The Mayor, the Soda Ban and the Joys of Unintended Consequences
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last week was a great or awful week, depending on which side of a controversial new regulation you agree with. New York City Mayor Michael Bloomberg was successful in his attempt to ban sugary drinks larger than 16 ounces, with the New York City Board of Health approving the new regulation 8-0 (with one abstention). There was little doubt that the regulation would be approved as Mayor Bloomberg had personally appointed each and every member of the Board of Health… but still. This regulation has soda industry giants The Coca-Cola Company (NYSE: KO) and PepsiCo (NYSE: PEP) worried about the implications of such a regulation, as well as the possible precedent it sets for other municipalities thinking about instituting a similar soda ban. However you feel about the new regulation, however well intentioned it may be, the new ban is full of many unintended consequences that have the potential of doing more harm than good. Three of the biggest such unintended consequences are highlighted below.
Exclusion of Some at the Expense of Others
The new ban required the compliance of all establishments that receive a letter grade from the New York City’s health department, as well as establishments that are otherwise regulated by the city. This group includes restaurants (upscale, casual and fast food), movie theater concession stands, street cart vendors and other such eating establishments. Who are excluded from the new ban’s requirements are establishments that derive less than half of their revenues from prepared food. This group includes grocery stores, drug stores, convenience stores and similar such retailers.
This means that a hot dog street vendor trying to make a living is unable to sell a 20 ounce drink without facing a possible $200 fine per violation. The 7-Eleven (NASDAQOTH: SVNDY) convenience store across the street selling hot dogs, however, is under no such restriction. 16 ounce? 20 ounce? 24 ounce? 2 liter? Those container sizes are no problem at all for convenience store operators. For a potential customer that just wants a hot dog and a 20 ounce bottle of Coke, the new ban essentially makes convenience store operators that only game in town for that food combo.
Compliance through Even Higher Calorie Drinks
While this ban is intended to lower the amount of calories consumed by New Yorkers, a curious provision in the regulation allows the ban to be circumvented if even more calories are added to a beverage. Sounds crazy, right? Well, this is how it works. The ban of all sugary drinks over 16 ounces also include sugary coffee drinks sold by Starbucks (NASDAQ: SBUX) and other coffee house establishments. That is, all sugary drinks, except for those that contain 50% or more of milk. To comply with the new regulation, all Starbucks and others would need to do is simply include more dairy in their sugary coffee drinks.
The problem there is that milk is naturally high in calories. 20 ounces of whole milk has about 120 more calories than 20 ounces of Coca-Cola Classic. Compliance by adding milk will actually increase the calories of the drinks sold by Starbucks. While milk obviously has many nutritional benefits beyond its amount of calories, if the goal of the ban is to simply curtail caloric-intake, the milk provision will end up having the opposite desired effect.
No 20 oz? Okay. Two 12.5 oz Cokes, Please!
Whatever you think of the soda industry, these companies are no dummies. While Mayor Bloomberg was busy talking about the dangers of 20 ounce drink containers, the soda industry was busy out-thinking this loophole-filled regulation before it was even approved. One such loophole is the lack of a limit on how many smaller-portioned drinks you are allowed to purchase. Taking advantage of that, last year The Coca-Cola Company introduced two new product sizes, the 12.5 ounce bottle and the 7.5 ounce mini-can. Conveniently, those two new portion sizes somehow equal 20 ounces exactly. I am sure that is just a coincidence though; a curious bit of happenstance (sarcasm alert). At a slightly higher price than a normal 20 ounce bottle of Coke, customers can now purchase one 12.5 ounce bottle and one 7.5 ounce mini-can, for a total of 20 ounces of soda.
Well then… no harm, no foul. We just ended up right back where we started, right? And since the same amount of soda now requires the purchase of two containers of different sizes, maybe a soda drinker will forgo that additional 7.5 ounce mini-can altogether. That is certainly possible (and the intended purpose of the ban). It is also possible that a soda drinker will end up purchasing two 12.5 ounce bottles, for a total of 25 ounces of soda (5 more ounces of soda than the now banned 20 ounce bottle). Either scenario seems possible. We will have to wait and see how that one plays out. Bloomberg and the Board of Health are obviously betting on an overall decreased consumption of soda due to the smaller portion sizes. But if The Coca-Cola Company is willing to bet on the introduction of newer, smaller container sizes (instead of just simply sticking with a regulatory-approved 16 ounce bottle), they likely have some internal company research to suggest that they will be able to sell more of the smaller product types. As I mentioned earlier, these companies are no dummies.
The Joys of Unintended Consequences
While I stopped at just three, there are potentially many more unintended consequences related to this newly approved sugary drink ban. However you feel about Mayor Bloomberg, civil liberties and the use of government regulations as it pertains to the health epidemic that is obesity, the New York City regulation as written and approved leaves much to be desired… as well intentioned as it may have been.
WhichStocksWork has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company, PepsiCo, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend PepsiCo, Starbucks, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.