The Sugar Tax Debate in Emerging Asia Threatens Growth Opportunities in Carbonates

The impact of high sugar soft drinks consumption on public health remains a global hot button issue as the beverages industry looks ahead to 2016. Excise taxation on sugary beverages may have the effect of diminishing volume growth opportunity in key categories like carbonated soft drinks (CSDs), juice and concentrates. Several important emerging Asian markets are currently considering legislative solutions and/or tighter regulation in response to growing concern about the role of sugary beverages in obesity, diabetes and other public health crises.

Southeast and Central Asia is about a quarter of Asia Pacific’s RTD beverage volume (excluding Japan and China). Strong economic growth and low per capita retail consumption make this a very promising region for beverage brands seeking volume growth opportunities. To date, the presence of strong, competitively priced local and regional companies have been the main challenge for major manufacturers in the region. But as sugar tax debates rage in developed markets, several emerging Asian markets for CSDs have also given serious consideration to public health taxation. Unprecedented price shocks in these volume growth markets could undermine the opportunity and strategic plans for global drinks players interested in expansion.

New tax proposals in the Philippines, Indonesia and India

In the last two months, legislators in the Philippines have proposed a tax of approximately $0.22/litre to be levied on carbonates, energy drinks and other beverages containing added sugar (by contrast, Mexico’s similar IEPS tax, implemented in 2014 was about $0.06/litre). Furthermore, the proposal in the Philippines bears similarities to the French attempt at taxation on sugary drinks (first implemented in January 2012) by including artificially-sweetened drinks, and not simply taxing the added sugar varieties. Despite a strong local sugar lobby and brand owner opposition, a bill cleared a House of Representatives committee this November.

Indonesia could be the next market to explore new excise taxes on beverages. The country previously had a luxury tax on some drinks, but the levy was lifted in 2004 after pressure from the local retail beverages industry and sugar companies. Any renewed tax on sugary drinks could be a serious impediment to brand leader Coca-Cola, whose substantial new investment in local bottler Amatil (US$500 million in October 2014) was predicated on major future joint investment in their retail beverage operation in Indonesia. Indonesia remains a work in progress for major brand owners in the region seeking to rehabilitate their businesses after macro-economic challenges impacted soft drinks, with high inflation and a weak currency. There are other important issues in play, as well. The rise of local players and economy-positioned brands from abroad (Big Cola from Aje Group) has posed strong competition for Coca-Cola in Indonesia. A substantial price hike could be a body blow for short-term manufacturer ambitions in the country.

More troubling still for the beverages industry, a substantial so-called ‘Sin Tax’ is also under discussion by the Indian government, who are seeking to standardize state and regional based taxation regimes under a new national tax system. According to local reports, the tax could rise to the level of 40% on sweetened carbonated beverages, in line with taxes levied on tobacco and alcoholic drinks. Coca-Cola’s local subsidiary in India has responded to the speculation from an Indian health committee by emphasizing the threat this policy change may pose to the company’s strategic growth plan and existing production capacity in India.

In almost all cases, the discussion of drinks or sugar tax is accompanied by local bottlers and food/beverage associations lobbying hard against policy changes. These lobbying efforts can continue to exert pressure after taxation is implemented, as evidence by the recent unsuccessful move in Mexico to roll back some of the provisions included in the IEPS tax. In Indonesia, especially, Coca-Cola Amatil (Coca-Cola’s anchor bottler in the region) would certainly push hard against any such tax provision.

Mexico as the model?

In the event that any of these taxation packages are passed and implemented, we would certainly see the same attempts to control the negative impact on volume through discounting, smaller packages and cost-cutting that we saw implemented by big brand owners in Mexico this year. Big players may be better suited to make these adjustments. One short to mid-term consequence of soda tax legislation is the disproportionate impact felt by smaller, economy positioned brands that lack the scale and power to temporarily absorb price increases. In addition, economy brands such as Ajegroup sometimes market larger package sizes (2 or 3 litre bottles) that are hardest hit by tax regimes applied per litre (in contrast to smaller, single-serve products favoured by larger brand owners). According to Euromonitor’s provisional data for the next edition of research, Ajegroup carbonates volumes declined by 5% in Mexico in 2014 (the first full year of the IEPS tax) while Coca-Cola and PepsiCo each declined by just 3%.

Historic and expected per capita CSD growth: Could this be under threat?

HistoriccandexpectedpercapitaCSDgrowth

Source: Euromonitor International

How substantial could the impact of a tax hike be in each of these important volume growth markets? In truth, a price shock could conceivably have a big impact on carbonates sales in emerging soft drinks markets where income growth has a strong relationship to growing retail volumes of carbonates over the past decade. However, it is a difficult to draw direct correlations with price changes, since (in constant terms) the price of carbonated soft drinks has been either flat or declining in the markets discussed. Historically, manufacturers have remained price conscious to appeal to a wide consumer demographic. An unprecedented double-digit price shock, as proposed in some markets, could close the door of opportunity for many low-income consumers who are dependent on small pack sizes and low prices to afford products in the category.

Off-trade carbonates unit price growth: No precedent for a tax price shock

Off-tradecarbonatesunitpricegrowth

Source: Euromonitor International

As volume sales in developed markets continue to decline or stagnate, emerging markets become an even more important part of the global portfolio for multinational beverage brands. This is why slowing growth in Indonesia, the Philippines or India is a major concern for the strategy of major manufacturers.

Is there any solution? One part of the equation is the growing importance of non-sparkling options in the portfolio for Coca-Cola Co, PepsiCo and their competitors, in both developed and emerging markets.  These include bottled waters, ‘hydration’ beverages, still isotonic drinks and juice options. High sugar carbonates and products with high amounts of added sugar may not prove to be the most appropriate categories for expansion as manufacturers seek to solidify and expand their positions in emerging Asia. While Coca-Cola, PepsiCo and other major global players have sought to diversify their product portfolios away from sugary carbonated drinks in developed markets for some time, the changing legislative agenda in emerging Asia underlines the importance of applying this mixed portfolio strategy to emerging markets as well.