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Can We Use Tax Credits to Stop Steadily Climbing Obesity Rates?

Hank Cardello

Recently the __Wall Street Journal__ reported that the major beverage companies are now taking ownership positions in coconut water brands. Touted as natural sports drinks, the beverages hold promise as the next wave of revenue and profit generators. More importantly, these actions are part of a pattern to shift from higher calorie products to better-for-you versions.

Large food and beverage companies are notorious for their poor track record at creating and developing new brands unless the name borrows from its legacy (e.g., Diet Coke; Honey Nut Cheerios; Grape Gatorade). Many big successes have often been acquired and examples abound:

  • General Mills acquired the U.S. licensing rights to market Yoplait in 1977 before that category gained popularity in the United States. At the time, the move was considered a gamble by the cereal and cake mix company. In 2011, U.S. sales topped $1.5 billion.
  • Gatorade could not break the $100 million sales barrier under baked bean canner Stokely-Van Camp. It was not until the Quaker Oats company bought the brand (now owned by PepsiCo) that it flourished, now commanding 70 percent of the $6.7 billion sports drink market.
  • Before competitors could swoop in, Coca-Cola purchased Vitaminwater for $4.2 billion to guarantee its toehold in the growing non-carbonated enhanced waters segment.

The soda companies have been particularly adept at employing this line extension/acquisition strategy. When I first entered the soft drink industry 30 years ago, lower calorie beverages (i.e., diet sodas) comprised only 20 percent of sales as sugar sodas ruled. Since then, line extensions like Diet Coke, Coca-Cola Zero, and Pepsi Max, combined with opportunistic acquisitions, have helped beverage companies grow while lowering the number of calories they sell. According to a recent University of North Carolina at Chapel Hill study, calories per capita from carbonated soft drinks (CSDs) sold by Coca-Cola and PepsiCo in the United States have actually declined 26 percent over the past decade. All this despite calls for increased regulatory action against these companies.

Yet despite high-profile acquisitions, line extensions (PDF) still represent the lion’s share of new product launches. The reason is that this strategy helps mitigate the risk of failure and delivers more controlled growth. However, relying on line extensions alone slows the transformation to better-for-you items.

If we really want food and beverage companies to help pull calories off the street, improve the nutritional content of their products, and accelerate the reversal of obesity rates, we must provide a pathway to encourage them to step-up their purchases of better-for-you brands developed outside their corporate walls.

Rather than impose new regulations intended to drive the conversion to lower-calorie foods and beverages, I prefer the carrot to the stick. As demonstrated above, the soft drink industry has lowered its calorie contribution substantially without regulation primarily in response to changing consumer needs. If anything, proposals to tax and ban certain sugared beverages only serve to delay progress in adopting healthier brands as the companies are certain to resist, resulting in a protracted and costly altercation.

To trigger action, give companies Calorie Credits when they buy brands/companies that lower the overall calories they sell per capita.

The validity of each company’s claim to a credit can be determined readily by tracking its Calorie Footprint, a measure of the calories sold per person or per dollar sales. Calorie Footprints for all food and beverage companies can be calculated via a credible third party institution, such as our Obesity Solutions Initiative at the Hudson Institute.

Several packaged goods marketers are already moving to shore up their product portfolios with better-for-you brands. Recent examples include General Mills’ completion of the Yoplait acquisition, Group Danone’s purchase of Stoneyfield Yogurt, and Coca-Cola’s procurement of Honest Tea. Accelerating such activities would go a long way toward removing excess calories from the market. Given that the annual cost of obesity is estimated to be between $147 billion and $215 billion, credits to drive widespread distribution of more lower-calorie foods and beverages are more than merited. And they have been proven to be effective. A study by the Government Accountability Office (GAO) concluded that the research tax credit, amounting to a $5.6 billion subsidy in 2009, fostered innovation and economic growth by reducing the cost of qualifying research by 6.4 percent to 7.3 percent.

One approach is to add a new provision to the 2010 Tax Relief Act which already allows R&D credits for such activities as new product development and ingredient research. An expansion of this definition to include the acquisition of better-for-you brands would go a long way to prompting the large food and beverage corporations to acquire and accelerate the national distribution of healthier, but less visible, brands.

Despite existing R&D credits, the food industry spends a paltry one percent to two percent of revenues on R&D. A broadened tax credit incorporating the purchase of better-for-you products would create a renewed urgency to accelerate acquisitions given their potential to more quickly impact revenues and profits.

Given the staggering price tag associated with obesity, credits are a small price to pay. They’re worth a try.

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