This article first appeared in The Edge Financial Daily on November 13, 2018
KUALA LUMPUR: Fraser & Neave Holdings Bhd (F&N), anticipating 90% of its beverage products will be subject to the new sugar tax proposed under Budget 2019, is bracing for its negative impact, though the group cannot as yet quantify the new tax’s implication on its business.
“We all know [the sugar tax] is not going to be positive for industry players. For now, we need more details on the tax from the government before we are able to fully assess its impact on our business,” said F&N chief executive officer Lim Yew Hoe at the group’s financial year 2018 results briefing yesterday.
Starting April 1 next year, Malaysia will impose an excise tax of 40 sen per litre on manufactured “sugar sweetened beverages” for the first time. Dubbed “sugar tax”, it will be imposed on non-alcoholic beverages with added sugar exceeding five grammes per 100ml, and on fruit or vegetable juices containing added sugar of over 12 grammes per 100ml.
F&N’s products affected by the new tax include 100PLUS, the largest contributor to the group’s soft drinks division. 100PLUS has around six grammes of added sugar per 100ml.
RAM Rating Services Bhd said last week the new tax is a negative development for F&N and therefore expects the group to raise retail prices for its sugar-sweetened drinks at between 10 sen and 60 sen, which would affect near-term demand owing to consumers’ knee-jerk reaction to the price hikes.
In response, Lim agreed that “simple maths” give a potential price increase of between 10 sen and 60 sen, based on the group’s existing retail prices of RM1.20 for RM250ml drinks and RM3.40 for 1.5-litre ones, should the group decide to fully pass on the sugar tax to consumers. However, he did not commit to what the group would do for now.
Nevertheless, Lim gave an assurance that sugar levels for certain products such as tea, soybean milk and its 100PLUS mainstay are easy to be tweaked, so they fall below the taxable level, even if the same can’t be said for some carbonated drinks.
Meanwhile, Lim said the group is seeking more opportunities for its mineral water business, which it hopes to strengthen to mitigate the sugar tax’s impact on the wide array of its beverages in the ready-to-drink (RTD) market.
Although the mineral water business’ contribution to the group is currently insignificant, Lim said growing this business is the right strategy for the group. F&N is considering measures such as teaming up with hotels to co-develop the brand, and bundling the bottled mineral water with its newly launched 100PLUS ACTIVE Powder in sachets, a powder form of the non-carbonated isotonic drink 100PLUS ACTIVE.
April 1 implementation too soon
Lim urged the government to give manufacturers more time to reformulate their products, suggesting the tax be implemented in different stages instead, as it takes more than just simply reducing sugar when tweaking the recipes to ensure the flavours remain acceptable to consumers, he said.
Lim also pledged that the group will continue promoting healthier options by providing an alternative, healthier variant for each of its beverage products by 2020.
“Over the years, the group has made significant efforts to reduce the amount of sugar in its total beverage portfolio. As a result, the sugar index [measuring the amount of sugar in grammes per ml] has decreased 34% since 2004.”
On the group’s 19% year-on-year net profit rise for the financial year ended Sept 30, 2018 (FY18), Lim said the notable results exemplified F&N’s commitment in addressing its customers’ needs while staying ahead of ever-changing industry trends.
“Despite the challenging market conditions, we remain focused on capacity and capability building; cost optimisation and extraction of synergies; leveraging on consumer-focused innovations to deliver new and unique product offerings; and expanding the reach for our export business. Moving forward, we will continue executing strategies that ensure a continuous growth.”
F&N’s FY18 net profit grew to RM385.13 million from RM323.38 million a year ago, while revenue strengthened to RM4.11 billion from RM4.10 billion, mainly because of cost synergies and lower overheads in its Malaysian operations, a favourable input cost, higher export revenue, and not having to account for one-off items such as restructuring costs incurred in FY17.
F&N shares fell 22 sen or 0.65% to RM33.62 yesterday, valuing the group at RM12.32 billion. In the past 12 months, the stock has grown near 34%.