Soft drinks brands take up the sugar tax gauntlet with focus on innovation and premiumisation

With the sugar tax on soft drinks coming into force on 6 April, the industry’s big players are looking to innovation and premiumisation to kickstart growth in a ‘complacent’ market.

From consumers stockpiling Irn Bru to criticisms of Ribena for “sneakily” ruining its taste by reducing sugar, soft drink brands have been on a bit of a roller coaster ever since former chancellor George Osborne unveiled the ‘sugar tax’ in 2016.

Officially called the Soft Drinks Industry Levy (SDIL), it comes into effect tomorrow (6 April) and will force soft drinks companies to pay a charge for added sugar. Under the two-band system, drinks that contain 5g of sugar or more per 100ml will be charged 18p per litre, whole those with 8g of sugar or more per 100ml will be charged 24p. This means a 330ml can of Coca Cola or Pepsi will cost 8p more, and Sprite and Fanta 6p more.

When the levy was first announced, soft drink brands hit out at being the scapegoat for obesity. However, there have been unintended upsides as the industry has innovated with new products, updated recipes and different approaches to marketing.

Sparking innovation and going premium

cawston press

Helen Pomphrey, head of marketing at Cawston Press, believes the sugar levy has truly benefited the sector. “There hasn’t been a lot of real, genuine innovation in soft drinks. Products like coffee, beer and crisps all have premium products, but soft drinks never really had that,” she explains.

Cawston Press has reformulated the recipe in many of its drinks in a move Pomphrey says has made its products more like craft soft drinks and actually improved the taste. The company chose to get rid of added sugar and up the amount of fruit juice, rather than adding artificial sweeteners to try to reduce the sugar content.

Pomphrey adds: “We were already very proud of our drinks but I think it has encouraged us to go back and look and make sure we are offering consumers the very best products.”

The levy has also caused some of the biggest brands in the sector to look to innovation and new products. Coca-Cola is releasing three new soft drinks this year: ice tea brand Fuzetea, ready-to-drink cold coffee Honest Coffee, and dairy-alternative smoothies brand AdeZ. Coca-Cola has also looked to improved classics, with 2017 seeing the company unveil a new Fanta — rolling out new packaging and slashing the sugar content in a bid to combat the levy.

A marketing push and investment in its zero-sugar options has led to Diet Coke and Coca-Cola Zero Sugar combined outselling Coke Classic in British supermarkets.

“When we launched new Coca-Cola Zero Sugar in 2016, we also launched our biggest ever marketing campaign for a zero-sugar variant. It was well received by our fans and in its first year, Coca-Cola Zero Sugar became the fastest-growing cola on the market,” says Joel Morris, director of corporate affairs at Coca-Cola.

READ MORE: Coke Zero gets £10m revamp as Coca-Cola aligns products behind ‘one brand’ strategy

Britvic has also seen a wave of innovations including Purdey’s, a natural energy drink with juice; and Robinsons Refresh’d and Fruit Cordials.

Gavin Partington, director general of the British Soft Drinks Association, agrees that the levy has led to soft drinks companies looking again at their recipes. “It has sped up the shift towards low- and no-calorie products within the sector and you can also see that most of the businesses that are coming into the sector, like small startups, are developing low- and no-calorie products.”

However, he remains sceptical about the tax’s overall impact, highlighting that in a survey of its members in 2014-15 brands had already seen a 50% shift towards advertising low- and no-sugar products.

“The soft drinks levy persuaded some companies to move further, faster, but across the breadth of the sector, most companies had already substantially started to shift their portfolio towards low- and no-calorie products long before the soft drinks industry levy was announced,” adds Partington.

The impact on soft drink sales

Both Britvic and Coca-Cola agree. Coca-Cola’s Morris says: “We’ve actually reformulated 34 drinks since 2005, reducing the sugar in many of our most popular drinks like Sprite, Fanta, Dr Pepper, Lilt and Oasis.”

For many soft drink brands, their overall portfolio will be unaffected by the tax. The majority of Britvic’s portfolio 94% of Britvic’s owned brands (72% of its total portfolio) is either under the sugar threshold or exempt from the levy.

Coca-Cola is in a similar position and by the time the tax comes into effect 95% of its brands in Great Britain will not be subject to it, including Diet Coke and Coca-Cola Zero Sugar.

However, Coca-Cola Classic will be taxed as the company chose not to change the recipe – as did rival Pepsi. Instead, it is reducing pack sizes, which will in effect keep the price the same but mean consumers get less Coke for their money. Morris says the solution “to keep sharing packs of Coca-Cola Classic as affordable as possible is to make them smaller – for example, the 1.75 litre bottle will be replaced by a 1.5 litre bottle as a direct result of the new tax”.

People love the taste of Coca-Cola Classic and have told us not to change it, and we believe that if that’s the drink they prefer they should be able to choose.

Joel Morris, Coca-Cola.

Ribena proves that consumers will notice a difference in taste if the recipe change misses the mark, however that doesn’t mean brands should ignore the tax.

Morris explains why Coke didn’t change its flagship product: “People love the taste of Coca-Cola Classic and have told us not to change it, and we believe that if that’s the drink they prefer they should be able to choose one.”

It is a decision Partington agrees with: “There will always be a place in the market for traditional full-sugar products which consumers have a taste for.”

However, according to figures from Mintel, a price hike will put consumers off. Nearly half (40%) of consumers say they would cut back on the amount they drink in response to a price rise, while 16% say they would stop drinking them altogether.

Significantly, half of 16- to 24-year-olds, the biggest consumers of soft drinks, would cut back on the amount of standard carbonated soft drinks they drink if the price were to rise under the sugar tax. A third would not change their drinking habits at all.

Pomphrey thinks that rather than shunning soft drinks consumers will “reappraise their choices”. She explains: “People have been buying habitually for a very long time and once the sugar levy comes into place people will make more informed decisions, and that’s not to say they’ll completely reject drinks with sugar but what we will see now is a variety of drinks.”

What is next for the war on sugar?

The sugar tax was implemented to tackle obesity, but its impact is up for debate. Professor Graham MacGregor, the chair of Action on Sugar, is optimistic about its effect. “We’re the first country in the world to have a tax that has this ability to let drinks reformulate to escape the tax so I think we’re going to see this adopted across the whole world.”

Yet Morris disagrees: “There is plenty of evidence that sugar content has been coming down sharply for a decade but obesity rates have continued to rise.”

MacGregor argues the tax needs to be tougher in order to ensure all drinks are reformulated. He says: “We want the amount of the levy to go up so Coca Cola Classic – the biggest seller in the UK – has to change its original formula, and the way to do that is to increase the tax.

“If you look at the tobacco tax, it is 700% of the cost price. The soft drink tax is only 24p a litre – that’s peanuts. Imagine you put it up to 700%; it would mean a bottle of coke would cost between £10 and £12.”

However, as brands point out, soft drinks aren’t the only cause for the UK’s increasing waistlines and Action for Sugar has already set its sights on other sectors. MacGregor says: “We’re calling on [prime minister] Theresa May to extend this tax to calorie-dense products.”