South Africa The Latest To Institute Soda Tax

by Trefis Team
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The beverage industry might lose volume sales in South Africa, once the tax on sugar-sweetened drinks is implemented this year. The government will institute a levy of 2.1 cents per gram of sugar on drinks that have a sugar content that is greater than 4 grams per 100 milliliters in April 2018, leading to an estimated 11% rise in the prices of such beverages. This development could have a multifold impact, not just on the soda volume sales and future growth plans of such companies in South Africa, but also on the country’s general business environment, as it can pressure the unemployment rate and negatively impact future investments by beverage companies in the region. South Africa isn’t the first to implement such a tax. It joins a host of other nations that have either enacted it, have passed legislation for their implementation, such as the United Kingdom and the United Arab Emirates, or are considering the levy of such a tax, including the Philippines, Nepal, and Seychelles.

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 the latest South African Demographic & Health Survey, 68% of women and 31% of men can be classified as overweight or obese in the country. Public hospitals in the country have reported 25,000 new hypertensive cases and 10,000 new diabetic patients each month. The 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.

Can The Tax 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. When the tax was being deliberated in 2016, the Beverage Association of South Africa had stated that ~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. Hence, 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 regulating sugar reduction in drinks, 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.

On the other hand, let us consider the example of Mexico, where a sugar tax imposed in 2014 pushed up the retail prices by almost 10%. According to an analysis published in Health Affairs in March 2017, the purchase of taxed beverages fell by 5.5% in the first year, followed by a 9.7% reduction in the second year, yielding an average reduction of 7.6% over the study period. Reductions were reported to be highest among the households of low socioeconomic status, reaching 17% in December 2014. While the sugar tax is expected to deter customers, especially the low and mid-income groups, from consumption of sugary beverages, it would not come as a surprise if the situation normalizes after the initial drop.

What Beverage Companies Can Do

With the implementation of such a tax in South Africa, besides other countries in the world, it would be necessary for beverage companies to regulate the amount of sugar that goes into their drinks. The Beverage Association of South Africa had earlier proposed committing to achieve double the calorie reduction as envisaged by the tax. 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 US. Smaller packs have lower cumulative calories and a higher price per unit, leaving both the customer and manufacturer content.

Such a tax can also hasten the shift toward healthier drinks, a trend that has forced beverage companies to innovate and introduce new or modified beverages such as flavored water, sparkling water, sports drinks, dairy beverages, and ready-to-drink teas and coffees. For example, The Coca-Cola Company (NYSE:KO)  introduced a cola version with “health benefits” in Japan. Aimed at the aging population in the country, the new drink, called Coca-Cola Plus, has no calories or sugar, and each bottle contains five grams of indigestible dextrin and other dietary fiber. The company claims that drinking one bottle each day along with meals will reduce the absorption of fat from food and moderate the levels of triglycerides in the blood following the meal. Meanwhile, PepsiCo (NYSE:PEP) has also announced its new targets to reduce calories and sugar in its beverages, and salt and fat in its snacks by 2025.

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