UAE “Sin Tax” Will Severely Reduce Sales – Companies Must React Now
Recently, the United Arab Emirates (UAE) cabinet decided to expand the list of excise taxable products to sweetened beverages and electronic smoking devices. What this means for manufacturers, distributors, and retailers explain industry experts Lovrenc Kessler (Partner) and Gawel Adamek (Director) from the global strategy and marketing consultancy Simon-Kucher & Partners.
On August 1, the UAE cabinet announced the expansion of the already existing excise tax to sweetened beverages and electronic smoking devices. From January 2020, a tax of 50 percent will be levied on any product with added sugar or other sweeteners that may be converted into a drink. Additionally, a tax of 100 percent will be applied to electronic smoking devices and the liquids used in them. Since 2017, the range of categories covered by what is dubbed “sin tax” have been energy drinks and tobacco (with a 100 percent mark-up), and carbonated drinks (50 percent mark-up). Now that this is about to expand to a much broader range of products, the whole industry faces a serious problem: Based on the learnings from the first round of excise tax that hit the markets in 2018, we expect customers to change their behavior drastically. Consumers of sweetened drinks will shift primarily to water that has a less hefty price per unit, or to healthier alternatives with no added sugar. Users of e-cigarettes will be less prone to switching to normal tobacco products already covered by the excise tax – we actually expect a high rate of users to stop smoking.
30 to 50% sales losses and lengthy recovery
Due to this shift in purchasing behaviors – and from our experience with similar tax introductions in the past – we predict consumption volumes to decrease by as much as 50 percent for premium brands and 30 percent for cheaper mainstream brands. Even under positive market conditions, it will take at least three years to build back the volumes sold to the levels before the tax hit. Therefore, it is vital for companies to now map out a strategy to mitigate the short-term negative financial impact and to fuel future growth in the new, uncertain market environment in the long run.
Four levers to mitigate the tax effect
Our advice to companies is to leverage a mix of four powerful measures to battle the “sin tax’s” impact. In our opinion, companies should optimize their price-pack architecture. Measures such as increasing package sizes together with the prices or decreasing package sizes to offset a price increase typically gain much better results than flat price increases. In doing that, companies can fully leverage the expected changes in consumer behavior. In addition, firms should take the opportunity of the tax disrupting the market to start a conversation about trade-term structures with their business partners. It can be an excellent opportunity to introduce performance-based conditions that will fuel growth and allow to gain market share from passive competitors. Any sales negotiations in the future will have to be thoroughly prepared: Companies should have a communication strategy ready to ensure buy-in and to show initiative to retailers and distributors. Doing homework on volume forecasts and financial models in advance ensures a more specific discussion and higher chances of support for proposed changes. Furthermore, a specific training for the sales team is fundamental to negotiate with long-term goals in mind. In taking these measures, industry players might be able to mitigate the tax’s significant cutbacks and even provide opportunities to distinguish themselves from the competition for long-term growth.
Simon-Kucher & Partners, strategy & marketing consultants: Simon-Kucher & Partners is a global consulting firm specializing in TopLine Power® with a focus on strategy, marketing, pricing, and sales. We help our clients achieve growth and profit targets by applying practical, evidence-based strategies. Simon-Kucher & Partners is regarded as the world’s leading pricing advisor and thought leader. The firm has more than 1,400 employees in 39 offices worldwide.