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Going against the sugar grain: Will the sugar tax spark a new wave of soft drink innovation?

By Ben Stark, senior strategist

April 6, 2016 | 8 min read

George Osborne’s surprise announcement of a sugar tax on soft drinks was one of the more notable inclusions in an all-round controversial budget. Designed to bring in around £520m of revenue and hopefully trim some fat from the UK’s obesity rates, the sugar tax presents a serious challenge to the big boys of the soft drinks industry like Coca-Cola, PepsiCo and Britvic.

But while they strongly consider a legal challenge to the shock tax, the fizzy drink giants will also be scrambling to mobilise their innovation teams to answer the threat. What are their options?

One obvious response is to try and tweak their formulas to limbo under Osborne’s new tax thresholds. The sugar tax will kick in for products with over 5g of sugar in every 100ml of liquid. With a second tier at 8g/100ml, there is a major incentive for Coca-Cola, for example, to reduce the sugar level in regular Coke (currently 10g/100ml) by 20 per cent and avoid a higher rate that would make a two litre bottle 50p more expensive than it is today.

The most obvious way to do this is to follow the route taken by their other brand Sprite, which reduced sugar and calories by around 30 per cent in March 2013 when it replaced a third of the sugar with stevia (or to be precise, steviol glycosides). Sprite now sits squarely the first tier with a sugar level of 6.6g per 100ml, meaning from 2018 a 330ml can would cost 6p more than today.

The only problem? Stevia tastes similar to sugar, but not exactly the same, and consumers fundamentally don’t seem to like it all that much. Lemon-lime Sprite was in decline well before the stevia decision, with sales falling by 6.6 per cent in the year before the ingredients change… but in the year after, sales crashed another 9.4 per cent. Stevia is clearly not the answer – at least not on its own.

So what else might we see the soft drinks industry turn to? There are an awful lot of sugar substitutes available, from the ubiquitous aspartame used in most diet drinks and xylitol used in chewing gum, to more natural alternatives like agave nectar, honey and coconut palm sugar. It’s likely that if Coca-Cola and chums do decide that their sales will decline thanks to Osborne's sugar tax, they will look to modifying the recipe using a combination of sugar, stevia and aspartame rather than expensive natural sweeteners. Even then it’s still a big call: Coca-Cola remains chastened by its disastrous experience playing with the world’s favourite recipe in the 1980s with New Coke, which led to an embarrassing u-turn after mass hysteria. Messing with a classic is a risky business indeed.

More exciting for the grocery industry is which competitors might look to take advantage and innovate to undercut fizzy drinks with exciting new products. Pure fruit juices seem to be one of the main winners, even though their sugar content is often just as high as fizzy drinks (Tropicana for example has as much sugar as Coke, albeit occurring naturally in the fruit rather than added). Tea, coffee and water brands will be happy, as well as manufacturers of powdered or concentrated drinks like Nesquik and Robinsons. Starbucks has slipped through the net, as its Frappuccinos (a whopping 76.2 grammes of sugar, that’s 18 teaspoons) are excluded as ‘milk-based drinks’. And what price a revival for childhood favourite Sodastream, which can now offer an even more compelling price advantage over the branded behemoths?

The other major winners are smaller manufacturers who will be excluded from the sugar tax. Will this lead to a rise in hipster colas and lemonades… a health inspired craft beer-esque revolution in sodas? The undisputed home of the soda is of course the USA, where specialty stores have been growing in recent years. The Galco Soda Pop Stop in Los Angeles has an incredible selection of over 500 bottles and cans of soda. It stocks such weird and wonderful products as Red Ribbon root beer made with sassafras bark, and Manhattan Special coffee soda. Will we see a new generation of soft drinks startups making artisan ginger beers and cherryades for a Generation Z that is increasingly eschewing beer and spirits? (1 in 5 Gen Z 16-24 year olds now don’t drink alcohol).

And what of the social effects of the sugar tax: will they achieve a significant reduction in obesity and tooth decay, or will consumers just buy the same fizzy drinks at slightly higher prices? Mexico introduced such a tax in 2014 and results were stunning: a 12 per cent drop in sales, and overwhelmingly it is the poorest consumers (who can’t afford healthcare) who have modified their consumption. Mexico however went in hard with a 10 per cent tax, which is higher than Osborne felt able to get away with.

The increasingly high-profile Behavioural Insights Team advises the government on ways to improve government policy and services through the uses of behavioural economics and psychological ‘nudges’. The team theorises that a tax alone isn’t enough: consumers ‘under-react to taxes that are not salient’. In other words, to increase the numbers of people converting to lower sugar options, it would help if the price differential is highlighted clearly in retail store signage so consumers can’t ignore it.

Taxation is only one weapon in the armoury of a nation collectively trying to reduce our obesity levels. We need to attack the problem from different sides: taxation needs to sit alongside education (both in schools and through government campaigns), industry regulation, changing the way our media presents consumption of high sugar foods, and encouraging self-regulation within the industry (as well as on-going innovation into low sugar or sugar alternative products).

What we are perhaps seeing here is the start of government intervention in sugar just as it has intervened for many years in alcohol and of course tobacco. The lesson from the tobacco industry is that change takes decades rather than years – but a journey of a thousand miles starts with a single step. The government has finally put the contribution of soft drinks manufacturers to obesity firmly at the centre of the debate, and it’s not beyond the realms of possibility that we will see similar strategies unfolding in the coming years to those eventually imposed on Big Tobacco.

In 20 years' time, will we have a ban on fizzy drink advertising near schools, bottles of Fanta with mandatory health warnings, and a ban on global corporations like McDonald's and Coca-Cola sponsoring sporting events like the Olympics? Will we have sugar-addicts banding together against an increasingly intrusive nanny state and developing an enhanced sense of rebellious community in the smoking areas outside pubs and clubs? And decades down the line, will we see a new generation of innovative products that give a passable sensation of sugar without any of the downsides?

It took over 40 years from the first warnings of smoking causing lung cancer to the launch of the first vaping products like the Rutoo and Gamucci e-cigarettes. Sugar substitute sweeteners have existed for a long time, but will someone come up with a revolutionary new one that changes the game entirely?

Overall, fizzy drinks have been in slight decline anyway in recent years, with sales in 2014 down 3.3 per cent from a high in 2011. Consumers have been moving to mid-calorie, low-calorie and zero-calorie options with less than half of all carbonated drinks sales now going to full sugar variants like Coca-Cola and Fanta. George’s sugar tax may just accelerate this trend… but we hope it sparks a new wave of soft drinks innovation as well. Partly because we just love the sound of Galco’s Cucumber soda. Anyone for a drink?

Ben Stark is senior strategist at Seymourpowell

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