Soft drinks left carrying the can with sugar levy

A massive shot in the arm in the race towards reformulation, or the signal for a stampede towards the law courts by some of the industry’s most powerful companies?

As the dust clouds settled on chancellor George Osborne’s plans for a sugar levy this week, both scenarios seemed possible.

But with exclusive new research by Brand View for The Grocer showing the extent to which a vast range of soft drinks products stand to be caught in the Chancellor’s net - far beyond the usual suspects of Coca-Cola, Pepsi and the rest - will Osborne’s Budget levy result in reformulation or recrimination?

The government plans to raise £500m - to be ploughed into school sporting activities - through a higher levy of 24p per litre for drinks that contain more than 8g of sugar per 100ml, and a levy of 18ppl for drinks that contain between 5g-8g/100ml.

The Brand View data shows almost 60% of carbonates and energy drinks will be hit by the levy, with no less than 42% of soft drinks products across Asda, Morrisons, Ocado, Sainsbury’s , Tesco and Waitrose set to be stung by the 24p per litre higher band.

Whilst the average price hike according to Brand View will be 6.3% across the carbonates and energy drinks categories, consumers have been warned that for many household products the impact on prices will be far more extreme, with some products set to go up by 50% if companies pass the tax on.

Some sources suggest Treasury officials privately fear they have gone off half-cock, amid huge anger that a supposedly pro-business government has ended up going even further than the health lobby (which had campaigned for a blanket 20% tax).

Questions have also been asked as to whether it is fair -and legally enforceable under competition law - for Osborne to say the levy will not apply sugary dairy and fruit juice drinks or, for that matter, other sectors contributing to sugar intake, including confectionery, biscuits, bread & morning goods, and ice cream.

According to recent Kantar Worldpanel figures, a raft of those have been outstripped by the sugar reduction efforts of soft drinks companies in the past few years, yet soft drinks are carrying the can.

Between January 2102 and 2016 (says Kantar) the amount of sugar from soft drinks in Brits’ shopping baskets fell by 13.6% (despite a 2.5% rise in volumes over the period), compared with a 5.6% rise from confectionery, which saw a much smaller volume increase.

With this backdrop, reports in several national newspapers have suggested there could be legal action from the soft drinks industry in what could be a re-run of the alcohol industry’s successful stand against minimum pricing in Scotland.

“We need clarification about how this tax is going to work, exactly what’s excluded and what’s not,” said Gavin Partington, director general of the British Soft Drinks Association. “Nothing can be ruled out at this stage,” he says.

Too soon to turn to lawyers

However, others told The Grocer it is too soon to turn to the lawyers just yet. “We are still very much in the fact-finding stage and we will be at that point for some time,” says CCE MD Leendert den Hollander. “I think the timing of the announcement in the Budget was a surprise but there clearly is an issue and has been for some time about obesity and we as an industry have been focused on that for quite some time with reformulation, through more innovation on low and no-calorie products and more communication.”

“The data suggests that strategy is working already. Soft drinks was the only category to address that. We very much agree on the issue but there is no evidence in the world that a sugar tax will work.”

Den Hollander claims the soft drinks industry was already getting its act in order through reformulation and NPD with low and no-calorie products.

Indeed, a new report from Britvic suggests the industry’s efforts were already proving transformational before the Chancellor stepped in.

According to the report, using figures from Nielsen, sales of low-calorie products were £1.5bn, an increase of 2.3%, in the year to 9 January 2016, in stark comparison to the 2% fall to £4bn of their standard counterparts.

Britvic has led the way in removing sugar from its soft drinks, with more than 18 billion calories removed since 2012 through reformulation and delisting full-sugar variants of products such as Robinson’s and Fruit Shoot, and was even namechecked by the chancellor.

The Grocer understands talks will now be held between companies and the government next week to try to answer some of the concerns raised, with a full consultation on implementation in the summer.

“We believe the government is establishing a negotiating position and this may not be the final outcome,” analysts at Société Generale suggest.

“Alternatively, the government could be responding to criticism that previous sugar taxes (eg in France and Mexico) have had little impact on sugar consumption, by setting the tax at a much higher rate, to force a change in consumer behaviour.”

Yet with the government saying it is down to companies to decide whether to pass on the levy, some analysts are warning there may be price hikes in lower-calorie products, while little or nothing is done to reformulate the main products in the government’s crosshairs.

Brand View’s research suggests lower-calorie drink Coca-Cola Life would increase in price by 12% if CCE passes on the charge, and others might also follow suit.

“There may be some revenue management around the portfolio to manage the overall impact,” claims Clive Black, of Shore Capital. “We suspect low-sugar and diet drinks may see some price increases to help offset and balance price increases in full-sugar drinks.

“Given that some of the brands in the UK market include mega brands such as Coca-Cola and Pepsi, we would expect limited reformulation work done on their core brands given the danger to brand equity and the fact the UK is a relatively small market for them as global companies.”

Desperate to avoid a repeat of the Pasty Tax fiasco, Osborne would surely be just as keen not to see the tax backfire and hike up the cost of healthier products.

Even the health lobby cannot agree on whether it’s fair for the chancellor to single out soft drinks.

Yes, says Jennifer Rosborough, nutritionist at campaign group Action on Sugar: “The consumption of SSBs (sugary sweetened beverages) compared with low-calorie drinks results in greater weight gain and increases in body mass index in children and adolescents.”

Yet Tam Fry, spokesman for the National Obesity Forum, says fizzy drinks giants would have a case to take to the judge. “The fact that the chancellor has said juices should be exempt and dairy drinks should be exempt and smaller companies should be exempt is plainly unfair,” says Fry. “When I read that companies like Coca-Cola were threatening to take this to court I have to admit my reaction was that I thought they had a good point.”

Fry says he will not be satisfied until the levy is extended to other products. “Two years is a reasonable time for soft drinks. It’s not a reasonable time with foodstuffs,” says Fry. “Maybe they will be given five years but I think these other categories should expect an announcement in a year’s time from the chancellor. Their time will come.”