Nielsen expects consumer sentiment to moderate downward closer to 100 in 2019 in the absence of sales tax holiday and shortage in government handouts in the Budget 2019. Malaysia will impose a ‘soda tax’ of 40 sen per litre on ready-to-drink (RTD) beverages containing over 5g of sugar/100ml. Based on our calculations, we estimate the shelf price increase to be below 4%, leading us to believe there will be no changes in sales volumes for sugary drinks.

We recently hosted Nielsen to discuss Malaysia’s consumer sentiment and the impending soda tax.

Consumer sentiment. We note that the MIER consumer sentiment peaked in 2Q18 at 132.9 due to the post-election euphoria before mediating back to 107.5 in 3Q18 (Figure #1). However, we note that there is a divergence in Nielsen’s consumer sentiment Index, which rose in 3Q18 to a ten-year high (Figure #2). Nielsen attributed this to the sales tax holiday preceding SST implementation in Sept 2018. Going forward, Nielsen expects consumer sentiment to moderate downward closer to 100 in 2019 in the absence of sales tax holiday and lower government handouts in the 2019 budget (RM9.2bn vs 12.7bn in 2018).

Implementation of soda tax. In the last decade, various countries have implemented taxes on sugary beverages (Figure #3). Beginning 1 Apr 2019, Malaysia will impose a ‘soda tax’ of 40 sen per litre on ready-to-drink (RTD) beverages containing over 5g of sugar/100ml. The soda tax is aimed at promoting a healthy lifestyle. Of the large cap listed counters, we note that there are multiple stock keeping units (SKU’s) that breach the permitted threshold, including Milo (6.9g of sugar), Nescafe (5.7g) (Nestle), 100 PLUS (6.0g), F&N (11.2g), Ice Cream Soda (11.2g) (Fraser and Neave, F&N). However, we note that F&N has introduced lower sugar variants of RTD 100PLUS (4.0g). Additionally, we note that Nestle also offer a lower sugar variant of Milo powder (25% less sugar), which leads us to believe they may launch a ready-to-drink low sugar variant of Milo. (Milo already have multiple RTD variants; Milo Ice, Milo Kaw, Milo Hi-Cal).

What happened in other countries? We note that in countries where shelf prices rose by more than 10%, sales for sugary beverages declined between 6-9% (Figure #4). However, in countries with price increases of 10% and below, short term sales decrease was short lived, returning to previous levels within two years.

Impact on FMCG players. Based on our calculations, the tax structure imposed only represents a shelf price increase of under 4%. Therefore, we do not expect a significant decline in volume sales for sugary drinks. Additionally, we expect FMCG players to pass on the higher tax cost to consumers, as has been done in every other country that underwent soda tax implementation. Additionally, while we note that FMCG companies in other countries reduced package sizes and reformulated recipes of SKU’s to reduce sugar content to below threshold levels, we do not expect this to happen in Malaysia given that the impact on shelf prices is expected to be minimal.

Sales volume of beverages. We note that in 9M18, healthy beverages such as bottled water (21.0%) and liquid milk (14.9%) were amongst the most robust growing product categories (Figure #5). Meanwhile canned soda drinks recorded just 0.2% volume growth. This implies that Malaysians are already seeking out healthier beverage options.

Maintain NEUTRAL rating on the consumer sector on back of expectations for sentiment to moderate downwards this year and rich valuations of most large cap consumer stocks.

Source: Hong Leong Investment Bank Research - 28 Jan 2019