The public arguments around what impact the sugar tax will have have tended to assume that producers and retailers would pass on the tax to consumers.
The design Treasury chose for its sugar tax, however, creates a massive incentive to reformulate and to change the package sizes companies emphasise. Smaller units sell at a higher price per litre, making the tax a smaller proportional burden. The tax rate on a 330ml can of Coca-Cola will be about 5% compared to 20% for a 2-litre bottle.
The small producers are at a disadvantage when it comes to these kinds of adaptations, they told City Press. They do not have the factories to pump out smaller packages at will and they don’t have the global research and development capabilities that a company like Coca-Cola commands for reformulation.
Coca-Cola introduced its Coca-Cola Life variant in South Africa last year, which replaces some of the sugar with stevia extract. This cuts the tax rate on a can to 2% and on a 2-litre bottle to 8% (see graphic).
Coca-Cola’s internal “B Brand” Sparletta has also seemingly been introducing sugar-and-sweetener mixes in some regions, but the company would not answer specific questions.
“People don’t always understand the structure of the industry. There is one very large player and then a lot of small players. We are the largest of the small players,” said Softbev’s Naidoo.
His company would be expanding its offering of smaller unit volumes, he said.
There is also a strictly financial problem facing the small players.
Cooldrink stocks can take several months to move from the manufacturer to the consumer.
When the sugar tax starts at the factory gate, the bottler will have to cover that expense and wait a long time for revenues to catch up, argued Sheppard.
“You need hundreds of millions of rands of cash for that adjustment.”
“It is going to hurt everyone, but it will be devastating for the smaller producers.”
Sheppard still believes an alternative to the tax is possible – and preferable.
If reformulation is going to be the major mechanism through which the sugar tax achieves its aims, the government should just legislate reformulation, he told City Press.
“Just legislate the existing goal for 15% less sugar by 2018 and penalise companies that do not reach it,” he said.
How reformulation can lower the sugar tax but still leave small players at a disadvantage
19.8% 21.6% 7.8% Coca-Cola LIFE 2l 49.2% 28.7% B Brand at 11.8g of sugar 2l 31.3% 14.4% Reformulated B Brand at 8g of sugar 2l Patrice Motsepe’s new property joint venture will combine the resources of one of the country’s best-known billionaires with that of probably its most publicity-shy and reclusive ones, Jonathan Beare.
The new venture, African Rainbow Capital (ARC) Real Estate, was launched this week and could snap up several billion rands’ worth of assets in a year if enough good deals present themselves.
KwaZulu-Natal-based Beare is seldom seen or heard from, but his propertyfocused company Buffet Investments is thought to be one the largest private investment groups in the country.
ARC Real Estate is 52% owned by ARC, with the balance owned by a longstanding property partnership between Buffet and KLT Holdings (Buffet-KLT).
The new company’s model is premised on large companies being willing to trade their properties for cash at a discount – helped along by the need for black economic empowerment credits.
“Let’s say a company owns its own building. If they sell that building to a black-empowered company, they can get shareholder points for that – for the sale itself,” said Johan van der Merwe, co-CEO of ARC, which Motsepe chairs.
“Then they get the procurement points for leasing from the black-empowered company, too.”
ARC and the Buffet-KLT partnership have both committed R500 million to the new property venture to begin with.
“So, it is R1 billion in equity. That billion you can leverage quite heavily to anything between R3 billion and R4 billion. If there are opportunities in the market, we will commit more than R500 million and so will they [Buffet-KLT],” said Van der Merwe.
“We just did a deal of R1.2 billion and we put no capital in. We are still waiting for them to call on the capital we earmarked.”
This first deal was the acquisition of the Setso Property Fund, and its 13 retail and commercial properties, from Pivotal Property Fund and Redefine Properties in December.
“We can build a substantial property company,” said Van der Merwe.
“We haven’t put a time frame on it. If we only get ARC’s partner in the new property company, Buffet-KLT, was represented at this week’s launch by KLT CEO Bradley Kark.
“My gut feeling is that there will be a lot of transactions with large corporations looking for cash and BEE credentials, but I think a lot of our ventures will be of traditional transactions, whether BEE credit enters into it or not,” he told City Press.
“BEE is part of it, but what we have is money, BEE and expertise,” said Kark.
Asked how large the Buffet-KLT portfolio is, he would only say that “it runs into billions”.
“We are among the largest private owners of real estate in South Africa,” Kark said.