Researched insights into the new Sugar Tax, it's application to B Brands and the South African market

1. 20 July 2016 - Sugar tax not so sweet for the B brands
Johannesburg, July 2016
By Brendan Grundlingh, Executive: Consumer Sector
Standard Bank
The proposed tax on sugar-sweetened beverages (SSBs) announced by the Minister of
Finance should be viewed as a very good first step in “nudging” consumers in the right
direction. With South Africa the most obese country in Sub-Saharan Africaⁱ, and with health
care costs up to 23%ⁱ more to treat an overweight person in SA than someone of healthy
weight, you can understand why an external nudge is needed. Is Government however the
right entity to force this behavioural change though?
The National Treasury’s Policy Paper on SSB tax, which came out on 8 July 2016,
commendably explains the policy context and rationale for the tax. Essentially South African’s
consume far too many calories through Sugar-Sweetened Beverages, in conjunction with not
enough exercise.
All you need to do is look at your local canteen or your ‘in-between meal’ corner store to see
that a 375ml soft drink consumed with a packet of crisps will add 247 kilocalories of energy
(or 1037 kilojoules) to your diet. The average person would need to exercise for 30min to
burn this off, and to be honest how many people do you see going for a 30min jog, swim or
cycle after each day?
The problem with sugar-sweetened beverages is that it becomes very easy to consume too
many Calories (kilocalories) of energy, as generally they are energy dense and do not allow
children and adults to realise they are energy full after drinking them. So the average person

2. uses a beverage to quench their thirst before or after a meal, not realising that the energy
they have got from the drink is almost more than the meal they are about to have.
In the National Treasury Policy paper there are a number of research references to
substantiate how and why a tax should work. Unfortunately most of them are referenced to
the developing world rather than emerging markets or Africa.
The one emerging market reference we can look at is Mexico, which introduced a soft drink
and junk food tax in 2014. A major limitation in using this as an example is that causality of
the tax cannot be establishedⁱⁱ, as other changes have been occurring alongside the tax.
These changes include health and wellness trends, economic conditions and better
nutritional education.
So while the paper references the initial decline in volumes of sugar beverages post the tax,
this may have already taken place due to consumer trends which we are also seeing here in
South Africa.
Smaller brands will get squeezed out
In the energy drinks sector in South Africa, the continuous entry of small brands over the past
three years has placed immense pressure on established players to offer products at
competitive prices. Consumers now have a wider range of products to choose from, with
some new entrants priced at a 40% discount to the large brands. This has led to very little
unit price growth, with price inflation well below CPI – a good thing for consumers looking for
an affordable product to service their energy needs.
The sugar content in energy drinks are about 110 grams per litre. This will raise the retail
price by on average R1.25 per 500ml can. Not so bad when you are the market leader with
28% market share and a retail price of R25 per 500ml can. Very bad for the locally
manufactured alternative brand who has 2% market share and retails for R9.99 per 500ml
can. That’s a 5% price increase for the market leading brand compared to a 12% price
increase for the smaller brand.
The carbonated soft drink category is likely to see the largest impact from the sugar tax. More
than 54% of total soft drink sales value occurs through supermarkets. The total soft drink
market is estimated by Euromonitor6
to be R80bn in size, with Carbonated beverages making
up R49bn (61%) of this sales value.
The off trade market (supermarkets and other groceries) has become very competitive with
Coca-Cola South Africa still leading the volume share, however losing share over the past 3
years to so called B brands which have been able to appeal to consumers by offering product
at substantially lower price points. The carbonates market is now dispersed amongst two
major multinational brands and more than 10 smaller private label and B brand players.
These B brands have traditionally based their strategy on a price point which is at a
substantial discount to Global brands – up to 40% cheaper2
. Currently house brand Cola
(private label) in supermarkets is priced at R9.99 per 2Litre, with the Global brand priced at

3. R15.99 per 2Litre. This R9.99 price point is seen as key to consumer demand, and any
breach above this draws consumer attention more to the Global brands.
Ultimately the sugar tax is supposed to impact demand, with the assumption that the tax
imposed will push certain products prices above a point at which consumers will reduce their
demand. The proposed tax will increase the B brand’s from R12.99 to R18.03 (+40%), while
private label price will increase from R9.99 to R15.94 (+50%), with the Global brand up from
R15.99 to R20.84 (+30%).
Essentially the premium to which Global brands have traded to B brands will be reduced, and
price points at which consumer behaviour has been anchored will be changed. Larger
players have the luxury of being able to adjust marketing strategies between different sized
products, for instance the price of a 330ml can of Cola only needs to move up from R8.49 to
R9.29 (+9%), and it is in these smaller sized offerings which Global brands make much
higher profits. For the B brands many of them are only set up to manufacture large volume 2
Litre offerings.
So who will benefit from the tax and adjustment in volumes sold?
Price elasticity of demand measures how responsive change in demand is to a change in
price. According to studies by Standard Bank3
beverages in South Africa have a price
elasticity of up to -0.85. This means that for a 5% price increase sales volume could fall by as
much as 4.6%. So for carbonated soft drinks, if sales volumes were growing at 7.5% per
year and a price increase of 5% was implemented, manufacturers would have to expect
sales volumes to reduce to 2.9% for the year.
So where would these volumes go? Or rather would consumers stop buying carbonated
beverages and rather buy something else. The high elasticity of demand in beverages has
often been explained due to the large product substitution potential that exists between
beverage types.
In the Mexican caseii
, in the first year of tax, volumes were 6% lower in taxed beverages
while beverages such as water and fruit beverages were up to 4% higher. In South Africa we
believe the concentrate or fruit blend market will likely be the beneficiaries to cross
substitution.
Liquid concentrates offer more value to consumers with limited disposable income. They also
have lower added sugar per diluted serving size. Branded players in the concentrates in a
1Litre size have between 12 and 27 grams of added sugar per litre of diluted beverage. This
means that for these top players in the category their price points would only need to be
increased by between 1% and 2% to reflect the proposed tax.
Clever strategic marketing in this category could see 2Litre concentrates replacing some of
the lost volume in carbonates in supermarket promotional sales.

4. One needs to also consider further inflation in manufacturing
The proposed tax is on sugar-sweetened beverages and not on sugar producers. Over the
past four years beverage players have benefited from their highest input being in surplus
globally, and this surplus was reflected in sugar prices being at 20-year lows4
. Since
February 2016, we have seen sugar prices rise from 13c/lb to 19c/lb, as the market prepares
for the second year of a deficit, but more importantly the reality of the lack of available sugar
really hits home as ending stocks are expected to be at levels last seen in 2009.
So as the proposed sugar tax increases the implied inflation in a category dependent on
sugar, the actual raw material itself is also set to rise in price. This will ultimately put
consumers in the beverage category exposed to price increases substantially above other
food and beverage products in their consumer basket. In the current economic climate it is
already very difficult to find categories, which provide a value offering to consumers.
This needs to be thought through as the likely implication of this tax could be a reduction in
competition and resultant slowdown in local manufacturing, as price points become too
excessive for the consumer to justify. Ultimately this all results in what the tax is meant to
achieve – a reduction in the amount of sugar-sweetened beverages that are consumed. But
at what cost to what industry?
Source:
ⁱ Lancet and WHO
ⁱⁱ Colchero, A., et al. (2016). Beverage purchases from stores in Mexico under the excise tax
on sugar sweetened beverages: observational study. BMJ, 352 (h6704).
ⁱⁱⁱⁱ Euromonitor
2
Average price taken from major supermarket outlets in Gauteng region as of 14 July 2016,
3
SBG Securities research
4
United States Department of Agriculture Foreign Agricultural Service May 2016
6
Euromonitor – Soft Drinks in South Africa Feb 2016,