Is sugar the new tobacco? December 2017

Transcription

1 Is sugar the new tobacco? December 2017

2 With policy makers aiming to nudge consumer behavior, EY is presenting a series of papers on the potential business implication Is sugar the new tobacco? How sugar taxes in ASEAN markets are impacting the P&Ls of consumer packaged goods (CPG) companies, and what options exist to protect the bottom line One small cup of Kopi O, a traditional coffee in Singapore and Malaysia, contains as much as 22.5 grams (4.5 teaspoons) of sugar. This means that just two to three cups of this popular staple drink will deplete your entire daily recommended energy intake. Sugar-sweetened beverages (SSBs) were once seen as a harmless indulgence, but are now falling from grace as ASEAN countries are struggling with rising diabetes and obesity figures. Singapore and Malaysia specifically are currently already the most obese countries in all of Asia. The Asian Development Bank estimates that 40.9% of adults in Asia are overweight compared with only 34.6% in Furthermore, it concludes that the rapid spread of excess weight is becoming an increasing burden on health systems and the region s economy. Governments are responding rapidly: in August, Singapore s prime minister obtained a pledge from seven CPG companies to reduce the sugar contents in their SSB products. This pledge is one of the friendlier attempts in the region to get its population to act healthier. The Malaysian deputy health minister stated that a SSB tax proposal has already been included in the Government s National Plan of Action for 2016 to Because of the health impact and it s addictive nature, sugar is often compared with tobacco and alcohol. Unsurprisingly, activists are urging similar means to bring down sugar intake that is, to tax them. Four countries in ASEAN have already implemented sin taxes, and the others with the exception of Myanmar are investigating whether to do so. See figure 1. 2 Is sugar the new tobacco?

3 Figure 1. Overview of SSB taxes in ASEAN Prevalence of obesity (percentage of overweight individuals above 18 years of age per country) SSB Tax Ad valorem Excise Tax type Specific (in US$ per Liter) Products applicable Comments Malaysia 33% 43% C n/a n/a n/a Aims to impose SSB tax by 2020 Brunei 33% 41% n/a 29ct Soft drinks Effective from 1 April 2017 Singapore 29% 32% C n/a n/a n/a Studying potential costs and benefits of SSB tax Thailand 23% 33% 10% 14% 15ct $1.33 Soda, fruit, vegetable, juices, powder, concentrates and syrups Ad valorem tax is levied on retail sales price Philippines 22% 28% C n/a 20 40ct All non-alcoholic, sugar-sweetened beverages Plans to introduce an SSB tax Indonesia 21% 28% C n/a n/a n/a Plans to implement an excise tax on soft drinks especially on flavored carbonated drinks Laos 18% 25% 5% 10% n/a RTD (soft drinks, soda, fruit juices and energy drinks) n/a Myanmar 18% 25% n/a n/a n/a No indication of introducing an SSB tax in the future Cambodia 16% 22% 10% n/a All beverage types Only on imported goods Vietnam 13% 18% C 10% 12% n/a Carbonated drinks Plans to impose an SSB tax and increase VAT on all kinds of beverages to 12% by = Implemented C = Considering Source : World Health Organization Is sugar the new tobacco? 3

4 What does this mean for SSB producers? Mainly, these taxes will impact an SSB producer s profit and loss (P&L) in either volumes, gross profit or both. The chief aim is to reduce the consumption of sugary drinks. In Thailand, a system of progressive tax rates based on sugar levels means that more sugar equals higher taxes. Taxed drinks include everything from carbonated drinks, green tea, coffee, energy drinks, sour milk, soy milk and juices. In the Philippines, the tax proposal assumes that for every 10% increase in price for all soft drinks, there will be a decrease in consumption of 8% 10%. With an estimate that retail prices will increase by 30% 50%, there is a serious risk to operational efficiencies as well as the bottom line. And still, companies are debating whether these taxes (and consumers growing awareness of the negative health impact of excess sugar consumption) actually influence short- or longterm buying behaviors. Nowadays each basis point of margin is carefully scrutinized by activist investors. The question arises if drinks companies can afford not to tackle this risk to profitable growth head on? So, what can SSB producers do? There are three key areas that need immediate attention to minimize business impact: pricing, trade investment and portfolio strategy. 1. Pricing (including promotional) strategies There is a trade-off to be made: CPGs can choose to either absorb the excise duties or increase their prices, passing the new taxes to the trade and ultimately increasing consumer pricing. Absorbing the costs can make sense if it delivers significantly higher volumes by taking share from competitor brands that do increase prices. However, in a market where competitor pricing is easily adjustable and market share is a key performance index, the assumption of competitors not passing on the tax hike is very unlikely. However, many producers in ASEAN markets lack robust pricing assessment tools to properly evaluate market reactions to a price increase. Two points to consider: First, price elasticities need to distinguish between direct, cannibalization and cross effects of price movements. Direct effects account for the loss of volume for a product resulting from a price increase. Cannibalization focuses on the switch of volume to other products (e.g., different pack sizes, products or even categories). Cross-brand effects measure the shift of volume to competitive products and/or substitutable segments and categories. Second, promotional activity also greatly influences shopper behavior and the bottom line. With promotions able to drive large volume movements, an acute understanding of promotional price elasticities is the first and best way to address the effects of the new sugar taxes in the short term. 2. Trade investment strategy If the tobacco industry provides any guidance, the implementation of excise duties is not the only thing coming. Tobacco has increasingly faced restrictions in how they advertise, promote or package their products and how the products can be displayed at the point of purchase. With a real threat of decreasing volumes, will your retail partners be as willing to maintain the current levels of shelf space for SSBs and against what terms and regulations? 4 Is sugar the new tobacco?

5 The trade investment strategy should focus on providing a positive shopper and retailer story, with a clear understanding of target shopper groups, consumption drivers and an alignment of trade investment options to drive the desired behaviors, volume and value outcomes. Trade spend has evolved organically in Asia and often does not go to the key priority accounts and channels. A trade investment framework needs to be established that can ensure that funds are invested in accounts and areas that drive a positive return on investment. For instance: Is your trade investment flowing to your most valuable or promising accounts? Is your trade investment linked to a joint business plan? Do the trade terms differentiate between fixed and discretionary investments? And, is your discretionary spend linked to mutually agreed volume/value targets? Are your key shopper events and promotional activities aligned? Do you track retail execution and do you know your options if the retailer doesn t execute as promised? 3. Portfolio strategy The mid-to long-term strategy will always revolve around the continuous development of their portfolio. Best-in-class companies drive 8% 10% of their annual turnover from new product development (NPD). With margin pressures coming from these new taxes, the focus on your portfolio strategy is becoming more and more important. Many companies think that they can just adjust their price and pack architecture, favoring smaller pack sizes at higher relative prices. The best-in-class companies go beyond this and are expanding beyond their core segments and are developing products with lower sugar levels as well as ones with no sugar at all. Several companies are driving significant investments in water, tea (at times sweetened with fruit juice), reduced sugar contents juices, such as coconut juice, or vegetable juices, as well as, traditional SSB, which now include stevia, as a non-caloric natural sweetener. In the UK, this strategy was successful as producers simply reformulated recipes to reduce sugar (resulting in a reduction in expected gains from the SSB tax). However, this will be more challenging to do so in ASEAN. First, ASEAN consumers pride themselves on their palette, and your food and beverage scientists will tell you that these consumers have a large sweet tooth. Combine that with a low awareness of health risks from nutrition, it will be hard to sway shoppers to move to the less sugary variety. Second, the majority of sales for most SSB producers still comes from their SSB portfolio. To change an entire portfolio in merely a few years would be an enormous feat. We ve already seen the valuation of SSB producers drop in countries where sugar taxes are implemented. Therefore, CPGs need to consider their longer-term choices and trends regarding their portfolio, which may include both SSB and non-ssb products. In the end, all three strategies are interrelated in addressing the disruptive change that these new sugar taxes bring. The CPG companies that act now will break from the pack, defend their bottom line and drive profitable growth. Is sugar the new tobacco? 5

6 Contact To find out more about our EY services, please feel free to contact: Jay Smith International Tax Services, Singapore Thomas Greysson Advisory Services, Singapore

7 Victor Yeh Advisory Services, Singapore Donald Thomson Indirect Tax Services, Singapore

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