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Soft Drinks

Getting tough on soft drinks: Three ways the Sugar Tax could impact suppliers and shoppers

On April 6th 2018 a number of the nation’s favourite soft drinks will be impacted by the Soft Drinks Industry Levy, or the ‘Sugar Tax’. This levy will affect any added sugar drinks with a sugar content greater than 5g per litre or 8g per litre and could result in customers paying 18p or 24p more per litre respectively.

The Government are keen to point out that the tax is on manufacturers and not on the customer. So what are the options for customers and how might this impact their behaviour?

Option 1: Customers adapt to a slightly different flavour profile following product reformulation

Reformulation is the key aim of the legislation, with manufacturers producing lower sugar drinks and supporting customers by reducing their sugar consumption. By coming in under the 5g per litre limit the tax can be avoided, but it does bring with it the risk of changing the taste. Historically the mere suggestion of a change in recipe can have customers up in arms, even though the manufacturer is trying to do the right thing from a health point of view.

Take the reformulation of Lucozade in 2017. Despite Lucozade Ribena Suntory’s support of the initiative to reduce sugar across its portfolio, the new Lucozade taste was not welcomed by customers who took straight to social media to share their thoughts. In addition, diabetes sufferers claimed that the drink is now not suitable for their dietary needs. All in all, this led to a 9%* decline in sales for the brand.

Option 2: The product recipe stays the same, with customers potentially ending up paying more for less product – the ultimate test of customer loyalty

We have seen this before across other categories, with ‘shrinkflation’ evident across chocolates such as Quality Street tins, Terry’s Chocolate Orange and Toblerone. We have also seen this in juice, biscuits, fish fingers and cider, with some putting these changes down to the impact of Brexit, rather than a government enforced levy.

But could this be a case study to challenge those who say there is no such thing as product loyalty? Some suppliers have chosen to change the pack size to come in under the price per litre allowance and minimise the impact on price but, crucially, the recipe remains unchanged. Customers will have to pay for it though. For example, a 1.75L bottle of cola previously costing £1.79 may change to 1.5L and get a cost increase to £1.99. It will be interesting to see if the product ‘loyalists’ continue to purchase at the same rate after the tax is implemented, indicating that it has always been about the taste and quality rather than price.

Option 3: Pass on the price increase to customers, while the product recipe and pack size stay the same.

Charging customers more can change what they do, evidenced recently with the 5p plastic bag charge. The government has quoted that plastic bag usage has reduced by 83% from the biggest retailers since 2014, from roughly 140 to 25 bags per customer per year. Looking at past campaigns and initiatives to educate the population on adopting more balanced diets, you could make some assumption that these haven’t really worked. So perhaps applying a price increase is the only way to tackle the problem?

Will the Sugar Tax really change behaviour or just cause confusion? It can’t be expected that all customers fully understand why the levy is being introduced, and therefore making an assessment on how customers might behave post 6th April is very hard to predict. If a customer goes into the soft drinks aisle and sees a 2L Original and 2L Sugar Free at different prices, they may not understand the root cause, and therefore interpret it as the retailers making a choice for them.

Insights show that customers who buy the original variants do so because of taste, including the more health conscious, who purchase as a treat. For some customers, taste is not something that they want to change and this would suggest that they are willing to pay more to get this. We all know that what customers say they’ll do and what they end up doing can be very different, so we wait with baited breath, and an eye on Twitter, to see the impact.

To find out more on understanding the Sugar Tax and what it means for your brands, contact i2c at enquiries@i-2-c.co.uk

*Nectar transactional data, April – October year on year % change

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