined 49%
Shipment Volume
Cigarettes (in millions)
700,000
600,000
500,000
400,000
300,000
200,000
100,000
Total Industry Shipment Source: MSAi Shipments to Wholesale
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
1931
0
Menthol Shipment 8
Menthol Share of Shipments • Menthol share of shipments (SOS) relatively stable for 25+ years ranging between 24%-29% Menthol SOS declined slightly for the first 15 years, stabilized and then has grown slightly thereafter 35. 35%
Menthol % of Industry Shipments
30% 30.
29 29 28 28 28
25%
25.
Menthol Shipment Share 26 26 26
25 25 25 25 25 25 25 25 24 24 24 24 24 24
27 26 26
20% 20.
15.
15%
10. 10% 5% 5.
0.
0%
Source: MSAi Shipments to Wholesale
9
Relative Declines – Menthol vs. Non-Menthol
• Overall development of menthol has not changed appreciably in 25+ years
• Slight differences in recent menthol decline rates vs. non-menthol Menthol has declined 21% since 1999 Non-menthol has declined 28% since 1999
• Result is a menthol relative to non-menthol preference shift Menthol share of shipments increased slightly - 24% to 27% since 1999 Non-menthol share of shipments decreased slightly - from 76% to 73% since 1999
10
Menthol Inclusion Levels • Menthol inclusion levels remained relatively stable during the period of menthol preference shift 350+ different menthol cigarettes in the market today Menthol levels range from 0.3% to 2.3%
Weighted Menthol Inclusion Level 26 26
0.9 24
24
0.8
24
24
24
24
30 30% 27
25
25% 25
Menthol Inclusion Levels, as available, for the major styles of the following brands: Kool Salem Newport Camel Menthol Marlboro Menthol
Menthol Inclusion %
0.7
20 20%
0.6 0.5
15 15%
0.4 10 10%
0.3 0.2
55%
0.1 0
% Industry Vol Represented:
00% 2000 56%
2001 56%
2002 58%
2003 60%
2004 60%
2005 62%
Menthol Shipment share
2006 64%
2007 63%
2008 64%
Menthol % of Industry Shipment
1
2009 62%
Menthol level 11
Source: RJRT R&D Specs and competitive analysis
Menthol Marketing
• Menthol preference shift coincides with the MSA Cigarette marketing activities substantially constrained Unlikely that menthol preference shift can be attributed to increased marketing activity Menthol “advertising” has changed little in message and medium during this time frame
12
Menthol - Advertising • Total industry cigarette advertising declined significantly (newspapers, magazines and billboards)
Menthol specific advertising trend followed FTC Total Cigarette Ad. Spend
$600,000 $400,000 $200,000 $0 1999
2000
2001
2002
2003
2004
2005
2006
3.2 3.1 3 2.9 2.8 2.7 2.6 2.5 2.4
Ad. Spend ($MM)
50 40 30 20 10 0 1999
2000
2001
2002
2003
Kool Ad Spend
2004
2005
2006
2007
Kool Share of Market
Kool SOM
• KOOL brand share, for example, declined in spite of advertising spend
2008 13
Menthol – Pricing • Pricing strategy not a factor in the shift towards menthol Menthol products sell at a slightly higher price than non-menthol Menthol products follow industry pricing trends Average Price Paid per Carton 49 46
$/Carton
$ 47
47
$37
37 $27
29 28
31 29
32 31
2000
2001
2002
32 31
32 31
2003
2004
34 33
35 34
2005
2006
37 37
40 38
2007
2008
27
Menthol
2009
Non‐Menthol
Source: RJRT Marlin
14
Menthol – Promotion • Price promotion also not a driver of menthol preference shift Menthol cigarettes receive less price promotion than non-menthol Menthol share of shipments were flat from 2000-2004 while menthol promotional levels increased Menthol share of shipments were growing from 2005-2009 when menthol promotional levels were relatively stable
% Volume Promoted %PV
70 26
36
35
47
55 62
60 66
59 65
61 65
61 63
70 74
52
67 71
2002
2003
2004
2005
2006
2007
2008
2009
42
20 2000
2001
Menthol
Non‐Menthol
Source: RJRT Marlin
15
Conclusion
• Among adult smokers our analysis shows 1) Menthol cigarette sales are declining 2) Non-menthol is still preferred approx. 3:1 3) Preference for menthol is slightly
increasing in a declining market 4) Trend is not explained by marketing or the amount of menthol in the product 16
