BTVCY Britvic PLC (QX)

By Saabira Chaudhuri in London and Mike Esterl in Atlanta 

LONDON--The U.K. government on Wednesday unveiled a surprise levy on sugary drinks, setting up a new battleground between the global soft-drinks industry and public-policy makers aiming to curb sugar intake.

While the U.K. is a relatively small market for global drink makers, executives have worried about the precedent such a move could set.

France, Mexico and Chile already have rolled out similar levies in recent years while India, Indonesia, the Philippines and South Africa are considering them. A number of states and municipalities in the U.S. also have toyed with the idea.

U.K. Treasury chief George Osborne announced the new tax, which will be introduced in two years, in his 2016 budget statement. He estimated the measure would raise $735.8 million in its first year, with receipts subsequently declining as makers reduce sugar content.

The U.K.'s Office for Budget Responsibility calculated that on the basis of the government's revenue target, the sugary-drinks levy would end up imposing unit charges of 18 pence or 24 pence a liter, "which we expect to be passed entirely onto the price paid by consumers." The money will be used to fund more sports in schools.

Industry groups sharply criticized the move.

"We are extremely disappointed by today's announcement," said Ian Wright, director-general of the Food and Drink Federation, a U.K. trade body. "The imposition of this tax will, sadly, result in less innovation and product reformulation, and for some manufacturers is certain to cost jobs."

Shares of Coca-Cola Co. and PepsiCo Inc. on Wednesday dipped 0.4% and 0.3%, respectively, in New York trading. Britvic PLC--which sells Pepsi's drinks in the U.K. and Ireland and has its own soft-drink brands, including Tango and J2O--was down 1.3% in London.

"Our actions are doing more to reduce sugar and calorie intake than a tax will," said Jon Woods, General Manager of Coca-Cola Great Britain.

A commission of the World Health Organization recommended in January that governments consider special taxes on sugar-sweetened beverages. The WHO recommended last year that adults and children keep added sugars to below 10% of daily calories--little more than a 12-ounce can of regular soda. The commission estimated 41 million children under five years of age are overweight--nearly half of them in Asia and a quarter in Africa.

The beverage industry says it is unfair to single out sugary drinks for special taxes and has spent more than $100 million since 2009 in the U.S. alone to defeat similar proposals in more than two dozen cities and states.

Nevertheless, the regulatory trend is clear and accelerating.

Lawmakers in New York state are proposing health-warning labels, and California legislators are looking at a special tax on sugary drinks. San Francisco residents are collecting signatures to put a sugar tax back on the ballot after narrowly falling short in 2014. And officials in Baltimore are weighing health warnings for sugary drinks in stores.

Philadelphia's mayor this month proposed a tax of three cents per ounce on sugar-sweetened beverages--three times as much as the tax in Berkeley, Calif., which in late 2014 became the first U.S. city to pass such a measure.

In all, 39 states and the cities of Chicago and Washington have taxes on sugary drinks, though those taxes generally are too small to affect consumption, according to the Center for Science in the Public Interest, a public-health group and soda-industry critic.

Still, U.S. soda sales have fallen 10 straight years in volume terms, according to industry tracker Beverage Digest, as Americans shift to alternatives like bottled water.

Mexico's tax of about 10% on soda, implemented in 2014, has helped to cut consumption of those drinks in the country, according to a study published this year in BMJ, formerly known as the British Medical Journal. The measure cut 2014 sales by 6% from the average of the previous two years, the study found.

In contrast to other countries, many U.K. consumers already have shifted to low-or zero-calorie sodas that contain little or no sugar. U.K. sales of carbonated soft drinks totaled $4.64 billion last year, or 2.8% of global sales.

Soda industry leader Coke had a 59% market share in the U.K., ahead of PepsiCo, with 16%, according to data provider Euromonitor International.

The U.K. government previously had said it had no plans to introduce a tax on sugar-sweetened beverages. Prime Minister David Cameron as recently as January voiced reluctance to consider a levy, though he noted the need to act against obesity.

The government had argued for a focus on other measures, such as increasing awareness of the dangers of consuming too much sugar and better food labeling.

Mr. Osborne's Wednesday announcement reflected a thorough shift.

"I am not prepared to look back at my time here in this Parliament, doing this job and say to my children's generation: I'm sorry, we knew there was a problem with sugary drinks, we knew it caused disease, but we ducked the difficult decisions and we did nothing," he said.

The levy will be introduced in two years to give companies time to change their product mix and will be determined based on the volume of sugar-sweetened drinks companies make or import.

It will be imposed according to two bands: one for sugar content above 5 grams per 100 milliliters, and another for drinks with more than 8 grams per 100 milliliters.

Mr. Osborne said pure fruit juices and milk-based drinks would be excluded and that the government would ensure "the smallest producers are kept out of scope." U.K. sales of energy and sports drinks, which totaled $2.18 billion last year, according to Euromonitor, would be affected by the tax.

--Nicholas Winning in London and Tripp Mickle in Atlanta contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Mike Esterl at mike.esterl@wsj.com

(END) Dow Jones Newswires

March 16, 2016 17:38 ET (21:38 GMT)

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