F&N should easily weather Malaysia’s sugar tax doldrums

Kuala Lumpur-listed Fraser & Neave Holdings (F&N) is Malaysia’s leading non-alcoholic drinks maker and subsidiary of the ThaiBev-controlled, Singapore-headquartered conglomerate, Fraser & Neave Limited. The company was upbeat earlier this month when it announced 15% net profit growth on the back of a negligible increase in revenues for the first quarter.

It also acknowledged its sugar-reduction strategy for tackling Malaysia’s new tax, which will be introduced on April 1, with potentially “dozens​” of new, healthier drinks lines in development.

Avoiding a 90% price increase

Announced by the finance minister as he delivered the 2019 budget last November, the duty will stand at RM0.40 [US$0.10] per litre for non-alcoholic beverages containing added sugars of more than 5g per 100ml drink. The levy will also be applied to fruit or vegetable juices that contain added sugars of more than 12g per 100ml drink.

The move was immediately greeted by the industry with fear and concern and sparked frenzied activity by drinks manufacturers as they went about deciding how to accommodate the tax.

In its initial reaction to the budget, F&N said the duty could force an increase in the price of some 90% of its products, which include a range of flavoured soft drinks under the F&N brand, the isotonic 100Plus, non-carbonated drinks under the Nutrisoy, Seasons and Fruit Tree brands, and Ice Mountain water.

It has since softened its outlook and professed its support of the government’s attempts to promote health and punish sugar, pledging to speed up healthy product development without needing to alter its prices.

"F&N will focus on bringing the sugar content for most of [our] products to be below 5%​​ while delivering the same great tastes​,” chief executive Lim Yew Hoe told sister title FoodNavigator-Asia​ last month.

The company is also investing in a RM30m beverage plant on the outskirts of Kuala Lumpur to manufacture a staggering number of new products and smaller packaging formats.

“The extra capital expenditure in Shah Alam will enable new products to be produced from October 2019. It could be a few dozens of them​,” said Lim.

“The opportunities are limitless and we are confident that our investments will enable us to accelerate the expansion into new categories and a more extensive portfolio of healthier options this year​.”

Small packs and reformulation

F&N claims that this new approach to healthy beverages was not prompted by the budget’s sugar tax announcement, citing the earlier launch of 100Plus Reduced Sugar, which contains 4g sugar per 100ml.

Lim said that this meant that 5g or less per 100ml was “within the company’s innovation range​”. He claims F&N has managed to reduce the sugar index—the amount of sugar in grams per millilitre of beverage—by 34% in the last 15 years.

Yet it doesn’t take a mind-reader to foresee that the Malaysian soft-drinks market is heading for a slowdown in growth. Analyst CIMB Research for one said it expected performances to be subdued over the next two years, though it speculated F&N’s healthy transformation might insulate it.

“We think that F&NBH is unlikely to see a major dip in sales post-April 1​,” it said in a note to clients, while still cutting its earnings forecast for the coming years.

Another research house, Kenaga, predicted the sugar tax would not be “overly​” detrimental to demand for F&N​’s products, while a new product range could help the company improve its market share.

MIDF Research was even more effusive, predicting that strong export growth would continue to boost the company’s earnings, while improved cost efficiency would have a positive impact on the balance sheet.

“We expect the impending excise duty would have a minimal impact on F&N‘s bottom line due to… the ongoing reformulation of the sugar content for most of its products to be below 5% while maintaining the same taste​,” it said.

To this end, chief executive Lim is focused on producing smaller packs, reformulating and reducing sugar content in existing offerings, as well as speeding up innovations. But he doesn’t rule out the possibility that his brands may yet need to increase in price to accommodate these changes.

“When we take out sugar, we need to replace it with something else [to give us the same taste profile and the costs for these will be different]​,” he said.

“If we cannot absorb these costs, we will increase the price. [Right now], it is too early to say. [That said], increasing prices for consumers will be the last resort​. ”