Hitting the sweet spot

Hitting the sweet spot

The new sugar tax is aimed at curbing Malaysia’s sweet tooth

Much has been said about the state of Malaysia’s health, with the 2015 National Health and Morbidity Survey reporting that 48% of Malaysian adults are overweight or obese and at risk for lifestyle-related diseases such as diabetes, hypertension and cancer.

To curb this burgeoning health problem, the Malaysian government introduced a new sugar tax in November 2018 aimed at reducing Malaysians’ consumption of sugary drinks. As of July 1, 2019, a MYR 0.40 tax per litre will be added to the price of soft drinks with more than 5 grams of sugar per 100 ml and juice or vegetable-based drinks with more than 12 grams of sugar per 100 ml.

Manufacturers get creative amid new tax

The government has imposed the tax at the manufacturer level, and we expect manufacturers to pass the increased cost on to customers.

When pressed, it’s common for manufacturers to reduce the size of their products while leaving the cost unchanged, which makes the impact of the overall cost less visible to consumers. In fact, this has become a common cost-reduction strategy over the past few years. And this new sugar tax could be a reason for manufacturers to continue using this strategy to protect their profit margins. If downsizing a product is too constant or highly noticeable to the consumers, however, consumers may lose faith in brands and consider alternatives.

But manufacturers aren’t going to simply address the issue with price and pack sizes. We also expect to see an increase in low- and zero-sugar beverage variants in the market, particularly in light of the government’s push for a healthier Malaysia. Over the past 12 months, low-sugar carbonated soft drinks have tripled their share of the beverage market, signifying manufacturers’ aggressiveness in experimenting and testing consumers’ acceptance of healthier drink options. For example, bottled water sales are up 15% over the past 12 months, and we expect this trend to continue.

how will malaysian consumers react?

Despite the drive to be healthier, Malaysians love their carbonated soft drinks, which are affected by the sugar tax. Carbonated beverages are the most-consumed type of beverage in Malaysia, accounting for 21% of the beverage market.

Despite the stronghold these beverages have in the market, a recent Nielsen study on consumer awareness of the sugar tax in Malaysia found that a majority of consumers intend to change their purchase behaviour in light of the new sugar tax. One way they plan to change is by purchasing fewer carbonated soft drinks. In this price-sensitive market, consumers say they would either buy smaller beverage packs or buy less quantities in general, thereby altering their lifestyles in the process.

To prevent a decline in their overall sales, manufacturers should market their low-sugar variants more aggressively through the effective use of branding and advertising. By raising awareness about the appeal of healthier variants, manufacturers can attract consumers to low-sugar variants. And since these options are not affected by the new tax, consumers can buy them in the same quantities.  

The sugar tax is not a new phenomenon

The idea of a sugar tax is not unique to Malaysia. In fact, more than 40 countries around the globe have some form of sugar tax on the books. Given the notoriety of the concept, we can envision three possible scenarios that could play out in Malaysia based on the effects that we’ve seen in other countries:

1. Consumption of soda drops—temporarily. In Mexico, one of the world’s largest soda markets, the sugar tax caused the price of the affected beverages, including carbonated soft drinks, to rise 10%. Consequently, consumption declined by 3% shortly after the tax came took effect, but returned to pre-tax levels just two years later.

2. Consumer preferences outweigh change. In the U.K., the sugar tax has encouraged manufacturers to reformulate their offerings and make low-sugar options available. Despite the efforts of manufacturers, however, many consumers have stated that their consumption behavior has not changed.

3. Soda consumption drops dramatically. In Saudi Arabia and the Philippines, the sugar tax led to a steep decline in soda consumption, falling by 14% and 6%, respectively. The pullback led to a notable rise in bottled water sales.

The next year will tell us which of these three possible outcomes will play out in Malaysia. The implementation of the sugar tax won’t, however, solve Malaysia’s health problem. It is, however, a component of the overall issue and is a step in the right direction, as it will lead to increased availability and awareness on the healthier beverages available in the market