Will the sugar tax hit the sweet spot or create a financial cavity for drinks manufacturers and consumers?

Wednesday 15th June 2016

The announcement of the so-called ‘sugar tax’ in the spring Budget was subject to much debate in the UK, with healthy eating groups labelling it a victory against obesity and manufacturers arguing it unfairly singles out their products.

A major question revolves around impact the sugar tax will have – will the intended effect of limiting sugar intake be achieved, or will it simply mean drinks manufacturers and consumers end up out of pocket? Will the tax actually influence obesity figures?

Under the proposals, a main rate of tax of 18p per litre will apply to drinks that contain between 5g and 8g of sugar per 100ml, with a higher 24p per litre charge applied to those with over 8g of sugar per 100ml.

Many popular drinks brands would be affected by the new regulations, with Dr Pepper, Sprite and Fanta all currently in the lower band, and Coca-Cola, Pepsi and Red Bull falling into the higher band.

Cost conundrum

Manufacturers will have to decide whether to maintain their recipes and absorb the cost of the new tax or to pass that cost on to consumers. Absorbing the cost makes some sense from a public relations perspective, but when weighed against the financial impact on the business, will not be attractive.

The second option is to pass on the costs to consumers, who will see a significant rise in the price of their favourite drink in supermarkets, pubs, bars and restaurants. In this instance the knock-on effect could be lower sales and potentially damaged brand loyalty among consumers unwilling to fork out a premium.

In France and Mexico, consumers subject to sugar taxes have broadly voted with their wallets and traded down to less expensive variants of popular beverages, opting instead for own-brand labels, which, while tasting different, are less hurtful on the pocket.

In the UK, the own-brand market is already competitive, so similar migration from premium products is unlikely. The price differences are already stark between, say, Coca-Cola and Tesco Cola. 1.75 litres of Coca-Cola will set you back around £1.85 whereas 2 litres of Tesco Cola is an appetising 55p. The big brands are likely to see a noticeable, but not unbearable, loss in revenue on their core lines.

The good news for retailers is that they should see their own-brand labels pick up that transient consumer and profit from the sugar. Whilst all this is happening, consumers will probably still be taking in as many calories as they were before the sugar tax and it will perhaps highlight the flaws and inadequacies of the tax.

Wider questions

The chancellor’s announcement has raised wider questions around whether the drinks industry has been singled out by the proposed levy. A study from the Taxpayers’ Alliance noted that some drinks at coffee shops contain more sugar than fizz drinks, with a Starbucks signature hot chocolate with whipped cream and coconut containing 11g of sugar per 100ml, compared with 10.6g per 100ml in a can of Coco-Cola.

Of course, all of this will hinge on exactly how the tax is implemented; there are still question marks around how the tax will be collected and by who, whether fructose and syrups will be included, and if it will also be applied to frozen drinks.

The government expects to raise £520 million during the first year of the levy which, under current proposals, will be rolled out within two years. The money will then be used to fund after-school sports programmes and anti-obesity initiatives.

There is always the possibility that the tax will not see the light of day in its current form or even be scrapped, similar to what occurred in Denmark in 2013 when its fat tax was deemed too damaging to the economy.

In Mexico, the tax only resulted in a reduction of 6.2 calories per day for the average person – equivalent to just 0.2 per cent of the average daily calorie consumption. Studies suggest that the impact on UK consumers would be similar.

Drinks manufacturers will not be able to rest on their laurels, however, and the next two years will involve a significant amount of work with consumers, retailers and suppliers to address all of the challenges above and find their own financial sweet spot.

If you need legal advice on food and drink retail matters, please contact Mark (0113 227 0297 or mark.jones@gordonsllp.com). For more information about us please visit www.gordonsllp.com/sectors/retail-lawyers/.