U.K. Unveils Levy on Sugary Drinks

LONDON—The U.K. government on Wednesday unveiled a surprise levy on sugary drinks, setting up a new battleground between the global soft-drinks industry and public-policy makers aiming to curb sugar intake.

The move pressured shares of Coca-Cola Co., down 1.4%, and PepsiCo Inc., down 1%, in New York trading. Britvic PLC—which sells Pepsi's drinks in the U.K. and Ireland and has its own soft-drink brands, including Tango and J2O—was down 2% in London. The companies had no immediate comment as they worked to digest the news.

While the U.K. is a relatively small market for global drink makers, executives have worried about the precedent such a move could set. France and Mexico have already rolled out similar levies, while a number of states and municipalities in the U.S. have toyed with the idea.

The beverage industry says it is unfair to single out sugary drinks for special taxes and has spent more than $100 million since 2009 in the U.S. alone to defeat similar proposals in more than two dozen cities and states.

U.K. Treasury chief George Osborne announced the new soft-drinks levy in his 2016 budget statement, targeting the producers and importers of drinks that contain added sugar. He estimated the measure would raise £ 520 million ($736.7 million) in its first year.

The U.K. government had previously said it had no plans to introduce a tax on sugar-sweetened beverages. It generally has argued that the focus should be on other measures, such as increasing awareness of the dangers of consuming too much sugar and better food labeling.

"I am not prepared to look back at my time here in this Parliament, doing this job and say to my children's generation: I'm sorry, we knew there was a problem with sugary drinks, we knew it caused disease, but we ducked the difficult decisions and we did nothing," Mr. Osborne said in announcing the new levy on Wednesday.

The levy will be introduced in two years to allow companies enough time to change their product mix and will be determined based on the volume of sugar-sweetened drinks companies make or import. It will be imposed according to two bands: one for sugar content above 5 grams per 100 milliliters, and another for drinks with more than 8 grams per 100 milliliters.

Mr. Osborne said pure fruit juices and milk-based drinks would be excluded and that the government would ensure "the smallest producers are kept out of scope." The U.K. government plans to consult with the industry on the levy's implementation.

The immediate industry reaction to the plan was sharply negative. "We are extremely disappointed by today's announcement," said Ian Wright, director-general of the Food and Drink Federation, a U.K. trade body. "The imposition of this tax will, sadly, result in less innovation and product reformulation, and for some manufacturers is certain to cost jobs."

Companies can choose to either pass the added costs along to consumers or absorb the costs themselves.

The U.K.'s Office for Budget Responsibility calculated that on the basis of the government's revenue target, the sugary-drinks levy would end up imposing unit charges of 18 pence or 24 pence a liter, "which we expect to be passed entirely onto the price paid by consumers."

Andrew Holland, an analyst at Socié té Gé né rale, said the levy "looks like a sensible approach that may actually work. Just putting prices up to the consumer has a modest impact on consumption."

The £ 520 million raised from the new levy—which Mr. Osborne estimated would fall in later years as sugar levels decline—would double the amount of funding directed at sports in primary schools.

The government says the estimated cost to the U.K. economy from obesity is about £ 27 billion, with the National Health Service spending more than £ 5 billion on obesity-related costs

Public Health England, the state body tasked with improving health in the country, in October issued a report urging the government to engineer a price increase of 10% to 20% on high-sugar products through a tax or levy such as those on full sugar drinks. Celebrity chef Jamie Oliver has lent his voice to the campaign to introduce a sugar tax, including appearing before the panel of lawmakers last year.

In the U.S., Philadelphia's mayor this month proposed a tax of three cents per ounce on sugar-sweetened beverages—three times as much as the tax in Berkeley, Calif., which in late 2014 became the first U.S. city to pass such a measure. In 2012, then-New York Mayor Michael Bloomberg failed in his effort to impose maximum portion sizes on sugary drinks.

India, Indonesia and the Philippines are among the other countries that have been considering special taxes.

Mike Esterl and Nicholas Winning contributed to this article.

Write to Saabira Chaudhuri at [e-mail]

(END) Dow Jones Newswires

March 16, 2016 12:55 ET (16:55 GMT)

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