NOMPU SIZIBA: The Canegrowers Association in South Africa has called on the government to urgently place a moratorium on the sugar tax. This after finance minister Tito Mboweni announced in his budget speech that the sugar tax would rise by a further 5.2%. The Canegrowers Association says as things stand right now some 10 000 jobs in the industry could be at stake, with some 1 000 jobs already lost since the tax inception last year.
But the sugar-tax issue is not just a South African phenomenon. Globally governments have chosen to levy taxes on the commodity, citing health benefits.
To tell us more about the issue I’m joined on the line by Andy Howard, Head of Sustainable Research, ESG at Schroders global asset managers. Andy, it’s not just South Africa that’s been whacked by so-called sugar taxes. This has become a global phenomenon. In what other jurisdictions has this been happening?
ANDY HOWARD: Well, we’ve seen what’s happened across a whole range of companies. There are around 40 countries in the world that now have some form of sugar regulation in place, primarily for beverages and soft drinks. But there has been a big increase. So if you look at that, compared to, say, three years ago, back in 2015, it has roughly doubled over a short space of time. So you have a number of states in the US, you have parts of Europe, you have the UK, you have Mexico, a number of major economies that have focused on the challenges of excessive sugar use within different societies which are turning to sugar taxes and sugar regulation as a way of dealing with that challenge.
We talk quite a lot about climate change and carbon pricing. Today more of the world’s soft-drink markets have a sugar tax in those markets, and then the world’s car emissions have a price attached to them. So while it has perhaps drawn more attention that it might have done on the radar screen, this has become a become a fairly sizeable issue in a relatively short space of time across large parts of the world.
NOMPU SIZIBA: It is very sizeable indeed. Have these taxes had the desired effect in terms of government levying them – supposedly for the benefit of people’s health?
ANDY HOWARD: Well, I think there is an awful lot further to go. We don’t see it as being the end of the road in terms of volumes. We’ve so far seen a focus on soft drinks in the beverage market, with volumes declining over the past few years. But it’s been a relatively slow pace of decline. And whether that’s down to sugar taxes or whether that’s down to changing consumer awareness of some of those health impacts is slightly unclear.
There is a broader shift towards disentangling which part of that is down to taxes, which part of it is down to regulation, which part is down to better marketing or clarity in terms of how producers can indicate what their products contain. Which part of it is down to consumer education is virtually impossible to gauge.
But there is a shift that we are seeing underway, and it’s having a meaningful effect on the industry. While the pace is slow, we see it as being the beginning of a road that may continue to run and become more intense going forward.
NOMPU SIZIBA: Andy, you are warning that corporates that deal in sugary products run the real risk of litigation. Is sugar becoming the new tobacco? And what are the chances of litigation being a success?
ANDY HOWARD: It can be. There are a lot of similarities and a lot of differences. Some of the differences are that it is harder in general to attribute whether this can be, in the case of tobacco or in cancer, the cause – particularly in respect of a single manufacturer. People tend to use the same brand of cigarettes, whereas [foods] can contain products from a wide range of companies.
It is also trickier in terms of disentangling what element of it is down to nutrition, and what elements are down to other parts of people’s lifestyles. The medical aspect of this is less clear-cut at this point, it would seem, than it is in the case of tobacco. This is important to note. There are some other similarities.
If we think of this in terms of public health, the scale of the problem more broadly and the health-impact issues are all of a very similar order of magnitude to the challenges of tobacco.
There are similarities in terms of the responsibility for that, in terms of companies being required to adapt. The threat they may face if they fail to do so is clearly there. But I am encouraged that we have seen parts of the industry beginning to respond already, taking a more proactive stance than we saw decades ago in the tobacco sector. There are similarities and there are differences, but I think the question is a real one.
As we look forward, those companies that are not thinking whether it’s litigation, or whether it’s just the broader direction of how this industry is changing, or how to build a business that will meet the requirements of what it will take to be a successful beverage company five or 10 years from now, and don’t start planning for that day, will find life more difficult.
NOMPU SIZIBA: As people become more health-conscious, or get put off by higher and higher prices of foods with a high sugar content, presumably this will have an impact on corporates invested in products which have sugar as their base. We’ve seen the likes of Coca-Cola and even McDonald’s trying to shift to healthier food. But what have other corporates been doing to try to deal with declining demand?
ANDY HOWARD: We’ve really got a few potential options. You can formulate the product to have less sugar in it. A better example here in some ways is salt. Over the past few years simple products like baked beans on shelves have progressively, just by small amounts year after year, had relatively lower levels of salt in them – in a way in which consumers typically haven’t noticed the difference. And so they’ve been able to do so over a gradual period of time.
Now in sugar that’s slightly trickier. We haven’t seen more companies trying to reformulate products simply to have a lower sugar content. The problem is one of time and whether you have time to do that in a gradual way as required by your chef.
We’ve seen more investment in innovation from the industry. So, for example Nestlé, where it provides much with similar flavour benefits, without having as much sugar content and with a warning of the sugar within them, trying to innovate how they continue to do what people are expecting to buy from them, and the way they supply them.
And finally you’ve seen companies responding and becoming successful over the past few years. Also some independent companies have, through the internet and through digital marketing and distribution channels, become ready to expand in the 21st century, and have become a bigger part of this industry. We’ve seen more in that space with some of the leading companies looking to buy consumer brands to put in their portfolio.
NOMPU SIZIBA: Food labelling has become very important from a regulation perspective, especially in jurisdictions like Europe. How are corporates doing in this arena, so that conscious consumers can be absolutely sure about food content and make informed decisions about what they are buying? And in instances of non-compliance are some jurisdictions very strict about this?
ANDY HOWARD: It has become a much bigger focus. By and large we’ve seen most companies have responded fairly well in terms of the letter of compliance with regulation. There are parts of the world outside Europe where perhaps transparency is slightly worse, or the requirements are slightly less clear. But in Europe it’s been a relatively straightforward process.
So simply being transparent about what a product contains may not necessarily be information that will influence consumers. For example, being transparent about the precise warnings of different kinds of products like sugar ingredients and so on has had partial effects. Where we’ve seen bigger changes are when people translate that into what it practically means – such things like in the UK traffic-light systems which are red, green or amber, which are still largely voluntary. But trying to translate regulatory disclosures into information that average consumers can digest – pardon the pun – and actually apply in their decision making, I don’t think that has played out yet. We have further to go in that direction.
But, by and large, the major players are relatively on board where this is the way the industry is changing, and we should go with it, rather than fight.
NOMPU SIZIBA: Given everything that we’ve discussed, how then should investors deal with being exposed to companies that are “sugar-oriented”? Should they be reactionary and jump ship, or perhaps see if the companies they have invested in are making strides to adapt to the changing tax and regulatory landscape, as you’ve cited in earlier examples?
ANDY HOWARD : I don’t think there’s a black and white answer to a topic like this because, as you say, as the industry goes through periods of disruption and change, what we are talking about, by and large, are a number of companies which have established mainstream brands, and a very strong consumer presence in a time when perhaps consumers can turn to a taste that’s slightly different. As for the changes, the question is clearly leveraging strengths that they have established, and continue to pull them down into all sorts of products the world will require going forward. I think they are looking for that kind of adaptability, those companies that are changing. This is not an industry that’s is particularly sure to come out tomorrow, or hold a whole different set of products to change everything overnight.
This is an industry which has historically benefited from gradual change rather than dramatic things. Companies could have started the process, but think about what their products and their consumers will want, what the regulations will require, and what will be required in the future world, and so adapt early. I do think this is a case of trying to understand the specifics rather than a black and white conclusion. The sugar industry is not going anywhere and the basic requirements of the products will still be there. The question is who the companies are.
NOMPU SIZIBA: Look, it does seem to me that companies that perhaps produce beverages and the like can be adaptable. But, as with coal, if that is your primary business, if sugar is your primary business, what happens? Just last week South Africa’s largest sugar producer, Tongaat Hulett, warned the market that it is likely to see earnings fall by about 250%. It cited the effects of the sugar tax being part of it. Now obviously it is expecting that it’s going to be very tough for it to acclimatise to this whole sugar-tax thing. Yes, there are demand issues which are in part influenced by the sugar tax. So what’s the future for people who actually grow sugar and produce sugar?
ANDY HOWARD: It’s very hard to say. If the aim of the process is to try to reduce consumption of sugar from the beginning of the process, the sugar producers and their own suppliers will be affected by that. But I do think, again, that if companies and the industry start to counter that relatively early, changing the way they think about the amount of capital involved, and they can start to think about that in time for a world in which demand becomes more constrained or indeed falls, then it becomes easier to ensure the industry may not have to shrink. I think a lot of it comes down to how one plans for demand for one’s products. If you can plan for that early and you can adapt to that, not just respond to it, but plan for it, this doesn’t have to as painful as one might think it is. If one doesn’t do that, and continues to hope that the world carries on as it always used to, that can be very painful indeed.
NOMPU SIZIBA: Our thanks to Andy Howard from Schroders.