Business Economics Assignment 2: Case Study on UK Sugar Tax

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Business Economics
Assignment 2: Case study

Table of Contents
INTRODUCTION............................................................................................................................. 2
Impact of market imperfection and market failure on entrepreneurial activities, labour as well
as financial products......................................................................................................................3
Sugar tax economic policies of the UK government shaping business strategy and decisions
made by management...................................................................................................................6
CONCLUSION................................................................................................................................. 9
REFERENCES.................................................................................................................................10
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INTRODUCTION
This assignment focuses on the case study of the UK sugar tax. This assignment explains the
impact of market imperfection and market failure on the entrepreneurial activities specifically
in labour and financial products (Hodder & Stoughton Limited, 2016). Also, it includes the
logical interpretation of the manner in which sugar tax economic policies of the UK government
shape the business strategy as well as the decision made by management.
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Impact of market imperfection and market failure on entrepreneurial
activities, labour as well as financial products
The UK sugar tax on soft drinks was introduced by George Osborne in March 2016 as a part of
the strategy by the UK government with the objective of reducing childhood obesity. Market
failures are the economic situation that is defined through an incompetent distribution of
goods as well as services in the free marketplace. Market imperfection resulted in the
generation of opportunities such as imperfect information and negative externalities (Pettinger,
2017). The presence of negative externalities as well as imperfect information result in
overconsumption which is a major market failure linked with sugar consumption.
Negative externalities demand improvement or attract solution. It provides opportunities to
initiate new entrepreneurial activities in order to reverse the environment externalities to
positive. Consumers who buy fizzy drinks are improbable to consider the negative externalities
affecting third parties (Hodder & Stoughton Limited, 2016). It results in strain on the healthcare
services from diseases related to obesity for example diabetes thereby reducing labour
productivity and increased illness absenteeism for the firms. In case of ignoring the negative
externalities, Consumer underestimates the social costs of soft drinks causing soft drinks
overconsumption from society’s opinion and lead to welfare loss as well as a market failure
(Jones, 2016).
Imperfect distribution of information leads to much variability on the patterns of production
and consumption. Those entrepreneurs, who can fulfil the gap in the market information, have
the ability to provide solution thereby benefitting the industry. Soft drinks are over consumed
by the consumers due to problems of imperfect information (Buckton et al., 2019). Consumers
may not be attentive to the continuing risks of consuming soft drinks. For instance, the life
expectancy of the consumers could be reduced by the consumption of large quantities of sugar
in soft drinks thus increasing heart disease risk. It might damage the potential of their future
earnings.
Majority of consumers are conscious of the potential private cost incurred by overconsumption
of sugar through health campaigns by government and children education in schools (Buckton
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et al., 2018). Being aware of this information, if the consumers continue to drinks soft drinks,
they ignore the long-lasting private costs to be incurred into the future thereby overestimating
their temporary private benefits.
Indirect taxation was used by George Osborne by following other countries as exampled to
manage the issues related to obesity. The specific tax was used by the UK government to target
the prime source of sugar that is soft drinks for teenagers (Buckton et al., 2018). They imposed
the tax on the company on their basis of high sugar drinks volume that is produced or imported
by them.
Several problems such as diabetes, tooth decay and obesity are linked with excess sugar
consumption. The costs on individuals as well as the rest of the society are imposed by the
consumption of sugar (Pettinger, 2017). Imposing tax by the UK government will help in
discouraging sugar consumption and also increase tax revenue for improved healthcare. For
example the, high external costs on society is imposed by sugary drinks as its overconsumption
will be a major reason of health problems such as, tooth decay, diabetes and obesity.
These external costs are imitated an increase in costs levied on national health services. Also,
work as well as productivity is adversely affected by poor health (Pettinger, 2017). Therefore
the private cost of sugar is lower than social cost of sugar consumption. Besides, sugary drinks
can be categorized as demerit goods as people may be not aware of the personal costs included
in sugar consumption. Also, people may be aware of the bad effects of sugar however struggle
to minimise their ingesting due to its addictive potentials.
It is estimated that 20 per cent sugar tax may result in raising around £1 billion which can be
used to decrease over taxes or vat. These reserves can also be spent on growing health issues
related to sugar consumption. Considering the political perspective, it makes it more pleasant
for the consumers to have tax reserved to fund spending in a specific area (Jones, 2016). It can
make good use of tax raised by using the fund for health care as well as education about
healthy eating. The incentive for the firms is created by sugar tax in order to supply an
alternative that is healthier (Pettinger, 2017). For example in certain fast food restaurants such
as McDonald's heavily promote sugary drinks which imply that supply generates its own
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demand. In case incentives to the firms sponsor healthier drinks with substantial low sugar
content then the user will also follow the supply.
Sugary content may lead to job loss while considering its economic perspective. The tax will
shift the request from sugary drinks to the non-sugary drinks thereby shifting demand within
the soft drink market. It may be likely that the tax might result in a small decline in the soft
drink market. Persons may shift to tap water and not the non-sugary drink thereby leading in
some decline in the market share and also job losses (Williams, 2018). However, at the same
time, spending the amount of sugar tax on health care and other education initiatives, more
jobs will be generated to treat the young people for diabetes and also educate them about
healthy diets.
The imposition of tax must be just transfering resources from sugary drinks to market of health
care. The sugar tax will hit the people with low income as they will have to pay for a higher
percentage of their income resulting in being regressive (Buckton et al., 2018). Implementing a
sugar tax may lead to various unintended consequences and may contribute to government
failure. Those consequences may be the struggling survival of some of the pubs due to
increased costs along with cross-border shopping and short-term bulk buying by consumers
resulting in no impact on sugar consumption.
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Sugar tax economic policies of the UK government shaping business
strategy and decisions made by management
The sugar tax was publicized by the UK government in March 2016 in order to tackle obesity
specifically among the children. This tax was imposed on producers as well as importers. The
tax will be applied to high sugary drinks that are popular among children, teenagers as well as
young people (Williams, 2018). The tax has been banded as the more sugar content, the higher
the tax. The main tax rate for the drink that contains more than 5 grams of sugar per 100 ml.
while higher tax rate will be charged on the drinks that comprise more than 8 grams of sugar
content per 100 ml (Warner, 2018). Some of the soft drinks such as pure fruit juices, coffee or
other milk-based products are excluded despite being high in sugar. Also, some of the small
producers have also been exempt.
There are different opportunities for soft drink companies in the UK. The first option for them is
to accept the tax and sit ideal. It is a potential option for the companies due to the complexity
in the price, consumption and buying patterns in the soft drinks market. The production and
retail channels may absorb the increased price (Hodder & Stoughton Limited, 2016). Another
option may accept the tax but increase the marketing of offending products resulting in risky
strategies, however regardless of aggressive marketing tactics; there is still a decline in the sales
of high sugar soft drink.
In case of acceptance option, the manufacturers and retailers may be borne the cost or partly
or fully transfer on to the consumers. In case of transferring the tax on the consumers, it is
estimated by the UK offer for Budget Responsibility that around 18 to 24 pence may be added
as a tax on the retail prices of a litre bottle of the standard product (Warner, 2018). Legislation
may be opposed by some of the companies; it may be attractive to the companies who are
against altering their recipes, a legal battle may lead to differences in a legal opinion and could
cost in terms of cash, brand image and also reputation.
The most simple and effective option is to accept the tax along with reducing sugar content by
reformulating or reducing the portion size (Triggle, 2015). The company can also opt for the
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provision of alternative by offering as well as promoting choices that have less sugar and does
not attract the tax.
One of the examples of how sugar tax shaped the business strategy and management decision
making is coca cola. The sugar tax would hardly hit coca cola which is the most popular soft
drinks manufacturer. Instead of fighting the management of coca cola took it as an opportunity
where they innovated or adapted low or zero sugar products and also promoted another
alternative within their portfolios such as waters, juices and other drinks where tax is not
applicable (Arthur, 2018). As a result, around 60 per cent of the portfolio of coca cola escaped
the tax.
There are other beverages such as Sprite, Capri-sun, and others that have reformulated their
drinks to avoid tax (Buckton et al., 2018). Another organization is AG Barr that delivered good
or excellent taste match. The three people who know the formula of Scottish favourite IRN-
BRU decided to ensure that to exempt 99 per cent of its brands such as IRN-BRU Sugar-Free,
IRN-BRU XTRA and other brands including omj!, KA, and Rockstar from the levy by reducing
more than half to below 5 grams in 2018 through its extended reformulation programme
(Warner, 2018).
Nichols boosted their offering by procurement of the feel good drink brand in the year 2015
and is well known for producing Vimto that is 100 per cent natural and has no added sugar. All
the new product developments of Nichols are either focused about no added sugar drinks or
reduction in added sugar. Nichols also furthers the Vimto ReMix brand having no added sugar.
The company will focus its marketing actions on Vimto No Added Sugar (Warner, 2018).
Also, the brand portfolio of Britvic is diverse and produces Robinson’s, Fruit Shoots, J20 and
other brands beneath the limited agreement with PepsiCo comprising Gatorade, Pepsi MAX,
&UP and Pepsi. The company did not require reacting suddenly on tax as they have already
reformulated their drinks and shifted towards improved products since 2013. Britvic told that
by April 2018, 94 per cent of their owned brands along with 72 per cent of their total portfolio
will be beneath the tax or exempt from it in Great Britain (Warner, 2018).
Fervertree Drinks offers a range of tonic waters along with flavours such as Soda water, Ginger
Ale, Sicilian Lemonade and Ginger Beer catering the mixer market in the UK. Looking at the 12
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drinks of the company, one three drinks that are Naturally Light Tonic Water, Premium Soda
Water and Naturally Light Ginger Beer have lower than 5 grams of sugar per 100 ml. other 9
drinks of the company have more than 5 grams of sugar including 3 that has more than 8 grams
of sugar (Warner, 2018).
Thus form the above example, it can be summarised that the soft drinks company in the UK has
reshaped its strategies. Also the management of such companies altered their decisions by
reformulating their drinks to bring sugar less than 5 grams in 100 ml.
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CONCLUSION
Sugar tax levied by the UK government has very strong economic, social and personal benefits.
The role of such tax will be to encourage a healthier diet and also raise money in order to deal
with increasing health costs related to obesity as well as excess sugar consumption. Negative
externalities, as well as imperfect information, might lead to overconsumption of sugary drinks
thereby causing market failure (Buckton et al., 2019). The companies may be the potential
losers as there might be some fall in demand. However various opportunities are available for
existing and new organizations in the soft drink market for avoiding sugar tax while producing
healthier options. It can serve good for national health services. Overall new welfare gain may
be generated from sugar tax with minimal disruption in the economy.
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REFERENCES
1. Arthur, R., 2018. Coca-Cola Assesses Sugar tax impact (Online) available at
https://www.beveragedaily.com/Article/2018/09/11/Coca-Cola-assesses-sugar-tax-
impact-UK-and-South-Africa Accessed on 25th May 2019
2. Buckton, C.H., Fergie, G., Leifeld, P. and Hilton, S., 2019. A discourse network analysis of
UK newspaper coverage of the “sugar tax” debate before and after the announcement
of the Soft Drinks Industry Levy. BMC public health, 19(1), p.490.
3. Buckton, C.H., Patterson, C., Hyseni, L., Katikireddi, S.V., Lloyd-Williams, F., Elliott-Green,
A., Capewell, S. and Hilton, S., 2018. The palatability of sugar-sweetened beverage
taxation: A content analysis of newspaper coverage of the UK sugar debate. PloS one,
13(12), p.e0207576.
4. Hodder & Stoughton Limited 2016. The UK sugar tax: will it reduce obesity? (Online)
available at
https://www.hoddereducation.co.uk/media/Documents/Economics/Edexcel-ALevel-
Economics-UK-Sugar-Tax-Case-Study.pdf Accessed on 25th May 2019
5. Jones, C.M., 2016. The UK sugar tax–a healthy start?. British dental journal, 221(2), p.59.
6. Pettinger, T., 2017. Sugar tax debate (Online) available at
https://www.economicshelp.org/blog/14884/economics/sugar-tax-debate/ Accessed on
25th May 2019
7. Triggle, N., 2015. Be bold on the sugar tax, Jamie Oliver says (Online) available at
https://www.bbc.com/news/health-34576006 Accessed on 25th May 2019
8. Warner, J., 2018. The UK Soft Drinks Levy: what’s the impact of the 2018 ‘sugar tax’?
(Online) available at https://www.ig.com/uk/news-and-trade-ideas/commodities-
news/the-uk-soft-drinks-levy--whats-the-impact-of-the-2018-sugar-tax--42387-180226
Accessed on 25th May 2019
9. Williams, A., 2018. Consumer perceptions and understanding of the planned UK sugar
tax: A cross sectional study.
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