Coca-Cola’s decision to shrink its bottles and raise its prices has raised eyebrows, but the economics of it are straightforward. In 2016, George Osborne announced the sugar levy of 24p a litre for drinks that contain more than 8 grams of added sugar per 100ml. At the time, Osborne disingenuously claimed that this was a tax on corporations rather than consumers. Whilst it is true that it is not a sales tax per se, it was bound to be passed on to consumers.

Osborne also claimed that paying the tax was optional because soft drink companies had the choice to reduce the sugar content of their products. For Coca-Cola, that was never going to happen. After the New Coke fiasco of the 1980s, the company has learned not to mess with its recipe. There is no question of it going down the risky road favoured by Lucozade and Irn-Bru.

It was therefore inevitable that Coke was going to reduce bottle sizes or raise prices. It has chosen to do both. It is reducing its 1.75 litre bottle to 1.5 litres and raising its price by 20p. The supermarket price for a 1.75 litre bottle is currently £1.66. If the price was reduced by the same proportion as the size, we would expect the price to fall to £1.42. But the sugar tax on 1.5 litres of Coca-Cola amounts to 36p, leaving a retail price of £1.78.

In fact, it appears that the new price is going to be £1.86 or thereabouts. In other words, we are seeing a nominal price rise of about 8p on top of the tax.

Likewise with the 500ml bottles which are reportedly going to stay the same size but with the price rising from £1.09 to £1.25. This is a hike of 16p, which is more than the 12p that would be expected if the sugar levy was passed on in full.

Anti-sugar campaigners should be delighted by this news. Higher prices and smaller portions are exactly what they have been calling for. But should consumers feel ripped off? Is this price gouging by Coca-Cola?

It is not unusual for companies to use tax hikes as an excuse to make greater profits, but it seems more likely in this instance that Coke has waited for the sugar levy to come into effect before introducing a price rise that was already due. The post-tax price rises implied by the figures above are not miles away from the current rate of inflation (3 per cent). A price rise would have been necessary sooner or later regardless of changes to the tax system.

It’s also possible that Coke are anticipating a fall in sales once the sugar levy comes in. That remains to be seen. My hunch is that the company might do quite well out of the whole thing. Many of Lucozade’s customers are abandoning the drink and Irn-Bru’s reformulation has been given a mixed reception. Disgruntled consumers of newly reformulated drinks will need somewhere to go and, even though Coke will be a little more expensive from April, there is a gap in the market for a soft drink that stands up to the nanny state.

 

This article was first published on CapX.