Simon-Kucher warns of tough times ahead due to UAE 'sin' tax

13 September 2019 Consultancy-me.com

Consultancy Simon-Kucher & partners has commented on the UAE’s recently announced expansion of its ‘sin-tax’ to sweetened beverages and e-smoking devices – hinting at tough times ahead for stakeholders.

A specialist in sales & pricing – ranked sixth worldwide among industry peers for the segment in the latest Vault.com survey – global strategy and marketing consultancy Simon-Kucher & Partners has outlined the ramifications for manufacturers, distributors and retailers of the recently announced extension of the UAE’s excise on sweetened beverages and electronic smoking products, which is due to come into effect at the beginning of next year.

Commonly described as a ‘sin’ tax, excises of up to 100 percent have been levied on a range of products considered harmful to human health in the Emirates since 2017, including a 100 percent whack on tobacco and energy drinks and a 50 percent mark-up on carbonated drinks. Now, any product with added sugar or other sweeteners that can be converted into a drink will join that list, along with a 100 percent tax on electronic smoking devices and vaping liquids.

The concerned industries now face a serious problem, says Simon-Kucher, which is expecting consumers to drastically alter their behavior in line with the price hike. If trends follow suit from the original round of excises, consumers of sweetened drinks will likely shift to the cheaper option of water or healthier alternatives without added sugar, while users of e-cigarettes, rather than switch to an already heavily-taxed tobacco, could potentially give up smoking altogether.

Simon-Kucher warns of tough times ahead due to UAE 'sin' tax

“Due to this shift in purchasing behaviors – and from our experience with similar tax introductions in the past – we predict consumption volumes to decrease by as much as 50 percent for premium brands and 30 percent for cheaper mainstream brands,” warned Dubai managing director Lovrenc Kessler and director Gawel Adamek. “Even under positive market conditions, it will take at least three years to build back the volumes sold to the levels before the tax hit.”

Both members of Simon-Kucher’s Global Consumer Goods and Retail practice with over a decade of experience, Kessler and Adamek state that with these strong headwinds in mind, it’s vital for companies operating in the impacted segments to start mapping out their strategies now, both in terms of mitigating the short-term negative financial impact, but also to fuel future growth over the longer run in what is a new and uncertain market environment.

“Our advice to companies is to leverage a mix of four powerful measures to battle the “sin tax’s” impact. In our opinion, companies should optimise their price-pack architecture. Measures such as increasing package sizes together with the prices or decreasing package sizes to offset a price increase typically gain much better results than flat price increases. In doing that, companies can fully leverage the expected changes in consumer behavior,” state Kessler and Adamek.

In addition, the Simon-Kucher experts suggest firms should take opportunity of the market disruption to start a conversation with business partners around trade-term structures, such as introducing performance-based conditions, as well as providing specific training for sales team to negotiate long-term goals and studying up on volume forecasts and financial models in advance to enhance the potential for gaining support. This, they say, may even help firms to "distinguish themselves from the competition for long-term growth."