With the unrelenting television chef Jamie Oliver as its talisman, the anti-sugar lobby was likely to score a victory sooner or later. Its persistent campaigning against all things over-sweet has been heard by chancellor George Osborne, who will impose a tax on sugary drinks from 2018. Critics - both those with and without a direct interest - question why only the soft drinks market was targeted, as too much chocolate and cake also contribute to obesity. But away from the justice argument, the question boils down to how attractive are those companies subject to the levy as investments, or whether alternative plays on the beverage industry should be sought.
Fizzed up
Looking at the share price movement of the soft drinks makers on Wednesday 16 March - otherwise known as Budget day - you could almost pinpoint the moment Mr Osborne said "sugar levy" at the despatch box as he delivered his announcement in Parliament. Vimto maker Nichols (NICL) was the hardest hit, with the stock dropping about 8 per cent on the day. Investors in rival group Britvic (BVIC) seemed less concerned judging by the 1 per cent fall. However, this may be because the chancellor name-checked its Robinsons brand as one which had actively removed added sugar from its recipes. Tonic maker Fevertree (FEVR) has remained largely unscathed even though its products would trigger the tax in their current format. Irn-Bru maker AG Barr (BAG) felt the ripples of Mr Osborne's move, too - recent results from which can also be read in this issue.
There is a way, of course, for affected companies to prevent Mr Osborne raking in the £520m he believes the tax will earn the Treasury in its first year. The answer involves reformulating products. Some companies have already been doing this. Marnie Millard, chief executive of Nichols, said in 2015 alone the company had reduced total sugar usage by 8 per cent year on year, while management at Britvic said the group had taken "bold steps to remove more than 18bn calories since 2012". However, it's just a reality that each company has products in its range which would trigger the tax (see chart).
| Company | Drink | Sugar per 100ml (g) |
| AG Barr | Irn-Bru | 10.3 |
| Rubicon | 13.1 | |
| Britvic | J20 | 6.8 |
| Tango | 4.2 | |
| Fevertree | Tonic Water | 8.0 |
| Ginger beer | 9.0 | |
| Nichols | Vimto | 6.6 |
| Sunkist | 6.0 | |
| Coca-Cola | Coca-Cola | 10.6 |
| Fanta Orange | 6.9 | |
| Source: Company data | ||
A balance will be needed. Change a drink too quickly or too drastically and it might lose loyal customers.
Taking the hit
Companies may well concede to pay tax on established flagship products. Taste, as pointed out by broker Liberum in its consumer trend tracker survey, often wins out over price (53 per cent versus 40 per cent). The attempts by Coca-Cola to launch 'New Coke' in the 1980s were widely regarded as a flop and served as a reminder that reformulation is a delicate process. It might be worth a company holding firm with a recipe of a core product if it feels confident it can pass part or all of the tax onto consumers through price hikes. What's more, while we know there will be a main rate for drinks which contain more than five grams of sugar per 100ml and a higher rate for those with more than eight grams per 100ml, we don't yet know what these rates will be. Just as Mr Oliver lobbied for the tax, the industry will no doubt do its fair share of ear-bending to make sure the levy isn't overly punitive.
On the other hand, companies may decide to spend more on creating new products or increase promotion of any existing low sugar options in their arsenal. This will be an important decision for company bosses and will be a crucial development for investors to watch out for before the implementation of the tax. Broker Numis said "there will be extra costs as brands are reformulated and new products accelerated". It also acknowledged some products would incur the levy, as well as see a fall in consumption.
Filling the gap
If the looming tax raises questions about investing in a beverage company, there are alternative ways to play the sector besides pub groups.
These include more specialist plays serving the soft drinks makers - notably producers of alternatives to sugar. PureCircle (PURE), the world's largest producer of stevia, witnessed its share price rise 7 per cent on the day of the Budget. Sales rose by more than a quarter, according to the last set of half-year results in March, and independent data quoted by the group suggest its products could continue to be in major demand. Mintel said more than 9,000 products had been launched with stevia in, of which more than 70 per cent had come to market in the past three years. Coca-Cola uses stevia in its "Life" product, as does Sprite. Besides its potential for increased business in the UK, PureCircle should also benefit from a November ruling in India allowing stevia into the food and beverage industry. Awareness of stevia is also improving in Britain judging by the growth in searches regarding the product on search engines.
Larger companies could benefit, too. Tate & Lyle (TATE) - which is no longer responsible for the brand of sugar seen in supermarkets - focuses much of its business on corn-based sweeteners such as high fructose corn syrup, which gets a fairly bad rap, too. But it's developing more advanced types of sugar alternatives as well. The most recent of these developments is allulose, a rare sugar with 90 per cent less calorie content than conventional sugar, according to the company. The product notched up its first commercial sales in the first six months of the current financial year, so it will be interesting to see how demand patterns look at the time the full-year numbers are released. Other reformulation companies, which include Kerry (KYGA) and Glanbia (GLB), could also benefit if their specialist ingredients businesses can help manufacturers replace the sugar in their drinks with something else.
IC view:
The thirst for drinks from the listed beverage manufacturers isn't going to go away completely, but it's likely money will need to be spent either developing recipes or promoting low or sugar-free versions of existing products. Those who have already developed recipes are a step ahead and the greater percentage of sales which are exported will also prove a boon.
Favourites
In terms of the beverage stocks, we're most bullish on Britvic, which has made significant steps to reduce the amount of sugar in its drinks. The fact that nearly a third of its sales are also outside the UK could also be a boost as the tax won't be levied on exports (albeit some of these sales are in France where there is an existing tax on soft drinks). We also view PureCircle more positively and believe demand for stevia will only continue to rise.
Outsiders
AG Barr is probably the most UK-focused of the soft drinks makers, leaving it most exposed to the new tax. It's Rubicon and Irn-Bru drinks would also trigger the higher rate of tax in their present form.
