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The sugar tax introduced by Chancellor George Osborne might not be perfect, but it has certainly focused attention on the UK’s sickly-sweet love affair with sugar, forcing businesses to assess their own operations and to consider their long-term strategies as they ponder how the value of their business could be impacted.
In March, the Chancellor’s crosshairs settled on drinks manufacturers and during his budget speech he pulled the trigger. The new tax targets those producing drinks with over 5g of sugar per 100ml. There is then a second tax tier for drinks with over 8g of sugar per 100ml.
But many industry practitioners and commentators have picked holes in the proposed tax that is due to come into force in 2018. Why, they ask, are fruit juices and milk-based drinks exempt, when many contain similar levels of sugar? Won’t the tax hit the poorest in society who are the biggest consumers of the drinks that have been singled out? Why have foods and confectionery with high-sugar content escaped the chancellor’s attention?
We are still waiting to hear the exact level at which the tax will be set and what companies it will apply to. The government has said the smallest firms will be exempt, but there are no details on exactly where the axe will fall.
An Uncertain Future
And so for drinks manufacturers there is a lot of uncertainty over the potential change in customer behavior that the tax will drive and how it will alter the ongoing cost of doing business.
The impact of this uncertainty was seen the moment the news of the tax fell from George Osborne’s lips as in the minutes afterwards shares in AG Barr dropped by 4.5% while those in Britvic fell by 2.4%.
The Domino Effect
Nor is it just drinks manufacturers that will be affected. There are also the sugar producers that supply the manufacturers, and the on-and-off trade businesses that sell their drinks. These firms might not have to pay the sugar tax, but they could see a drop in the value of their businesses off the back of it.
Whether publicly listed or not, the sugar tax will reduce company profits and cashflows. For drinks manufacturers and associated businesses with debt to service this could mean reconsidering their facilities and/or covenants.
Beyond the changing company valuations, the negative public sentiment towards high-sugar products is driving a cultural change that all companies in the food and beverage sectors will have to stay ahead of if they want to stay in business. In particular, they should think about the potential effect of this changing sentiment on the value of their brand.
The drinks industry has already done a lot to recognize and react to changing public opinion, and last year the British Drinks Association announced a calorie reduction goal of 20% by 2020.
On average its members have already reduced the sugar content of their drinks by 13.6% since 2012. Many soft drinks firms have diversified their operations and either acquired businesses with low-sugar product lines or developed new products for themselves. The drive towards further diversification and different product lines will speed up in the years to come.
Opportunities for British Businesses
Companies making these low-sugar lines will be more attractive to commercial suitors in the months and years ahead, enabling them to command higher multiples for their businesses. Similarly there is a growing appetite for sweetener products as manufacturers explore how they can replace sugar with similar tasting alternatives. This sugar replacement strategy is not without risk, and the beverage market is littered with examples of changed recipes that have gone wrong and actually reduced sales.
But those that get the taste right will benefit from the swing towards low-sugar options. According to the British Drinks Association, 57% of soft drinks now sold in the UK are low and no calorie, including nearly 49% of all carbonates.
For those developing and manufacturing sweetener products, the move away from sugar will underpin future demand.
But not all consumers will want to move to low-sugar options. To counter the price increase created by the sugar tax they might move from branded drinks to less expensive private label alternatives. If they do, is there an opportunity for manufacturers to make and supply more of these private label products?
Firms need to consider how quickly they can diversify into new product lines and new geographical territories and whether they should do this organically or through merger and acquisition.
No market ever stands still for long and the evolving public opinion towards high-sugar products was already forcing change in the food and beverage sectors. The sugar tax accelerates that pace of change and puts pressure on firms to respond more rapidly.
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