Is the tax on sugar just beginning?

17 May 2016

Every year obesity costs the UK economy £47bn – equivalent to 3% of GDP. That figure, in a study by McKinsey, makes it easy to understand why George Osborne, the Chancellor of the Exchequer, introduced a tax on sugary soft drinks in his recent Budget.

Though it seemed to come out of the blue, similar policies have been implemented in Belgium, Chile, Finland, France, Hungary and Mexico (where its effectiveness is fiercely debated). Governments in India, Indonesia, South Africa and the Philippines (where obesity in children under five has soared by 400% since 1992) may follow suit.

As proposed, the UK tax – on soft drinks with more than 5g of sugar per 100ml – could add 18-24p to the cost of a litre. Crispin Mair, co-founder of supply chain consultancy Crimson & Co, says: “Retailers will want to protect both the margins and rebates that they receive from their drinks suppliers. The taxes will therefore manifest themselves as price increases to the consumer or slimmer margins for the producers.”

The impact could, Mair says, be more a test of how much the soft drinks giants really know about their products. “The drinks producers will respond with new brands, varieties and recipes, as sales and marketing teams try achieving a balance on sugar and non-sugary drinks across their product portfolios. Producers with a good grasp of the true cost-to-produce and the cost-to-serve on each channel will gain a significant advantage over those whose costing methodologies mask the real impact of the changes in product complexity.”

Soft drinks companies have threatened legal action against the tax, which will come in to force in 2018 and is expected to raise £504m a year. Roger White, CEO of AG Barr, maker of Irn Bru, said: “It is extremely disappointing that soft drinks have been singled out given that it is the only food and drink category to have made any real progress in reducing sugar intake in recent years, down 13.6% since 2012.” AG Barr says it has reduced the average calorific content of its brands by 8.8% in four years and is set to meet the industry target of a 20% reduction by 2020.

For Mair, this will mean changes in relationships for manufacturers. “Drinks companies are going to have to work closely with key suppliers to ensure their products both appeal to consumers and meet sugar targets.” The variation in sugar levels suggests they have plenty of room to manoeuvre: Old Jamaica Ginger Beer Extra Fiery contains 15.7g of sugar per 100ml – seven and a half times that of Tango Apple.

 “The need for more transparency on product contents will impact packaging requirements, driving up complexity in managing packaging materials. Drinks manufacturers don’t want to be left with lots of obsolete materials when any new regulations come into play. You only need to look to tobacco and its packaging challenges to understand the impact this could have.”

If governments see sugar as the principal enemy in the war on obesity, the soft drinks levy may only be the start: taxing one product with sugar in it is a bit like tackling tobacco consumption by taxing cigars but not cigarettes. For example, Welch’s 100% Pure Purple Grape Juice (not taxed because it is not fizzy) contains 16.5g of sugar per 100ml, even more than Old Jamaica.

With McKinsey predicting that obesity could cost the NHS £10-12bn by 2020, the real significance of the UK sugar tax may lie in the precedent it sets.

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