Tuesday, 14 January 2014

Day 198: The Prime Prospect

During Mr. Peter Hoult's sixth day of testimony at the Montreal tobacco trials, the pace mercifully picked up a bit.

It may have had nothing to do with Justice Riordan's obvious impatience yesterday, but today JTI-Macdonald counsel, Doug Mitchell, kept his witness far more focused on specific documents and specific events. As a result, it was easier to follow the arch of the counter-narrative that he was trying to establish.

(JTI-Macdonald's legal team has focused more than the others on providing alternative explanations to the documents that have been used as evidence of the company's wrongdoings. Mr. Hoult is the third company marketer brought by the defence for this purpose - Mr. Robin Robb and Mr. Lance Newman testified last November.)

As I understood it, Mr. Hoult's testimony was aimed at establishing that the marketing activities of the company were not to recruit non-smokers, to discourage quitting or to diminish concerns about the health risks of smoking.

He explained that they could instead be seen as the appropriate actions of skilled marketers when operating in a highly competitive tobacco market. In this sink-or-swim environment, the company used modern segmentation techniques to find ways to match their products with the needs and desires of their Prime Prospects. These would-be customers were always adults over 18 who were already smokers.

Peter Hoult - one witness among many former presidents

Mr. Hoult's experience is being given a disproportionate hearing in this trial. (By the time he leaves this week, he will have testified for 7 days). Only one other president of this company has been invited, although others have testified posthumously through their written records.

Attempts to save Export A 

Much of the morning was spent in detailed questions about the development, launch and redesign of the expanded suite of Export  brands: - Export A (filter), Export A Light, Export A Medium and Export A Mild.

Of the 80 or so new documents introduced by this witness (which are numbered as Exhibits 40418 to 40492), more than half seem to relate to Export A marketing efforts - strategic plans, market research, advertising copy, etc.

In his explanation of the efforts to stop the "haemorrhaging" of clients from Export A to Players' Light, Mr. Hoult elaborated on the minutiae of marketing that is by now very familiar to this trial. His presentation also reinforced the impression that those who directed these efforts were detached from the controversies of their business, and from the impact of it on the lives of the men (and women) whose custom they sought. The "needs and desires" of smokers, as Mr. Hoult described them, were always and only for a more suitable cigarette brand.

The needs of the company appeared similarly uni-dimensional: the bottom line in Mr. Hoult's world was the bottom line.

When asked by Mr. Mitchel to estimate the value of the small market shares that were sometimes pursued, Mr. Hoult estimated that a 1% share of the market in 1980 was worth about $8.5 million in net revenues, and about $1.5 million in profits. (Exhibit 40476).  By my calculation, that would put the profits from the entire market in 1980 at the equivalent of $400 million in today's dollars, but I have seen estimates of the industry's profits in subsequent years that were very much higher.

Small brands (like Macdonald Select) were worth saving, and big brands (like Export A Lights) were worth pursuing. Despite being a risk averse company in a risk averse industry, the marketing department was prepared to tinker with modestly successful brands if they thought doing so would increase market share.

There were, however, brands that Mr. Hoult was reluctant to pursue or which received scant attention. The American brands sold by the company - Winston, Salem and Camel - were distributed without any real marketing support. And when his American owners wanted to launch a test market for the Premier heat-not-burn cigarette, Mr. Hoult dragged his feet. "It was very clear to me that the product would not succeed..... the flavour was awful - the aroma was acrid."

Advertising: necessary, informative, boring.

Mr. Hoult's views on advertising were  mixed. On the one hand, he attributed restraints on advertising as the reason that he was unable to reach the desired sales objectives for some of his brands. The cap on advertising expenditures imposed by the CTMC meant that he had to divide a small pie among several internal needs.

At the same time, he suggested that advertising was not such a powerful marketing force. "The biggest challenge is to get interest and get attention... Cigarettes are not the most interesting product, even for smokers. ... In the main, advertising is quite boring."

Exhibit 40479
He repeated the exercise of identifying the information content for certain Export A advertisements (Exhibit 40479). "These are successful executions of the brand position," he said. "They do reflect the target needs and wants. They do reflect those product benefits that we have determined from the research."

Not only was the imagery linked across the ads, it "communicated to the consumer that mild is slightly fuller flavor and slightly more satisfaction than light." 

Always following the rules 

Mr. Hoult began his testimony yesterday by clarifying the record from his first appearance at the trial in the fall of 2012. Despite how it might have appeared, he wanted to make sure that Justice Riordan understod that "there was no editing of [internal reports] of any sort .... We never did research on young people under the age of eighteen."  ... "There would be no use for that research, because we didn't market to people under eighteen." 

He was given further opportunities today to stress how compliant the company was with the CTMC code, and how it obliged its advertising suppliers to respect these rules. (Exhibits 40484 and 40482). Complaints about compliance were few, and if errors were ever made, they were usually caught by their competitors.

But trying to prevent any new rules

During his testimony in 2012, Mr. Hoult had been asked about the involvement of American officials in the company's attempts to prevent Canada's first tobacco ad ban from coming into law. The documents presented certainly gave the impression that it was the American strategists who were calling the shots in that lobbying effort.

Eighteen months later, Mr. Mitchell asked his witness to present a different account of these events. Mr. Hoult described how his return to Canada in 1987 coincided with the introduction of bill C-51, which had come as a shock and a surprise to the industry.

Defeat had been snatched from the jaws of the victory they expected in arriving at a new voluntary agreement with Minister Epp. He suggested that the abandonment of this effort and the introduction of a law was politically motivated, and was aimed more at pre-empting the success of a competing private member's bill. "The prize would otherwise be taken out from under his nose." 

Mr. Hoult was further dismayed that his counterparts in the other companies looked like they were willing to let it happen. His first encounter with the other presidents was to discuss the proposed law:  "I drew the conclusion that the CTMC would probably not do anything about it... This bill would be passed without any opposition at all."

He attributed this attitude to the fact that the CTMC was dominated by the views of  Imperial Tobacco (which also provided most of the funds for CTMC activitie). The other companies were steadily losing customers to Imperial Tobacco. In an environment without advertising, Mr. Hoult felt this momentum would continue and that the new law would benefit the larger company.

His decision to call in reinforcements from his U.S. firm was the catalyst for Imperial Tobacco to resist the law: "It couldn’t allow a small company to take the lead."

The CTMC invited natural allies to join this effort - "other interested partners – unions, retail trade, and advertising agencies." They did not directly mobilize smokers, but "an embryonic smokers' rights association" was funded to present the views of smokers to government. ("I can't remember whether they approached us or we approached them.")

All of this was proper behaviour, he said. "In Canada, as in other democracies, you have MPs, you have governments, and you are expected to express your case to them." His goal was never to delay the bill, but to modify it "so it was somewhat more reasonable."

Fleeting success

Mr. Hoult had no trouble identifying several accomplishments of his tenure as vice-president of marketing at RJR-Macdonald between 1979 and 1983. "We stabilized that steep decline" in Export A market share, introduced two new brands, and respositioned Export A lights. "I would say I was pleased with what we did."

There were flashes of ego as he described what happened to the company in the four years between his departure as VP-marketing (1983) and his arrival as president (1987). The company was further behind when he returned as president only four years later. (Exhibit 40486). "We had slipped from the peak position to one which was very close to the one when I arrived." Even in the Maritimes and Quebec, where it had traditionally been strong, the company was seeing its market share shrink year over year.

Moreover, the whole industry was now facing a challenge. "The writing was on the wall. In the course of the next five years we would be talking of an industry with declining volume." 

Mr. Hoult described enormous efforts to fight for market share, and to fight back against laws that threatened industry activity. But towards the threats that faced the entire sector, he seemed resigned to defeat. "There was nothing we could do. There was nothing we did."

By the mid-day break, Mr. Mitchell had finished his questions for Mr. Hoult. The cross-examination, which began this afternoon, will be reported tomorrow.

Mr. Hoult's last day of testimony will be tomorrow. On Monday the iconoclastic Kip Viscusi will testify as an expert on warnings.