The recent election produced more than a new President-elect. Voters passed a new regime of soft drink taxes that have implications for our clients. The new taxes are aimed at reducing the amount of sugar-added drinks consumed by residents of the four communities affected.
Who will be taxed?
In all four cases, the distributors of the products pay the tax to the governments. Whether the tax ultimately reaches consumers is up to the distributors.
If the distributors decide to pass on the tax to the retailers, it is likely the consumer will end up paying the tax.
What’s covered by the tax?
All four municipalities tax the distribution of sugary drinks, energy drinks, and packaged juice with added sugar.
Diet soda is exempt. 100% juice and milk drinks are exempt from the tax. Coconut water is not taxed unless it has added sugar.
The guidelines that determine if a drink is “sugary” or will be taxed are
- Greater than 25 calories per 12oz. of fluid
- In Boulder, at least 5g of added-calorie sweetener in 12 fluid oz.
How much is the tax?
- San Francisco, CA: 1 cent per finished ounce
- Oakland, CA: 1 cent per finished ounce
- Albany CA: 1 cent per finished ounce
- Boulder, CO: 2 cents per finished ounce
A finished ounce means an ounce of product that is consumed by the end user of the product.
Where does the money go?
San Francisco previously attempted to pass similar legislation that would have allocated all the tax revenue to programs that would combat obesity. Each of the new taxes in all four municipalities simply go into the general funding.
Packaged Products Implications
If the distributor passes on the tax to retailers, the drink will simply cost more per ounce by either one or two cents. A 12oz can of Coca-Cola will cost 12 cents more in Oakland, San Francisco, and Albany. In Boulder, it will cost 24 cents more.
Fountain Implications
If distributors pass the tax on, restaurants and other fountain retailers will pay higher prices for their full sugar fountain syrups. The current national price for a gallon of Coca-Cola fountain syrup is $14.25 (Pepsi syrup costs $14.00 per gallon). Remember that a gallon of sugar fountain syrup produces 768 ounces of finished drink when mixed at 5 to 1. It is not clear from the available information how the tax authorities will handle a different specification of syrup to water ratio. This is an area of interest that we will continue to monitor. The tax would likely add $7.68 to that gallon at the common 5 to 1 ratio. The price of a five-gallon bag-in-box would likely go from $71.25 to $109.65 under the one cent tax regime. The two-cent tax regime will make a five gallon bag-in-box of Coca-Cola syrup $148.05, more than doubling the cost of goods.
Assuming the tax is passed on by the distributors to the restaurants in full, the margin impact is significant, especially for Boulder, with the 2-cent per finished ounce tax. Please see the below table which shows the ultimate impact on a restaurant currently serving fountain Coca-Cola at $2.00 for a 20oz serving. The table only considers syrup cost. It does not consider cup, lid, straw, ice, CO2, or equipment depreciation costs, which also have an impact on the drink economics.
| No Tax | 1 Cent | 2 Cent | |||
| Per gallon | 14.25 | 21.93 | 29.61 | ||
| Per finished ounce | $0.019 | $0.029 | $0.039 | ||
| Per 20oz drink | $0.37 | $0.57 | $0.77 | ||
| Profit at 2.00 Retail | $1.63 | $1.43 | $1.23 | ||
| Food cost | 18.55% | 28.55% | 38.55% |
Consumption Effect
The effect of the tax on consumption is not yet known, but Mexico passed a similar tax in 2013. That tax seemed to cause a 6 percent decline in soda consumption in Mexico, which historically has one of the highest per capita consumption rates of sugar soft drinks in the world.
Carbonated soft drink consumption continues to decline overall. While diet drinks lead the decline, carbonated sugar drink consumption has declined steadily from -1% to -3% annually over the past few years in general. It occasionally spiked up or down, but the general trend is steady decline.
Depending on the degree of tax pass-through by the distributors, the implication for fountain retailers may be that serving non-carbonated, non-sugar alternatives will boost margins and profits at a time when consumers are looking for alternatives. The good news for the large soft drink companies, and for our clients, is that they have well-developed portfolios of alternative, better-for-you type beverages which have passed the consumer-acceptance test.
To summarize, full sugar beverage retailers in these four cities will most likely experience increased cost of goods. These retailers should take steps now to model out the likely impact of this increase on their bottom lines. They should also become educated about consumer preferences and trends in their local markets with respect to low and no-calorie beverages.
More cities may follow suit with sugar taxes of their own, and we would love the opportunity to help any retailer navigate through this new reality. Contact us today.
