Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

The UK Soft Drinks Levy: what’s the impact of the 2018 ‘sugar tax’?

The soft drinks industry has been voluntarily reducing sugar content in their drinks and moving toward healthier brands. But soft drinks will be taxed in the UK from this April based on their sugar content. How has industry responded to the Soft Drinks Levy, and how will the tax on sugar impact the market?

Source: Bloomberg

The Soft Drinks Levy: a tax on sugar in soft drinks

‘Just a spoonful of sugar helps the medicine go down’ – Mary Poppins.

Health officials and the media like to remind the public that they’re enjoying too much of something, whether it be too much salt, too much fat, or too much alcohol. Many of these warnings grab attention only until the next health scare comes about, but some do stick – and this time we are being told we are consuming too much sugar, especially children in the UK.

Our sugar intake from soft drinks is specifically the problem, according to the UK government. Industry found this a hard pill to swallow, with 78% of soft drink companies originally against the proposals, although retailers were more supportive, with 73% backing the plan.

The Soft Drinks Industry Levy, better known as the ‘sugar tax’, is a completely new measure that will come into force in from 6 April 2018. The levy applies to the production and importation of soft drinks containing added sugar.

Drinks with a total sugar content of over five but below eight grams per 100 millilitres will be subject to the lower rate, while those producing drinks with over eight grams of sugar will face a higher rate. Importantly, the measure only affects drinks with added sugar, not those that have naturally-occurring sugars.

The Office for Budget Responsibility expects the levy to be 'passed entirely onto the price paid by consumers'. The lower tax band will see 18p added onto the drink’s price per litre unit, while the higher tax band would push the price up by 24p.

Why is the UK introducing a sugar tax on soft drinks?

‘The sugar tax on drinks is not a tax on customers, it is a tax on manufacturers. The whole point of it was to get manufacturers to change the ingredients of the product.’ – Camilla Cavendish, author of the Soft Drinks Industry Levy, as former head of policy under David Cameron.

There is a debate about what the impact of the levy was supposed to be, but the reason for its introduction (according to the government) is clear – the UK has one of the highest obesity rates in the developed world, and it’s getting worse. The Department for Health and Social Care claims over 35% of boys and 20% of girls aged between six and ten will be obese by 2050, and that the general issue of obesity in the UK costs the NHS around £6 billion each year.

As Cavendish has pointed out, 'making things more expensive does change people’s behaviour in a way that I’m afraid all the leaflets we have all read over the years and all the newspaper articles fundamentally don’t.'

What is the impact of the sugar tax on the public coffer?

The sugar tax is sweet for some and sour for others. When the levy was drawn up, the government forecast the measure would bring in £1.5 billion over the first three years, with £520 million in the first year of implementation alone.

However, as most companies have tried to avoid the tax by taking measures like reformulating their drinks, the first year forecast was lowered to £385 million in the Spring 2017 Budget and then down to £275 million last autumn.

George Osborne, the chancellor who introduced the tax, and who has since become the editor of the London Evening Standard, earmarked the money for school sports programmes and breakfast clubs, as the primary aim is to reduce sugar consumption for children rather than adults.

What does the soft drink industry think of the sugar tax?

‘Given current increases in cost of goods, we're surprised the Treasury wishes to put more pressure on businesses and raise prices for hard-pressed consumers.’ – Gavin Partington, director general of the British Soft Drink Association (BSDA), March 2017.

Quite simply, the industry feels hard done by. Organisations like the BSDA and the Food and Drink Federation, which not only represent the likes of drink producers but also the wider supply chain (covering pubs, restaurants, distributors and retailers) firmly believe the levy is unnecessary, as industry was already addressing the problem.

One criticism made by the BSDA is that the decision to introduce the tax was based on data taken in 2012, before the industry implemented plans to reduce the sugar content in drinks voluntarily.

The BSDA claims producers have lowered the sugar content of soft drinks by 19% since 2013, that 11-to-18 year olds reduced consumption of sugar-sweetened beverages by 23% between 2010 and 2014, and that overall sugar intake in teenagers dropped by over 8% over the two years to 2014.

Contribution to take home sugar since 2013

Soft drinks -18.70%
Cakes and pastries -1.90%
Frozen confectionary +8.70%
Take home confectionary +2.30%
Biscuits +1.40%

(Source: BSDA using Kantar Worldpanel data)

The soft drinks industry was also proactive when the government was drawing up plans to stop advertising food and drink that is high in fat, salt, or sugar to children across non-broadcast channels. That came into force in July 2017, and although firms have been allowed to continue marketing these types of products to children through broadcast mediums like television, the soft drinks industry voluntarily agreed not to advertise regular soft drinks to children under 16 across all media channels, one year before the legislation was implemented.

On top of that, the soft drinks is the only sector that has set a calorie reduction target for 2020 in line with government guidelines, which it views as further evidence the industry doesn’t need taxing to achieve the shared goal of making products healthier.

Trade bodies were quick to argue the effectiveness of taxing your way to better health and claims the levy will place even further pressure on an industry, like many others that import ingredients from abroad, facing higher input costs following the devaluation of sterling as a result of the EU Referendum vote in June 2016.

What is the potential economic impact of Brexit?

Oxford Economics predicted over 4000 jobs could be lost in the UK as a result of the tax, with nearly 2000 off-trade jobs, nearly 1800 on-trade jobs and over 250 roles from the manufacturing supply chain at risk. Job losses will be primarily concentrated in the London and South East regions, and sales in the hospitality sector and for smaller retailers are expected to drop by about £132 million annually.

Consultancy giant McKinsey & Co released a UK-focused report in late 2014 on how best to battle obesity, which ranked 16 measures that can be taken to reduce obesity levels. Introducing tax was seen as the twelfth most effective (or fourth least effective) action that could be taken – even surgery was deemed to be a better option. Portion control was seen as the best way to tackle obesity, and in second was reformulation – which we will come onto next.

Overall, pressure on the soft drinks industry is mounting on several fronts, with ethical pressures also emerging about matters like the use of plastic, recycling, and higher amounts of litter.

The reformulation of soft drinks: bittersweet?

‘There was an onslaught from the companies – every company said they couldn’t possibly reformulate it, it would be impossible to change their ingredients, it would be impossible to take the sugar out. Here we are, three months before the tax comes in, and every single company, except one, has already reformulated its drink to avoid the tax. Which I think is a huge success.’ Camilla Cavendish, February 2018.

A report by Oxford Economics in August 2016 predicted just over one-fifth of all soft drink volumes sold in the UK were to be subject to the levy.

The report also flagged that about 80% of the soft drinks on the market would have fallen into the higher-tax band. Out of all volumes to be exposed to the levy, over half of the entire tax would come from carbonate drinks, 21% from still and juice drinks, 17% from energy drinks, 10% from dilutables and 1% from sports beverages.

All companies have responded to the tax, with nearly all of them reformulating their drinks in one way or another. Most have opted to get sugar content below the five gram limit to avoid the tax altogether, while others have introduced new brands containing little or no sugar, or made portions smaller.

How will the sugar tax impact Coca-Cola Co?

A report from Euromonitor suggested the biggest player in the market, Coca-Cola Co, would be responsible for 52%, or £374 million of the total tax to be raised in the first year. This is mainly because it holds such a large proportion of the carbonates market.

It is unsurprising that the company is reluctant to change the taste of the world’s favourite soft drink and believes its brand is strong enough to absorb any negative impact. But nearly all of its other drinks, such as Fanta, have seen sugar content drop below the five gram threshold. It also has its zero-sugar alternatives like Fanta Zero alongside many of its best-known brands.

Still, the company is shifting its sales away from carbonates altogether. It rolled out three new brands last year, ice tea drink Fuzetea, ready-to-drink cold coffee Honest Coffee, and dairy-alternative smoothies brand AdeZ – all of which will be exempt from the tax. Over the next few years, Coca-Cola expects over 30% of UK sales to come from still drinks, more than double the current level.

Find out about the history of Coca-Cola.

How will the sugar tax impact Coca-Cola European Partners?

Coca-Cola European Partners bottles and distributes Coke’s products in the UK. It has said it will be passing on costs to consumers through a combination of higher prices and smaller bottles.

The company spent £10 million last year reformulating and promoting Coca-Cola Zero, which was its biggest launch in the UK for ten years. About half of all products are expected to escape the tax, which was higher than the 45% originally predicted.

How will the sugar tax impact AG Barr?

Only three people in the world know the recipe behind Scottish favourite IRN-BRU, and the trio have decided to ensure virtually all of its brands will be exempt from the levy. Sugar content in its flagship brand has been reduced by more than half to below fvie grams since January 2018, and AG Barr said nine out of ten regular drinkers believed it delivered a 'good or excellent taste match'.

‘Up to’ 99% of its total brand portfolio will not be liable to the tax by the time it is implemented in April.

AG Barr, which also has IRN-BRU Sugar Free, IRN-BRU XTRA and other brands including KA, omj! and Rockstar, had originally planned for 90% of its portfolio to escape the levy before it extended its reformulation programme.

How will the sugar tax impact Nichols?

‘We are well prepared for the introduction of the Sugar Levy with 100% of the Vimto and Feel Good brands portfolio already below the levy threshold.’ – Nichols.

Nichols is best known for producing Vimto, and bolstered its offering by buying the Feel Good drink brand in 2015, which is 100% natural with no added sugar. Its other brands include the Levi Roots range, the Sunkist brand, and a package of frozen beverages.

All of Nichols new product development has been focused around no added sugar drinks, while those with added sugar have all seen a reduction. Vimto No Added Sugar sales have been representing a larger proportion of total Vimto sales over recent years, rising to 41% in 2016 from 33% in 2015. It has also added the Vimto ReMix brand, which also has no added sugar.

‘The relaunch of Feel Good in the UK and further new product development will see it firmly lead the category as a natural healthier alternative soft drink. We will continue to focus all our marketing activities on Vimto No Added Sugar. Through product development, we will ensure Vimto is able to meet the challenge of the sugar levy due in 2018,’ Nichols said in its 2016 annual results.

How will the sugar tax impact Britvic?

‘The introduction of a soft drinks industry levy in the UK and Ireland brings a level of uncertainty, but we are well placed to navigate this given the strength and breadth of our brand portfolio and exciting marketing and innovation plans’ – Britvic.

Britvic's brand portfolio in is diverse, producing the likes of Robinson’s, J20 and Fruit Shoots, as well as other brands under an exclusive agreement with PepsiCo including Pepsi, Pepsi MAX, Gatorade, and 7UP.

The company said it 'didn’t have to react suddenly' to the levy as it had already been reformulating its drinks and moving toward healthier products since 2013.

'By April, 72% of our total portfolio and 94% of our owned brands will be under the levy, or exempt from it, in GB. In Ireland 69% of our portfolio will be below or exempt from the soft drinks levy.' Britvic told IG in a statement.

However, its full sugar Pepsi and 7UP brands are set to subject to the levy – and currently account for about 20% of Britvic’s UK sales.

How will the sugar tax impact Fevertree Drinks?

Fevertree Drinks cater for the mixers market in the UK, offering a range of tonic waters, as well as flavours, like Sicilian Lemonade, Ginger Ale, Soda Water, Madagascan Cola and Ginger Beer. The company, which was not available for comment when contacted by IG, has not outlined any reformulation plans or specific actions in response to the levy.

Looking at 12 of the company’s drinks, only three have less than five grams of sugar per 100 millimetres (Premium Soda Water, Naturally Light Tonic Water and Naturally Light Ginger Beer). The other nine all have over five grams of sugar, with three of them containing more than eight grams (Indian Tonic Water, Limited Edition Clementine & Cinnamon Tonic Water and Ginger Beer).

Should you take a shot on spirits or bet on beer: what's the investment case for alcohol producers?

Is the tax on sugary soft drinks just the start?

The government has been firm in stating it has no plans to begin taxing other foods and drinks based on their sugar, salt or fat content. Still, some like Deloitte believe the tax ‘marks a new direction for so-called “sin taxes”’ and builds upon the taxes placed upon the likes of tobacco and alcohol that we have all become accustomed to.

‘This arguably marks the first step towards the government tackling potentially unhealthy foods through tax measures.’ – Deloitte.

The Office for Budget Responsibility expects the tax to add around a quarter of a percentage point to consumer price index (CPI) and retail prices index (RPI) inflation in 2018-19. If any-and-all taxes on food and drink are to be passed onto the consumer as expected, then any further levies would need to be introduced gradually to minimise the impact on the public’s purse-strings.

The government has been setting targets for the food industry to reduce the level of both sugar and salt for years. The targets apply to wide range of food categories – from hot-dogs, burgers, pasties and kebabs, to bread, cereal, cheese and sauces.

There is no doubt that there has been an overall reduction in sugar and salt levels as a result of this voluntary approach, but some years have seen only a small proportion of manufacturers meet the targets that have been set.

The tax on the soft drinks industry is the first time government has decided to order, rather than ask, an industry to make their products healthier. Industry has always preferred to work with the government to help shape policy and will be nervous about losing its place at the table. There might not be much to cheers for a while.

Find out more about what markets to trade: discover our range of over 15,000 markets.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by writer