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Taxation on carbonates remains one of the global hot button political issues in packaged consumer goods. Public health advocacy groups maintain that sharp increases in the retail price of sugary, high-calorie beverages can reduce consumption and yield positive social health benefits. Meanwhile, the soft drinks industry often contends that there is no compelling evidence of a strong relationship between increasing soft drinks taxes and positive health outcomes, pointing instead to the increasing lower calorie options available to consumers in many markets and potentially regressive nature of so-called ‘sin taxes’.
There are compelling arguments for and against carbonates taxation, and these vary widely according to the specific health challenges and consumption trends of individual markets. Euromonitor International has recently explored the subject specific to Australia. The topic has also been on the political agenda in neighbouring New Zealand, where an Auckland University study this year called for a 20% tax on carbonates. This follows several high-profile news stories linking excessive sugar and caffeine consumption with severe illnesses.
According to Euromonitor International’s Industry Demand Model, price has historically (over a 15-year period) had a weak relationship with volume sales of carbonates in both Australia and New Zealand. Both markets have seen volume sales decline in the category. Since 2007, off-trade volume sales of carbonates have shrunk consistently. This is despite flat or declining unit prices (considered in constant prices) in the category as a whole.
By simply examining annual volume and value sales figures in a single market, it is difficult to predict what the ultimate outcome of a price shock might be. While the carbonates category demonstrates relatively low price elasticity on an annual basis, there is little precedent for the sort of hefty 20% price increase (assuming the majority of this tax is reflected in the final unit price per litre) proposed by leading health advocacy campaigners in New Zealand. Despite weak observable price elasticity for carbonates, the very stable pricing environment for the category in New Zealand cannot adequately inform our analysis or conclusions. Comparative international examples of carbonates taxation may provide better guidance.
In 2012, France imposed a tax of €3-6 per litre on sugary soft drinks, including carbonates. This followed a similar campaign for sugar and calorie reduction (as well as an urgent need from the government to find alternative sources of tax revenue). After years of flat or declining prices, the unit price of carbonates spiked by 3% in constant terms in 2012 after the tax was imposed, and increased by 2% in each of the following two years. Volume sales of carbonates in France, which had grown by 3% in both 2010 and 2011, suddenly dipped by 3% in 2012. Volume sales declined again at a similar rate in both 2013 and 2014.
It is fair to suggest that the tax had a demonstrable impact on consumer behaviour. It remains to be seen if the French example is instructive for New Zealand’s policy makers. It is important to note that the French carbonates market was in a state of consistent growth over the review period prior to the introduction of the sugar tax, having increased annually over the past decade from a smaller base. The price increase in 2012 (moderated by reformulation and discounting) arrested and reversed this growth. Yet in New Zealand, carbonates volume sales have declined at similar rates over the past decade, despite flat or declining prices in constant terms. A tipping point may already have occurred. As in Australia, consumers have seemingly exited the category for reasons other than price. A substantial price increase as a result of carbonates taxation may accelerate this trend, or may not be a necessary market driver to calorie/sugar reduction.
On the other hand, per capita consumption of carbonates in New Zealand is presently much higher than in France, complicating the comparison. In 2011, before the introduction of the tax, carbonates consumption in France stood at 36 litres per capita, with just eight litres per capita emerging from reduced sugar carbonates. In New Zealand in 2014, carbonates consumption was almost 73 litres per capita, with 26 litres emerging from the reduced sugar category. The high consumption of carbonates in New Zealand – more comparable with North American markets than France – may suggest a more developed habit of consumption and a more urgent need for a policy prescription. This weakens the parallel.
The more recent (2014) sugar tax imposed in Mexico may be a closer example in terms of the per capita consumption environment, but vast disparities in terms of consumer income and Mexico’s far less developed low-calorie carbonates category present their own challenges in offering a valid comparison. The relatively high per capita consumption of carbonates in New Zealand is impressive when considered against the comparatively high unit price of carbonates in the country, where high delivery costs and a concentrated retail environment drive up prices.
More granular data would certainly be needed to reach any acceptable conclusions on the efficacy of tax increases to curb carbonates consumption. But for its part, the industry may point to the surge in low-calorie carbonates as evidence that policy changes may not be needed to affect healthier consumer behaviours. Over 2009-2014, reduced sugar carbonates have seen retail volume sales grow by 20% in New Zealand. Low-calorie cola carbonates have seen retail volume sales rise by 14%, over the same period that ‘regular’ cola carbonates declined by 5%. While the public debates the issue of carbonates taxation, the industry would be wise to consider further investments in high-growth, low-calorie brands like Coca-Cola Zero, Sprite Zero and Pepsi Max, which have taken share from full-sugar alternatives.
One final issue weighing on the public’s perception of the carbonates industry is the link between carbonates consumption and young people. While Euromonitor International’s Industry Demand Model does not suggest a strong relationship between price and volume consumption in most carbonates categories, there is a strong demographic relationship in New Zealand and other markets between carbonates volumes and growth in the population of teenagers and young adolescents. This is troubling in the context of high rates of childhood obesity, which is the third-highest among OECD member states. Coca-Cola Amatil New Zealand, the leading carbonates bottler in the market, has a policy of not marketing to under 12-year-olds and pledged in 2006 to eliminate the supply of full sugar beverages and energy drinks to New Zealand schools. As in Europe, however, brand owners will continue to face pressure from the public – and increasingly their retail partners – to commit to low- and zero-sugar alternatives for families and children, with more responsible marketing strategies.