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UK Sugar Tax May Only Reinforce Mounting Consumer Desire for Low-Calorie Soft Drinks

18 March 2016

By Fiona Baillie, Analyst for Canadean

Sugar Tax

The UK government announced on 16 March 2016 that it will levy a tax on soft drinks producers and importers, on products with added sugar from April 2018. The hope is that the two year gap will allow time for companies to reformulate, decreasing the sugar content. The sugar tax will be split into two bands: one for total sugar content above 5 grams per 100 millilitres, and a higher rate for beverages with total sugar content above 8 grams per 100 millilitres. Some of the money raised through the tax (anticipated to be £520 million in its first year) will go towards doubling the budget for primary school PE and sports, fighting childhood obesity.

Pure fruit juices and milk-based beverages will be exempt from the tax, meaning that the declining trend juices have seen due to sugar concerns may see a turnaround, with consumers migrating back to juice from nectar and still drinks. This will be driven by better pricing and a change in consumer perception, as the government’s exclusion of natural fructose from the tax will suggest it is not as harmful as often portrayed in the media.

With two years to reformulate and strategize, and many soft drinks brands already cutting sugar content, as discussed in Canadean’s report Opportunities for Sweeteners: Responding to the Sugar Backlash, how much of an impact will the new tax have on consumption of soft drinks in the UK? The main category to come under scrutiny will be the child-focused still drinks, with the primary reason for the tax being childhood obesity and some already quite public culling of products from Tesco stores. The low-calorie still drinks segment saw a growth of 6% in 2014, which was much more positive than regular-calorie’s 2% growth, showing that consumers are already switching to drinks that may fall under the lower tax band. Migration to natural flavoured water is also expected to continue, with the division between the two often blurred in favour of still drinks branded as near-water products. As consumer opinion on healthiness often guided by packaging, it may be the case that still drinks aimed at children further promote their more natural attributes, not to attract the young consumers, but rather the adults making the purchase

The carbonates category is also due to experience some change, as consumer perception continues to go against the prevailing health and wellness trend, and the new tax reinforces this view. With low-calorie versions again performing ahead of regular-calorie, it seems inevitable that other major brands will follow Coca-Cola’s lead and formulate low-calorie, naturally sweetened extensions of traditional favourites. Though taste has often been an obstacle to the success of such extensions, the combination of this new tax, the health and wellness trend and the return of ‘treats’ for many may just result in the perfect storm.

There have been similar taxes in other countries, most notably the 2014 Mexican sugar tax. Though it is still early days, there have been mixed reports on the benefits. Whilst the country has seen migration towards the packaged water category, and has seemingly prompted a similar trend in neighbouring countries, there has also been social outcry that the tax affects the poorest. Tap water is often an issue in less developed, more remote areas and there is a deep-rooted culture of drinking carbonates with meals, meaning that many see the tax as an infringement on their day to day lives. With a link between lower income consumers and high sugar intake in the UK, this may be reflected in the coming years. It is worth noting that the UK has seen larger declines in carbonates than Mexico since the introduction of the Mexican sugar tax.

Sumptuary tax is not new to Europe. A tax on soft drinks in France saw the market struggle initially in 2012-13, particularly in carbonates, still drinks and sports drinks, as consumers were unwilling to increase grocery bills in a time of economic depression. However, as consumers acclimatised to the higher prices, and the economy started to show some positive signs, these categories began to recover, and by 2014 were back in a combined growth of over 1%.

The taxes imposed on sugar and fat in Denmark led to such high amounts of border shopping and consequential declines in Danish business that they were scrapped in 2014, and growth in purchases of soft drinks in the domestic market has been observed.

The war on sugar is being waged on one segment of the British diet, and with trends already moving away from added-sugar drinks and towards packaged water, it is worth asking if the new tax is hanging on to the coattails of an already changing market, rather than driving any change. Though there have been arguments that reformulating and reducing pack sizes will be more affective in tackling obesity than a tax, it may be that there needs to be a more visible, media orientated approach to really kick-start a nationwide reduction in soft drink sugar consumption.