Summer Blues – Planned Malaysian Sugar Tax Could Impact Next Summer's Soft-Drink Volumes

Malaysia has become the latest country to propose a tax on sugar-sweetened beverages. While the impact on the overall soft-drink sector is unlikely to be substantial, the carbonates category could bear the brunt of the measures. Especially the timing of the tax could become an issue, while changes in the packaging mix could help companies to manage the impact on their margins.

Malaysia hops on the sugar-tax bandwagon

With a stated objective of wanting to reduce the increase in cases of diabetes, the Malaysian government recently proposed a new excise duty on sugar-sweetened beverages (SSBs). The announcement formed part of federal budget discussions earlier this week, proposing an excise duty of MYR 0.40/litre on:

● non-alcoholic beverages – such as carbonated drinks with added sugar or other sweetening matter, or flavoured exceeding 5 grams/100 millilitres and

● fruit juices and vegetable juices with sugar exceeding 12 grams/100 millilitres

If approved, the proposal will become effective as of 1 April 2019, giving soft-drink manufacturers less than six months to prepare and adopt any changes in packaging or formulation in order to mitigate the impact.

The new excise duty will add ~15% to the retail price of carbonated beverages, based on the 2017 average price. Assuming there is no change in packaging or formulation, and companies pass the total excise duty on to consumers, the average retail price of SSBs could increase between 4% and 16% – with carbonated drinks seeing the most impact and energy drinks the least.

Figure 1: Baseline estimated increase in retail price by SSB category

Summer_Blues_Fig1

Source: Rabobank 2018

Is this the 'Philippines moment' for Malaysia's soft-drink industry?

Earlier this year, the Philippines introduced sugar taxes, and the impact on domestic SSB volumes has been quite severe. In this regard, we do, however, need to keep a few points in mind. First, unlike the Philippines, Malaysia doesn’t distinguish between high- and low-calorie sugar, or between sugar and HFCS. Therefore, companies have no incentive to shift from using HFCS to sugar or high-intensity sugar. Second, per capita income in Malaysia is three times that of the Philippines – and therefore, a similar increase in price will have less of an impact in Malaysia. Third, the Malaysian packaged food & beverage industry’s sugar consumption is different from that in the Philippines. For example, in the Philippines, the carbonated drinks segment is the main sugar user within packaged F&B, while dairy (largely condensed milk) is the top category in Malaysia. Dairy has not been included in the new excise duty regime.

Ahead of the main consuming season, timing is the key issue

It’s worth noting that Malaysia's SSB volume in 2017 was below 2016 levels, though the first half of 2018 has shown largely improved volume performance. Consequent to the new sugar tax, we could see some demand shift at the mass-market scale, to local unpackaged beverage alternatives such as bandung, iced teh tarik, etc. Therefore, assuming no further shocks are to come, there is unlikely to be any significant impact on overall soft-drink consumption owing to excise duty in 2019. However, categories with a higher incidence of relative price increases, such as carbonates, could see a disproportionate impact on volumes. Unfortunately, the tax comes into effect at the start of the main consuming season for soft drinks, which will keep brand owners worried.

Soft-drink companies will need to consider optimising their packaging mix – between high-margin SKU and large-volume SKU – and formulation changes in order to manage any potential impact on volumes and margins. With under five months to go, the big question is, do soft drinks companies have enough time to formulate a response before the start of the busy summer season sales period?

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