Sugar tax used by EU soft drinks firms to boost margins

So-called “sugar taxes” lead to retailers and suppliers boosting their profit margins on full-sugar and diet drinks, a Europe-wide study has suggested.

The report, commissioned by the European Commission and conducted by analysts Ecorys over a seven-month period, examined the impact of a raft of taxes on food and drinks high in fat, salt and sugar in a number of European countries, including France, Finland, Hungary and Denmark.

It concluded health taxes in general succeeded in bringing down consumption of HFSS products and “in some cases” led to products being reformulated, but taxes on soft drinks specifically also resulted in retailers or suppliers - and, in some cases, both - bolstering margins.

Companies strategically put up soft drinks prices by more than the tax increases called for, to compensate for falling sales, the report claimed.

“Mostly, higher product prices occurred in conjunction with profit margins remaining stable, indicating full pass-through of the tax,” it said. “However, there is evidence of over-shifting in the sugar-sweetened beverage sector in all non-alcoholic beverage taxes studied.”

In France - whose soft drinks tax has been hailed as a potential blueprint for the UK - the price of low-calorie colas shot up by more than 10% as companies “employ strategies to buffer the effects” of new taxes, according to the report.

And in Finland, where health taxes on soft drinks were increased in 2011 and 2012, price rises were “far larger than the increase attributable to tax.” This year, it could see price hikes of up to 30%, the report said.

Meanwhile, in Denmark, which scrapped its tax on soft drinks and juices in January, retailers had managed to “increase their margin for cola every time the tax was increased.”

The report claimed fizzy drinks manufactures had taken advantage of the relative lack of rival substitute products, compared with other sectors, such as flavoured waters and fruit drinks, to raise margins.

Responding to the report, BSDA director general Gavin Partington said: “The reality is that tax rises will certainly result in price increases for the consumer, which are both unfair and unlikely to have the desired effects that the proponents of a tax claim.”

But Professor Jack Winkler, former professor of nutrition policy at London Metropolitan University, said he did not believe the UK market would allow the levels of “over-shifting” seen in Europe. “I think this is a significant report. However, it explicitly does not look at the health consequences or the revenue-raising elements of taxation. It also takes no account of the politics involved.”