UK Chancellor of the Exchequer George Osborne took aim at the soft drinks industry on Wednesday, announcing a new tax on sugary drinks. Investors immediately dumped UK beverages: Irn Bru maker A.G. Barr and Tango seller Britvic both fell more than 5 per cent, sugar and sweetener producer Tate & Lyle suffered a similar hit while Associated British Foods also fell.
But there are reasons to think this bitter pill will be an easier one to swallow than initially thought.
The tax doesn't take effect until 2018, so beverage producers have time to decide how to respond. The levy will be assessed on total sugar content rather than revenues or profits, so a company might find ways to change unit size or add alternative sweeteners to soften the impact.
The prospect of reformulation shouldn't come as a complete surprise – companies have already had plenty of time to grapple with increasing suspicion from consumers over sugar content. Consumption of carbonated drinks and especially fruit juices has taken a hit in recent years, according to the British Soft Drinks Association, while bottled water consumption jumped 10 per cent in 2013 and 9.3 percent in 2014.
But what's more likely is that manufacturers will pass the cost on to the consumer. BSDA data show that Brits have consistently been paying more per liter for soft drinks every year since 2010, even when overall volumes consumed have fallen. In fact, the UK's independent Office for Budget Responsibility said it expected the new tax to be paid entirely by consumers.
And if ever the UK consumer were able to cope with this kind of tax increase, it's now. They've got some spending power – pay growth has averaged 2.4 per cent since the start of last year, far outstripping the inflation rate, which has hovered around zero.
A.G. Barr and Britvic are certainly in the firing line, as they have strong revenue exposures to the UK. But even though the soft drinks tax is not exactly sweet news, shareholders' pessimism may prove short lived.
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