Philly Soda Sellers Say Tax Has Reduced Sales by as Much as 50%

(Bloomberg) -- Philadelphia’s six-week-old tax on sweetened beverages is already taking a toll on drink distributors and grocers, with some reporting sales drops of as much as 50 percent.

Canada Dry Delaware Valley -- a local distributor of Canada Dry Ginger Ale, Sunkist, A&W Root Beer, Arizona Iced Tea and Vita Coco -- said business fell 45 percent in Philadelphia in the first five weeks of 2017, compared with the same period last year. Total revenue at Brown’s Super Stores, which operates 12 ShopRite and Fresh Grocer supermarkets, fell 15 percent at its six retailers in the city.

“In 30 years of business, there’s never been a circumstance in which we’ve ever had a sales decline of any significant amount,” said Jeff Brown, chief executive officer of Brown’s Super Stores. “I would describe the impact as nothing less than devastating.”

Philadelphia became the first major U.S. city to implement a soft-drink tax when it approved a levy of 1.5 cents per ounce on sweetened beverages in June, almost doubling the price of 12 packs of cans and two-liter bottles. The legislation gave momentum to the anti-soda movement, further battering an industry that was already facing long-term sales declines amid increasing health concerns. Following Philadelphia with similar measures were the California cities of San Francisco and Oakland; Boulder, Colorado; and Cook County, Illinois, home of Chicago.

City Limits

Canada Dry Delaware Valley Chief Operating Officer Bob Brockway said he expects his business will decline by at least a third over the course of the year. He distributes more than 20 percent of all soft drinks in Philadelphia market. Even though retailers just outside the city limits have gotten a sales bump, that increase isn’t enough to offset the drop in Philadelphia. Brockway said he’ll have to lay off 30 of his 165 employees in the area in March. Depending on summer sales, the layoffs will probably continue, he said.

The sales declines are hurting grocery stores and bodegas in poor neighborhoods, where shoppers tend to buy in bulk, more than convenience stores, Brockway said. A 12-pack of cans for $2.99 is subject to a $2.16 tax. A $1.89 single-serve 20-ounce bottle, on the other hand, is only 30 cents more expensive now.

City officials say that because the levy is assessed at the distributor level, it isn’t technically a sales tax. The reason that some prices have doubled is because distributors have chosen to pass along the increase to their customers, they say.

At Brown’s stores, many of which were established in places previously designated as food deserts, beverage sales are down 50 percent. Jeff Brown said he’s had to cut 5,000 to 6,000 hours of employment per week, the equivalent of about 280 jobs. Beverages are the biggest category in a grocery store, he said, with 4,000 products. When consumers drive outside the city to find cheaper prices, Brown said he’s losing the non-beverage portion of their carts as well.

Accelerating Trend

The tax has accelerated declines in sweetened-beverage sales that were already in motion. Per capita soda consumption in the U.S. hit a three-decade low in 2015, according to Beverage Digest, a trade publication. Brockway says he hasn’t had an increase in his sugar-sweetened beverage portfolio in the last eight years.

“The consumer over the last 10 years has already told us that we need to develop brands and packages that are either good for you or better for you,” he said. “All that’s happening with this tax is that it’s accelerating that consumer dynamic.”

Philadelphia’s plan differed from about 40 other attempts to enact soda taxes in cities across the U.S. because Mayor Jim Kenney focused on the potential fiscal benefits of a tax, not public health. The levy is expected to generate $409.5 million over five years, according to Kenney, a first-term Democrat. Of that amount, $314 million would go to programs such as expanding pre-kindergarten and renovating recreation centers and libraries.

Too Soon

Advocates of the tax say it’s far too soon to know what its impact will be. A 50 percent sales decline is significantly larger than what would be expected based on the results of previous sugary-beverage taxes in Mexico and Berkeley, California, according to Jim Krieger, executive director of Healthy Food America, an organization that supports soda taxes.

“This is just an attempt by industry to whip up the troops and try to turn back sound public policy,” Krieger said. “The bottom line is that the purpose of the tax was to raise money for important needs and to serve the residents of Philadelphia, and it’s doing precisely that.”

The mayor’s office said a drop in revenue was to be expected early in the year. For distributors, declines are higher than forecast because retailers stocked up on pre-tax inventory, said Mike Dunn, a spokesman for Kenney. Retailer declines will likely subside some as shoppers become more used to the new prices, stop driving out of the city to purchase groceries and substitute sugary drinks with more healthful, untaxed beverages, he said. 

The American Beverage Association, a trade group representing Coca-Cola, PepsiCo Inc. and Dr Pepper Snapple Group, has challenged the tax in court.

Philadelphians for a Fair Future, a group that supported the tax, received donations from former New York Mayor Michael Bloomberg, whose philanthropy supports anti-smoking campaigns and other health initiatives. Bloomberg also gave more than $18 million to campaigns in support of the Oakland and San Francisco soda-tax initiatives, finance records show. The former mayor is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.

If the tax proves financially successful, it will spread to more parts of the country, according to John Stanton, professor of food marketing at Saint Joseph’s University.

“If Philadelphia shows big revenues and there’s not a huge amount of complaint, every city in the country will be doing it,” he said. “It’s a beautiful way to tax people and make them think you’re doing them a favor.”

To contact the reporter on this story: Jennifer Kaplan in New York at jkaplan84@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Mark Schoifet