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Point of View

Sugar tax: will it affect more than your wallet and waistline?

By Shiraaz Abdullah, Global Equity Analyst

 

On the 6 April 2018, the Soft Drinks Industry Levy (otherwise known as the Sugar Tax), will become law. This signifies a big win for health campaigners, and hopefully our NHS. Indeed, a report by Public Health England states that reducing our sugar intake could save 80,000 lives and £15 billion in a generation[1], and it seems that sugary drinks are a great place to start.

What does this mean for consumers?

Apart from the obvious health benefits that come from drinking less sugar, consumers can expect to feel an impact on their wallet. Drinks producers will be taxed at 18p per litre on drinks with sugar content above 5g per 100ml, and 24p per litre on drinks with sugar content above 8g per 100ml.  In theory that means we’ll be paying 6p more for a can of Fanta and 8p more for a can of Coke or Pepsi.
 
To what degree this new tax will result in consumers moving towards healthier (rather than lower-sugar) alternatives remains to be seen.

How have drinks producers reacted?

As the sugar tax was first mentioned in the 2016 budget speech, industry players have had time to figure out how best to comply. AG Barr, the manufacturer of Irn Bru, Rubicon and Tizer, made the bold move of completely replacing their traditional drinks with a lower-sugar equivalent. This was met with a consumer back-lash, but the company remains confident their customers will barely notice the difference.
 
In contrast, Coca-Cola refuses to change its traditional Coke recipe, and is passing the cost onto the consumer in the form of higher prices, and smaller bottles. At the same time, they’re launching three brand-new drinks into the UK market – an ice tea, ready-to-drink cold coffee, and a dairy-alternative smoothie – banking on consumers moving towards healthier alternatives, rather than reduced-sugar versions of the old guard.

The looming sugar tax in the UK has led some investors to question the prospects of sugar-filled drinks producers like Coca-Cola and Pepsi. The most important thing for UK investors is that both Pepsico and Coke only generate a small amount of their profits in the UK, so this new tax won’t necessarily have a big impact on global earnings, albeit we acknowledge the rising global trend to tax sugar-filled drinks.

The Sanlam view

At Sanlam we use a robust evidence-based framework for all our investment decisions. We’re owners of Pepsico shares as we believe the company is well-placed to grow their snack offering, as well as their healthier beverage portfolio, which will result in growing dividends and buybacks for shareholders. Their snack portfolio is showing good growth in North America as well as in emerging economies, and we believe this division will be able to offset the slowing beverage portfolio in North America.
 
Coca-Cola on the other hand, whilst a brilliant beverage company, does not have other levers to pull and trades on a valuation that is a little too sweet for our liking.


[1]www.gov.uk/government/uploads/system/uploads/attachment_data/file/470179/Sugar_reduction_The_evidence_for_action.pdf
 

This article is for information purposes and should not be treated as advice to buy or sell any security or to adopt any trading strategy. Past performance is not a reliable indicator of future results. Shares in Pepsi are currently held in Sanlam’s core models for UK clients and in Sanlam’s global income model.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.