Industry Trend Analysis - Sugar Taxes In The Americas: Brazil And Canada Most Likely To Follow Mexico's Lead - FEB 2018
BMI View: We are seeing growing momentum for sugar taxes in the Americas, with a number of countries considering follow ing Mexico ' s lead which introduced a tax on sugary drinks in 2014. We profile the impact of M exico's sugar tax in the years since , and assess the latest policy developments and overall likelihood of a sugar tax in other major markets in the region. We highlight Brazil and Canada as the most likely to announce a sugar tax in 2018 and beyond , while Chile is another market to watch, as the country explores the possibility of taxing confectionery and other foods with high-sugar content .
The table above summarises existing sugar tax initiatives in the Americas and our outlook for regulation from 2018 onwards. Based on this, the selected countries were grouped into three colour-coded categories:
Green - Sugar tax proposals rejected/yet to emerge and therefore unlikely to be implemented over coming years.
Yellow - Sugar taxes already in place. Further regulations are a possibility but face obstacles (eg opposition from industry lobbyists, lack of political mandate)
Red - Most at risk of sugar tax implementation (eg large fiscal deficit, high prevalence of health risks associated with sugar intake, tax proposals put forward)
Me xico - Additional Sugar Tax A Possibility But Not Core View
In 2014, Mexico became one of the first countries in the world to implement a sugar tax as part of efforts to curb the rising prevalence of obesity and diabetes among its population. The legislation imposed a MXN1 per litre tax on sugary drinks, which equates to approximately 10% of the average retail price. In the same year, the government also increased taxes by 8% on processed foods with a determined caloric value of 275Kcal or more per 100 grams, including confectionery and cereal-based products.
Initial Drop Off In Consumption...
Key findings based on company performance, trade data and academic research reveal that the overall impact of the sugar tax in Mexico has been mixed. While there was a drop off in consumption of carbonated soft drinks during the first two years of the tax, the market has undergone a recovery from 2016 onwards.
According to ANPRAC, Mexico's national beverage association, volume sales of soft drinks recorded a 1.9% y-o-y fall in 2014, followed by flat growth in 2015. Research carried out by health professionals in Mexico and the US indicated a more pronounced impact, with household purchases of sugary drinks falling by an average of 7.6% y-o-y over the first two years of implementation (2014 and 2015). The study, which was compiled by Mexico's National Institute of Public Health and the University of North Carolina, found that the volume reduction was greatest among low-income households.
Food & drink companies operating in Mexico are responding to the sugar tax by cutting sugar content in their products and investing in new healthier alternatives. By focusing attention on still beverages (eg water, fruit juices), isotonic drinks and low-calorie alternatives, Mexico's leading beverage producers have sought to diversify their offerings to satisfy the demands of increasingly health-conscious consumers, and mitigate the impact of the sugar tax on their financial performance.
... But Impact Waning
Mexico's two largest bottlers of carbonated drinks, Coca-Cola FEMSA and Arca Continental, endured a challenging sales environment in 2014 as a result of the tax ( see chart below). However, this was relatively short-lived, with both companies achieving double-digit revenue growth in their Mexican operations in FY15 and FY16. This was supported by rising volumes, not just transaction values, suggesting that consumer demand has largely overcome the initial shock of higher retail prices as a result of the tax. While this can partly be attributed to portfolio diversification, with companies rolling out new and healthier product lines, carbonates still make up around three-quarters of total volume sales in Mexico for beverage producers. The fact that carbonate volumes grew by 3.6% y-o-y in Mexico for FEMSA in FY16 suggests that the effect of the sugar tax on consumption is waning.
Government revenues from the sugar tax are also rising, lending further support to the idea that consumer demand for carbonates is rebounding. The government budgeted to receive MXN12.5bn in 2014 but collected MXN18.3bn, and this rose further to MXN21.4bn in 2015.
|Tax Impact On Leading Soft Drink Producers Short-Lived|
|Mexico - Revenues, MXNbn (LHS) & Volume Change, % y-o-y (RHS)|
|Source: Company results, BMI|
One of the major impediments to reducing the consumption of sugary drinks is the fact that in rural areas of the country, where disposable incomes are lower, bottles of Coca-Cola can still be found at lower prices than a bottle of water of the same size. Thus, the tax does not have a major impact in the areas most commonly associated with obesity because the consumers in those areas cannot necessarily afford to pay higher prices for bottled water. These areas also lack the same level of education and health awareness regarding the drawbacks of soft drinks.
Mexican senator Armando Rios Piter is among a group of health advocates and anti-sugar lobbyists in the country calling for the tax to be doubled. Doubling the tax would therefore amount to MXN2 per litre or around 20% of the average purchase price. Supporters of higher taxation argue that increased fiscal revenues from the tax would enable the country to subsidise the provision of drinkable water, leading to lower prices of bottled water, enabling low-income consumers to shift away from carbonates.
|Worst Of Sugar Tax Over, Stronger Growth Ahead|
|Mexico - Carbonated Drinks, Sales, MXN Per Capita|
|e/f = BMI estimate/forecast. Source: National Statistics, BMI|
Our core view is that further fiscal measures targeting sugar consumption will not be implemented in Mexico over the short-to-medium term. The 2018 Presidential election and concerns over the future of NAFTA means the Mexican government has other priorities, and bringing in a regressive tax is unlikely to be popular with the large number of low-income consumers.
We believe that the carbonated soft drinks sector in Mexico will remain resilient, with our forecasts based on the existing taxation environment suggesting a general upward trend in sales growth over the coming years. While per capita sales of carbonates fell from MXN476 (USD37) to MXN398 (USD30) between 2013 and 2014 as a result of the tax, we expect spending to continue to recover, averaging 3.5% growth between 2018 and 2022, reaching MXN570 by the end of our five-year forecast period. This will be driven by rising disposable incomes and greater penetration of soft drinks within Mexico, including lower sugar and premium soft drink products that target an expanding middle-class consumer base.
Chile - Sugar Tax On Foods A Possibility Following Nutritional Labelling Strategy
We expect Chile to step up tax regulations designed to discourage the consumption of sugary food and drink from 2018 onwards. The Ministry of Health is understood to be exploring ways to build on the nutritional labelling laws it introduced in June 2016. Specifically, they are considering proposals to incentivise healthy eating and place pressure on companies to improve the quality and nutritional value of the ingredients they use. This follows the 5% increase in VAT on drinks containing more than 6.25 grams of sugar per 100ml, which are now subject to 18% VAT (or IVA as it is referred to in the Hispanic world). At the same time, taxation on non-sugar sweetened beverages was reduced by 2%.
One measure put forward by Senator Guido Girardi is to apply a 20% tax on all foods that have been designated with black labels warning consumers of their high sugar/calorific content. This would affect over 3,000 products which exceed 275 calories, 400 milligrams of sodium, 10 grams of sugar or 4 grams of saturated fats per 100 grams. Meanwhile, products deemed to have greater nutritional value would be subsidised to cover their higher production costs and make them more affordable for lower-income groups.
|High-Sugar Foods At Risk Of Taxation In Chile|
|Sugar & Calorie Content Among Major Confectionary Brands|
We caution, however, that any form of taxation on sugary foods in Chile faces significant obstacles before being implemented, including scrutiny from industry lobbyists and a divided legislature following the election of Sebastian Pinera as president (who will take office in March 2018). While sugar taxes did not play a prominent role in the general election campaign, and therefore it is difficult to ascertain policy direction in this area, we believe business-friendly Pinera is less likely to press ahead with a sugar tax than centre-left presidential candidate Alejandro Guillier, who is more ideologically aligned with the outgoing socialist administration.
Nevertheless, Chile suffers from a similar rate of obesity as Mexico (28% of adults classified as obese) and there is believed to be broad consensus among ministers and health officials regarding the need to research and review the possibilities of a sugar tax, alongside other measures to reduce sugar consumption.
Brazil - Sugar Tax Discussions Gaining Momentum
In May 2017, Brazil became the first country to make formal commitments to the UN as part of the organisation's Decade of Action On Nutrition. The country's three commitments to be achieved by 2019 include:
Stopping growth in the adult obesity rate which currently stands at 22.1%
Reducing the consumption of sugar-sweetened beverages among adults by at least 30%
Increasing the proportion of adults who regularly eat fruit and vegetables by at least 17.8%
In order to fulfil these commitments, fiscal policies are among a number of specific measures under consideration by the Brazilian government. Along with improved nutritional education in schools, restrictions on promoting sugary products to children and microcredit loans to family farmers, Brazil's Ministry of Health is finalising a proposal to introduce a tax on sugary drinks in line with Mexico.
We believe the prospect of targeted taxation on sugary products is made more likely in Brazil given the country's fiscal situation. Our Country Risk team forecasts Brazil's budget deficit to come in at 8.0% of GDP in 2017, or BRL522bn, which is among the widest in the region ( see chart below). As we have seen in Mexico, a sugar tax is a relatively straightforward yet effective way of boosting government fiscal revenues, particularly given that it can be justified on a health basis.
|Large Fiscal Deficit Makes Sugar Tax More Likely|
|Budget Deficit (% of GDP)|
|f = BMI forecast. Source: National sources, BMI|
ABIR, Brazil's Trade Association for soft drinks and chocolates, representing companies such as PepsiCo, Mondelez and Coca-Cola in the country, has responded to the potential roll out of a sugar tax by voluntarily proposing to reduce sugar content in its offerings from 16 grams to 10.6 grams per 100 grams by 2021. If the agreement is formalised, at least half of the products commercialised in the country will have to change their composition to suit the new requirements.
Colombia - Sugar Tax Off The Cards For Now
In 2016, proposals were put forward for a 20% tax on sugary drinks in Colombia as part of wider tax reform designed to boost fiscal revenues amid the low oil price environment (oil is a key export for Colombia).The measure, which was projected to raise USD340mn annually and would help fund the country's healthcare system, was supported by the Colombian president and 70% of the public according to opinion polls.
However, the tax was met with fierce opposition from beverage producers and industry lobbyists. Responding to a complaint by the nation's leading soda company Postobon, a national television advertisement that linked sugary drinks to obesity and diabetes was ordered off air on the basis of being misleading. Advocates from civil society group, Educar Consumidores, the most visible proponent of a proposed tax on sugary drinks, were also prohibited from publicly discussing the health risks of sugar, under penalty of a USD250,000 fine. At the end of 2016, the proposals for a sugar tax were defeated in congress, and as a result, we do not expect debates over a sugar tax to resurface in Colombia over the short-to-medium term.
Canada - Gradual Roll-Out Of Sugar Taxes At Federal Level Likely
Obesity is a growing health concern in Canada, with 29.4% of adults (18 years and older) classified as obese in 2016 according to the WHO. This is among the highest rates globally, above Mexico, and second only to the US in the Americas region. While the government is taking action in the form of a childhood obesity strategy, with plans for new laws on food labelling and marketing to children, sugar taxes are not currently included as part of this, at least at a national scale.
|Growing Obesity Concerns In Canada|
|Global - Obesity Rate (% of adults, 18 yrs+)|
|Source: WHO, BMI|
While health organisations such as Diabetes Canada and the Canadian Heart and Stroke foundation are strongly in favour of a tax, the government has concerns over potential job losses and the regressive nature of introducing a tax, as it tends to hit low-income families hardest. Our core view is that sugar tax debates in Canada will surface during budget consultation periods, but that the national government will continue to prioritise other initiatives to tackle obesity.
Rather, we believe any move towards sugar tax legislation in Canada is likely to emerge gradually at a federal level, similar to what we have seen in a number of US states and cities. In February 2017, the government of Canada's Northwest Territories announced plans to introduce a tax on sugary soft drinks during the 2018/2019 budget year. Meanwhile, Montreal City Council passed a motion calling for the federal government to impose an excise tax on sugar-sweetened beverages, in addition to other measures such as removing points of sale of sugary food products from municipal buildings such as sports centres and arenas.