Soda Tax Plans Popping Up

By Eric Novinson - September 14, 2012 | Tickers: KO, DPS, MNST, PEP | 0 Comments

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Even if beverage companies avoid direct fines or penalties for selling energy drinks, these companies' margins could still shrink next year because of new soda taxes. Patricia Leigh Brown, at the New York Times, explained that Richmond plans to use soda tax revenue to help improve residents' health habits if city residents approve the tax in November. CBS Local reports that El Monte voters will also vote on a Richmond style soda tax initiative, and Baldwin Park may follow the examples of Richmond and El Monte with its own city soda tax initiative. Richmond, El Monte, and Baldwin Park are California cities, but governments in other states, and other countries, have also debated soda taxes.

Legislators in Colorado and Illinois have also considered soda taxes. An article at Our Colorado News reports that Lakewood decided to tax candy, as well as soft drinks, and stated that the state of Colorado also taxes soft drinks. UPI reports that Chicago legislators debated whether to go with a Richmond style 1 cent per ounce tax or a flat fee per container.

Soft drink companies also have to worry about soda taxes in Mexico. Blogger Erin, at The Food Doctors, reported that Mexico passed a tax on soda that contained high fructose corn syrup in 2002, although the United States convinced the World Trade Organization that this law was anti-competitive, so the tax ended in 2005. The HFCS tax didn't apply to Coca-Cola's (NYSE: KO) income from sugar based Coke it produced in Mexico, but HFCS based Coke that Coca-Cola exported from the United States was subject to the tax, angering United States farmers. The Monster (NASDAQ: MNST) 2011 10-K states that Mexico passed a 25 percent tax on all energy drinks in 2011. An article by Murry Page at Mazatlan Messenger reported that the OECD wanted Mexico to pass a new soda tax law in 2012.

William Harless, at PBS, reports that France, Hungary, and Finland have also passed taxes on sugary drinks, and Britain also considered a soda tax, since the financial crisis limits the other sources of revenue for European countries. Ben Bouckley, at Beveragedaily.com, reported that Irish officials considered a national soda tax as well. Soft drink manufacturers have started selling more diet drinks in Europe in response, which could limit the damage from these soda taxes. Dana Flavelle, at Thestar.com, reported that beverage companies rolled out a new marketing effort to prevent soda taxes from passing in Canada.

Figures from the United States can be used to get a rough estimate of the impact of global soft drink taxes. Matt Paish, at Australian Food News, reports that scientists from the United States estimated that a soft drink tax would bring in $13 billion from the United States alone. Beverage Digest gives a figure of $76 billion total United States soft drink revenue. MarketResearch.com gives a figure of $504 billion for 2010 global soft drink sales. $76 billion sales divided by $13 billion tax equals a 17 percent average tax rate for United States soda sales. 17 percent times $504 billion equals $86 billion global soft drink tax revenue, although it could be a long time before every nation taxes soda. Coca-Cola earns 22 percent of its revenue from North America and 15 percent from Europe, the two regions where the taxes look like they'll show up first. 37 percent of $86 billion equals $37 billion, which would still mean a major bite out of beverage makers' income.

The beverage companies have to decide whether to absorb the tax increase to prevent their revenue from shrinking, or let shoppers pay the extra tax and risk losing market share. Using the 17 percent United States tax rate as a guideline, 37 percent of Coca-Cola's total sales would be affected by a tax increase in North America and Europe, and Coca-Cola has $47.5 billion in revenue. Coca-Cola would have to absorb a $2.99 billion tax hit if it cut drink prices to compensate for the tax, which would take a major bite out of the $8.71 billion that Yahoo! Finance lists for Coca-Cola's income. The Dr. Pepper Snapple Group (NYSE: DPS) primarily sells drinks in North America, and it earned $5.97 billion in revenue. Absorbing the $1.01 billion tax increase would take Dr. Pepper from $600 million in income to a $401 million loss, so Dr. Pepper is unlikely to cut prices.

80 percent of Monster's sales came from the United States in 2011, according to Monster's 2011 10-K, and Monster also explains that Coca-Cola distributes Monster drinks in several European countries. Although Monster does sell energy drinks in South America, Asia, and the Middle East, taxes in North America and Europe seem like they would affect the vast majority of Monster's current sales. Monster has $1.93 billion in revenue, and cutting prices to absorb a hypothetical 17 percent tax increase would cost Monster $328 million, which would wipe out almost all of Monster's $333 million income. Monster's a high growth stock that could crash hard if its earnings stop rising, so it isn't likely to cut prices either.

The 2011 Pepsi (NYSE: PEP) annual report shows that about a third of Pepsi's revenue came from beverage sales in the Americas, and another third came from food sales in the Americas. Pepsi states that its Latin America food statement had $7 billion in earnings later in the report, but revenue for the North America drink segment shows up as $22 billion total. I subtracted $7 billion in estimated South American drink sales, assuming that Pepsi's food and drink revenue figures in South America were roughly equal, to get an estimate of $15 billion drink revenue for Pepsi in North America. Pepsi's total revenue from Europe was $14 billion, so I estimated $7 billion for drink sales. This gives a total of $22 billion drink sales in North America and Europe for Pepsi that could be subject to a 17 percent tax, which would cost Pepsi $3.7 billion if it absorbed the tax hit. Absorbing the soda tax would reduce Pepsi's income from $6 billion to $2.3 billion, although Pepsi would still remain profitable because of its food operations. Pepsi doesn't seem likely to sacrifice more than half of its income, though.

Coca-Cola has a lot to lose if soda taxes go worldwide, but if the tax increase is limited to North America and Europe for now, Coca-Cola could absorb a soda tax increase to undercut its competitors. Pepsi also has some room to absorb a soda tax, although regulators might also decide to tax chips and other snacks. Monster has to pass soda taxes on, which could be problematic for revenue growth, especially if other nations follow Mexico's model and tax energy drinks at a higher rate. Dr. Pepper has no room to absorb the tax increase, which could make it vulnerable to a price cut by Coca-Cola. Soda taxes pose major risks to all four beverage companies, so even if more nations think about jumping on the bandwagon, Coca-Cola, Monster, Dr. Pepper, and Pepsi will work together to prevent new laws from passing.

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