A food earthquake just hit south of the border. Mexico has successfully passed legislation placing an 8 percent sales tax on sugary soft drinks in response to their obesity epidemic. This is a significant public policy threat to the revenues of industrial beverage companies like Pepsi and Coca-Cola. It also raises public policy questions for the U.S. as it struggles with its own national epidemic of obesity and diabetes.
Health care costs expand with waistlines
Mexico and the United States are two of the world’s fattest countries. In the U.S. 31.8 percent of adults are classified as obese. In Mexico, it is 32.8 percent.
Heightened obesity levels increase human suffering. Obesity is linked to type 2 diabetes, coronary heart disease, stroke, hypertension and arthritis. Today, 25 million Americans have type 2 diabetes. 27 million have chronic heart disease. 68 million have hypertension and 50 million have arthritis.
Heightened obesity levels also place a heavy cost burden upon our national economy and family budgets. In the U.S., the cost of treating obesity-related diseases is $48 billion. The Harvard School of Public Health estimates that the added costs of lost work days, increased medical insurance rates and lost wages results in a $190 billion cost impact upon our national economy.
Increased sodas sales drive obesity rates higher
The consumption of just one can of soda is not going to make a person obese or cause diabetes. It is the volume of soda being consumed by Americans and Mexicans that is threatening human health. According to the national Soft Drink Association, the average adult in the U.S. consumes 600 12-ounce servings of soda per year. Mexico is the world’s largest consumer of soft drinks. The average Mexican drinks a stunning 46 gallons of soda per year! Coca-Cola’s own estimates are that the average Mexican consumes 650 cans of soda per year.
Research points to increased soda consumption driving obesity rates higher in both Mexico and the United States. The rate of increased soda consumption and the increase in obesity rates have risen together.
Soda plus junk food are threatening our children’s health
Soda and fast food companies view their products as benign to human health because a “calorie is a calorie.” Research say this is not the case. A National Health and Nutrition Examination Survey found that top sources of energy for 2 to 18-year-olds were grain desserts, pizza and sugar sweetened beverages. This study went on to identify that half of the “empty calories” in our children’s diet comes from just six foods: soda, fruit drinks, dairy desserts, grain desserts, pizza and whole milk. Illogically, government policy continues to support the food industry’s promotion of increased junk food and soda consumption by our sons and daughters that over the long term will increase their exposure to obesity-related diseases.
Marketing, advertising and volume price incentives drive obesity rates higher
I attended a national marketing conference where the Coca-Cola company’s confused ethics were brought to my attention. At this conference, a Coca-Cola marketing manager presented his success in growing Diet Coke sales through a promotional campaign focused upon the erosion of polar bear habitat due to climate change. This Diet Coke marketing campaign was a Hollywood-quality media outreach that successfully engaged youth and the millennial generation on their heightened focus of environmental issues. Proudly, this marketing manager reported that this campaign drove the sale of Diet Coke to record results. This case study left me with these impressions:
- Polar bears gained needed publicity on their loss of habitat
- Nothing really happened that enhanced the survival rate of polar bears
- The Coca-Cola company grew their revenues
- A marketing team may have gotten a financial raise
- The health risk to U.S. citizens, especially our children, from drinking “empty calories” was increased
Will Mexico’s sales tax on soda reduce obesity?
The public policy question of Mexico’s 8 percent tax on soda is whether it will result in reduced sugar consumption, resulting in the reduction of obesity. Raising the price of a product through a tax will reduce its purchase if these three key conditions are met:
- Consumer incomes do not increase to levels that economically compensate for the demand suppressing tax
- There are viable and cost-attractive product substitutes to the product being taxed
- The product tax is significantly high enough to create a new “cultural norm” away from purchasing the taxed product
The challenge for Mexico is that soda fills a consumer void in clean water supplies. Soda has also become a cultural norm promoted by millions of dollars in annual advertising that links soda to the aspirations and values of consumers. And the income of Mexicans are increasing and this income increase can blunt or eliminate the demand-suppressing impacts of a tax upon soda.
Public policy that can reduce obesity
The current U.S. public policy of increasing consumer awareness of the health risks tied to high levels of soda consumption is at best slowing the rate of soda consumption. Encouragingly, at least half of U.S. moms say they are reducing their family’s consumption of soda.
Cigarette regulations provide an example of public policy that will meaningfully reduce soda consumption levels and its human health impacts. The public policy tools used to reduce the rate of cigarette consumption were:
- Significantly higher product taxes
- Advertising restrictions, especially toward children
- Very visible and frank package labeling that links consumption to adverse health risks
- Regulation of adult consumption behaviors
- Sales prohibition to minors
Applying similar rules and regulations to soda sales will reshape the current cultural norm of soda drink dispensers that offer unlimited refills and “super size me” portions. Without this level of public policy, it is highly unlikely that the U.S. will achieve affordable health care insurance or significant reductions in the human suffering created from the marketing of obesity-linked diets.
Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017