Sickly sweet ‘fizz’ for stakeholders

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In November, 2017, the Government of Sri Lanka imposed a tax of Rs. 0.50 per gram of sugar contained in beverages – specifically carbonated beverages – under the belief that the ‘sugar tax’ will assist towards furthering its public health objectives. The main intent was will assist towards furthering its public health objectives., and therefore, with a view to catalyse a reduction in obesity, diabetes and the growing concern over the burgeoning public health spend on non-communicable diseases (NCD).

Whilst the long-term ‘public health’ outcome of this regulatory change remains unclear, the commercial impact on the carbonated beverage industry was woefully clear as industry leaders presented their financials for the year end of 2017/18.

Ceylon Cold Stores (CCS) – a 152 year old Sri Lankan corporate and market leader in the carbonated beverage industry – reeled from the unanticipated imposition of the excise duty as costs escalated significantly, necessitating price revision for all of their SKUs in a bid to mitigate the tax burden. The imposition of the sugar tax resulted in the prices of the Carbonated Soft Drinks portfolio increasing by an average of 33%, with some of the larger volume SKUs rising by as much as Rs. 100.

Overall profitability of the group witnessed a double-digit decline across all profitability parameters from operating profit (-24%) YoY, profit before tax (-26%) YoY to profit after tax (-28%) YoY – a surprising trend from positive growth across the same parameters in the previous reporting period. Additionally, volumes of the beverage sector declined by 16%, stemming from the duality of sluggish consumer discretionary spend on food and upward price revisions of the carbonated drinks range.

Interestingly, the impact of the sugar-tax on multinational players was less debilitating. Benefitting from their global multiple brand strategy, multinational players gained ground-snapping-up market share from CCS by almost instantly pushing their marketing spend towards promoting low calorie-sugar free SKUs, placing less emphasis on the mainstream product portfolio.

However, if the rationale for the sugar-tax lies on the premise of health concerns for the public, it must be noted that the zero-calorific beverages or low calorific beverages almost always depend on artificial sweeteners. The question then arises, are the health impacts of artificial sweeteners more beneficial than that of sugar? Critically, are they safe for consumption by children, adolescents and youth? Research suggests that children and youth are the largest consumer groups for carbonated drinks, demonstrating at least a twice-weekly consumption pattern (Ratnayake and Ekanayake, 2012). In that respect, if the sugar-tax encourages the consumption of artificially sweetened alternatives, is the public health interest agenda infallible? Possibly not.

The sugar-tax concept is not new. It has been enacted, dabbled with, and, in some cases, revoked in many other countries. Many of the advocates for the sugar-tax point their finger to Mexico as a largely successful initiative. However, no direct correlation has been made between the tax and decreased sugar consumption, subsequent to the imposition of the tax. In developed nations where carbonated soft drink taxes have been introduced, like France, Denmark and some of states in United States, they have had a negligible impact on calorie consumption and obesity.

Trend analysis shows that Sri Lankan consumers are moving towards (at least psychologically desiring) naturally derived products. Follow through in terms of actual consumer behaviour at present may not yet be overtly visible, but in the medium term, healthy product variables are needed as critical components of the product mix. Encouragingly, corporates such as CCS have identified the trend, and are responsive to the changing consumer psyche. With a range of naturally sweetened beverages on their production pipeline, and some on the shelf, consumers can look forward to zero calorific beverages that have less adverse health effects than the currently available, artificially sweetened variety. Produced using naturally (plant) derived sweetener stevia, this zero calorie/zero sugar variety by CCS will definitely yield positive outcomes for the public health agenda.

This is where we to need to revisit the manner in which the sugar tax came into effect. Governments enact regulation in most countries consequent to many months, if not years, of stakeholder engagement. Regulation stems from research, analysis of consumer behaviour, and through a process of education and interaction with the industry concerned. Unfortunately, such systematic determination of policy remains an elusive dream in Sri Lanka. Industry players literally wake up to new regulation, giving them little or no time to digest or streamline their operations.

In the case of CCS, the sudden imposition of the sugar-tax struck them in mid-air, when, in fact, they were on a journey towards developing zero calorie/zero sugar range, reformulating existing formulas and developing varieties, in response to shifting consumer preferences. As a result of these efforts, CCS had already decreased its carbonated soft drink calorie count by nearly 45% during the year 2017/18, prioritising the offer of healthier options to consumers with R&D efforts focused towards using more natural and local ingredients in product formulation.

If an inclusive stakeholder engagement process had been in place, prior to the enactment of the regulation, possibly, the Government would have realised that there is, indeed, better initiatives to address the growing obesity and diabetes health issues across the country. By far, the traffic light labelling system introduced by the Ministry of Health to categorise the level of sugar for all beverages is viable and commendable; in that it empowers the consumer to make an informed decision on their purchase.

Empower, is a key word here. Consumers in Sri Lanka are largely an educated mass. With high literacy rates and growing exposure to media, they are well-honed to make informed decisions for their own wellbeing. In fact, the Government should have worked hand in hand with industry to propagate changes in consumer behaviour through joint-consumer awareness efforts, instead of using the rod to punish both the consumer and the producer.

The cascading effects of the tax on CCS’s value chain is evident in that the decline in volume triggers a multiplier effect on 80 distributors and over 90,000 retail outlets island-wide. Contraction of distributor and retailer performance, and resulting constriction of economic activity and disposable incomes of thousands of families that are dependent on the CCS business. Farmer communities from Kandy, Kurunegala, Kaluthara, Puttlam, Gampaha and villages of the Central Province such as Aludeniya, Galabawa, Poojapitiya, Uduwa and Hataraliyadda grow and supply ginger and spices for CCS. With declining volumes, CCS is hard pressed to continue to support these farmer communities, their families and associated workers.

This is a reality check that may well mean further hardships for local farmers penalised by already exacerbated ill-conducive weather and tapering economic conditions. The spiralling effect of the sugar-tax, therefore, is multifold, and possibly not as simplistic as it appears on paper.

Going forward, Government policy needs to be far-sighted and less impulsive. A voluntary code of conduct for manufacturers, highlighting ethical marketing practice, transparency in labelling information and a commitment to achieve healthy alternatives, would be a viable solution and a sustainable one. Obesity, after all, is more complex, and its cause cannot be attributed to carbonated drinks alone. We need a nation-wide agenda that examines our lifestyles and food preferences and cheers on the virtues of a balanced diet – not a slap on the wrist for bad food choices.