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What will a UK sugar tax mean for soft drinks producers? - Comment

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This month, Richard Corbett considers the impact of a sugar tax on the UK CSD market.

The UK will introduce a sugar tax in 2018

The UK will introduce a sugar tax in 2018

In the UK, every Budget needs a headline and, unfortunately for category stakeholders, the new tax on soft drinks was the Chancellor's party trick this year. The move comes despite a well-defined strategy from producers to reduce the calorie content of soft drinks by 20% by 2020. The industry had thought the waters were clear, only for a huge crocodile to come out of nowhere and bite them where it hurts. 

A tax on sugary soft drinks is not new in Europe. The Danes, French, Finnish and Norwegians have all gone down this route at some point to get their children to slim down, or to raise revenue. Based on past experiences we can speculate as to what the aftermath of the tax will mean for soft drinks producers in Western Europe's second-biggest CSD market.

Investors never like a tax and the first effect is that share prices fall. Britvic, AG Barr and Coca-Cola all saw their share prices drop immediately after the tax was unveiled. Such was the hysteria that even shares in Tate & Lyle fell back before recovering, as traders realised the company had sold its sugar business in 2009. Consumption of soft drinks will of course fall. The impact of a tax is every bit as psychological as it is financial and the symbolism of the tax will be very negative on perceptions. Estimates suggest that a can of Coke will jump by around 8p, or more than 10%, and that will make a dent in a child's weekly pocket money. 

In France, according to researcher Canadean, the tax pushed average CSD off-trade prices up by 8% in 2012 and by a further 6% in 2013. The result was that the French CSD market dropped by between 4-5%. Nothing too dramatic, until you consider that the decline came on the back of seven years of growth during which time the market had expanded by more than a quarter. Weather is also believed to have amplified losses in 2012, but in the two subsequent years, the French CSD market also fell.

Although now abolished, the Danes had been subjected to a soft drinks tax since the 1930s. In 2001, however, the tax jumped by 65%, adding around 6% to the average price of CSDs in the off-trade. This triggered a volume decline of 7% in 2001 and a further drop of 1% in 2002.

A hot summer will dilute the losses and a cold summer will exaggerate them, and given that the market is edging downwards anyway, you can probably expect the UK CSD drinks market to drop by around 7-12%. That would equate to between 350m-600m litres. 

Reformulation

The level of decline will be offset by the fact that the rate of tax will be based on sugar content and there will be a shift to low-calorie drinks. In January 2010, Denmark opted to have a two-tier tax with regular soft drinks liable to nearly twice the tax rate of low-calorie alternatives. During promotional activities, prices were harmonised, but the rest of the time low-calorie drinks were listed at a lower price than regular drinks. Sales of low-calorie drinks increased as a result and it is more than likely that they will do in the UK.

Post tax, France witnessed a surge in zero soft drinks and stevia-based new product development. The UK can also expect the same. You can assume even more resources will be put behind Coca-Cola Life, which was reformulated earlier this year, and you can prepare for other high profile brands to introduce their own stevia-based alternatives as a halfway house between zero and regular products. Soft drink players will be active in their laboratories, reformulating and reinventing - the prospect of the tax actually signals the beginning of a period of opportunity for drinks suppliers in the UK.

Juices may be free from the tax but there will not be any change in the fortunes of the category, which has been shrinking for some time. The breakfast-skipping generation is drinking better quality juice but less of it. I would anticipate the health lobby will turn their attention to campaigning for juices to be included in the tax in the run up to its implimentation.

In contrast, bottled waters look set to make gains. Nestle and Danone have been developing a strategy to capitalise on the contracting CSD markets of the Western world by investing in their fizzy water portfolios and this will no doubt accelerate their plans. Flavoured sparkling waters look well placed to raise their presence in the UK market place. Last week, Danone CEO Emmanuel Faber highlighted the potential for the bottled water sector as health guidelines push consumers to drink more water

Soft drinks operators and retailers will put into place measures to defend their value sales. Price pointing will be an important part of that defensive mechanism. We will no doubt see more 25cl cans instead of 33cl ones and more one litre and 125cl PET bottles at the expense of 150cl and 200cl bottles. Initially, the prices of drinks liable to the tax will be artificially high to allow for future promotional pricing cuts. In early 2018 there will be a rush by the big retailers to fill their warehouses full of untaxed stock in preparation.

When the tax does come in April 2018, it will be here to stay. The Danes abolished their soft drinks tax because of the size of the border trade with Germany, but being an island nation this is not relevant to the UK. It will not only be here for good, it will also go up. The Norwegian sugar tax rises annually by an average of 2% and along with cigarettes and alcohol, budget commentators in the UK will be watching carefully.


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