SPECIAL REPORT: Sweeteners and Sugar Substitutes Likely to Benefit from Sugar Tax as Experts Predict Sugary Drinks to Take Short-Term Hit

Health campaigners claimed it as a victory following long-standing pressure for such a tax-including from celebrity chef Jamie Oliver-who believe the tax will help reduce childhood obesity.

 

The tax, which aims to raise £520m (US$ 746m), in the first year, will be introduced in two years’ time, giving manufacturers such as Coca-Cola, Britvic and AG Barr time to reduce sugar level to avoid the levy.

 

According to the price comparison site MoneySupermarket, around 350 drinks sold by big name retailers such as Tesco and ASDA will be impacted by the levy.

 

People will still consume soft drinks but many will switch
Speaking to FoodIngredientsFirst, Harry Drnec, the former managing director of Red Bull UK, said the tax will prompt a big shift in consumer buying habits.

 

He said: “There will be the die-hards, five or ten percent that will still go out and drink [sugary drinks] no matter what. Everybody else will switch. I don’t this per capita consumption of soft drinks will go down much, if at all. We will just get used to it.”

 

Drnec believes the tax will used as a catalyst by the government and it could next be eyeing up similar a similar tax on food and other drinks which contain high levels of sugar.

 

He said: “The government will use it to somehow focus everybody on sugar. There is nothing wrong with soft drinks. It‘s the sugar in the soft drinks which is the problem.”

 

“It’s the right thing to do. The government could turn around and say to the manufacturers ‘no sugar in your soft drinks’. It’s almost unconstitutional. They can’t do that. There is sugar in everything else. The only way to do it tax it.”

 

City analysts are more circumspect than Drnec and believe the shift away from sugary drinks will be less dramatic.

 

They believe that sales of brands such as Coca-Cola and Vimto will be impacted by the tax, but until the scale of the taxes is revealed it will be difficult to assess to what extent.

 

Charles Pick, analyst at Numis, said: “If the levy is passed on to the consumer, as it probably will be, some brands/variants will see short-term falls in consumption.”

 

Will it help reduce obesity?
Whether the sugar tax will help cut obesity, particularly childhood obesity, is a moot point.

 

The soft drinks companies say no, pointing out that it has not worked in other countries and it is not fair on the consumer.

 

Speaking to FoodIngredientsFirst, Marnie Millar, chief executive of Vimto maker Nichols, said:” While we recognise sugar consumption is a shared responsibility, we do not believe that a tax on soft drinks is an effective solution or fair to consumers.”

 

The UK boss of Coca-Cola Enterprises, Coca-Cola’s bottler, Leendert den Hollander, told the Guardian: “We know this is one of the mechanics and solutions that people think will help deal with the issue of obesity, at least from a government perspective, but there is no evidence to suggest that this will reduce obesity.”

 

On the other hand, Cancer Research argue that the tax could help cut obesity rates as the higher price will cut consumption which will have big implications for cancer.

 

It says that cutting the number of people who are overweight or obese by one per cent each year by 2035 could potentially avoid around 64, 300 cancer cases.

 

Sir Harpal Kumar, Cancer Research UK, said: “The chancellor’s announcement of a levy on high sugar drinks is great news for the health of our children. Making sugary drinks more expensive and less appealing to children is a vital step in reducing obesity levels in the UK.”

 

However, some experts believe that consumers will simply switch from buying more expensive named brands such as Red Bull and Pepsi to equivalent cheaper supermarket-own brands drinks, thus completely negating the aim of reducing obesity levels.

 

Will the tax unfairly hit the poorest in society and is it fairly targeted?
Lower income families tend to consume more sugary foods than higher income families, so some argue the tax will unfairly impact them.  The Institute of Economic Affairs says the policy “picks the pockets of the poor for no benefit”.

 

According to the IFS (Institute for Fiscal Studies), a more sensible approach would have been to levy the tax on tax per gram of sugar, as opposed to the proposed levy which is on per litre of a product.

 

As an example, the IFS says the tax on three litres of Coca Cola, containing 318 grams of tax will be 72p while on a two litre bottle of Sainsbury’s Orange Energy drink, containing 318 grams of sugar, the tax would be 48p.

 

Like other experts, the IFS also points out that if a consumer has a strong taste for sugar, they would could switch to chocolate or confectionery.

 

Sugar taxes in other countries
Britain is not the first country to impose a sugar tax. Mexico, France, Hungary and Finland have also introduced similar levies.

 

Mexico, which has one of the biggest weight problems in the world, introduced a 10 percent tax in 2014 to help cut obesity levels which were higher than the US, making it the most obese country in the world.

 

In the first year, sales of sugary drinks were down 12 percent and the drop was biggest among the lowest income groups in Mexico.

 

On average, research found that over the course of the year, the average Mexican purchased 4.4 fewer litres of sweetened drinks.

 

In fact, sales had fallen more than the government had expected from the levy.

 

France, Hungary and Finland also introduced a tax on sugary drinks- but, unlike Mexico, there aim was revenue growth, not health concerns, and they also taxed mineral water and diet soda.

 

In Denmark, however, a tax saturated fats has not worked and was axed after just one year.

 

Overall, the evidence points that a tax on sugary drinks does reduce sales and therefore consumption.

 

Impact on sweeteners and other sugar substitutes
It might not all be doom and gloom for Coca-Cola and Pepsi and the other big soft drinks vendors.

 

Coca-Cola has a large portfolio of drinks’ brands, including its stevia-sweetened drink Coca-Cola Life, which has a third less calories compared to standard Coca-Cola.

 

Stevia is up to 400 times sweeter than sugar but doesn’t carry any calories or raise blood sugar levels.

 

Although Coca-Cola Life does contain some sugar- four teaspoons of sugar per 330 ml can- with some reformulation and clever marketing, sales could benefit as customers will be wooed by its  lower calorie count, 89 calories compared to 139 calories of standard Coca-Cola.

 

Likewise, the two-year grace period before the tax is introduced offers ample opportunity for drinks’ manufacturers to roll out new low calorie versions.

 

The vendors of sweeteners also could see a benefit.

 

PureCircle, which sells stevia and sucralose-maker Tate & Lyle could see a fresh fillip to sales, in light of consumer’s awareness of the obesity problem raising even further following the tax.

 

Ingredion, the US seller or corn syrup, has witnessed a big lift in sales of specialist ingredients in Mexico since it introduced its sugar tax.

 

Ingredion chief executive Ilene Gordon told Reuters: “It created an environment for a company like ours to come up with affordable, healthy solutions.”

 

“We quickly took formulations that we had in the rest of the world, solutions from Europe, and we adjusted them for the Mexican market, in flavour, taste and affordability.”

 

Consequences for the sugar market in the UK
Associated British Foods’ sugar unit AB Sugar- which is Britain’s main sugar supplier- immediately hit out at the tax.
Katharine Teague, head of advocacy, AB Sugar, said: “There is no conclusive evidence that a sugar levy on soft drinks would have the desired effect on consumers and lead people to change their behavior when it comes to health and diet.”

 

“AB Sugar is supportive of measures that help people better manage their diet and address some of the key health concerns in the UK such as obesity. However, obesity is a complex issue and a result of many different lifestyle factors - there is no silver bullet to solving this problem.”

 

But analysts speaking to FoodIngredientsFirst believe the tax will have minimal impact on ABF, as the sugar they supply is used for sundry other products, whether it be its own Silver Spoon sugar brand or for food and in other applications.

 

According to Jeff Stent, analyst at BNP Paribas, the big potential game-changer for ABF is not the sugar tax but the impending abandonment of EU sugar quotas in.

 

This effectively means that the EU market will switch from being a relatively isolated market to one which pricing will have stronger links with the world market.

 

Stent said: “There is a great deal of uncertainly across the entire industry as to the prospects for pricing. In determining the likely shape of the [sugar price] market there are two principal drivers: EU stocks and world prices.”
Meanwhile, the farmers who grow the sugar appear as much in the dark as many others as to how the tax, if at all, will impact them.

 

Speaking to FoodIngredientsFirst William Martin, NFU sugar board chairman, said: “British farmers will continue to produce sugar to meet consumer demand. Our members have seen year-on-year increases in sugar yields.”
 
“The NFU will now meet with processors to discuss how George Osborne’s sugar tax on soft drinks could impact future production of sugar beet in the UK.
 
“As has always been the case, the NFU encourages shoppers to maintain a varied and well balanced diet and back British farming by looking for in-season British food.”

 

Will Ireland follow suit?
The battle between health campaigners and the drinks industry in the UK is also being mirrored in Ireland, where a sugar tax is planned in 2018.

 

Food & Drink Ireland (FDII) director Paul Kelly, said: “We will oppose the introduction of a sugar tax. There is already a tax on these products in the form of VAT. Double taxation is not the way to go.”

 

However, the Department of Health has indicated  that its support for the introduction of a sugar tax to crack down on rising obesity, which revealed that one in four Irish children are overweight.

 

Conclusion
With the tax not being introduced for two years, there appears plenty of time for drinks’ manufacturers to launch less sugary products or reformulate existing drinks to make them escape the tax.
 
It also seems inevitable that they will pass on some of the tax to consumers, some of whom in turn will change their purchasing decisions.

 

But until the scale of the taxes is revealed, it is difficult to assess the extent of the shift. What seems certain is those suppliers of sugar substitutes are faced with a big opportunity to cash-in on the increasing trend to move to healthier drinks.