Richard Corbett

Comment – Soft Drinks & Water - The French Should Look to Denmark

By | 11 January 2012

Last week, the French authorities carried out their threat and introduced a tax on CSDs. Richard Corbett believes, however, that the French should look north, to Denmark, to see how effective - or not - such a move will be on a nation's pattern of consumption.

Being surrounded by all that classic cuisine, the French might be forgiven for filling out a bit. Their politicians are worried and, as of 1 Januar,y measures have been taken. No, it’s not a tax on croissants; once again the finger has been pointed at soft drinks consumption and a much-publicised soft drinks tax has finally been implemented.

In fairness to the Government, the consumption of CSDs in France has been on the up. According to Beverage researchers at Canadean, annual demand per capita has jumped by more than 14 litres to nearly 53 litres since the turn of the century, and latest estimates point to another healthy increase in volumes last year.

Whether this is enough to justify such intervention is debatable, particularly because 4 litres of that increase is made up of low calorie products. It could be argued, then, that the industry is already addressing obesity concerns by focusing on their ‘light’ portfolios.

As is well documented, the idea of the tax has not been well received by Coca-Cola Enterprises. Relations deteriorated so badly that in September the company even threatened to cancel their 40th birthday party celebrations at their Marseille Plant – oh and a proposed EUR17m (US$21.6m) investment. A good party is always welcomed in gloomy times but, more importantly, investment should be applauded and nurtured during periods of austerity. So, are CCE’s fears well founded? Is this tax going to impact on consumption patterns?

The first thing that stands out to me is that the amount of tax to be levied is not a back-breaking amount. EUR0.02 per 33cl can is not a behavioural-changing sum of money - in a French hypermarket you will pay around EUR2.65 ($2.10) for a six-pack of 33cl cans. If retailers pass on the tax, then it will equate to a 3% to 4% increase in the average retail selling price of soft drinks. Take into account promotional activity, and the 3% or 4% may well go unnoticed by the consumer.

If that is the case, then it will mean that the tax will be absorbed by the retailers and the bottlers, so the implications for consumption could be minimal and the EUR120m the tax raises will mainly come out of the pockets of the retailers and the producers. This, at a time when the cost of producing, packaging and distributing soft drinks is probably more than it has ever been. No wonder CCE is upset.

If you look at the Danish example, however, then the effect of the tax in France may be a little more pronounced than might be expected. Back in 2001, the then Danish government opted to hike up the soft drinks tax to DKK1.65 (EUR0.22) triggering a drop in CSD volumes of between 6 and 7% that year. Bear in mind, though, that the tax as a percentage of retail price was more draconian and a big drop in sales was always likely.

I'm sure that the French government will be delighted to see that the tax in Denmark prompted such a notable drop in soft drink sales. The only problem is that the Danish sales may have fallen, but that did not mean that consumption did. The main side-effect of the tax in Denmark was to actually create a huge demand for soft drinks in the border trade shops in neighbouring Germany. Danes were now buying soft drinks as well as beer on their excursions to Germany. The bizarre scenario developed where Danish soft drink players exported their drinks to Germany to sell to Danish consumers. There was also talk of consumers in Copenhagen buying soft drinks on-line from supermarkets in Sweden and having them delivered.

The illegal vending of border trade soft drinks became sufficient an issue to encourage the tax rate to be reduced in subsequent years. That was until 2010, when the Danes opted to increase the tax again but, as the French are doing, they levied a lower tax rate on ‘low calorie’ drinks. This initially caused chaos among retailers because they did not know how to price promote their carbonates. There was a fear that, if they did not price light and regular drinks differently, then the government would react by widening the differential.

So, did the government action encourage a shift from regular to light products? It had some influence in 2010 but, if you look at government tax figures for 2011 to August, sales of regular products have increased by 4% and ‘light’ products by 3%.

Not to be deterred, the new Danish government elected in September to increase the tax on regular products by nearly 50% in 2012 to DKK1.58 per litre (EUR0.21); ironically, still less than the original tax implemented in 2001. In Europe, the Danes and French are not alone in using tax to target soft drinks; Norway too will see a rise in tax on the sugar used in soft drinks this year.

I am sure that the tax is well-intentioned, but whether it will have the intended effect is questionable. The most effective tool to combat obesity to come out of France in recent times has not been related to tax but has been the Dukan Diet.

I should know; my wife has put me on it since New Year.

Sectors: Legislation, Soft drinks, Water

Companies: CCE

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