UK Sugar Levy Scares Soft Drinks Manufacturers into Action But What About Consumers?

In the UK, a GBP 0.20 levy has now been imposed on products with a sugar content of five to eight grams per 100 ml, and a GBP 0.30 levy is in effect for products containing more than eight grams of sugar per 100 ml. Most ‘regular’ carbonated soft drinks (CSDs) fall into the latter category, with an average sugar content of around 11 grams per 100 ml.

According to industry representatives, the total amount of sugar in UK CSDs has now dropped by 19%, and for juice drinks, the sugar level has apparently even dropped by 26% (100% pure juices are not affected by the levy). Almost all soft drinks companies in the UK have opted to (partly) substitute sugar with non-caloric sweeteners, which fits the UK government’s goal. For instance, the number-two manufacturer Britvic brought 94% of its portfolio below the levy’s lower threshold, and for two other top-five players (AG Barr and Suntory) 98% of their portfolio is. Additionally, new brands, such as Coca-Cola’s Fuze Tea, have been launched with lower sugar content.

The manufacturers of the leading two cola brands Coca-Cola and Pepsi, on the other hand, who already had ‘regular’ and ‘diet’ varieties on the market, continue to give consumers the option to buy their classic regular drink. The high-in-sugar variety will be sold at a higher price, including the levy, which looks like it will be fully passed on to the consumer. The higher price is sometimes masked by a smaller unit size, with the price staying the same, but the bottle or can shrinking.

The uniform UK industry response is rather striking. When sugar taxes were installed elsewhere, for instance in Mexico, regular CSDs remained widely available. The price increase was mainly felt by the consumer, with some people initially walking away from sugary soft drinks as a result. Often, the change was temporary, with consumers returning to soft drinks once they became used to the new higher price. Also, the consumption of diet drinks did not increase significantly relative to regular drinks, and the overall soft drinks market continued to grow (see Figure 1).

In the UK however, the effect of the sugar levy will likely be more permanent, with manufacturers reformulating drinks to avoid the resulting price raise in order to avoid loss of market share. After the sugar tax, diet drinks are expected to increase in market share (see Figure 2), but it remains unclear whether this will be solely supply-driven, or also demand-driven. The UK consumer may be less-price sensitive than his or her Mexican counterpart, but the UK sugar tax is six times higher (whereas the GDP per capita is only four and a half times higher). Furthermore, the market share of diet soft drinks was already high in the UK prior to the introduction of the levy, signalling acceptance of the product by many consumers.

Generally speaking, sugar is a more expensive ingredient for soft drinks manufacturers compared to artificial sweeteners (such as aspartame) or natural ‘alternative’ sweeteners (such as those based on stevia). Still, manufacturers have until now refrained from replacing sugar in soft drinks with non-caloric sweeteners. This may have several reasons. First, consumers may want less sugar, but some are also increasingly wary about ‘artificial’ food ingredients, as these are perceived to be less healthy. In that respect, it will be interesting to watch whether the consumption of products without sugar and without sweeteners will grow – do consumers really see artificial sweeteners as a healthier option? Secondly, consumers are sensitive to taste changes, especially when it comes to old-time favourites. For several brands, there have been protests against the withdrawal of regular varieties – Irn-Bru has been a notable case, with its fans stockpiling the remaining sugary cans and bottles.

Finally, we note the relative speed at which reformulation happened in the UK. Even when taking into account the fact that reformulation is technically easier for drinks than for food, manufacturers were all ready. What helped is that the rules of the sugar levy in the UK were clearly set out by the government two years before the levy was to come into effect, giving manufacturers ample time to judge their strategy going forward and experiment with reformulation. The sugar levy in the UK may have given manufacturers the level playing field needed to venture into reformulation without risking loss of market share. And finally they may have judged it to be worth the effort and investment, as regulation may become even stricter in the future, and other governments may follow the UK’s lead. In the meantime, the anti-sugar lobby and the UK government seem to get what they want, but consumer choice has become more restricted, creating a huge opportunity for innovations in ‘all-natural’, non-sugary drinks.