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Products sold by Coca-Cola in Mexico. The price of a 355 ml can of Coca-Cola sold at a convenience store will only increase 4 percent, but a 3.3 liter bottle of Big Cola will jump more than 25 percent.
Wednesday, November 13, 2013
Special Reports

Mexico Sugary Drink Tax: Winners & Losers


It is unlikely that the tax will dramatically reduce soft drinks consumption overall in Mexico.

BY BETHANY GOMEZ
Euromonitor International 

The Mexican foods and drinks industry has been reeling following the passage of the new budget proposed by the Peña Nieto administration, including, among other reforms, a US$0.08/liter (Mx$1/liter) tax on "sugary" drinks and an 8 percent tax on certain types of food products (including sweet and savory snacks, biscuits, confectionery and ice cream) with more than 275 calories per 100g. 

The tax is not out of character in Mexico, where the government has become more proactive in combating the growing prevalence of obesity and diabetes.  During the 2012-2013 school year, the final phase of a regulation restricting what food items can be sold to children in schools went into effect. This law imposed restrictions on calories, sugar and fat content in meals sold to schoolchildren, as well as mandating the use of whole grains.  Government actions such as these have become more important in light of an international focus on Mexico’s obesity crisis. A 2013 United Nations report found that Mexico had overtaken the United States as the country with the highest prevalence of obesity; which has been steadily increasing by more than a percentage point per year, from 27 percent in 2007 to 33 percent in 2012. 

All that said, it is unlikely that the tax will dramatically reduce soft drinks consumption overall in Mexico, where potable water is in short supply.   Neither is it likely to deter most impulse purchases of comida chatarra (junk food).  Instead, it may cause a shift in purchasing behavior between product categories, with many consumers trading down to smaller pack sizes. 

THE DEVIL IS IN THE DETAILS

The exact language of the Mexican “sugary” drink tax proposal is thus far somewhat vague, leaving drinks companies scrambling to determine their next move.  "Sugar-sweetened" beverages will be subject to the tax, but drinks sweetened by artificial sweeteners and drinks naturally containing sugar (namely 100 percent fruit juice) will not be affected.  Also yoghurt and milk drinks will not be affected as they have nutritive value and are not considered empty calories. 

However it is not clear if there is a limit to the amount of sugar that is allowed per liter to avoid the tax or if drinks including any sugar will be subject to the tax.  This is an important distinction for beverage companies who may try to avoid the tax by launching stevia sweetened products or reformulating their existing products to include stevia.  Stevia is a natural sweetener so it avoids much of the stigma attached to artificial sweeteners.  However, in many products, stevia is used in addition to a reduced amount of sugar in order to avoid the unpleasant aftertaste which is a common complaint of stevia.  Furthermore, it is not clear exactly how the law will apply to powder and liquid concentrates – one of Mexico’s most important beverage categories due to the affordable nature of the product. If the per liter tax is found to apply to the reconstituted volumes of these beverages, these products will lose much of their inherent price advantage, particularly among price-sensitive low income consumers.

The law does specify what categories of packaged foods products will be affected, and given that the tax is limited to non-staple products may help avoid issues that have come up with other countries.  In Denmark, a "fat tax" that was put into effect taxing all products with more than 2.3 percent fat, the tax was highly unpopular with both consumers and companies alike, as it not only included junk food but also staples such as butter and cheese, and was repealed after just one year.  While many companies and consumers may not love the new tax, given the sky high rates of obesity in Mexico, such a targeted tax is less likely to receive the same levels of backlash or be repealed.   

NEAR-TERM WINNERS AND LOSERS

Sales of larger pack sizes will likely be more heavily affected -  the price of a 355 ml can of Coca-Cola sold at a convenience store will only increase from US$0.62 to US$0.65 (Mx$8 to Mx$8.35), an increase of 4 percent, probably not a change significant enough to discourage many impulse purchases.  However, a 3.3 liter bottle of Big Cola will jump from US$1 to US$1.26 (Mx$12.9 to Mx$16.2), an increase of more than 25 percent, which may be significant enough to encourage consumers to rethink their purchases.   This will affect standard carbonates the most, as more than 60 percent of carbonates are sold in packs larger than one liter, whereas pack sizes greater than one liter are rare among other beverage categories.    

Full calorie concentrates are sure to take a huge hit. While the language of the tax is not entirely clear on this matter, it implies that concentrates will be taxed based on the liters of beverage their packs make.  For example, a 25g pack of Tang is sold through a discounter in Mexico for US$0.19 (Mx$2.45) prior to the tax.  This 25g pack makes 2 liters of ready-to-drink beverage, and therefore would be subject to a tax of up to US$0.16 (Mx$2), increasing the sales price by more than 80 percent to reach US$0.34 (Mx$4.45). 

According to Euromonitor International, growth of RTD tea has been very promising in recent years, with a volume CAGR of 26 percent between 2008 and 2013, as many consumers view this as being a healthier alternative to carbonates.  However, standard RTD tea has similar sugar content to standard carbonates and therefore, instead of the 20-25 percent volume growth that was expected prior to the tax, growth could slow to single digits for full calorie RTD formats. 

As with drinks, most affected packaged food products will be those in large pack sizes where the difference in pricing is most noticeable - an 8 percent increase on a single pack pastry only amounts to approximately one peso, not necessarily enough to deter many impulse purchases.  Therefore the most heavily affected products will be the larger presentations of sweet and savory snacks, biscuits and pastries, as consumers trade down to smaller pack sizes. For 2014 we can expect to see deceleration or even single digit volume declines for 2014 for affected categories, with growth rates stabilizing thereafter as people become used to the new pricing levels and settle into modified consumption habits.

In the short term, we can expect companies to increase their promotion of low calorie products, particularly targeted towards lower income consumers, who will be the most affected by the tax and where these products have the lowest consumption currently. Despite advertising campaigns, this population has been slow to adopt lower calorie carbonates, and companies worry that if the tax is made law, this core consumer group may reduce their volume consumption entirely without substituting carbonates for any other products.    Growth of products excluded from the drinks tax, (zero calorie carbonates, concentrates, no-sugar added bottled water, light RTD tea and 100 percent juice ) is expected to increase dramatically in 2014, with growth then decelerating through the forecast period as consumers become more accustomed to the new taxes and settle into their new habits.  In foods we may see a substitution effect, particularly as parents reconsider what they are putting into their child's lunch, as some switch away from pastries, biscuits or sweet and savory snacks to healthier options, such as fruit snacks, nuts, granola bars and yoghurts.

LOOKING FURTHER

In the medium term, companies will want to rethink their product portfolios, promoting or expanding their lines of flavored waters (so long as flavored waters no longer have added sugar so they can be exempt from the tax), offering more carbonates and RTD tea flavors that use non-sugar sweeteners (particularly Splenda or Stevia sweetened drinks as these have a healthier perception than aspartame), and expanding their selections of 100 percent juices.  Mexican snacks companies have already started along this path following the change in school regulations in recent years.  Companies have reworked many of their products to reduce sugar, fat and calorie contents for their "school portfolio" - with many companies, including PepsiCo and Grupo Bimbo, already investing in research in development of health and wellness products. 

It is unlikely that the tax will single-handedly turn the tide on obesity; many suspect that it is not high enough to really change consumption patterns at all, and that the biggest impact will be to drive inflation.  However, this is part of a larger effort by the government to educate the Mexican consumer on what foods are healthy and which contribute to obesity.   Changing behaviors takes time but these types of initiatives (sugary drinks and junk food tax, school snack regulations, encouraging exercise) incentivize healthy behavior and should, in time, see rates of obesity start to decline.  Until that happens however, Mexicans should expect to see more of these interventions, as the costs of obesity (and the resulting health problems) to the state are too high to be overlooked. 

 Bethany Gomez is a research analyst at Euromonitor International.  This article was written for Latinvex.

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