Companies studied in the research experienced negative stock market returns on the day the tax was announced, these companies’ returns had ‘bounced back’ over the following four days

Sugar levy had no lasting negative impacts on the UK soft drinks industry

Leading UK soft drinks companies continued to experience positive growth in their share prices during the implementation of the UK Government’s Soft Drinks Industry Levy (SDIL), despite widespread industry fears the tax would harm their businesses, researchers have found.

An analysis of stock market returns of soft-drinks companies registered on the London Stock Exchange, was conducted by researchers funded by the National Institute for Health Research (NIHR), the nation’s largest funder of health and social care research, and is published today in ‘Economics & Human Biology’.

The research found that, although companies studied in the research experienced negative stock market returns on the day the tax was announced, these companies’ returns had ‘bounced back’ over the following four days. They also noted that the soft drinks companies’ stock prices increased over the following two years to the end of the study.

The SDIL was introduced as part of the UK Government’s Childhood Obesity Plan to address childhood obesity, and related conditions such as diabetes and heart disease and help people reduce their daily sugar intake. The levy applies to drinks containing more than 5g of sugar per 100ml, but not to fruit juice, milk-based drinks, alcoholic drinks, or drinks from companies with sales of less than one million litres per year.

On its announcement, the soft drinks industry claimed the SDIL would negatively affect businesses across the soft-drink supply chain’, leading to job losses and a reduction in UK GDP, according to reports in the news media.

Research from the London School of Hygiene & Tropical Medicine (LSHTM), the University of Cambridge, Exeter and Bath Universities looked at stock returns of companies quoted on the London Stock Exchange under the beverage sector, excluding private label producers and eliminating alcoholic beverage manufacturers. This resulted in four companies - including the largest UK soft-drink firm - listed on the London Stock Exchange*.

Stock returns were analysed from July 2015 to July 2018, noting four key dates - the SDIL announcement on 16 March 2016; the release of draft SDIL legislation and consultation summary on 5 December 2016; the announcement of SDIL rates on 8 March 2017 and when the tax came into effect on 6 April, 2018.

Researchers found that, on the day of the announcement, three of the four soft drinks firms experienced a statistically significant and abnormal decline in their stock return but stocks had returned to their normal levels within four trading days.

Professor Richard Smith, of the University of Exeter, who co-authored the study, said: “Stock market values are a great barometer of how concerned investors are about announcements like the SDIL.  Given the rhetoric that SDIL could have a very negative impact on industry profits it is really valuable to establish that investors didn’t see it this way, and rather that they have great confidence in the industry being able to respond and maintain their value.” He added that “this sort of finding contributes a new angle to the rapidly emerging evidence around the value of fiscal policies in improving public health nutrition.”

Dr Cherry Law, Research Fellow at the London School of Hygiene & Tropical Medicine, the paper’s lead author, said: “Overall, the abnormal stock returns in response to the SDIL news we observed were negative but short-lived.

“While the stock market initially perceived the SDIL announcement as detrimental to the soft drink companies, the ‘bounce back’ of abnormal stock returns suggests that negative financial impact might not be as substantial as claimed by industry in the news media.

“This research provides an important foundation for more research into the value of fiscal interventions aiming at improving public health.”

Professor Martin White, Professor of Population Health Research in the Medical Research Council (MRC) Epidemiology Unit at the University of Cambridge and Chief Investigator for the SDIL Evaluation, said: “On the day of the announcement of the SDIL, a number of soft drinks companies issued stark warnings to the news media about the anticipated negative impacts of the levy on their businesses, so we wanted to see whether these were borne out by the data. We already know that the levy has led to substantial reformulation of soft drinks, reducing sugar levels considerably. To confirm that the levy only minimally impacted on the share value of the four companies listed in the UK suggests the SDIL is a win for public health and economically viable.”

Professor Ashley Adamson, NIHR expert in public health and nutrition, said:  “Conducting high quality research into the effectiveness of interventions like the sugar levy, designed to help us all choose healthier diets by making healthier choices the easy choice, is crucial in improving the health and wealth of the nation.

“This study provides important evidence to inform decision-makers on how successfully their policies are working. It’s essential that more research is done on the wider impact of large-scale policies like this if we are to make the major advances in public health we so urgently need.”

The paper is entitled: An analysis of the stock market reaction to the announcements of the UK Soft Drinks Industry Levy

Date: 26 February 2020