Comment - Soft Drinks & Bottled Water - Things are Big, Down Mexico Way

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It's to Mexico for Ray Rowlands this month. How have the soft drinks and bottled water categories fared, one year on from the introduction of a tax on full-sugar drinks in the country?

Authorities in Mexico introduced a tax on full-sugar soft drinks in January last year

Authorities in Mexico introduced a tax on full-sugar soft drinks in January last year

Mexico has a colourful and vibrant culinary tradition dating back to the time of the Aztecs. Many staple foods that formed part of the Aztec diet, such as avocados, beans, chillies and maize are still familiar today. Over time, such traditional dishes have been supplemented by a rise in junk-food snacking, with the accompaniment of sweet, fizzy drinks.

The net result has been a major increase in average Mexican body weight. But, a large girth is no longer a sign of prosperity; it actually represents a serious health risk. Incredible though it may seem, almost 70% of Mexicans are said to be overweight, whilst a third of the population is diagnosed as being obese.

Diabetes and heart disease are top causes of death in the country.

It was concern over these issues which led the Mexican authorities to introduce what has been described as groundbreaking legislation, in January 2014. An 8% tax was imposed on all junk food that contained 275 calories-or-more per 100 grams and MXN1 (US$0.08) per litre was added to all sweetened drinks. The tax on concentrates, such as fruit powders and syrups, was based on the amount of sugar-flavoured beverage they yield.

Much of the added cost was passed on to the consumer. But, has the tax really worked and how has its introduction affected the composition of the Mexican beverage market?

Influenced by Mexico’s close proximity to the US, CSDs have long accounted for the bulk of the country’s soft drink consumption. According to a media report, Mexicans consumed 43 gallons of soda drinks per person in 2013 – the highest level in the world. That equates to around 20bn litres, or a little under half of the volumes consumed in the US. When the new tax was announced, the initial view at Mexican Coke bottler Coca-Cola FEMSA was that its soda volumes could fall by as much as 7%, whilst sister bottler Arca Continental projected a decline of 6%.

The Mexicans love their sugar, though, and, in reality, the category drop is believed to have been far less severe, albeit still significant in actual volume terms.

A major beneficiary from the introduction of the tax was, of course, bottled water, current consumption of which is estimated by a cross-section of sources at around 4bn litres. Considering its diminutive size, next to soda, the segment's opportunities for market expansion seem great until it is appreciated that water coolers (or 'bubble tops') represent five times the volume of bottled water and provide water that is much cheaper on a per-litre basis. 

Bottled volumes undeniably grew following the introduction of the sugar tax, but annual demand was already climbing well before 2014, a trend supported more by fears about tap water quality than the absence of any sugar in the bottle. As a result, the direct effect of the new legislation is disguised. 

One negative influence on both bottled and cooler water growth was a law approved by Mexico City's legislators in January 2014. This requires that all city restaurants (some 65,000) install filters so they can offer patrons free, drinkable tap water that won't lead to stomach problems. Nonetheless, considering its established upwards trajectory, bottled water is projected to have encountered high single-digit volume growth last year.

Fruit powders, such as Tang – once consumed by orbiting US astronauts - provide a popular base for making sweetened drinks. At a ready-to-drink equivalent volume, the fruit powders market is almost as large as that of bottled water. In fact, most powders are mixed with bottled (or cooler) water. Their traditional popularity has been linked to their cheapness. However, the inconvenience of powders, in respect of preparation - along with their perceived artificial nature - had already begun to block growth before the arrival of 2014. Although some producers reformulated their products in order to avoid or minimise the new sugar tax, the segment inevitably suffered a further contraction.

Mexican consumers often do not differentiate between pure juice and juice-based drinks, although stricter labelling measures introduced in 2011 resulted in a number of juice products being re-categorised. This had the effect of reducing the size of the pure juice category but combined JNSD (juice, nectars, still drinks) volumes carried on growing, buoyed by an increasing consumer focus on health, plus the diverse and dynamic nature of the large still drinks market. However, the impact of the new sugar levy was felt here too and volumes dipped following its implementation, although lower-priced products fared more favourably than others.

So, has the new tax met its objective? Official sources are certainly claiming success. After all, it did signal that over-indulgence of highly-sweetened refreshments is a vice, and made Mexican parents more aware of the dangers of giving sugary drinks to their offspring. Preliminary data also indicates that volumes of soda and other sweetened drinks are dipping as bottled water consumption continues to rise. According to an August survey, half of Mexicans said they had lowered their sugary-drink intake last year compared to 2013. It is good news too from a fiscal viewpoint; with the tax set at MXN1 per litre, it will have pulled in around MXN20bn from soda sales alone. The money is intended to finance the provision of drinking water in schools, so all in a good cause.

The Government has increased the size of its coffers and overall intake of soft drinks is down. However, what I have yet to find is evidence that the level of obesity in Mexico has actually been reduced as a result of the tax and, moreover, whether there is indisputable evidence that raising the price of sugar sweetened drinks actually does significantly affect obesity.

I'll let you know what I find out.

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