The sugar tax conundrum currently playing out in Asian markets

The main rationale for governments to impose higher taxes on sugary beverages is to address growing concern about the role of these drinks in skyrocketing rates of obesity and diabetes, as well as other non-communicable diseases.

Aside from Japan and China, southeast and central Asia account for around a quarter of ready-to-drink beverage volumes in Asia-Pacific, with hitherto strong economic growth by a small retail market making it a promising for beverage brands, says Howard Telford, the global research agency’s senior beverages analyst. 

However, Telford says the strength and competitive pricing of local and regional players has presented a significant challenge for global manufacturers to enter the market.

Developed beverage markets are now not the only places where debate over sugar tax is raging, with some Asian countries giving 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​,” says Telford, with the Philippines, Indonesia and India each debating increasing taxes in beverages by various degrees.

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.

Legislators in the Philippines began work just two months ago on levying a tax of roughly US$0.22 per litre on carbonates, energy drinks and other beverages containing added sugar.

This sum is significantly higher than the Mexican IEPS tax of US$0.06 per litre that has often been cited as a model for other emerging markets to follow since it was imposed in 2014.

The proposal is similar, though, to the French attempt at taxation from January 2012 in that it includes artificially sweetened drinks while not simply taxing the added sugar varieties.

Though brand owners and a strong Filipino sugar lobby have opposed the Bill, it has cleared a House of Representatives committee this November

Despite a strong local sugar lobby and brand owner opposition, a bill cleared a House of Representatives committee this November.

Indonesia, meanwhile, could be the next market to explore new beverage taxes, though it won’t be the first time Jakarta has attempted to do so, says Euromonitor. 

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, at US$500m in October 2014, was predicated on major future joint investment in their retail beverage operation in Indonesia​,” explains Telford, adding that local players and economy brands from overseas, such as Big Cola from Aje Group, have posed strong competition for the multinational bottler.

“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​. A substantial price hike could be a body blow for short-term manufacturer ambitions in the country​.”

In India, a so-called “sin tax” proposed by the committee investigating the implementation of a new GST regime that is slated to begin this year could prove more troubling still for the beverage industry.

One of the flagship policies of Narendra Modi’s administration is to replace the wide range of regional taxes with a standardised system that is expected to be pitched at around 9%. However, goods such as tobacco, alcoholic drinks, luxury cars and sweetened drinks could incur a level of 40%. 

Lobbying against this recommendation, Coca-Cola’s Indian operation has been emphasising the threat the policy might pose to the company’s strategic growth plan and production capacity in the country.

“In almost all cases, the discussion of drinks or sugar tax is accompanied by local brands and food/beverage associations lobbying hard against policy changes​,” says Telford. 

“These lobbying efforts can continue to exert pressure after taxation is implemented, as evidenced 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​.”

Euromonitor cautions that an attempt to introduce any of these tax measures in Asia would see attempts to control a reduction in growth by way of discounting, introducing smaller packages and cutting costs, as was the case of big brand owners in Mexico last year. 

While big players may be better suited to make these adjustments, smaller brands will feel a disproportionate impact through the short and mid terms. This is because the latter category lacks the scale and power to temporarily absorb price increases. 

Moreover, economy brands sometimes market larger package sizes of 2- or 3-litre bottles, says Telford, which will be hardest hit by tax regimes applied by quantity compared 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%.

“A price shock could conceivably have a sizeable 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​,” says Telford. 

“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​.”

To mitigate any fall in demand, brands are recognising the growing importance of non-sparkling options from Coca-Cola Co, PepsiCo and their competitors, in both developed and​ emerging markets, including bottled waters, hydration beverages, still isotonic drinks and juice options.  

Yet Euromonitor warns that high-sugar carbonates and products with large quantities 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​,” said Telford.