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Sugar tax: Reformulation games begin

Mar 19 2017 06:00
Dewald van Rensburg

Johannesburg - South Africa’s soft drink producers are set to introduce sugar-reducing reformulations of their products as National Treasury forges ahead with its new, lower sugar tax.

Small producers of so-called B Brands are, however, still upset after the lower tax was announced in the Budget Review last month. The new version exempts the first 4 grams of sugar per 100ml and taxes the rest at 2.1c per gram.

For a 2-litre bottle of Coca-Cola, the original tax would have been about R4.86 or 35% of the current retail price. The new tax is about R2.77 or 20%.

The small producers still fear that the tax will affect them disproportionately and possibly lead to even more concentration in the sector where Coca-Cola is estimated to control more than 80% of the market.

“The new level does not improve things at all,” said Glenn Sheppard, director of Little Green Beverages (LGB). “Four grams is nothing; the average sugar content is 11.5g,” he told City Press.

LGB produces the Refreshhh! brand of soft drinks and Sheppard has been one of the most outspoken critics of the sugar tax.

The structure of the industry means that small companies like LGB will almost inevitably face a proportionally higher sugar-tax burden. This is because small companies tend to sell at a lower price with more emphasis on large bottles.

The tax is based on sugar content so it imposes a higher tax rate on a cheaper cooldrink that has the same sugar content as a more expensive one.

This makes adaptation through reformulation even more urgent for the B Brands.

Brett Naidoo, CEO of Softbev, said that new formulations of its Coo-ee and Jive brands will start appearing in shops in April as old stock makes its way out of the system.

The company has managed to reduce the sugar content of various flavours by between 30% and 50%, he told City Press.

“We use a range of generally available sweeteners. Different sweeteners work better with different flavours. You want to maintain the taste as closely as possible. Some actually taste better with less sugar.”

None of Softbev’s reformulated cooldrinks has managed to fall below the new 4g per 100ml threshold and become sugar-tax free.

“We are not there, but we will look at that and see if it is possible. This is the first step,” said Naidoo.

He added that the reductions mean that the more-or-less standard 11g per 100ml is getting reduced to between 7g and 8g, with variations for different products.

LGB’s Sheppard cites the same range of sugar content for reformulations his company will introduce.

LGB’s reformulated products will probably reach shelves next year, in line with a pre-existing voluntary agreement the industry had reached with the department of health. This is for a minimum 15% reduction in sugar content by 2018.

“We are close but not quite there yet,” said Sheppard.

DISPROPORTIONATE BURDEN

The public arguments around what impact the sugar tax will have tended to assume that producers and retailers would pass on the tax to consumers.

The design Treasury chose for its sugar tax, however, creates a massive incentive to reformulate and to change the package sizes companies emphasise.

Smaller units sell at a higher price per litre, making the tax a smaller proportional burden.

The tax rate on a 330ml can of Coca-Cola will be about 5% compared to 20% for a 2-litre bottle.

The small producers are at a disadvantage when it comes to these kinds of adaptations, they told City Press.

They do not have the factories to pump out smaller packages at will and they don’t have the global research and development capabilities that a company like Coca-Cola commands for reformulation.

Coca-Cola introduced its Coca-Cola Life variant in South Africa last year, which replaces some of the sugar with stevia extract. This cuts the tax rate on a can to 2% and on a 2-litre bottle to 8% .

Coca-Cola’s internal “B Brand” Sparletta has also seemingly been introducing sugar-and-sweetener mixes in some regions, but the company would not answer specific questions.

“People don’t always understand the structure of the industry. There is one very large player and then a lot of small players. We are the largest of the small players,” said Softbev’s Naidoo.

His company would be expanding its offering of smaller unit volumes, he said.

There is also a strictly financial problem facing the small players.

Cooldrink stocks can take several months to move from the manufacturer to the consumer.

When the sugar tax starts at the factory gate, the bottler will have to cover that expense and wait a long time for revenues to catch up, argued Sheppard.

“You need hundreds of millions of rands of cash for that adjustment.”

“It is going to hurt everyone, but it will be devastating for the smaller producers.”

Sheppard still believes an alternative to the tax is possible – and preferable.

If reformulation is going to be the major mechanism through which the sugar tax achieves its aims, the government should just legislate reformulation, he told City Press.

“Just legislate the existing goal for 15% less sugar by 2018 and penalise companies that do not reach it,” he said.

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