Comment - Soft Drinks & Water - France: A Tax

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We're halfway through the year and in France, the tax on CSDs in January has had six months to bed in. Richard Corbett takes a look at how the country's soft drinks producers have fared so far.

Back in January, I, like many others, was speculating as to the impact of the dramatic increase in the excise duty on soft drinks in France. At EUR7.16 (US$8.94) per hectolitre the duty was actually not a huge financial hit, but it prompted an outraged response from the industry, with investment plans shelved and birthday parties cancelled.

The response was understandable given the current trading environment;, when all your other costs have ballooned, the last thing you need is a tax hike. It’s like running a marathon and being told en route that the finish line has been moved back a kilometre.

The idea of a soft drinks tax is not a new one in France; it has been put forward in the past as a way of subsidising the country's struggling wine producers. In 2011, however, the tax rise was presented as a method of addressing France’s expanding waistlines, piggybacking on that well-worn path of ‘concerns over obesity’.

A few eyebrows were subsequently raised when the tax was implemented on artificially sweetened products as well as sugar sweetened products – only Stevia sweetened products were exempt. Quite fairly, many of the more cynical readers may already be questioning how genuine the claim that the tax is a deterrent against obesity really was, when light products are penalised at the same level as regular ones.

The first observation on the ground in France is that prices have certainly increased since the tax rise came in; comparisons between April 2011 and April 2012 point to a rise in the average price of CSDs of more than 5%. The price rise is more noticeable on the bigger 1.5- and 2-litre bottles than the smaller unit sizes.

Consequently, it has been the lower-end and private label producers that have been more vulnerable than the higher-end producers. Although 5% may not sound enough to radically alter behaviour patterns it is often the physiological effect that delivers more of a sting. Perception is often more damaging than reality.

In terms of volume, drinks researchers Canadean, report that CSDs, which make up the bulk of beverages liable to the tax, fell back by a little over 2% in the opening quarter of this year. The results should be taken in the context of a three-month period in which weather conditions were not very compatible with soft drinks consumption. But, they do suggest that the carbonates category in France could contract this year for the first time since 2004.

That said, Canadean predicts the market will be almost flat in 2012, but it does look likely that the category will at least have stopped growing this year after a sustained period of continuous expansion. Of course a scorching Q3 and a successful Olympics for the French team may well compensate for the tax, but you can conclude that, in the first three months, the tax has definitely had some repercussions for volume sales in France.

What you can also conclude is that this new tax has not been a catastrophe for the soft drinks industry in France; consumers are still enjoying their fizzy soft drinks, even if they are paying a little more for them. The wind picked up and the clouds gathered, but the forecast storm never really materialised.

So, at this early stage, the side effects of the tax look to have been relatively muted and the damage has been more restrained than many might have feared. It will have been the first three months when the implications of the tax would have been at their most pronounced, so it is unlikely now that there will be any significant deterioration in the market during the rest of the year.

What is of more concern for the longer term is that, now the tax is in place, it can be - and is likely to be - increased, especially in times when France is trying to balance its books. In Denmark, where a soft drinks tax is well-established and the strength of the lobby against sugar sweetened soft drinks is strong, the tax has increased twice in two years. Not only this, but the Danish government has now proposed an annual increase in the tax in line with consumer prices, a move that is being fiercely contested.

The French example has generated sufficient noise as to have caught the attention of many other markets around the world who are probably waiting to assess the consumer response in France before making a similar move.

In the UK, the Government has not ruled out tax as a tool for tackling obesity and there has been plenty of media speculation about the matter. Other countries too are undoubtedly watching from the side-lines having seen how much they can raise from the duty on alcohol any excuse to lobby one on soft drinks could prove to be very attractive.

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