Consumer Goods have historically been one of the stand out performing sectors within UK equities, the story is no different for the Soft Drinks industry which has generated excellent returns for long term investors.
Three constituents in the chart below that have a long term listing, have all demonstrated resilient margins and growth in revenue across household brands, such as Robinson’s, IRN-Bru and Vimto. Share price rises have also been accompanied by an excellent dividend track record.
However, over the last few months there has been a high profile campaign to cut down sugar consumption and target a reduction in obesity amongst children, with one of the solutions a tax on sugary drinks.
In the March budget the Chancellor announced that there will be a two tier tax system in 2018 in an effort to combat rising obesity, with funds going to school sports and schemes to support children’s welfare. The levy will be on based upon sugar content per 100ml and is expected to be taxed at an additional 18p and 24p. Small producers will be exempt from the scheme, as are fruit juice and milk based drinks.
The Office of Budget Responsibility has estimated that the scheme will generate £500m from 2018 onwards, but at a cost to government of £1bn to implement, through the additional costs the government will incur through accrued interest on index linked gilts.
AG Barr has been the first of the major UK listed soft drink companies to report trading since a sugar tax. CEO Roger White commented that, “Although the details of the Chancellor’s proposed soft drinks levy are still to be consulted upon, we believe our combination of brand strength, ongoing product reformulation and consumer driven innovation will allow us to minimise the financial impact on the business at the proposed point of implementation in April 2018.” There is the possibility the industry will challenge the system, although it is awaiting further details from the Chancellor; similar taxes in Scandinavia have been challenged previously.
AG Barr’s statement provides some indication there will be some changes to products in the consultation period leading up to April 2018 to combat the thresholds of guided sugar content, at a cost to the business. There is a risk other countries will adopt this style of legislating. Ultimately the business will be responding to changing consumer tastes, so it could be argued that the additional costs are negligible. The industry is cash generative and it is likely that the costs from additional tax will be absorbed by the consumer. Given the track record of the industry, news surrounding this should be looked upon as a bump in the road, but unlikely to impact the long term prospects to the industry.