Should Coca-Cola Amatil Ltd investors be worried about a sugar tax?

Credit: James Flynn

Much to the delight of world-famous chef and anti-sugar campaigner Jamie Oliver, the British government has announced the introduction of a sugar tax by 2018 to combat spiralling childhood obesity levels.

The levy will be applied to drinks with over five grams of sugar per 100 millilitres, and be the equivalent of 18-24 British pence (34-45 Australian cents) per litre.

Following the announcement, Mr Oliver called on the Australian government to do the same. Because of this, it may come as little surprise to learn that the shares of Coca-Cola Amatil Ltd (ASX: CCL) are trading lower today.

I feel it is likely that the tax will be introduced in Australia as well. In the UK the tax is expected to raise around £530 million ($1 billion) per year for the government. Considering the state of Australia’s deficit, these funds would come in quite handy as well as potentially curbing child obesity levels.

Should Coca-Cola Amatil’s shareholders be concerned? I think they should be. If a tax were introduced it would almost certainly be a blow to domestic sales if the company chose to pass the costs onto the consumer.

Woolworths Limited (ASX: WOW) sells 1.25 litre bottles of Coca-Cola for $2.95, which would become roughly $3.40 with the tax applied. I believe this 15% price rise would turn a lot of consumers away to cheaper and hopefully healthier drinks.

Alternatively, if it chose to absorb the costs to keep prices consistent it would negatively impact its margins. Unfortunately both scenarios do end up with the company losing out.

The good news is that Coca-Cola Amatil does have a diverse product assortment which is capable of catering to changing consumer tastes. It also has a clear focus on the rapidly growing consumer class in Indonesia.

It will no doubt hope to offset any damage that is done to its domestic business with its Indonesia operations. With a rapidly growing population that currently sits at 250 million, the potential size of this market for the company could very quickly eclipse that of the Australian market.

At this point there has been no comment from the Australian government so it remains speculation. But with Jamie Oliver pushing hard for changes, I don’t think this will be the last we hear on the matter.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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