Article’s title: Coca-Cola to sell smaller bottles at higher prices in response to sugar tax https://www.theguardian.com/society/2018/jan/05/coca-cola-to-sell-smaller-bottles-at-higher-prices-in-response-to-sugar-tax.
This is the article about British sugar tax that will oblige the companies producing soft drinks to reduce the amount of sugar per bottle. Two companies are mentioned: Scottish Irn-Bru that decided to follow the rules and change the recipe and Coca-Cola that chose the opposite strategy. Both companies have a long history, both have been using the same recipe for many years and have a recognizable brand. Though the amount of tax payment is considerable, such is the risk of losing customers who wouldn’t like the changed taste of a drink.

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British government obliged companies to pay 24p per litre if the drink contains 8g sugar or more per 100ml. Coca-Cola Classic, with the recipe remained unchanged for 125 years, contains 10.6g of sugar per 100ml. Before the company decided to raise the price per bottle, that would result in 11% profit loss for 0.5-litre bottle and 23% loss for 1.75-litre bottle which results in general profit loss of approximately 17%. However, the company decided to increase price and reduce the size of 1.75-litre bottle. That would almost neutralize profit loss because of the sugar tax since it increases company’s revenues by 15%.

As for Irn-Bru, the original recipe will be changed with four rather than 8.5g of sugar per 100ml, so it will not be taxed.

Taking such step, Coca-Cola’s management understands what would be at stake should they change the original recipe: in 1985 such amendment resulted in huge consumer backlash so that the company was urged to revert the former recipe in a matter of weeks. Irn-Bru is now at similar risk since it also has a long history and its original taste is a recognizable trademark in Scotland.

The opposite strategies are applied. In case of Coca-Cola, success will depend on the price elasticity of demand. That means whether the amount of sales would change considerably following the change in prices.

Elasticity of demand depends on several factors: recognisability of the brand, the number of substitutes on the market, market share of the company, etc. In 2014, Coca-Cola was the leader in UK market with more than 14% of market share. Its major substitutes are PepsiCo (7%) and private labels (30.8%). Irn-Bru is a local leader – its market share is considerable only in Scotland, while in the rest of the country it is insignificant. Therefore, the demand for it is more flexible with respect to price. On the figure above, curve D shows the demand for Coca-Cola in the United Kingdom. D1 stands for Irn-Bru consumer demand. With sugar tax, supply curve for both drinks shifts upwards, which means that the same amount of a drink will be marketed with a higher price (+ tax rate).

The shape of D curve indicates product’s elasticity. In case of Coca-Cola, increase in price, which is almost equal to the amount of sugar tax, will result in a slight change of consumption (Q  Q1). That means that consumers would rather pay the higher price than search for a substitute. If Irn-Bru would follow Coca-Cola’s example and tried to shift the tax burden on consumers rather than changing recipe, that would result in more significant decrease of consumption (Q  Q2). Therefore, the strategy of shifting tax responsibility is effective only for those companies which have the greatest market share. The taste of Coca-Cola Classic appeared to be the company’s security against any government’s effort to reduce the amount of sugar in soft drinks.

With regard to this particular case, I would like to introduce another variable – sugar elasticity of demand. That is, the amount of consumption changed with the amount of sugar in the recipe. The demand for Coca-Cola is extremely elastic in this case. The company is bound to one recipe which proved to be successful for decades. The taste of Irn-Bru is not as recognizable as the taste of Coca-Cola Classic, so it has less sugar elasticity. It is obvious that altering recipe is a better strategy for tackling with tax burden for Irn-Bru. However, its original taste is highly valued in Scotland, and the company occupies larger market share in the region. Although trying to shift tax burden on consumers is not a better option, the company would try a certain kind of compromise: 1) it might not change the recipe for Scotland while changing it for the rest of the country or 2) it could keep up with the lower limit of sugar (5g instead of 4g).

    References
  • Allen, K., Asthana, A. & Mason, R., 2016. George Osborne unveils sugar tax in eighth budget as growth forecast falls [Online] (updated 16 Mar. 2016) Available at [Accessed 7 Jan. 2018].
  • Campbell, D., 2017. Calls for ban on Coca-Cola’s Christmas truck tour over child health fears [Online] (updated 29 Nov. 2017) Available at [Accessed 7 Jan. 2018].
  • Grierson, J., 2017. Coca-Cola says sugar cuts have not harmed sales [Online] (updated 17 May 2017) Available at [Accessed 7 Jan. 2018].
  • Statista.com, 2014. Share of the soft drinks market in the United Kingdom in 2015 [Online] (updated in 2015) Available at [Accessed 7 Jan. 2018].
  • Wood, Z., 2018. Coca-Cola to sell smaller bottles at higher prices in response to sugar tax [Online] (updated 5 Jan. 2018) Available at [Accessed 7 Jan. 2018].