Is sugar the new tobacco? Some companies are worried that it is

Is sugar the new tobacco? Amid growing concerns that sugar is one of the main culprits in the global obesity (“globesity”) epidemic, people are increasingly shunning the ubiquitous ingredient.

Meanwhile, governments are becoming more focused on implementing initiatives to reduce the public and personal costs of obesity and related diseases. The confluence of these factors is forcing many companies, such as food and beverage manufacturers, to reconsider their products, including sugar content and portion size.

Not so sweet

As physical activity has decreased and the intake of energy-dense foods has increased, the worldwide rate of obesity has more than doubled since 1980.

Today 1.9 billion adults globally are overweight or obese, with more deaths associated with being overweight and obese than being underweight. Australia conforms to this trend with almost a third of adults and a quarter of children falling into the obese category, an increase of 47 per cent over the past 20 years.

Noting evidence showing that an increase in dietary sugar is linked with increases in weight, the World Health Organization (WHO) strongly recommends an individual’s daily sugar intake be less than 10 per cent of their total energy consumption.

Last year, WHO updated its sugar guideline, stating that cutting consumption to less than 5 per cent (around six teaspoons) of daily kilojoules provides added health benefits.

With greater consumer focus on health, the anti-sugar movement has gathered momentum in Australia, driven by high-profile media commentators including Sarah Wilson (I Quit Sugar), health bodies and recently, documentary That Sugar Film.

The public’s increasingly negative perception of sugar is now seeing the sugar industry starting to lose its social license to operate in much the same way as tobacco has.

Considered particularly nefarious are the saccharine soft drinks, which the National Health and Medical Research Council reports are the largest source of sugars in the Australian diet.

In their dietary guidelines, they note that new evidence “emphasizes the relevance of sugar-sweetened drinks to the development of excess weight …” Similarly, WHO cites research indicating children with a high intake of soft drink are more likely to be overweight or obese.

Sugar hit

Governments around the world are also measuring the impacts of sugar consumption and obesity, including the direct and indirect economic costs. Direct costs consist primarily of healthcare expenditure attributed to obesity.

In Australia, this direct economic cost is estimated to be $3.8 billion a year according to a recent study by PWC. Less easily identifiable are the indirect economic costs associated with obesity (such as productivity losses, forgone tax and government subsides), which PWC estimates are $4.8 billion each year.

Modelling by Morgan Stanley last year measured the economic costs of sugar consumption specifically. The investment bank found that the GDP growth of OECD economies would be adversely impacted if sugar intake remained stagnant or increased. It singled out Australia as potentially one of the worst-affected economies, given it’s already significant rates of obesity, which are among the highest in the world.

As governments globally assess the economic costs of sugar consumption and obesity and while constituents’ concerns mount, the impetus to take action is intensifying. Levers at their disposal include education campaigns and regulatory changes such as labeling laws and restrictions on sugar content.

In some jurisdictions, governments have introduced a so-called sugar tax with the aim of cutting sugar consumption. Most recently, the United Kingdom mandated a sugar levy, with numerous advocates – including academics and health advocates – urging the Australian parliament do the same.

With WHO earlier this year recommending sugar taxes to fight childhood obesity and 85 per cent of Australians in support of a sugar levy if the proceeds were to support initiatives preventing childhood obesity, Australia’s leaders may feel compelled to act on this front.

Investment impacts

According to Morgan Stanley, sugar consumption in developed markets is falling, creating big problems for food and beverage businesses that derive a significant proportion of revenue from sugary products, most notably soft drink makers.

With customers seeking healthier alternatives, in addition to a drop in sales, these companies may find themselves exposed to sugar taxes.

In the face of shifting public sentiment, McDonald’s significantly changed its menu in recent years. By adding healthier options, cutting the sugar and energy content of menu items and reducing portion sizes, the fast food company has effectively positioned itself to capitalize on current attitudes towards health.

In Australia, Coca-Cola Amatil Limited (ASX: CCL) has acknowledged shifting consumer preferences, with the company adapting its products to ensure the business is sustainable in the long term.

To meet changing demands, Coke has implemented measures including the launch last year of Coke Life, sweetened with Stevia as well as sugar, and offering smaller cans. CEO Alison Watkins recently said 8 per cent of its formulations have had their sugar content cut recently. Reflecting changing customer attitudes, the company has reported its low and no-calorie drinks are a growing portion of its portfolio.

Outlook

As the risk of sugar and its role in the globesity epidemic continues to gain public and government attention, an important and emerging investment theme is presented of which investors ought be cognizant.

In our view, the future viability of businesses reliant on sales of sugary products will depend on their ability to adapt to evolving consumer preferences and potential legislative changes.

Chris Stott is chief investment officer at Wilson Asset Management.

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