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RJR MC TOBACCO

Growth Strategy for Japan

Overview of BCG's Assistance over Dec . 94 - Feb. 95
Tokyo, May 11 th,1995

THE BOSTO N CO N SULTING GROUP

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http://legacy.library.ucsf.edu/tid/cir41d00/pdf

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RJR MC TOBACCO

Growth strategy for Japan

Overview of BCG's assistance over Dec . 94 - Feb . 95

Prepared by
The Boston Consulting Group K.K.
4-1 Kioi-cho, Chiyoda-ku,
Tokyo 102
May 11th,1995

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This booklet has been prepared to complement the presentations

prepared by RJR MC Tobacco to RJR top management on May 11th
Therefore, it is focussing on describing the approach and key points,
but does not give the details of the financials which will be presented
by RJR

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AGENDA

Introduction

Growth opportunities and selected issues

Summary of key hypothesis for financial projections

Conclusion

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INTRODUCTION

THE BOSTON COH9ILTNG CiRWP

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PROJECT OBJECTIVES

Initially
Identify, assess and prioritize strategic options which will enable
RJR MC Tobacco to achieve 5% SOM goal in 1998

Later in the project

Assess also less aggressive options that would require less
investment but boost market share

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THE B06TON CONSILTlK' GROIA

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OVERALL APPROACH AND TIMING

, Dec.1994 , Jan.1995 , Feb.1995 ,

Stage 1 : Strategic audit

Module 1 : Market structure, evolution and

progress
Module 2: Competitive analysis
Module 3: RJR competitiveness in Japan
Module 4: Broad strategic options
Stage 2: Development of business vision

Stage 3: Business strategy development

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THE BOSTOH COHSULiNG GItOW

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MAJOR SOURCES OF DATA

Market datalstatistics
Competitive monthly sales performance report
National smoking incidence survey
ACR
Tracking survey
RJR on-pack research
Various statistics (population projections, etc .)

External interviews
Retailers
Selling tours with salesmen

Simulations by Henley Centre

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GROWTH OPPORTUNITIES AND SELECTED ISSUES

http://legacy.library.ucsf.edu/tid/cir41d00/pdf

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'INITIAL VIEWS ON GROWTH OPPORTUNITIES

(WITHOUT INVESTMENT CONSTRAINTS)

SOM

Salem

SLB

1994

1998

0.7

0.9

Nature of opportunities Issues

Co-leadership in Menthol

Possibility to undercut

Camel

competitors in tar
0.2 ~ Gain share from non-

SPL

0.1

Salem 1
SSL
Salem Slim 1

0.3
-

0.8

Gain share from V . Slims User survey for tar level

CFB,CMB,CLB

0.3

0.9

Revitalize the brand Creative new concept

0.4

menthol 1mg

Decrease price to V220

SIMOS

1 .4

New/innovative concept User survey for tar level

Others

0.5

0.4

Vantage to remain a niche

product

Total

1 .9

5.1

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TWO THRESHOLDS : ONE LINKED TO MARKETING EXPENDITURES

ONE LINKED TO VENDING MACHINES PENETRATION
Marketing expenditures threshold :
y4 Bn/1% SOM for each brand family

VM penetration threshold :
58% VM penetration/0.6% SOM for each brand styles

SOM

SOM"
(Oct. 1994, %)
2 .0

(Nov. 1994, %) *4Bn

7.0

58%
Lark hWds CPB

6.0

1.8

Cabin

o RJR
5.0

J77
A Lark

PMI

4.0

fandlies'

Pal ~nf

0 1

2 .0

4.0

Marn NgMs CPB I

Lerk super 1 ts PB
SLB o0
Lark CPB
Marlboro 11" Ma rlboro Iiphts CPB
SOL

~~
~
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0.6

Nsxt

~~~Dunhl~~
0 1Mnston

0.4

VI Sqnls A

!a!0

Marlboro FF C PB

Lucky strike FF CPB

1 .0

BdeW

0.8

All other brand

Lucky

0.2

Af

CLB en.`
VBO pCM
o
BW-4
Smstl

0
6.0

a RJR
JTI
A PMI

1 .2
VSL menlha CPB

wrlboro

1 .4

1 .0

Kent

2 .0

. Nsxt CPB

B&W

Frontlar

3.0

1 .6

8.0 10 .0
Traditional Marketing Exp.
(1994LE, VBn)

20

40

per Iighb
60

80

100
Vending penetratlon
(Oot.1994, %)

" TM Exp. unawlleble for other minor brand famlliss

'" Panetratlon x In store shsro

Note :

National dab

Sources : RJR (Monthly salss perfonnance rapoet Inland, marketing spsnding worksheet) ; Nlelsen; BCG analysis
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RJR SALESFORCE PRODUCTIVITY (NUMBER OF CALLS) IS

VERY HIGH, PROBABLY TOO HIGH

JT

PM

B&W

RJR

271

34.7

13.4

6.5

2,400

1,050

550

441

Sales per salesman

(mil . sticks/year)

113

33

24

15

# of stores covered (1,000)

230

200

130

150

# of stores per salesman

96

190

236

340

# of daily calls per salesman

15

17

15

25

# of monthly calls per store

3.1

1 .8

1 .3

1 .5

Total sales
(bil . sticks/year)
# of salesmen

Sources : RJR estimate; BCG analysis

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SUMMARY OF KEY HYPOTHESIS FOR FINANCIAL PROJECTIONS

http://legacy.library.ucsf.edu/tid/cir41d00/pdf

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MANY SCENARIOS HAVE BEEN ANALYSED

3 brands (Salem + Simos + Camel - 220 yen)

Salem + Camel (220 yen)

Salem + Simos
Start in 1995

Start in Sept. 1996

Start in April 1997

Salem alone

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OVERVIEW OF THE SIMULATION MODEL

Competitive situation
~ by brand

Marketing spending~ C RJR financial

benchmarks department

Target scenario
Number of brands
Target market share by brand
, Number of brand styies_

Target revenues

Gross margin

Required marketing
support by brand
Marketing Investment

Salesforce Investment

Required number
of salesmen
Overheads cost

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SUMMARY OF KEY HYPOTHESIS (1)

VM penetration target is 65% in core & urban, and 50% in suburban (58% national)
The numbers of necessary additional columns is 277,000 for 6 brand styles
Column cost is increasing 5% annually due to competition
Salesforce coverage of 85% in core & urban areas and 52% in suburban areas
The number of salesmen necessary at peak is 650 for 6 brand styles

more than half of the increase are contracted salesmen

when the necessary number of columns is reached, the number of salesmen
will be reduced to maintenance level (490 salesmen)
A "4 month pipeline assumption" for sales volume has been taken into account
The product costs, freight costs and hedge costs have been adjusted on a year by
year basis in close cooperation with RJR Finance Department

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SUMMARY OF KEY HYPOTHESIS (2)

VM assumptions in 1996

1995

No. of Brand Styles with

58% VM penetration
SLB

Salem 1

1996

1996

Salem+SIMOS

Salem Alone

0
0

0
0

0
0

Salem Siim 1
SPL

SIMOS A
SIMOS B

Sources: RJR ; Henley Centre; BCG analysis

http://legacy.library.ucsf.edu/tid/cir41d00/pdf

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SUMMARY OF KEY HYPOTHESIS (3)

Annual vending machine spendings to push 6 brand styles
above VM threshold

Core & urban

# of brand styles

Addltionai Col umn cost'

columns (CPP :VM = 8 :2)
(VBn)
('WV)

Suburban

Additional
columns
('WV)

1st

2nd

3rd

22

1 .0

19

4th

32

0.5

5th

43

6th

52

6 brand total
(Including

149
(187)

1 .7

National

Column cost
(CPP:VM = 8:2)
(VBn)

Additionai
columns

Column cost"
(CPP:VM = 8 :2)

('VW)

(TOn)

1 .5

3.2

I
JJ

0.8

41

1 .7

27

0.4

59

0.9

0.6

37

0.5

80

1 .1

0.6

45

0.5

97

1 .1

4.4
(4 .8)

128
(170)

3.6
(4 .1)

277
(357)

8.0
(8.9)

other brands)

* Assuming suburban CPP column cost 10% less than core & urban
Note: CPP cost Increase due to competition not Included
Source: BCG anaiysis
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http://legacy.library.ucsf.edu/tid/cir41d00/pdf

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SUMMARY OF KEY HYPOTHESIS (4)

Salesforce coverage target
(%)
Store categories
AA

Total

Current Ta t Current Ta et Current Tar Current Target Current Tar

Core

&

urban

99

95

Suburban

92

Total

-3,

96

97

99

89

40

60

-~

-~

99

90

94

95

68

81

4
4

95
75

85

92
75

82

95

4~

->

13

75

84

51

0-3. 10

23

Current Taret

72 4 85

40

-)~ 52

53

4 65

Guidelines :
Attain coverage similar to competitors in core & urban
Set coverage higher than penetration target in suburban

Source: BCG analysis

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http://legacy.library.ucsf.edu/tid/cir41d00/pdf

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SUMMARY OF KEY HYPOTHESIS (5)

Required number of salesmen

1994

1995

1996

1997

1998

1999

6 brand styles

440

440

540

650

490

490

4 brand styles

440

440

500

440

440

440

Number of brand styles above

VM threshold In 1998

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APPROACH TO ASSESS THE REQUIRED NUMBER OF SALESMEN

Illustration : number of salesmen needed for 6 brand styles
1994

1995

1996

1997

1998

1999

Capacity for gaining columns

# of brands (excluding other brands)
# of additional columns ('000)
# of salesmen needed *

97
84

38
33

161
140

183
159

0
0

0
0

Capacity for maintaining columns

Coverage (%)

53

53

65

65

65

65

3.1
316

3.3
322

3.6
407

4.6
446

4.6
446

4.6
446

Key account salesman

400
40

355
40

547
40

605
40

446
40

446
40

Total

440

395

587

645

486

486

645

486

486

# of columns to maintain per store**

# of salesmen needed
# of route salesmen needed

1*
# of salesman used in scenarios

440

440

542

1 salesman gains 1,150 columnsJyear

' # of total columns

ores co
Source : BCG analysis
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CONCLUSION (1)

Up to now, by focusing on maximizing OCC, RJR has weakened its market position
Market share is low (around 2%)
The salesforce is very productive but overstretched
The VM penetration is too low, and
The Camel brand has been sacrificed

The Japanese market offers attractive opportunities for RJR :

The Menthol segment (Salem) and share of foreign brands in the

Masculine segment (Camel) is growing
Salem 1, Salem Slim 1 and SIMOS offer opportunities to leverage new
consumer concerns (health consciousness, social concerns)
Foreign brand penetration of the Popular segment (V220 - 240) Is expected
to increase which Is an alternative for Camel

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CONCLUSION (2)

Analysis of the various scenarios has shown that :

The revitalization of Camel without a major and creative change of the

brand is not economically viable
The Salem alone scenario is risky, because with only one brand RJR is
exposed to competitors aggressive moves

BCG's recommendations are :

To Increase investment in Salem (SOM : 1 .1% In 1994 to 2.3% in 1998)

To launch a second brand, Simos, the only one having a leapfrog potential
(SOM: 1 .3% In 1998)

Possibly to relaunch Camel if a great new concept is discovered

Key success factors are :

Sustained commitment to Japan, if RJR wants to be here long term

Consistent resource allocation (over thresholds)

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Excellent project management for the next 3 years

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