Taxing sugar-sweetened beverages to reduce consumption : ewill it be effective in Portugal?

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ABSTRACT

In the last few years, a growing number of individuals suffer from excess weight, obesity and related illnesses, which has compelled governments to implement measures that reduce the consumption of certain nutrients that in excess are detrimental to health.

Since there is no paper that studies the potential impact that an extra levy on sugary drinks may have on the Portuguese consumption, this dissertation aims to answer this question, as well as understand the factors that influence it.

To accomplish this, two regressions were performed, one for Soft Drinks and another for Juices & Nectars. The first conclusion withdrawn was that both GDP and the variable Tax, which intended to capture the effects of the VAT increase in 2012 for these drinks, were not statistically significant, for none of the two regressions.

The second conclusion is that education is a significant variable for Juices & Nectars, but not for Soft drinks. The opposite is true for the variable Maximum Temperature, which shows significance for Soft Drinks and not for Juices & Nectars.

In short, we can conclude that, in the Portuguese case, an extra tax does not seem to be the most appropriate tool to fight obesity and potential alternatives may be educational programs, partnerships with producers to foster reformulation of products or to focus on other nutrients that Portuguese consume more, namely fats and salt.

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SUMÁRIO

Nos últimos anos tem-se evidenciado um crescente número de indivíduos que sofrem de excesso de peso, obesidade e de doenças relacionadas, o que impulsionou vários governos a implementar medidas que diminuam o consumo de certos nutrientes que em excesso são nocivos para a saúde.

Visto não existir nenhum estudo que preveja o potencial impacto que uma taxa extra nas bebidas açucaradas possa ter no consumo português, este estudo visa responder a essa mesma questão e perceber quais são os fatores que o influenciam.

Para isso, foram executadas duas regressões, uma para as Bebidas Refrescantes e outra para os Sumos & Néctares. A primeira conclusão que se retirou foi que tanto o PIB como a variável Imposto, que pretendia capturar os efeitos que o aumento do IVA em 2012 para as bebidas teve no consumo destas, não têm significado estatístico para nenhuma das duas regressões.

A segunda conclusão é que a variável Educação é significativa para os Sumos & Néctares, mas não para as Bebidas Refrescantes. O contrário se passa com a variável Temperatura Máxima que mostra significância para as Bebidas Refrescantes mas não para os Sumos & Néctares.

Em suma, podemos concluir que, no caso português, um imposto extra parece não ser a ferramenta mais adequada no combate à obesidade e acrescentar que potenciais alternativas poderão ser os programas de educação, parcerias com produtores para reformulações de produtos ou até o foco noutros nutrientes como sejam as gorduras e o sal.

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ACKNOWLEDGEMENTS

I would like to thank first and foremost my advisor, Professor Susana Frazão Pinheiro, for always guiding and helping me in the moments that I needed the most, keeping me motivated and focus and for her valuable feedback and time spend with this project.

Also a big thank you to all my colleagues at work, particularly Sophie, for always giving me the flexibility needed for developing this dissertation and their interest and support showed every day.

Finally, a very special thank you to my parents, grand-mother and closest friends, whose encouraging and loving words, always supported and inspired me to pursue my goals.

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TABLE OF FIGURES

Figure 1: Division by Types of Beverages, according to the European and Portuguese Law. 24

Figure 2: Consumption per Capita of Soft Drinks and Packaged Water, 1998-2015 ... 33

Figure 3: Annual Variation of Soft Drinks and Packaged Water, 1998-2015 ... 33

Figure 4: Annual Variation of Soft Drinks and Juices & Nectars, 1998-2015 ... 34

Figure 5: Annual Variation of Juices & Nectars and Packaged Water, 1998-2015 ... 35

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TABLE OF TABLES

Table 1: Design of some of the existing Tax on SSB worldwide ... 18

Table 2: Expected vs Actual Price Changes after the implementation of the SSB tax in Finland ... 20

Table 3: Expected vs Actual Price Changes after the implementation of the SSB tax in France ... 20

Table 4: Expected vs Actual Price Changes after the implementation of the SSB tax in Hungary ... 21

Table 5: Weight of each Category in terms of Overall Consumption of all Beverages ... 30

Table 6: Annual and Total Variation by Category ... 31

Table 7: Variation and CAGR for the 3 categories of the Commercial Drinks ... 32

Table 8: Importance of the Low Calorie Soft Drinks in Portugal, 2009-2015 ... 41

Table 9: Importance of the Low Calorie Soft Drinks in the European Union, 2009-2015 ... 42

Table 10: Consumption of Soft Drinks during the 1st Semester, millions of litres, 2006-2010 ... 43

Table 11: Consumption of Juices & Nectars during the 1st Semester, millions of litres, 2007-2010 ... 43

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TABLE OF ANNEXES

ANNEX 1: Definitions according to the Portuguese and European Law + Some examples54 ANNEX 2: Consumption per Capita of Soft Drinks, Juices & Nectars and Packaged Water

from 1998-2015 ... 57

ANNEX 3: Annual Variation of Soft Drinks, Juices & Nectars and Packaged Water from 1998-2015 ... 58

ANNEX 4: Summary of the Database ... 58

ANNEX 5: AIC Test for the Regression of Soft Drinks ... 59

ANNEX 6: Linear Regressions for Soft Drinks ... 60

ANNEX 7: Final Model for Soft Drinks ... 63

ANNEX 8: AIC Test for the Regression of Juices & Nectars ... 64

ANNEX 9: Linear Regressions for Juices & Nectars... 65

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LIST OF ACRONYMS

ACSS: Central Administration of the National Health System

APIAM: Portuguese Association of the Industrials of Mineral Water BMI: Body Mass Index

CAGR: Compound Annual Growth Rate DGS: General Direction of Health DKK: Danish Krone

ECB: European Central Bank EDUC: Education Level EU: European Union

GDP: Gross Domestic Product HUF: Hungarian Forint

IMF: International Monetary Fund INE: National Institute of Statistics

IPMA: Portuguese Institute of the Sea and Atmosphere JN: Juices and Nectars

KCAL: Kilo-calorie

MAX.TEMP: Maximum Temperature ML: Millilitres

NACD: Non-Alcoholic Commercial Drinks NOK: Norwegian Krone

OLS: Ordinary Least Squares PC: Per Capita

POP: Population

PROBEB: Portuguese Association of Non-Alcoholic Beverages PW: Packaged Water

SD: Soft Drinks

SNS: National Health System SSB: Sugar-Sweetened Beverages

UNESDA: Union of European Beverage Association UK: United Kingdom

VAT: Value Added Tax

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1. INTRODUCTION

1.1. Background and problem statement

In the last few years, some countries all over the world, namely Mexico, France and Hungary, have applied an extra tax to drinks that have a higher concentration of sugar, in order to prevent the further increase in the levels of obesity, diabetes and correlated sicknesses and, additionally, be able to transfer some of the consequent financial gain to the health care or education systems, that in most social countries represent an important parcel of the public expenses.

One of the very last countries to pass on National Parliament and capture more awareness towards this topic has been the United Kingdom (UK) that in two years is going to implement these measures on its market. Nevertheless, the topic is far from consensual and its mixed results bring some doubts of its actual effectiveness.

In the particular case of Portugal, the doubt resides in the fact that the consumption of sugary drinks in the first place is below average and obesity levels over the average, which may indicate that these products probably are not the main contributors to the excessive caloric intake of the Portuguese population.

1.2. Aims and Scope

The main aim of this dissertation is to address the effect that a tax on sugar-sweetened beverages would have in terms of consumption on the particular case of the Portuguese society. Thus, to achieve this result, two questions will be answered:

RQ1: Have previous tax increases focused on these products changed the Portuguese consumption? And what about the GDP influence?

RQ2: What other factors, besides the economic ones, influence the consumption and to which extent?

The object of study is a specific group of beverages whose content of sugar is considered high and excessive in terms of a healthy and balanced diet and can contribute to some extent to the growing rate of obesity and related illnesses.

In some countries, particularly the Nordic ones, this type of tax based on sugar dense products includes, besides beverages, pastries, chocolates, sweets and ice-creams in order to avoid potential substitution effects. However, in this dissertation the only focus will be on

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12 beverages because, as observed in other countries, the latter one is applied first as a test due to its less complex nature and much faster implementation.

1.3. Research Methods

The methodology applied in this study will be created having as a basis the secondary data collected in different national and internationals reputable institutions, such as UNESDA, PROBEB, APIAM, INE and IPMA, which include yearly indicators of the consumption of Soft Drinks, Juices & Nectars, Packaged Water, the GDP level, Population, Temperature and Education Level, from 1998 till 2015.

Initially, it will be developed an analysis of the three types of beverages and its subcategories, consisting of the variation of its composition throughout the years, as well as their growth levels and general trends.

In a posterior phase, two models will be run in R software: one explaining the factors that contribute to the consumption of Soft Drinks and the other for Juices and Nectars. The ultimate goal is to understand the importance of three main factors thought to be explicative of the vast majority of the consumption of sugary: the Economic factor, the Climate and the Education level. It will be assessed the significance of these three in the particular case of Portugal and also if all beverages are explained by exactly the same factors and if not, address the differences observed with information about the particular market of each one.

These models will also measure the relations between the beverages themselves in an attempt to understand if there is a certain level of substitution between them or, on the contrary, if they are complementary for the Portuguese consumer.

With all this information in display, the final objective is to address the potential effectiveness of a tax implemented in Portugal and for that a parallel with the VAT increase in January 2012 from 6% to 23% on these products will be drawn to comprehend the behaviour observed at that time that can occur again if a sin tax is applied.

1.4. Relevance

This research should help national decision-makers to understand the impact a soda tax would have in Portugal and if the expected results would be comparable to those countries who have already experienced the consequences of this implementation or those whose reality inspired research analogous to this one.

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13 This theme is extremely recent and relevant, since during the development of this paper, the Ministry of Health alongside the Ministry of Finance and Economics announced their interest on an extra tax to be implemented on 2017, still without any concrete date or value, but certain that the income generated would be fully transferred to the National Health System, from now on referred as SNS, and to educational campaigns about healthy lifestyle, the importance of physical activity and about obesity and its related illnesses.

Although these types of taxes seem to be constructed on a simple premise, which implies that those who consume more sugary drinks can more easily reach an overweight or obese state, in reality the relation is not as clear. For example, Portugal’s levels of obesity is just hitting the average of the EU-28 with 15.4% and only 0.1% difference separating them, but its consumption per capita of sugary drinks is approximately 30% less that the consumption of the average European citizen. On the other side of the spectrum is the example of Germany, with 13.6% of its population obese and each German consuming 176 litres per year, compared to the Portuguese 82 litres. (UNESDA, 2015, WHO, 2015)

Concluding, this is much more multifaceted that it seemed at first glance and it depends on many factors that decision makers cannot control or need to be aware off, such as culture, the supply side response, weather, etc., and equate solutions accordingly, so the ultimate goal is not jeopardized.

1.5. Dissertation Outline

In the Second chapter, a literature review will be presented including a theoretical framework build from the most recent studies that present the benefits, disadvantages and potential impact of the implementation of such a levy, but also an analysis in terms of price, consumption, substitution effect, competitiveness and Public Health for those countries who already took a step forward and implemented this tax.

In the following chapter, named Methodology, a description of the research methods, databases and statistical analysis that test the hypotheses about the impact of a soda tax in Portugal’s Consumption of sugary drinks will be made.

Then, a presentation and discussion about the most relevant study results will be developed in the fourth chapter. In the fifth and last chapter, implications of the results are debated, along with the limitations of the present study and recommendations for future research.

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2. LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK

2.1. The Obesity Epidemic: numbers and trends

Globally, obesity levels doubled since 1980, with 1.9 billion overweight adults and 600 million obese affected, representing 39% and 13% of the total adult population respectively and when it comes to children the scenario is not positive either, with the predominance of obesity for those under the age of 5 years old accounting a total of 42 million, in 2013. The situation is so alarming and evolved so quickly that even WHO admitted that it is impossible to accomplish their goal of stabilizing the numbers of those affected, until 2020. (WHO, 2015)

Overweight and Obesity are classified by an index called Body Mass Index (BMI) that can be easily calculated by dividing the weight in kilograms by the square of the height in meters (kilograms/meters²). If the value obtained is between 25 and 29.9 an individual is considered overweight, and with values greater that 30 is considered obese. (WHO, 2015)

When referring to obesity, it is also crucial to refer that this illness brings a great number of other sicknesses alongside, such as heart disease, strokes, diabetes, osteoarthritis and some types of cancers, as for example, endometrial, breast and colon (WHO, 2015). Actually, many doctors defend that overeating may be the largest avoidable cause of cancer in nonsmokers (Calle and Thun, 2004).

Lastly, it is important to retain that obesity is a disease almost completely preventable and that a personal compromise on small changes in dietary habits and exercise regime, allied with the support system of the community is extremely relevant to invert this trend. (WHO, 2015)

2.2. Theoretical Frameworks: Arguments for and Against

Inspired by the example of tobacco, it is believed that taxing foods that have a high concentration of sugar is the answer to reduce the obesity levels through an induced reduction of the demand, which is believed to decrease the daily caloric intake. This is justified with the classic microeconomics theories (Marshall, 1890), that proved that there is a negative relation between the price of a product and its demand, known as demand-elasticity. (Caraher and

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15 Cowburn 2005; Finkelstein et al. 2004; Jacobson and Brownell 2000; Kim and Kawachi 2006; Kuchler, Tegene, and Harris 2005; Leicester and Windmeijer 2004)

There are five types of demand-elasticity: elastic, perfectly elastic, inelastic, perfectly inelastic and unit-elastic. In the first case, an increase of price of 1% leads to a decrease in consumption of more than 1%, ceteris paribus, which means that the response of the consumer is much more significant and that it is most probably a non- essential good. An extreme case of this type is the perfectly elastic demand where the smallest change imaginable in price will lead to a major change in the consumption, because that product is completely superfluous (Marshall, 1890).

An essential product most of the times entails an inelastic demand, where an increase of 1% in price leads to a decrease in consumption of less than 1%, ceteris paribus, because consumers still have to satisfy their need for that product, so they try to reduce their purchase, but only a small decrease is possible. When there is absolutely no possibility of decreasing or shifting consumption there is a case of perfectly inelastic, where the buyers are insensitive to a price change. (Marshall, 1890)

There is also the unit-case one, where an increase of price of 1% leads to a decrease in consumption of exactly 1%, ceteris paribus, which is a rare case since the values tend to be below or above and not exactly. (Marshall, 1890)

A common concern about taxing food is that it can be inelastic and have a very small contribution to the reduction of consumption, because these products are a basic need, without which survival is threatened. Yet, the food category and its inelasticity can be further divided into the most needed goods, such as cereals and meat, and those who are not absolutely essential and that need to be consumed in moderation, such as excessively sweet and salty foods that must be considered occasional treats, so its demand is still inelastic but with value much closer to -1. (Andreyeva, Long and Brownell, 2010)

When it comes to sugar-sweetened beverages, studies have shown that the demand-elasticity level is approximately between -0.8 and -1, or that an increase in 1% in price will lead to a reduction between 0.8% and 1% in demand, which indicates that this tax can be an important toll in the battle against obesity. (Andreyeva, Long and Brownell, 2010)

Other advantage is the financial reinforcement (Jacobson and Brownell, 2000) that can be injected in the respective national health system to alleviate a possible negative balance or the increased costs of obesity related illnesses, as well as improving the allocation of public goods, as for example, the water supply in more isolated and poor regions, as it happen in Mexico (Colchero et al., 2016).

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16 Some unanswered questions arise from the fact that this indirect taxation has a recessive nature that harms lower income households, since the tax amount is the same for everybody, regardless of their economic status, making it more burdensome, in terms of percentage of income, to poorer families (Nnoaham et al., 2009). The counter argument is that sugary drinks are not a basic necessity and are nutritionally poor, not contributing to a healthy and varied diet. Moreover, obesity is more prevalent in low income families what would make this amplified decrease in consumption that much more positive in terms of health and well-being. (Kotakorpi et al., 2011)

Lastly, in order to overcome potential problems and to maximize the positive effects on a health perspective, it is crucial that a significant level of tax is implemented in order to affect those who have higher consumption levels and that need it the most (Powell and Chaloupka, 2009).

2.3. Portugal: Reasons for being interested in this Tax

There are both practical and substantive reasons that can appeal the Portuguese decision makers to introduce a tax on sugary drinks.

Firstly, it is much easier to implement a soda tax than any other sin taxes, because the identification of products with these characteristics: beverages that contain levels of sugar above a certain limit considered normal, is less complex unlike, for example, a tax on product with high concentration of salt where it would be needed to check virtually every product, since there are those which are perceived as not salty or even healthy, that contain high levels of salt. (American Heart Association, 2015)

Specifically for Portugal, Government could be attracted to implement this sugary tax as the prevalence of excess weight and obesity have increased throughout the years and it affects now 50% of the population (DGS, 2015) and also due to the fact that high BMI levels were responsible for 13% of the total of potential years of life lost. (Institute for Health Metrics and Evaluation, 2013)

The reality is even more alarming when it comes to childhood obesity, with one in three Portuguese children, between the ages of 2 and 12, being overweight and obese (Rito et al., 2012). Not to mention also that these obese children, compared to normal weight ones, are twice as likely to be obese adults (Serdula et al., 1993) and that, when parenthood arrives, if one of them suffers from obesity, their off springs will have 40% more chances of growing up

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17 obese, creating a vicious genetic and environmental cycle that is hard to break. (Lifshitz, 2008)

Furthermore, the National Health Expenses in percentage of the GDP, from 2000 to 2015, had a general growing trend, even though a decrease was observed from 2010 to 2015 due to the demands of the financial rescue plan (ACSS, 2014), which shows Portugal’s difficult financial situation that could be improved, if part of the revenues would be channelled for the national health system, for educational preventive purposes and/or to subsidize healthy products. (Jacobson and Brownell, 2000)

2.4.SSB’s Tax brought to life

After reviewing the theories developed around this subject, it is crucial to observe what countries from all over the world have experienced after implementing measures that aim to reduce the consumption of certain groups of products and minimize the negative externalities in terms of health.

To better understand this phenomenon this chapter will analyse the tax design, as well as its influence on price, consumption, substitution effects, public health and competitiveness of the sector.

Due to the lack of exhaustive research about these six effects in all the countries listed above, the analysis on these parts will be focused on four countries: Denmark, Finland, France and Hungary, whose cases are very well studied. Despite this, in the following sub-chapter 2.4.1, characteristics of the tax in other countries less well studied will be presented, in order to show the variety of forms that these levies can assume.

2.4.1. The countries and their policies

When analysing Table 1, the first aspect that stands out is that this measure is not new for Denmark and Finland, that started developing and implementing in the 30’s and 40’s, with the particularity of the abolishment in 2014 in Denmark.

This abolishment appears after the implementation of a recent tax applied to saturated fat that increased even more the level of dissatisfaction of the Danish citizens, since it seems to be linked with job losses, loss of competitiveness, cross border shopping, illegal sales and incapability of transferring the revenues into the health and educational system. All of these

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18 lead to a fall of both sugary drinks and fat tax as a pro-economic growth and employment measure. (Vallgarda, Holm and Jensen, 2015, Gade and Klarskov, 2012, Snowdon, 2013)

Secondly, there is no homogeneity in terms of formula or values of sugar that can be considered high, with some countries going as low as 0.5g per 100ml, others starting at 5g and in some cases even at 8g. Additionally there are also those who created particular levy bands, such as the UK and Denmark. Some have even created a different levy according to the type of sweetener used, dividing between sugar-sweetened and sweetener-based beverage.

Thirdly, some doubts are raised when it comes to two specific products: 0 kcal soft drinks and 100% fruit juices, since the first do not have calories but are still considered a soft drink, while the second still has a high content of sugar but it comes purely from fruit. Countries such as France and Mexico have decided to include 0kcal and light drinks despite its absence or extremely reduced nutritional value, due to the fact that it can lead to other medical problems, such as dental erosion, due to the presence of citric, phosphoric and tartaric acids (Nadimi et al., 2013).

The inclusion of fruit juices is also not unanimous, as this good still has the minerals, vitamins and anti-oxidants of fruits but, thanks to the squeezing process, has lost most of the natural fibre, that slowly breaks down the sugars during digestion and avoids that this big quantity of sugar ingested in a very short amount of time leaves the liver unable to metabolize, forcing its storage in the form of fat. (Crowe and Murray, 2013)

Lastly, a mention of the fact that the UK has decided to give a two year period after approving the law, so the companies present on its market have the opportunity to innovate, substitute and/or decrease the content of sugar, in order to reduce the potential hazards that it can have on competitiveness and employment.(The Telegraph, 2016)

Table 1: Design of some of the existing Tax on SSB worldwide

Country Introduction Products Tax Rate/Amount

Denmark

(Ecorys, 2014) Since 1930’s. Abolished in January 2014

All Soft drinks and Juices without exceptions.

 For sugar content > 0.5g per 100ml: DKK 0.82/L (≈0.11€/L)  For sugar content <0.5g per

100ml: DKK 0.296/L (≈0.03€/l) Finland

(Ecorys, 2014) Since 1940’s Sugar and Non-sugar sweetened soft drinks, juices and flavoured waters.

 Sugar-sweetened beverages & juices: 0.220€/L

Sweetener-based soft drinks and waters: 0.11€/L Norway (Rickertsen and Gustavsen, 1981 Non-alcoholic beverages with added sugar or

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2011) sweeteners

Hungary

(Ecorys,2014) 2011 Soft drinks, syrups or concentrates with less than 25% fruit/ vegetable content and products prepared with the use of less than 50% of milk;

Energy drinks

 > 8g/100ml: 7 HUF (≈0.022€)/ litre

 Energy Drinks: 250HUF (≈0.8€)/litre

France (Berardi et

al.,2012)

1 Jan 2012 Sugar and Non-sugar sweetened beverages and energy drinks except 100% juice;

 7.53€ / hectolitre in 2016

(Adjusted every 1st of January to the consumption’s price index)  Energy drinks: 1€/litre

Mexico (Colchero et

al, 2016)

July 2014 All Sugar Sweetened Beverages

 1 peso (≈ 0.05€) per litre

United Kingdom (The Telegraph, 2016) To be implemented in 2018 Sugar Sweetened Soft Drinks and Nectars;

Exception: pure fruit juices and milk based products

 5g-8g per ml: 18p per litre  >8g/ml: 24p per litre

2.4.2. Impacts of the Tax on Price

One of the most determinant factors for the success of this policy is the amount of the tax that retailers and manufacturers absorb themselves and consequently do not pass to the consumer. In the case of under-shifting, which means that the producers did not passed the total amount of tax and that prices did not increased as much as intended, a less significant decrease in consumption will be observed and it can jeopardize the health benefits expected.

The ideal scenario would be to have an over-shift, which means that the actual price increase is much greater than the expected, which can indicate that retailers and/or manufacturers seize this opportunity to increase prices.

Denmark: Tax of Soft Drinks and Juices (Ecorys, 2014)

When it comes to the analysis of under or over-shifting in Denmark, the result is inconclusive for the overall effect, the only product where there is a strong indication that the margins for both manufacturers and retailers increased are colas.

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20 Finland: Tax of Soft Drinks and Juices (Ecorys, 2014)

As it is possible to see the prices rose severely more than expected and the margins for retailers and Manufacturers also rose.

Table 2: Expected vs Actual Price Changes after the implementation of the SSB tax in Finland

2011 2012 2013

Expected Price

Change 1.5% 0% 0.9%

Actual Price Change 7.3% 7.3% 2.7%

Source: Ecorys, 2014

France: Tax on Sugared and Non-sugar-sweetened Soft Drinks (Ecorys, 2014)

An interesting aspect of this experience in France is that manufacturers and retailers were unable to fully pass the total amount of tax right in 2012, so, as a consequence, the total amount of the actual price change is the sum of the effect on the first and subsequent years, which means that for the regular cola the total is 8.1%, low calorie cola 10.6% and juices 9.2%.

The first conclusion that can be drawn is that there was an over-shifting in all categories.

The second conclusion that this study presented was that the sector’s margins were maintained, but if analysed in particular terms there is a decrease in regular cola, while in low calorie there is an increase in margin, which results in a Strategic Pricing Strategy.

Table 3: Expected vs Actual Price Changes after the implementation of the SSB tax in France

Regular Cola Low Calorie Cola Juices (1%-99%) Expected Price

Change 2012: 4.5% 2012: 4.7% 2012: 6.2%

Actual Price Change 2012: 5%; 2013: 3.1% Total: 8.1% 2012: 6%; 2013: 4.6% Total: 10.6% 2012: 5.3%; 2013: 3.9% Total: 9.2% Source: Ecorys, 2014

Hungary: Tax on Sugared and Non-sugar-sweetened Soft Drinks (Ecorys, 2014) As it can be verified the total expected price change for the colas (3.1%) was slightly below than the total actual price change (5.3%) which indicates an over-shift. Moreover there was also a strategic price strategy taking place, with the increase of margins for the two types of cola. When it comes to juices, the link is not straight-forward because the total actual price

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21 change was lower than the expected, which may mislead to an idea of under-shifting, which is only partly true. In actuality, what happen was that retailers maintain the margin in the taxed juices but when it came to non-taxed juices (>25%) they raised significantly their margins and prices.

Another interesting aspect that occurred in Hungary was the fast response when it came to product reformulation in response to the tax implementation, since 70% of the manufacturers reduced the amount of the targeted ingredient.

Table 4: Expected vs Actual Price Changes after the implementation of the SSB tax in Hungary

Regular and Low-Cal. Cola Juices (< 25%) Expected Price Change 2011 + 2012: 3.1% 2011 + 2012: 2.7% Actual Price Change 2011: 3.4%; 2012: 1.2%;

2013: 0.7% Total: 5.3% 2011: 0.1%; 2012: 0.6 %; 2013: 1.3% Total: 2% Source: Ecorys, 2014

2.4.3. Impact of the Price on Consumption

Denmark: Tax of Soft Drinks and Juices (Ecorys, 2014)

A high volatility of demand was observed over time that does not seem to be related to the tax change.

Finland: Tax of Soft Drinks (Ecorys, 2014)

In Finland there was already a negative trend before the implementation of the soda tax but the pace of this decrease was accelerated and in one year the consumption fell 3.8%. In terms of juices, the decrease was even more severe with values ranging from 15% to -35%.

France: Tax on Sugared and Non-sugar-sweetened Soft Drinks (Ecorys, 2014)

In this country there was an inversion of a growing trend and an accumulated decrease in consumption in 2012-2013 of around 6.7% for regular cola and 6.1% for low calorie cola, representing a decrease of 3 to 3.5 litres per person per year. The decrease was far less expressive in the juices category, with an effect of -2% which is close to the negative trend already observed in previous years.

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22 Hungary: Tax on Sugared and Non-sugar-sweetened Soft Drinks (Ecorys, 2014) As it occurs in Finland, there was already a negative trend taking place, but still having this fact in consideration the decrease was bigger than expected which can be attributed to the tax. For the period of 2007-2011 it was observed a decrease of 13.51% and in 2011-2013 -15.1% and in juices -2.7% and -22.92%. The industry as a whole, decreased 14% in the late period studied.

2.4.4. Product and Brand Substitution

Concerning Product substitution, it is very difficult to draw any conclusion in the cases of Denmark and Finland that show trends that seem to be largely attributed to the pre-existing trend before alterations in the taxation methods than actually any reactive change. One example that can perfectly illustrate this is low calorie sodas whose growth has changed by only the previous trend effect and not any further increase as a result of the added tax, which would penalize the almost perfect substitute regular cola. (Ecorys, 2014)

In France and Hungary, the picture is clearer when it comes to product substitution, with the consumption of 100% juices increasing after the application of a tax to all soft drinks in France (Bonnet and Réquillart, 2013) and a rise for sugar-free, low-calorie and mineral water for the Hungarian market. (PWC, 2013)

In terms of substitution effects towards other food categories such as sweets and salty snacks there is no robust link that can assure a connection between the two. (Finkelstein et al., 2013)

2.4.5. Impact of Demand on Public Health

Due to its novelty, it is very hard to determine the real effects of such a measure. There is really no long-term data about diet characteristics, obesity levels and related illnesses that can lead to conclusive outcomes about the relation between this measure and a positive impact on the reduction of obesity. (Ecorys, 2014)

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2.4.6. Impact on Competitiveness

As expected, these taxation policies brought an added administrative burden to companies, particularly dependent of the national tax design. (Ecorys, 2014)

Concerning the profitability, it is very difficult to affirm the real effects of such a measure since most companies interviewed produced both taxed and non-taxed products which meant that in terms of the taxed ones there was a slight decreased in profitability that was more than compensated by the increased profitability of the non-taxed alternatives and lead to redirection of investment towards these non-taxed drinks. (Ecorys, 2014)

The same trend is observed in terms of employment, showing that the decrease in demand of labour in taxed goods in the value chain is transferred to the non-taxed since the majority is produced in the same factories and distributed by the same companies. (Ecorys, 2014)

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24 Beverages

Hot Drinks _{Commercial Drinks}Non-alcoholic

Soft Drinks Carbonated

Iced Tea/Coffee

Still Drinks

Concentraded, Powder, Energy and Sports Drinks

Juices and Nectars 100% Juices Nectars Packaged Water Milk Products

3. METHODOLOGY

3.1. Definition of the different categories

As it is possible to see in the diagram below there are three categories in the Market of Beverages, but the focus of this study will be the commercial drinks section, which is divided in: Bottled water; Juices & Nectars and Soft drinks.

Most of these concepts are easily grasped, such as bottled mineral water, Milk Products, Coffee and Tea, but some can raise several doubts due to its similarities, particularly concerning the Juices & Nectars and Soft Drinks. That is the reason why Annex 1 is, a summary and explanation derived from the Portuguese and Europeam Law, ilustrated with some examples, was created, as well as Figure 1 where it is possible to understand how the categories are divided.

Figure 1: Division by Types of Beverages, according to the European and Portuguese Law.

3.2. Organization and Explanation of the Dataset

In the particular case of beverages, some possible factors that may influence its purchase are the Gross National Product (Stuckler et al., 2012), Weather (Murray et al., 2010) and Psychological factors. (Elfhag et al., 2008, Glanz et al., 1998)

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25 The first one is the “Consumption group” which includes 3 variables: the annual consumption per capita of Juices & Nectars (JN), Packaged Water (PW) and Soft Drinks (SD).

It is crucial to refer that all of these consumption categories include only the amount of litres consumed in the Portuguese territory, sold in all the outlets, from the on-trade ones (bars, restaurants, etc.) to off-trade (supermarkets, hypermarkets, independent retailers and others), and does not include, for example, the part of national production exported.

Concerning the categories itself, Juices & Nectars maintain its definition used until now and better explained in Annex 1, as well as Packaged Water, where only the bottled Natural Mineral Water (non-carbonated) is considered. However it is crucial to highlight the small difference between the definitions of Soft Drinks used until now and on these mathematical studies, since the last one does not include the dilutables. This does not constitute a problem, knowing that this product contribution to the total non-alcoholic beverages is about 1% and its growth is stagnated for the last 6 years, in Portugal, which will be analysed in depth in the next chapter.

The data concerning these three variables was all developed by Canadean, an international researcher for soft drinks and alcoholic beverages, who has a vast number of studies that are then purchased by institutions such as UNESDA (Union of European Beverage Association), PROBEB (Portuguese Association of Non-Alcoholic Beverages) and APIAM (Portuguese Association of the Industrials of Mineral Water), that at no charge release part of these data in order to inform the general public about the market of Soft Drinks, Juices, Nectars and Water.

The second group of this study is associated to the Social-Demographic aspect and it comprises two variables: Population (Pop), which is understandably the residents in the national territory, in millions; and Education Level (Educ), that in this case is the number of individuals with higher education (minimum of a bachelor degree), in thousands. The addition of the Education variable is an attempt to capture part of the psychological factors, mostly health and environmental related.

Thirdly, there is a smaller group, whose objective is to address the correlation between the atmospheric conditions and the consumption of sugary beverages. Initially, the variable chosen was the Average Temperature (AverTemp), which is the average of the monthly average temperature registered in the Portuguese territory. However, the disadvantage known to the average concept had in this case a preponderant role. For example, there could be that 2 years with the exact same average temperature, but very different variations between the

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26 winter temperatures and the summer ones which would signify that the demand in the one with more variation is higher.

Therefore, an alternative variable, whose computation is the average of the maximum temperatures observed monthly in Portugal, was implemented to try to mitigate the above explained disadvantage, even though several simulations to test both were done in order to understand its effect and the most suited one. Lastly, the source of these two variables was IPMA (Portuguese Institute of the Sea and Atmosphere), a reputable national entity that investigates, publishes and informs about meteorological, geological and maritime occurrences.

The final and most relevant group for this study is the Economic one, composed by two variables: the Gross Domestic Product (GDP), which shows the output created in a particular economy in a certain period, in this case a year, and other variable called Tax. This last one is associated to the increased VAT level on SD and JN implemented on January 1st 2012 and that meant that these products were transferred from the lowest VAT category of 6% to the highest one of 23%. The aim here was to assess if there was a shift of any source in the consumption that can be attributed to this measure, and that can illustrate in a realistic manner how a sin tax penalizing sugary drinks can work out for Portugal.

In the GDP case, the logic was that, as it represents the wealth of a country and its citizens, then a decrease as the one registered during the crisis is synonym of a decrease in income that may incite a decrease in the demand of such products.

The source from where the data concerning the GDP was extracted was INE (National Institute of Statistics) and for the Tax, a variable was created on R that can capture some possible effect during and after 2012.

All of the above variables are yearly with the first observation in 1998 and the last in 2015, bringing to a total of 18 periods. It is crucial to denote that data before 1998 was excluded from this study due to the fact that before this year the sub-category “Iced Tea/Coffee”, the second most important category in the Portuguese Soft Drinks’ market, was not included in the overall Soft Drinks’ value of consumption and it was impossible to find values for that isolated parcel.

Finally, the three variables linked to the consumption as well as the GDP were transformed into per capita values, simply achieved by dividing by the population of that particular year, in order to avoid the effect of the variating population in the total consumption/GDP.

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27

3.3.Interaction between the variables

In order to answer the two research questions proposed earlier, analysis of the data will be done to explore the nature, composition and variation of the beverage market on a more insightful manner.

To achieve that, the analysis will start on a more narrow perspective of the consumption derived from a close up to the Crisis Period (2010-2014) that is part of Portugal’s reality for the last years and which is extremely relevant to grasp the intrinsic characteristics of the market and its consumer behaviour, in a down period.

This section includes the observation and computation of the weight of each sub-division, both on a category level, as well as on the macro level of NACD. Additionally, it will be studied the variation, year by year, for all, as well as the variation 2014/2010 and the Compound Annual Growth Rate (CAGR).

Due to the fact that detailed data about the sub-categories of both Juices & Nectars and Soft Drinks were not available before 2010 and for the year of 2015, there is then a broadening of the spectrum of the analysis for the data frame of 1998-2015, that only focus on the three main groups: SD, JN and PW.

This sub-chapter can be divided into two segments: an initial one, where it is analysed the trends, annual growth rate and CAGR for the beverages after the data frame is divided in three distinct phases of consumption; and a second segment where it will be observed graphically the interactions between the consumption variables between each other to try to see if there is any relation between them and if yes, if there is any sign of complementarity or substitution to one another. Similarly, a comparison between the growth rates of GDP and each of the beverages will be done to understand if they are in any way related.

Following this initial graphic analysis, there is the exploration of the interaction between the several factors for the Soft Drinks and Juices and Nectars through the interpretation of the results of the regressions ran.

For this last part it the program R was used to run two multiple linear regressions through the method of Ordinary Least Squares (OLS) (Rencher and Christensen, 2012), in order to understand the behaviour of the consumer when it comes to SD and JN and the cause-effect relation between the several variables.

The respective initial regressions are as follows:

 𝑆𝐷𝑝𝑐 = 𝛽0+ 𝛽1∗ 𝑌𝑒𝑎𝑟 + 𝛽2∗ 𝐽𝑁𝑝𝑐 + 𝛽3∗ 𝑃𝑊𝑝𝑐 + 𝛽4∗ 𝑃𝑜𝑝 + 𝛽5∗ 𝑀𝑎𝑥𝑇𝑒𝑚𝑝 + 𝛽6∗ 𝐸𝑑𝑢𝑐 + 𝛽7∗ 𝐺𝐷𝑃𝑝𝑐 + 𝛽8∗ 𝑇𝑎𝑥 + 𝜀

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28  𝐽𝑁𝑝𝑐 = 𝛽0+ 𝛽1∗ 𝑌𝑒𝑎𝑟 + 𝛽2∗ 𝑆𝐷𝑝𝑐 + 𝛽3∗ 𝑃𝑊𝑝𝑐 + 𝛽4∗ 𝑃𝑜𝑝 + 𝛽5∗

𝑀𝑎𝑥𝑇𝑒𝑚𝑝 + 𝛽6∗ 𝐸𝑑𝑢𝑐 + 𝛽7∗ 𝐺𝐷𝑃𝑝𝑐 + 𝛽8∗ 𝑇𝑎𝑥 + 𝜀

From this point on several alternative models will be tested to see which of the variables are significant and contribute more to the understanding of the dependant variable, as well as the overall quality of the model. After finding those explanatory variables, the coefficients will be interpreted and the values will be explain by theoretical research about the general trends of the market, consumer behaviour, strategies of the companies who operate in the Portuguese market, among others.

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29

4. RESULTS AND DISCUSSION

4.1.Focused Analysis of the Crisis Period

4.1.1. Analysis of the Importance of each Category

Examining the database of Canadean, it is possible to observe that the Non-Alcoholic Commercial Drinks represent around 60% of the total consumption of beverages, even though it suffered a decrease of 3%. In second place, there is milk with around 30% and hot drinks with 10%, both increasing their importance overtime.

In the first category, the bottled water represents more than half of the consumption of NACD and has verified a decrease of 1.8%, in the period 2010-2014. In second place there is the SD with approximately 22% of the total Beverages and a change of -1.3%, explained by the decrease of the three major subgroups: Carbonated; Iced Tea/ Coffee and Still drinks, being the others unable to counterbalance these losses, due to its minor contribution to the overall total of refreshing drinks.

Interestingly, the subcategory of carbonated stabilized its importance in terms of total beverages, but in terms of the soft drinks it gained 2%. The same cannot be said about the still drinks that decrease almost 1% overall and its importance inside the sub-category decreased 3%.

Concerning the Milk Category, the white milk represent the vast majority and increased 1.5% over time, while the Other milk, such as soy, almond, coconut, chocolate, vanilla and strawberry, and yogurts sustained their position with a marginal change of 0.3% and 0.2%, respectively.

Lastly, the hot drinks most important category is hot coffee that varied almost 1% and tea with an insignificant 0.1% increase.

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30

Table 5: Weight of each Category in terms of Overall Consumption of all Beverages

2010 2011 2012 2013 2014

Non-Alcoholic Commercial Drinks 62,0% 61,1% 58,8% 58,2% 58,9%

Bottled Mineral Water 36,3% 36,3% 34,9% 33,9% 34,5%

Juices & Nectars 2,9% 2,8% 2,9% 3,0% 3,0%

Juices 0,7% 0,6% 0,6% 0,6% 0,6%

Nectars 2,3% 2,1% 2,2% 2,4% 2,5%

Soft Drinks 22,8% 22,0% 21,0% 21,3% 21,4%

Carbonated Drinks 11,2% 10,7% 10,4% 10,7% 11,0%

Iced Tea and Coffee 6,5% 6,8% 6,4% 6,2% 6,1%

Still Drinks 3,7% 3,3% 2,8% 2,9% 2,9%

Squash and syrups 0,5% 0,6% 0,6% 0,7% 0,7%

Fruit Powders 0,6% 0,6% 0,6% 0,6% 0,6% Energy Drinks 0,1% 0,1% 0,1% 0,1% 0,1% Sports Drinks 0,1% 0,1% 0,1% 0,0% 0,0% Milk Products 29,1% 29,7% 31,6% 32,0% 31,1% White Milk 23,2% 23,6% 25,2% 25,6% 24,7% Other Milk 2,6% 2,7% 2,9% 2,9% 2,9% Drinkable Yogurts 3,3% 3,3% 3,5% 3,5% 3,5% Hot Beverages 8,9% 9,2% 9,6% 9,7% 10,0% Coffee 8,2% 8,4% 8,7% 8,8% 9,1% Tea 0,8% 0,8% 0,9% 0,9% 0,9% Source: Canadean, 2014

4.1.2. Analysis of the Variation throughout the Years

Having has a base the database of Canadean about the consumption in millions of litres from 2010 to 2014 of this categories and subgroups, it is possible to affirm that all of the three main categories, NACD, Milk and Hot drinks decreased in terms of consumption in the time framed analysed. Being the biggest fall observed in NACD with -17.4% followed by the milk products with a decrease of -7.3% and Hot Beverages with a smaller decrease of -2.7%.

Analysing in more detail the NACD subgroups, it is possible to observe that the mineral water variation between 2010 and 2014 was -17.5%. When it comes to Fruit juices and nectars the overall trend was -10.2% being the fruit juices the most affected with -27.9%.

The soft drinks took a toll of -18.3%, with the extreme cases of sports drinks reducing to half and the non-carbonated/still beverages -33.1%, while the carbonated ones only decreased -15%. A type of drink that has an inverted trend are the squash and syrups that had an increase of 12.9%.

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31

Table 6: Annual and Total Variation by Category

∆11/10 ∆12/11 ∆13/12 ∆14/13 ∆14/10

Non-Alcoholic Commercial

Drinks -4,4% -11,0% -3,6% 0,6% -17,4%

Bottled Mineral Water -2,9% -11,0% -5,3% 1,0%

-17,5%

Juices & Nectars -9,2% -3,6% 2,4% 0,3%

-10,2% Juices -10,8% -5,0% -11,8% -3,5% -27,9% Nectars -8,7% -3,2% 6,5% 1,2% -4,8% Soft Drinks -6,1% -11,8% -1,4% 0,1% -18,3% Carbonated Drinks -7,9% -9,7% 0,4% 1,8% -15,0% Iced Tea and Coffee 1,1% -12,9% -6,0% -1,8% -18,7%

Still Drinks -15,2% -20,4% 2,0% -2,8% -33,1%

Squash and syrups 4,8% 3,2% 2,2% 2,2% 12,9%

Fruit Powders -1,3% -2,7% -1,8% -1,4% -7,1% Energy Drinks 4,4% -4,3% -4,4% 2,3% -2,2% Sports Drinks -17,6% -25,0% -19,0% 0,0% -50,0% Milk Products -1,2% -1,4% -1,3% -3,6% -7,3% Hot Beverages 0,1% -3,9% -1,1% 2,2% -2,7% Total Beverages -3,1% -7,5% -2,6% -0,6% -13,2% Source: Canadean, 2014

4.2. General Analysis from 1998 to 2015

4.2.1. Analysis of the Consumption of Total Commercial Drinks from 1998-2015

Through the observation of the Canadean data, it is possible to denote the existence of three different consumption cycles: the first starting in 1998 and reaching the peak in 2004; the second from 2005 to 2010, where it is visible a decrease after 2004 and recuperating by the end; finally from 2011 to 2015, with a fall after 2010 and the beginning of a recuperation by 2015.

Starting the analysis from 1998 to 2004, there was a period of great expansion for all three categories and particularly for Soft Drinks with 30.59% increase, followed by Packaged Water with 26.02% and Juices & Nectars 23.84%, which represent a CAGR of 4.55%, 3.93% and 3.63% per year, respectively.

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32 Concerning the period of 2005-2010, the growth has been a lot more modest for soft drinks and Juices & Nectars with less than 9% variation, while the Packaged Water thrived with 48.02% growth.

On the last section, from 2011-2015, both soft drinks and water took a tool due to the financial crisis, registering a decrease of -12.64% and -7.75%, respectively. The category of Juices & Nectars had a surprising variation of 14.68%, which was higher than on the last period.

Also it is relevant to note that Soft Drinks and Juices & Nectars, in 2015 registered a small recovery, even though the packaged water continued to fall.

Table 7: Variation and CAGR for the 3 categories of the Commercial Drinks

Soft Drinks Packaged Water Juices & Nectars

∆04/98 30,59% 26,02% 23,84% CAGR 4,55% 3,93% 3,63% ∆10/05 6,52% 48,02% 8,35% CAGR 1,27% 8,16% 1,62% ∆15/11 -12,64% -7,75% 14,68% CAGR -3,32% -2,00% 3,48% Source: Canadean, 2014

4.2.2. Comparison of the Growth of Soft Drinks vs Packaged Water

Right at the beginning, from 1999 to 2001 the yearly growth rates increase and observe a very similar movement for both, with the only difference that SD grow at a higher rate that packaged water. Also, in terms of quantities, PW is slightly below in litres per person and only surpasses the SD consumption later in 2005.

Afterwards, the movement between the two do not seem as synchronized as before, with the soft drinks being affected by a slower and slower rate of growth until 2005, the first year were a negative value of growth was observed, and continued until 2007. The movement of packaged water was always made on the positive side with growth rates between 7% and 9% in 2003, 2005 and 2006 and 1% and 2% on the remaining years.

From 2006 onwards, till 2013, the trend is again parallel peaking in 2008 with the greatest value of the growth (20%) reached by the packaged water, which was always superior to SD. The descend started from there and in 2011 the values passed to negative growth rates

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36

4.2.5. Comparison of the Growth of GDP vs Juices & Nectars and Soft Drinks

In order to try to understand the possible relation between these two sugary beverages and the Gross Domestic Product created in the Portuguese Economy, a first graphic analysis will be now done and right away, it is observed that there is a certain degree of inconsistency.

In the first few years, more precisely from 1998 to 2004, there is a certain cohesion in terms growth since the economy is rising from 1% to 7% and the consumption of beverages seem to follow the trend with some years such as 1999 and 2000 where the same rate is roughly observed and after there is the JN which growth at a slower rate than the GDP and the SD at a slightly higher and from 2002 to 2004 they return to have very close movement.

After this, there is a period of inconsistency with some periods where there is an expansion in the national economy of approximately 4% to 5% and still the consumption reached some of the lowest points with -7% and -5% in 2005 and -3% and -1% in 2006 for Juices & Nectars and Soft Drinks, respectively. It is also possible to see that, for example, in 2015 the growth in the economy was also 4% and the values were very unalike with JN increasing 16% and SD 1%.

In 2008 and 2009, both SD and JN increased more than the GDP and in 2010 the same value was observed for the three indicators.

The pick of the Portuguese financial crisis was observed in 2011 and 2012 and that possibly lead to the two drinks decreasing more than the latter. In the last few years of this framework, the GDP and the Soft Drinks seem to be more in sync while the Juices and Nectars behaviour is not as stable.

1,00 1,04 1,08 1,08 1,04 1,01 1,02 0,95 0,99 0,94 1,10 1,02 1,02 0,94 0,88 0,99 0,99 1,01 1,00 1,07 1,07 1,03 1,03 0,99 1,02 0,93 0,97 1,00 1,06 1,03 _1,02 0,91 0,97 1,03 0,99 1,16 1,00 1,07 1,07 1,05 1,04 1,02 1,04 1,04 1,05 1,05 1,02 0,98 1,03 0,98 0,96 1,02 1,02 1,04 0,85 0,90 0,95 1,00 1,05 1,10 1,15 1,20 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Soft Drinks Juices & Nectars GDPpc

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37

4.2.6. Understanding the Demand of Soft Drinks in Portugal

𝑆𝐷𝑝𝑐 = 𝛽0+ 𝛽1∗ 𝑌𝑒𝑎𝑟 + 𝛽2∗ 𝑃𝑜𝑝 + 𝛽3∗ 𝐽𝑁𝑝𝑐 + 𝛽4∗ 𝑃𝑊𝑝𝑐 + 𝛽5∗ 𝑀𝑎𝑥𝑇𝑒𝑚𝑝 + 𝛽6∗ 𝐸𝑑𝑢𝑐 + 𝛽7∗ 𝐺𝐷𝑃𝑝𝑐 + 𝛽8∗ 𝑇𝑎𝑥 + 𝜀

Starting with the R analysis, the first AIC test that was performed to assess the relative quality of this model and as it is possible to observe in Annex 5 the two only variables to be excluded from this model are the economic ones: GDPpc and Tax.

Since the AIC does not inform about the absolute quality of the model, it is necessary to confirm the validity of this information, and 4 models were developed and shown in Annex 6 and the final model in Annex 7.

Model 1 includes all the variables and has it is possible to see, 4 of the variables were not statistically significant (MaxTemp, GDPpc, Educ and Tax) and the adj. 𝑅2_{was 0.966.}

For the Model 2, the variable Tax, which was the one with the highest p-value in the previous one, was removed and as consequence of that the variable MaxTemp is now statistically significant in a confidence interval of 90%, the Year and Constant went from a 90% to 95% confidence interval and PWpc from 95% to 99% and the overall fitness of the model the adjusted 𝑅2_{increased to 0.969. Still the GDPpc and Educ are not significant.}

In model 3, the GDPpc was removed, which made the Year gain more significance and increase the adjusted 𝑅2_{to 0.972 but the Educ is still not significant.}

Lastly, in model 4, the final one, this variable is removed and the final result is the regression that follows:

𝑆𝐷𝑝𝑐 = 𝛽0+ 𝛽1∗ 𝑌𝑒𝑎𝑟 + 𝛽2∗ Pop + 𝛽3∗ 𝐽𝑁𝑝𝑐 + 𝛽4∗ 𝑃𝑊𝑝𝑐 + 𝛽5∗ 𝑀𝑎𝑥𝑇𝑒𝑚𝑝 + 𝜀 ↔ 𝑆𝐷𝑝𝑐 = 2511.52763 − 1.51542 ∗ 𝑌𝑒𝑎𝑟 + 43.02935 ∗ Pop + 5.20023 ∗ 𝐽𝑁𝑝𝑐 + 0.15192

∗ 𝑃𝑊𝑝𝑐 + 4.00886 ∗ 𝑀𝑎𝑥𝑇𝑒𝑚𝑝 + 𝜀

Interpretation of the coefficients

 Constant:𝛽0 = 2511.52763. If all of the remaining factors are zero, the consumption of soft drinks per person will be on average 2511.52763 litres. However, this value does not have a meaningful interpretation, due to the fact that several variables cannot be 0, namely the year, that starts at 1998, population whose minimum value is 10.16 million, as it is shown in the summary of the Database in Annex 4, and Maximum temperature with at least 20.72ºC.

 Year: 𝛽1 = − 1.51542. If the variable Year increases 1 year, the consumption of SD per capita will decrease, on average, 1.51542 litres per person, ceteris paribus.

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38  Population: 𝛽2 = 43.02935. If the variable Population increases 1 million, the consumption of SD per capita will increase, on average, 43.0235 litres per person, ceteris paribus. In a more realistic analysis, the population has varied yearly, in the last 18 years, approximately 100000, 1% of 1 million, will increase 0.430235 litres per person, which represents 0.6% of the average consumption of soft drinks.

 Juices & Nectars: 𝛽3 = 5.20023; If the consumption per capita of Juices and Nectars increases 1 litre per person, the consumption of SD per capita will increase, on average, 5.20023 litres per person, ceteris paribus.

 Packaged Water: 𝛽4 = 0.15192; If the consumption per capita of Packaged Water increases 1 litre per person, the consumption of SD per capita will increase, on average, 0.15192 litres per person, ceteris paribus.

 Maximum Temperature: 𝛽5 = 4.00886; If the Maximum Temperature increases 1ºC, the consumption of SD per capita will increase, on average, 4.00886 litres per person, ceteris paribus, or a 1.16% increase in the case of a 1% increase in temperature.

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39

4.2.7. Understanding the Demand of Juices & Nectars in Portugal

In this section, an OLS regression will be done in order to understand the independent variables that influence the dependable variable representing the Juices & Nectars. And the initial function is as follows:

𝐽𝑁𝑝𝑐 = 𝛽0+ 𝛽1∗ 𝑌𝑒𝑎𝑟 + 𝛽2∗ 𝑆𝐷𝑝𝑐 + 𝛽3∗ 𝑃𝑊𝑝𝑐 + 𝛽4∗ 𝑃𝑜𝑝 + 𝛽5∗ 𝑀𝑎𝑥𝑇𝑒𝑚𝑝 + 𝛽6∗ 𝐸𝑑𝑢𝑐 + 𝛽7∗ 𝐺𝐷𝑃𝑝𝑐 + 𝛽8∗ 𝑇𝑎𝑥 + 𝜀

The procedure is the same as the one followed in the Soft Drinks sub-chapter, where initially an AIC test, which is in Annex 8, to have an idea of the relative quality of the model in question and the results were the same as the ones observed in the SD, where it showed that GDPpc and tax were not contributing to the relative quality of the model.

To confirm these, several alternatives were run and they are all included in Annex 9, until the fittest model and variable were found (Annex 10).

𝐽𝑁𝑝𝑐 = 𝛽0+ 𝛽1∗ 𝑌𝑒𝑎𝑟 + 𝛽2∗ 𝑃𝑜𝑝 + 𝛽3∗ 𝑆𝐷𝑝𝑐 + 𝛽4∗ 𝑃𝑊𝑝𝑐 + +𝛽5∗ 𝐸𝑑𝑢𝑐 + 𝜀 ↔ 𝐽𝑁𝑝𝑐 = −1322 + 0.7084 ∗ 𝑌𝑒𝑎𝑟 − 8.630 ∗ 𝑃𝑜𝑝 + 0.1524 ∗ 𝑆𝐷𝑝𝑐 − 0.03657 ∗ 𝑃𝑊𝑝𝑐

− 0.006778 ∗ 𝐸𝑑𝑢𝑐 + 𝜀

Interpretation of the coefficients

 Constant: 𝛽0 = −1322; If all of the remaining factors are zero, the consumption of Juices and Nectars per person will be on average -1322 litres. As explained before this does not have a meaningful interpretation, adding also to the fact that consumption in litres can never be negative.

 Year: 𝛽1 = 0.7084. If the variable Year increases 1 year, the consumption of JN per capita will increase, on average, 0.7084 litres per person, ceteris paribus.

 Population: 𝛽2 = − 8.630. If the variable Population increases 1 million, the consumption of JN per capita will decrease, on average, 8.630 litres per person, ceteris paribus. In a more realistic analysis, if the population varied approximately 100000, the consumption would decrease 0.08630 litres per person.

 Soft Drinks:: 𝛽3 = 0.1524; If the consumption per capita of Soft Drinks increases 1 litre per person, the consumption of JN per capita will increase, on average, 0.1524 litres per person, ceteris paribus.