CONSUMER STRATEGIES REPORT April 8 2003

al berrios & co. CONSUMER STRATEGIES REPORT 04.08.03: Tobacco, vary the levels of addiction in your products

THIS WEEK'S CONTENTS ARE:
[1] UPDATES: Updates
[2] BRANDSTRATEGY: A New Tobacco Industry: Sweeping Recommendations
[3] CONSUMERFOCUS: Water, The Biggest Con On Earth
[4] MEDIA: Why I Gave Away 200 Japanime Video Tapes
[5] MANAGEMENT: We're Regular Joes, Not Pharmacists
[6] EVENT REPORT: International Pharmaceutical Industry Congress 2003
[7] EVENT REPORT: CSFB Global Beverage & Tobacco Conference 2003
[8] OPINION REPORT: Are We Butchers or Saviors? And The HealthSouth Revolution

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[1] UPDATES: Updates

>> "Attorneys General are our business partners." - Martin Broughton, Chairman, British American Tobacco at the CSFB Global Beverage & Tobacco Conference 2003

Good morning execs,

It has occurred to me that I send this early in the morning, but you receive later in the afternoon. My only explanation is slow email servers. I sincerely apologize. But remember, if you don't want to wait, just give us a home on your "Links" bar on your web browser, and every Tuesday morning, there's fresh content just for you. Visit www.alberrios.com.

On April 16th, Al Berrios will give a seminar via teleconference on "Trends in Media: Exploiting Non-Media Assets and Re-Assessing Traditional Media's Role in Your Consumer Communications" in a Great Marketing Minds™ - Lessons in Marketing Excellence interview series hosted by Jane Tabachnick eMarketing. To register or to join their mailing list go to http://www.greatmarketingminds.com

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Enjoy today's REPORT.

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[2] BRANDSTRATEGY: A New Tobacco Industry: Sweeping Recommendations

Why do people smoke? Turns out it's the flavor. I have never smoked, so can never truly appreciate the "pleasure" of smoking, however, if it tastes anything like it smells, perhaps flavor isn't the only reason people smoke. Enter addiction. Already found to cause shorter life spans, smoking is under intense siege. Recently, a smoking ban started in New York City. And in what is turning out to be one of the most ironic cases of addiction to tobacco, Phillip Morris recently lost a verdict in Illinois, where if they want to appeal, they have to post a bond worth the damages - in this case $12 billion. However, posting this bond would potentially cause PM to file for bankruptcy, and consequently risk their payments to states as agreed in the Master Settlement Lawsuit in 1998 where states sued Big Tobacco for fraud and deception. The irony is, states have become addicted to this revenue stream as it pays for programs, fills budget gaps (which states are required by law to fill annually), and of course, pays for smoking prevention and cessation programs, so believe it or not, states are partners with PM and don't want to see them go bankrupt. (Expect PM to hold out on their Master Settlement payment, due April 15, then if they don't settle, possibly file for bankruptcy if Illinois still doesn't back down, resulting in lawsuits aplenty as everyone starts to stake their claim to PM after a filing.) Combine this sort of aggressive litigation, high taxes on cigarettes (resulting from the Master Settlement), cheap cigarette alternatives, considered the pirated MP3s of tobacco, limited marketing flexibility, and a hugely successful anti-smoking campaign, and the tobacco industry will cease to exist within a decade.

BOTTOM LINE: But alas, any industry that overflows bank accounts with so much money will never die. In the Iraqi war front, soldiers bid the price of cigarettes as high as $50 bucks a pack due to scarcity. The "contraband and conterfeit" cigarette industry is booming because there is still huge demand. Consumers, defined as the entire over-18, global population by industry executives at a recent analyst conference, with a focus on "adults under 30", enjoy the taste of their favorite brand of cigarettes, regardless of their scientifically proven, legally-discovered harmful effects. So, since consumers won't stop smoking, the only real solution is two-fold: innovation (in products) and transparency (in strategy and product manufacturing.) Let's start with transparency: using a master PR strategy, it would be in the best interest of Big Tobacco to simply admit what everyone already knows. But not just admit it, lay out, for the world to see, their strategy to get consumers to buy their addictive products. By being straightforward with something everyone already knows whether they smoke or not, they can effectively start fresh relationships with their consumers. Consumers naturally root for the underdog, and in this case, consumers are the underdogs. By reversing their strategy of secrecy to one where they are now telling the world what they do, they will reverse public opinion to one where they are perceived as the victim of overzealous litigation and government regulation practices that drive up the cost of a product consumers actually budget for. In addition, by making their manufacturing process more consumer-friendly (i.e. a smoking education campaign starting on cigarette packaging describing chemicals and their affects on the human body, rather than just a less attractive "warning"), companies will regain control of their on-package communications. Yes, there will be a loss of core consumers, however, by empowering consumers the same way nutritional labels on foods do, companies 1) stand to attract new info-obsessed consumers, but most importantly 2) absolutely eliminate future legal risks resulting from unannounced effects of their products. With regards to innovation: Humans are addicts by nature, becoming dependent on everything from playing video games, gambling, to substances. And it's all legal. Although our morals prevent us from harming others intentionally, we assuage them with the belief that by targeting mature, responsible adults that understand the consequences of their consumption habits, we're not really harming them, but providing a wanted and needed service that if we don't provide, someone else will. Margaret M. Foran, VP, Corporate Governance over at Pfizer once told me that "companies are in the business of business" and spend their time thinking of how to make money, not lose it. And because innovation is a critical component of doing business successfully, it's OK to innovate in an industry such as tobacco. al berrios & co. recommends to big tobacco that if you're willing to follow a transparency strategy, it is in your best interest to vary the levels of addiction in your products to attract a broader audience to your "flavors". Consumers are clearly interested in lighter brands, so the concept of a less addictive product will appeal to consumers that hesitate to try your product chiefly because it's very addictive. And while on the subject of flavors, how about strawberry flavor cigs or vanilla-scented exhale smoke?

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[3] CONSUMERFOCUS: Water, The Biggest Con On Earth

Take two parts hydrogen, one part oxygen, combine with plastic bottle, and you've got gold. How ironic is it to know that there is water purification technology that can make salt water, and even urine, drinkable, and eliminates not just benign contaminants, but viruses and other disease causing bacteria, too. And yet, consumers still believe that water in a plastic bottle that says it originates from some mountain ice cap is better and even healthier. Did you know that the government regulates water purification levels? Yup, turns out that the water used to clean the equipment that makes our prescription drugs has to be cleaner than the water we drink. Companies actually "dirty" our precious mountain spring mineral water (which, by the way are different classes of water) a little just because it's too clean. How did companies ever convince us to spend so much money on their water?

BOTTOM LINE: Water has always been consumers' primary source of hydration and fluid replacement. Since caffeinated and alcoholic beverages are known not to hydrate, consumers turn to water, milk, juices, and flavored waters commonly referred to as sports-drinks. The trend to drink more non-carbonated drinks has existed for at least a decade, however, grown in recent years due to increased demand for healthier lifestyles and marketing and product innovations in water packaging and flavors designed to increase revenue from non-carb products. In a study of 1400 consumers conducted last year by al berrios & co. we discovered that 5.8% of consumers did not prefer carbonated, caffeinated soft drinks, with 3.2% specifically mentioning water as their primary or only beverage choice. As marketers become more adept at training their consumers to trust their brands amidst a plethora of choices, consumers have also been trained to trust water brands. This gives those 61% of water users that aren't aware that water quality is regulated by the government a sense of security they can't get from their tap. (Source: International Bottled Water Association). Water purification has been a national issue since the 1960s. With standards in the parts per trillion (as opposed to the now-less-accurate parts per million as the measurement of contaminants that indicate water purity) and quality enforcement, water is rarely contaminated by the time you turn on your faucet. In fact, according to Biotechnology Market Manager for water purification systems manufacturer GE Osmonics Eric S. Berry, contamination usually occurs at the local level with plumbing most likely affecting water purity. Municipal water treatment facilities purify water of contaminants with chlorine, so yes, water does have trace amounts of chlorine that tastes and smells unpleasant. However, chlorine in this amount doesn't affect humans, especially since the chlorine cancels out when you eat food with your water. Water filterers like Brita eliminate these odors and tastes with carbon filters, but don't eliminate viruses and bacteria, which means you can still get sick after using one of these filter technologies. (This is why these marketers play up their great tasting water, since that's their primary contribution.) Ultimately, consumer demand for water they can trust to be clean, and irrationally, healthier, will continue its amazing growth as they demand more flavors and benefits from their beverages in their pursuit of simpler, healthier lifestyles.

NEWS COMMENTARY: Inmates now number 2 million in jails across the country. It's a culture. A lifestyle. And it won't be long until some marketer decides that this is a segment worth reaching. It says a lot about our society that this is possible. It says even more that we incarcerate so many.

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[4] MEDIA: Why I Gave Away 200 Japanime Video Tapes

On a beautiful summer day I moved into my new apartment. No furniture, no computer, no bed. I slept on the floor for a month. I didn't even have cable, since I had my trusty Toshiba VCR and my treasured Japanime tapes, a collection of mainstream, rare, dubbed, and English-subtitled Japanese animation that I had spent the last 7 years of my life building up. It was impressive. The largest collection I had ever seen outside of a retail store. I had gone to conventions, tradeshows, and catalogues to order many of my rarest tapes. It was the sort of collection that if my apartment ever burned down, they'd be the first things I'd take with me. About 3 months after I moved in, the cable guy came to install cable. Since I was usually at work 10 hours a day, having cable didn't really matter to me, but I figured, what the heck. Interesting thing about cable guys in my area - they're all shady. Since they're contracted by the local cable provider, they will all try and sell you illegal cable. My cable guy that day was no exception. I said no, mostly because I didn't want to do business with this sort of character. Well, as he's running cables into one of my bedrooms, where I was temporarily storing my Anime tapes, he sees them and his jaw literally drops. He tells me that he collects Anime, too, and that he had just started. And I remember how things are when you just start a collection: the biggest collection you've ever seen is your inspiration to keep collecting. One thing I will say about my shady cable guy, he's a quick thinker and a born negotiator. The next thing he said to me paused me for several minutes, "What if you give me all your tapes for this cable box and I won't even report it." I said no. Then he offers me free cable without the box (hooked up to my VCR). This deal was more appealing (especially since he told me that the prior tenant hadn't shut off his cable and I was still receiving a signal even though my local provider wasn't billing the address) but I didn't reveal my interest. Then, almost as if he sensed my hesitation, he offered me money! Imagine that! The shady cable guy offers me money for my Anime collection. I thought about it for 3 seconds and agreed. An hour later, after his shift, he returned and took a collection that took me at least $4000 to build for $250. It was summer 2000.

BOTTOM LINE: You're probably wondering if my tapes were messed up or something? Actually, they were mostly in mint condition. Although I had seen them many times, I took exceptional care of my collection. So why then, would I surrender such a valuable collection on the cheap and free cable for life? Two reasons: 1) That content lost entertainment value to me because I had already seen them countless times, 2) The format in which that content was in was not going to last me forever. Why did that content lose value? Well, how many times can I possibly watch any one thing and still derive the same pleasure from it? The amount of times is actually limited. The only value to be extracted from this asset belonged to the manufacturer of this asset, not the end user. The value is in the sale to the end user. And profit is achieved by repeating this transaction with a whole lot of end users. As an individual end user, I had no rights to profit from the sale of this content. So, if this content had no value other than entertainment, which it no longer had for me either, then what would have been the point of keeping this content? Then, what reinforced my decision was the advent of digital. By this time the FCC had already started talking about digitizing broadcast signals. DVDs were rapidly infiltrating America, and for me to get one was just a matter of time. The point is that as content was being created and stored digitally, my VHS tapes would lose value even faster. And in the meantime, the quality would degrade anyway. In return, I received unlimited pay per view movies, as well as premium and basic cable entertainment. At a cost of well over $100 monthly (not including skipping trips to the video rental store since I was getting the latest movies at the same time for free), spread across 5 years (the time I was estimating my VCR would simply cease to function anymore), I would have more than covered the cost of my collection, with about $2000 in added value. Alas, my VCR exploded about a year later and my savings were never fully realized and I ended up having to pay for cable. But the lesson remains: Content ownership amongst consumers is a price-based commodity market because entertainment value is based on a limited frequency and after a while, the consumer realizes that the content he values actually has very little future value due to rapidly changing technology. How long do you think it'll take for pirates, encouraged by retailers' very own sales teams and practices, to start offering $3 dollar Radio Shack adaptors that send a signal from your computer to your television screen, with every perfect-quality, free download of your latest movie? It's already happened to music, they're just in denial. Based on this, and the rate of broadband and high technology penetration around the world, the future of content is in renting or broadcasting, not retail.

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[5] MANAGEMENT: We're Regular Joes, Not Pharmacists

At last week's Pharma Congress, I learned healthcare and pharma, nicely named "life sciences", is about as complex as explaining human behavior mathematically. The sheer number of companies involved in this trillion-dollar industry clarifies for me why it's so expensive to buy drugs and pay for hospital care. Perhaps the thing that continues to deter millions of Americans from getting proper healthcare is actually lack of education in this vast maze of offerings. Families have always relied on their doctors for recommendations, however, what if the doctor doesn't speak their patients' language, what if the doctor is only aware of a limited number of drugs, what if a patient cannot afford the prescription? The life sciences industry should adopt laymen's mentality when communicating their brands to laymen consumers. What good is a magazine ad with technical description of a drug if I don't have the education to 1) understand the effects and usage, 2) remember it when I have to for my doctor? How about those celebratory commercials on TV where neither the drug, nor the reasons why I should ask for it, are the hero, but instead regular people doing regular things… What am I being asked to buy? As marketers, we are all aware that the 40+ crowd has trillions to spend, and as they get older, your brands become more relevant. However, if your communication strategy concentrated more on simplified explanations, with the drug as hero, it would improve profitability. The successes of brands like Viagra, AdvanceAir, and Nexium that clearly display the look and shape of their drugs and their benefits support this strategy, instead of families laughing mindlessly into the sky or multi-cultural individuals standing in open fields telling me that my life can now get better, but not leaving me with an understanding as to how or why.

BOTTOM LINE: The FDA regulates consumer marketing of drugs, so technical descriptions are legally required for our protection. However, the fact of the matter is that we all don't have pharma or financial degrees and need our choices displayed for us concisely, able to answer what good is that for me. There's no doubt that current consumer marketing (where you have comparisons, testimonials, or doctor recommendations) works - after all, some healthcare brands generate billions. However, many are monopolies protected by patents, or health plans distributed throughout decades by powerfully large insurance retailers, or the only hospital in an area. Consumers aren't aware of their choices in many of these cases, especially when patents expire and competitors enter insurance retailing and hospital care. If healthcare brands talked to consumers like regular people, not physicists, more product would sell, because it would then become easier for consumers to research, recall, and respond.

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[6] EVENT REPORT: International Pharmaceutical Industry Congress 2003

Hosted at New York's Javits Center, it was huge… and unless you were already familiar with the industry, awe-inspiring. Taking up the entire Javits space (around 500,000 sq ft) it literally took 5 hours to walk end to end, row to row (still skipping some rows), to take it all in. During my walks I came across some incredibly engaging engineers and experts that made the trip interesting and a worthwhile learning experience. The exhibits were free to check out, as typical of events this size, and this economy seems to have done nothing to deter visitors, as the place was packed with North Jersey industry executives. Javits is always a near-by favorite, mostly worthwhile due to the size of the facilities and it's New York location, and the event itself, as I've been told, is THE event for the industry. I will be attending next year.

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[7] EVENT REPORT: CSFB Global Beverage & Tobacco Conference 2003

I find it invaluable that investment banks open their analyst conferences to outsiders. Although Credit Suisse First Boston's facilities weren't as grand as Bear Stearns', their food was superior to Bear Stearns'. The fact that this was a beverage conference also drastically improved the beverage selections, as we were sampled with new and upcoming products. Support staff, ambiance, and furniture at both analyst conferences were impressive and comfortable. In case you're wondering, I made it part of my new years' resolution to attend more of these conferences, to learn, but also to meet new prospects. And no other event I have ever attended compares to the amazing prospecting opportunities at analyst conferences (think about it, CEOs and presidents are at their weakest state as they divulge strategies, finances, and management structure). Anyway, if you've got the time, credentials, and stamina, I encourage you to attend analyst conferences as well. Why stamina? As you'll quickly discover, you will have to concentrate for several hours straight, as these things are non-stop marathons of executive discussions, probes, and witty banter, concluding with an additional 50 to 100lbs of annual reports and presentation materials that is in your best interest to take with you, regardless of how far you've got to take it. Basically, I've stopped stressing about not working out as I've left to trek back to New Jersey on train and bus from New York conferences with enough additional weight to put a strongman weight lifter to shame.

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[8] OPINION REPORT: Are We Butchers or Saviors? And The HealthSouth Revolution

Are you pro-war or anti-war? Were you a college student during the Vietnam War? Do you get your information from one or several sources? Your feelings during the Vietnam War actually bias your feelings about the Iraqi war. Think about the reporters covering the war? They lived during the Vietnam era and may have disagreed with what occurred then. They entered this current war with feelings of distrust for our "Big Brother" government. When the Pentagon opened itself up with "embedded reporters", everyone was skeptical and unsure about what it meant. But nevertheless, coverage mushroomed into what we have today - an indigestible cornucopia of information. This overload has actually resulted in information hiding in plain sight, which in turn has created a greater feeling of distrust among reporters, which in turn has influenced consumer sentiment negatively about the US Government's international policies. What the Pentagon has done with embedded reporting, though, has a name on Wall Street: corporate governance. They've made themselves completely transparent to their citizens not just to be able to tell their side of the conflict, but to amend constituent sentiment towards their policies and strategies. Although this ingenious strategy will ultimately go down in the strategic playbook for future multinationals and governments, at the moment, it's not working. Why? As discussed in last week's REPORT, depending on where you live, your perspective is actually different. Americans are particularly fond of the details, of placing blame, and their own self-worth, while cultures in the East are the complete opposite, taking a broader view of situations. And media, with their on-going battle for eyeballs, perpetuate this narrow-mindedness. It matters little that in this war, the coverage comes from individuals who have a pre-imposed bias due to their advocacy experiences in the 70s. It matters even less that because consumers just don't have the time, they typically refer to just one source and one perspective for their information. So, with few dissenters of reporting standards, and little time to dissent, anti-war rallying and boycotting seems to be the strategies favored by the ignorant, and that's what makes our economy more frustrating, even though war actually helps it. The information is there. Look at the al-Jazeera network. Last week, they were banned from covering the US financial markets because of their handling of subjects sensitive to administrators. This network is the lone voice for Iraq-centered content via US media, and yet, it's censored. But if you do manage to see what they cover, the language used is typically reflective of Iraqi sentiment. Rather than liberating a country, al-Jazeera reports that Americans are "invading", leaving major civilian casualties. It's not a big deal that this network is being censored… as long as you are aware of what's going on. American media is now popularizing the rescue of P.O.W. Jessica Lynch because it humanizes this war. However, few outlets discuss the immediate impacts of American intervention on the lives of starving and mostly uneducated and brainwashed Iraqi citizenry. Well, with victory close at hand, it doesn't really matter. The war in Iraq will quickly take on a financial aspect as contractors vie political contacts assigned to rebuild the country for billions at stake. The purpose will no longer be remembered as national attention focuses on the SARS virus and the massive tourism declines, as well as the HealthSouth Revolution. Bush will claim victory on terrorism, while continuing a hunt for Osama, fight domestic corporate governance issues, and fix tax, healthcare and education systems. Homeland security will mushroom even bigger, creating what everyone feared in the first place, a big brother. And of course, Bush will be re-elected, because nothing increases popularity as reminders of who stuck with Americans in the midst of 9/11, who eliminated terrorism from our lives, who won the last big war victory, and who has protected us from evil corporate titans. Protected? At this rate, we won't have any companies left to protect us from. But get ready folks, because soon-to-be-imposed extreme liabilities for middle management will reveal corporate fraud on levels even more massive than the recent HealthSouth scandal. How massive was HealthSouth? Enron was a jaywalk compared to this. Well, I'm already referring to things to come as the HealthSouth Revolution.

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Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

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