Coca-Cola Faces The Sugar-Tax Problem In South Africa

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The Coca-Cola Company (NYSE:KO) might lose volume sales in South Africa, should the proposed tax on sugar-sweetened drinks be implemented next year. The government has proposed a 20% tax on sugary drinks that will be levied with effect from 1 April 2017. This development could have a multifold impact, not just on Coca-Cola’s volume sales and future growth plans in South Africa, but also on the country’s general business environment.

Why The Tax Makes Sense

Taxes on sugary drinks are a way to try and curb the intake of these drinks that are often blamed for obesity and an increased risk for lifestyle diseases such as type 2 diabetes, heart disease, and stroke. According to a study conducted by the University of Washington’s Institute for Health Metrics and Evaluation, 70% of women and 40% of men in South Africa were overweight or obese. The pretty hefty tax on calorie-fueled drinks, such as carbonated soft drinks (CSD), fruit juices, energy/sports drinks, sweetened iced teas, vitamin waters, etc., is expected to deter customers from consumption and, thereby, encourage South Africans to live a healthier lifestyle.

Why The Tax Will Not Help Curb Overall Sugar Intake

While the sugar tax is aimed at reducing the overall calorie intake by South Africans, it might not be very effective. According to Beverage Association of South Africa, ~97% of South Africa’s obesity problems had nothing to do with sugary drinks as they accounted for only 3% of the average daily kilojoule intake. [1] A more meaningful lifestyle shift is required to curb the intake of sugar in the country, and the tax might not be the right solution. Other measures such as reformulation, labeling, and other targeted marketing efforts could have a greater impact on tackling obesity than the anticipated reduction of just 37 kilojoules a day due to the tax.

In addition, the tax might not be effective in significantly reducing consumption of sugary drinks altogether. Take the example of Mexico, where a sugar tax was imposed in 2014, increasing retail prices by almost 10%. After a brief period of drop in sales volume, volume is rising again in Mexico. The soda market in the country grew 0.5% year-over-year in 2015, after a drop of 1.9% in 2014, boosting results of beverage manufacturers such as Coca-Cola and PepsiCo. The sugar tax is expected to deter customers, especially the mid-income groups, from consumption of sugary beverages. However, the situation could normalize after an initial drop, as was the case in Mexico.

The Tax Could Disrupt The Beverage Industry

Almost 60,000 jobs in South Africa could be lost as a result of the sugar tax.

Profit in South Africa, which forms ~2.5% of Coca-Cola’s net volume, could more than half for Coca-Cola Beverages Africa, the bottling joint venture between Coca-Cola, SABMiller and Gutsche Family Investments. The newly formed bottling unit will produce and distribute approximately 40% of all Coca-Cola beverage volumes in Africa, initially serving 11 high-growth countries, which will increase to a total of 14 countries. [2] CCBA is headquartered in South Africa, and the excessive tax in the country could disrupt its operations. CCBA will rethink its spending plans in South Africa, if the proposed tax goes through. The unemployment rate in the country exceeds 26% and the beverage sector employs roughly 200,000 people. The beverage sector grew by 258% since 2008, much larger growth than South Africa’s GDP growth of 43% during the same period. The anticipated decrease in volume could hurt the beverage sector, and it could also prompt manufacturers to raise retail prices of other offerings in order to offset the losses from the increased taxes on sugary drinks.

Coca-Cola has made a $60 million commitment to the South African government to develop a program targeted at small, medium, and micro-sized enterprises, half of which would be allocated for the development of mostly emerging sugar farmers. Coca-Cola’s investment plans could be hit in the country if consumption is hit significantly after the tax is in place. The beverage industry was planning to add 60,000 jobs over the next five years by investing in around 30,000 new outlets, thereby committing to the country’s economic growth. However, the reduction in consumption due to the added tax could mean the loss of these potential new job openings.

Are Taxes The Right Way To Go?

The sugar tax is expected to generate almost 11 billion rand ($813 million) in government revenue, but it might not be effective in curbing health problems, as aforementioned. Moreover, it could prompt Coca-Cola to rethink its strategy in South Africa. If the tax were implemented as proposed, it is estimated that CCBA’s South Africa volume would probably drop by at least 25%.

Another way to help South Africans live a healthier lifestyle could be an emphasis on smaller packs — a strategy that has worked well in the U.S.  Smaller packs have lower cumulative calories and a higher price per unit, leaving both the customer and manufacturer content.

Have more questions on Coca-Cola? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Coca-Cola

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Notes:
  1. Sugar tax could cause 60,000 job cuts []
  2. Coca-Cola press release []
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