Beverage Taxes Shown to Dampen Retail Sales

As Cook County, Ill., settles into its first month under a penny-per-ounce sweetened beverage tax, results from the first several months of a similar levy in Philadelphia may offer hints as to how Chicago-area retailers will be impacted.

A recent study from St. Petersburg, Fla.-based personalized digital media company Catalina found that Philadelphia’s sweetened-beverage tax, which was instituted this past January, led to a “staggering” 55 percent decline in carbonated soft-drink sales within the city, while sales of the same beverages just outside of Philadelphia ballooned by 38 percent.

The report also found significant sales declines within Philadelphia’s city limits for energy drinks, sports drinks, and ready-to-drink coffee and tea, while sales outside the border for those categories grew.

Leaders in Philadelphia, Cook County and other localities across the county have looked to new taxes on sweetened beverages as a public health move to discourage product use, to raise additional revenue, or perhaps both reasons.

But the results of the Catalina study indicate that, in practice, such taxes generate revenue below expectations and in fact drive business to areas not subject to the tax.

Published reports indicate that revenue generated by the Philadelphia tax in its first six months fell just short of a revised projection, which was more than $6 million lower than estimated when the tax was proposed. However, the impact on area businesses appears to be far more significant.

Negative Sales Impact

Interestingly, while benefiting at least one beverage category, the measure has negatively affected sales of some items not included in the tax.

“Our study also shows that sales of bottled water, perhaps an alternative to sweetened beverages, have increased in Philadelphia,” the Catalina report noted. “However, the sales of natural refrigerated juices, which are also not taxed, have declined, most likely because shoppers mistakenly believe they are being taxed.” The consumer confusion may arise from the fact that refrigerated juices containing less than 50 percent real juice are subject to the tax.

“In the Philly core, the sales volume of taxed refrigerated juice drinks is down a whopping 47 percent,” the report observed. “Just inside the border experienced declines of 36 percent. In contrast to other categories, shoppers of refrigerated juice drinks are not purchasing the category outside the city limits. The change in store sales volume just outside the border is flat, at 0.2 percent.”

Total Grocery Declined

Beyond beverages, overall grocery sales in Philadelphia have declined in the wake of the measure’s implementation.

“While total shopping trips in the Philly core remained relatively flat in the first three months after the tax, the average basket size decreased by 5 percent, possibly due to the decline in sweetened beverages in the shopping cart,” the Catalina report said. “For the period ending May 31, both trips and basket size are flat. Just inside the border, total basket size was down 2.1 percent as of May 31.” Unsurprisingly, the area just outside the border saw a slight increase in shopping trips during this time frame.

Among the report’s conclusions: “Our data shows quite clearly that the tax is dramatically reducing sales of taxable beverages within the city, but that a significant number of shoppers are travelling outside of city limits to buy their favorite beverages.”

Philadelphia retailers could have predicted the results of the study.

“I don’t think we’ve seen the full effect of this tax yet,” Alex Baloga, VP of external communications at the Camp Hill-based Pennsylvania Food Merchants Association (PFMA), told Progressive Grocer in early March.

Baloga noted that beverage sales have declined as much as 50 percent at affected retailers, who characterized the measure as “devastating” and were bracing for job cuts. At that time, major area bottlers such as PepsiCo and Canada Dry had already begun laying off workers. 

Despite a campaign by retailers and merchants to repeal the measure on the grounds that it amounted to double taxation, it was upheld by an appellate panel this past June. 

Likewise, legal attempts by the Illinois Retail Merchants Association (IRMA) to kill the Cook County beverage tax succeeded only in delaying it by a month; the tax took effect Aug. 2 and is being enforced while IRMA continues to fight it in the courts. Meanwhile, the Cook County Board president sued IRMA for damages, alleging its challenge of the tax deprived the county of revenue; this action was later withdrawn.