SUGAR: Fizzy tax won't solve obesity problem

By Katherine Rich (in Supermarket News) 1 July 2015

Sugar tax supporters believe a 10% tax on fizzy drinks like in Mexico will be a magic solution to New Zealand’s obesity problem.

Local activists such as Boyd Swinburn were overjoyed following the release of a study by Mexico’s National Institute of Public Health. It claimed the tax reduced purchases in Mexican households by an average 12% at the end of the first year, and that “taxes imposed on sugar-sweetened beverages can help change behaviours in benefit of public health”.

Put aside the fact that the study was funded by the pro-tax lobby closely involved with the Mexican tax implementation – and was therefore unlikely to conclude anything other than the tax was a raving success – and the strange belief that a country like Mexico, where the poorest earn less than $200 a month, is comparable to New Zealand. Because there is another inconvenient truth: Mexicans are consuming the same amount of fizzy as they were before the tax, following a small dip in consumption after the 1 peso (9 cents) per litre tax came into effect early last year.

The only difference is that the Mexican Government is now billions of dollars richer.

So how can this be when the “research” says there was an average 12% drop?

Easy. The research was from shopper panel information and, as readers of Supermarket News know, what shoppers say in surveys and what they actually buy in-store are often completely different things.

Where pro-tax activists go wrong is they don’t understand the dynamics of the fizzy aisle or the grocery sector generally.

We all know that in the fizzy category there are different brands at vastly different prices. Recently in the supermarkets near where I live, Countdown had a 1.5 litre bottle of Coca-Cola for $3.39 and its Homebrand Cola was 97 cents. At the New World it was $3.36 and its Budget Cola $1.11. It’s not the difference in price between the stores that’s of interest, it’s the difference WITHIN the category that explains why any low-level tax will do little more than collect money.

Coke is already 300% more expensive than the budget products yet many people choose to buy it over plain colas. The idea that a 10% tax would make any significant difference to buyer behaviour is ludicrous.

Applying the tax, Countdown’s Coke becomes $3.79, and its Homebrand becomes a $1.06. Does anyone apart from those with ideological blinkers on think this will make any difference to consumption in New Zealand?

Activists often make the comparison between tobacco taxes and sugar taxes, completely overlooking the fact that tobacco taxes are levied at between 400-500%, not 10%.

Then there’s the reality of grocery pricing over time.

A 10% tax would be completely lost in all in the ups and downs in price from specials and promotions. Retailers can also choose to sell goods at any price, as Pak 'n' Save Northland did recently with its 9 cent fizz special. Applying a 10% tax to that would have been less than 1 cent, but still pro-tax supporters would have us believe such a policy would work.

In Australia there has already been a 10% tax on sugary drinks in the form of GST, but has that made any difference to consumption? No.

When I visited Mexico a few months ago the message from industry was loud and clear: sales data shows consumption is back to pre-tax levels. People are simply paying more for either the same brands, or (the very poor) are trading down to cheaper brands, indicating again the low elasticity of demand for products.

The data also shows that Mexico’s poorest are cutting back on other, non-food groceries, to suit their budget.

It’s no surprise that a small tax doesn’t have much effect when brands were already offered at a huge range of prices before the tax. This is the same the world over. And that’s where the price differential between the top-line brands and the private label brands comes in. Shoppers buying Coke and Pepsi are already choosing products two and three times the price of the plain pack cola, so it’s not hard to see why a price differential from a tax of 10% in New Zealand would be most unlikely to affect consumption.

This style of tax won’t achieve the target hoped for by proponents. It’s basic economics.

Such taxes make little if any difference when demand for a product is largely inelastic. And in a higher-wage economy such as ours, adding 10 cents to a 1.5-litre bottle will not change anyone's buying habits in the long term.

The Mexico tax was meant to curtail obesity, and in that respect increasing the price of a single item has been a failure.

There is nothing to suggest that targeting a single product with a punitive tax is leading to lower levels of obesity in Mexico, and that would also apply in New Zealand. That’s because the causes of obesity are much more complex than can be dealt to by curtailing the consumption of a single product.