Election Day 2016 Confirms It's Now the Era of Big Global Soda Taxes

Updated from 4:42 a.m. EST
 
Although four cities convincingly passed soda taxes on Election Day, it will unlikely be end-of-the-world stuff for the bottom lines of PepsiCo ( PEP) and Coca-Cola ( KO) .

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Soda taxes passed by convincing margins in three California cities: San Francisco, Oakland and Albany. All three Bay Area measures will raise taxes on sugar-sweetened beverages by 1 cent per ounce. Additionally, a ballot measure in Boulder, Colo., to enact a tax of 2 cents per ounce on sugary drinks also passed.

Without question, 2016 has been the year of the soda tax uprising.

The Philadelphia City Council signed off on a 1.5-cents-per-ounce tax on sugar-added and artificially sweetened soft drinks earlier in the year. The new tax would add about 18 cents to the cost of a 12 ounce can of soda, $1.08 for a six-pack or $1.02 for a two-liter bottle, and goes into effect on Jan. 1, 2017. It's estimated to raise $91 million a year in revenue. Funds will be used to support pre-K expansion, community schools, reinvestment in parks and recreation centers, and add to Philadelphia's general fund. It will also fund tax credits that the council approved for retailers that sell "healthy" beverages.

Soda taxes have also been spreading overseas.

In March, the U.K. passed a fairly significant soda tax. Starting in April 2018, a tax of about 36 cents and 22 cents will be slapped on each liter of high-sugar or low-sugar fizzy drinks, respectively. The tax is not only designed to slash soda consumption, but is projected to raise as much as $757 million in revenue in the first year alone.

Meanwhile, South Africa's Treasury said in July that it's proposing a 20% tax on sugar-sweetened beverages in an effort to curb consumption of such products and lower obesity levels.

Post Election Day, PepsiCo and Coca-Cola may be looking to Mexico to gauge the potential impact of new soda taxes on sales of the brown fizzy drinks. In 2013, lawmakers there approved a tax of one peso, or about 8 cents, per liter on soft drinks, and an 8% sales tax on high-calorie foods such as potato chips, sweets and cereal.

Buying a full-calorie soda may cost more in some states after Election Day. 
 
According to research from the University of North Carolina, in concert with Mexican public health officials, there was an average 6% decrease in soda sales in 2013 after the tax went into effect. By December 2014, the final year of the study, sales fell 12% from the prior year, as lower-income Mexicans appeared to reduce their consumption.
 
"The [soda] taxes we have seen tend to have a one-year impact and then the category goes back to whatever their trajectory was before that," PepsiCo Vice Chairman and CFO Hugh Johnston told TheStreet in a July interview.
 
While governments rejoice in finding a new tax to impose on people and dream of the day sugar-laced soda disappears from store shelves, the bureaucrats may want to keep one important thing in mind: the soft drink giants have worked hard to diversify their product portfolios away from down-trending sales of 12-ounce soda cans and 2-litter soda bottles. So new soda taxes will unlikely create dire financial straits for these two major public companies.
 
For example, both Coke and Pepsi have found success selling 7.5 ounce drinks -- aka "mini cans" -- to shoppers. Pushing consumers to smaller can sizes due to any new taxes on soda would actually be good news for the beverage companies -- small cans boast higher profit margins relative to package larger sizes.
 
"These [smaller] packs can provide both a premium experience as well as being an affordable, yet profitable, way to bring people into the [Coca-Cola] franchise," pointed out Coca-Cola COO James Quincey to analysts on a Oct. 26 conference call.
 
Meanwhile, the companies have successfully launched many other non-soda drinks and developed new zero sugar sodas such as Coke Zero and the soon to launch Pepsi Zero Sugar. Additionally, each company has also ventured more and more into the cold-pressed juice and low-calorie sparkling beverage markets, while also pledging to cut sugar use.

Soda companies have diversified away from soda. 
 
PepsiCo said in October that by 2025 at least two-thirds of its drinks will have 100 calories or fewer from added sugar per 12-ounce serving, up from about 40% currently. The new global target is more ambitious than its prior goal of reducing sugar by 25% in select drinks in certain markets by 2020. Coca-Cola has said that by 2020 it would sell low-calorie or no-calorie options in every market.
 
The broader portfolio of beverages for consumers at each company once again helped lift sales and profit in the most recent quarter. Coke's organic revenue, which excludes the impact of currency fluctuations, rose 3% in the third quarter on the the back of momentum globally for sports drinks, teas, packaged water and energy drinks. In North America, Pepsi's beverage business was able to overcome sluggish soda sales and deliver revenue and profit increases in the third quarter of 3% and 10%, respectively, due to demand for fruit-flavored Mountain Dew Kickstart and Gatorade.
 
Johnston added, "Obviously, from a company perspective, we are not in favor of taxes that target individual products. We understand there is some political will to do this, but we think we will manage it very successfully." So far, so good on that front.

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