Reformulation and taxes for healthier consumption: Empirical evidence from the French dessert market

Céline Bonnet


The number of countries that have implemented a tax on unhealthy foods is growing rapidly. Ex-post evaluations of the impact of taxation show that they can curb consumption (e.g. Colchero et al., 2015; Silver et al., 2017). The decrease of consumption is generally considered as a consequence of the price increase of taxed products. However, several studies showed that the price transmission of the tax is not that straightforward. In addition to changes in prices, tax policy can also be designed to induce changes in the characteristics of products. Excise tax proportional to the nutrient content of product, such as the revised soda tax implemented in France, should provide incentives for food industry to change product recipe. Indeed, on the soda market in France, several brands anticipated the change in the tax design and reduced the sugar content of their products. With such a scheme, a decrease in the nutrient content of a product allows producer to pay a lower tax. Furthermore, if firms react to this ‘quality’ incentive by lowering product nutrient content, then consumers, even if they keep constant their consumption in the taxed food product category, will experience a decrease in the associated nutrient intake. As a consequence, change in consumer’s nutrient intake can result from changes in the level of consumption as well as in the nutrient content of taxed product.

The aim of this study is to integrate firm reactions in both prices and characteristics of products in the assessment of (ex-ante) tax policy evaluation. If there are now a few works that endogenize how firms are likely to modify their prices in response to taxation (Bonnet and Réquillart, 2013; Nesheim et al., 2018; Allais et al., 2015; Dubois et al., 2018), to our best knowledge, there is no study that integrates a change in the characteristics of products that might result from taxation. However, integrating the possibility for firms to reformulate their products is very important in the perspective of evaluating the health consequences of the policy. If a change in the characteristics of the products occurs, the nutrient intakes of consumers are affected whatever consumers modify or not their consumption. In this paper, in addition to the strategic price reactions of firms (to a tax policy), we propose to assess the effect of exogenous changes in product nutritional composition on key market outcomes, such as the equilibrium prices, market shares, firm profits, and nutrient purchases. These changes consist in decreasing the content of the taxed nutrient so that a firm can lower the level of the tax she has to pay or even in some cases she can fully escape the tax. The proposed changes are a priori beneficial for the firms, in the sense that the decrease in the amount of the per-unit tax is larger than the increase, if any, in cost to achieve reformulation. However, we cannot claim that these changes are optimal as we only focus on the cost side ignoring the impact on demand due to the change in characteristics.

We develop a structural econometric model that integrates substitution patterns and account for competition between firms. The model allows analyzing strategic price reactions of firms to a taxation scheme (Bonnet and Réquillart, 2013). This methodology is used to assess the impact of a specific taxation scheme. Following Duvaleix-Tréguer et al. (2012), a product is taxed if its sugar content is above a threshold, and the amount of the excise tax is proportional to product sugar content. In a first step, we analyze the impact of this taxation scheme integrating strategic price reactions of firms only. Then, we integrate the possibility for firms of modifying the characteristics of the products in response to taxation. Reformulation consists in decreasing the quantity of added sugar to the minimum content technically feasible and sensory acceptable for consumers. The minimum added sugar content is estimated for 18 product recipes using optimization models. Then, integrating the new characteristics of products as well as the corresponding new marginal costs, we use the structural model to determine the new market equilibrium integrating strategic price reactions of firms to the tax scheme. Our results suggest that taxation and reformulation act in the same direction, that is a reduction in the sugar intake. However, their effects are not additive as for the chosen taxation scheme, reformulation implies less product taxed and lower tax revenue. We also show that the main impact of reformulation is through the change in nutrient content. The other channels, i.e. change in demand and adjustment of prices, play a minor role. Our analysis also shows the importance of taking into account how products that are not subject to taxes (outside good in our case) benefit from taxation. Finally, firms might have an interest in reformulating their products as most of them loose less from the taxation and reformulation scenario than from the taxation scenario only. Some firms can even benefit from the reformulation and taxation scenario depending on the repartition of their production in the four product categories. Indeed, profits on compote and FBPS segments would be positively affected whereas those on yogurt and other dairy dessert in a larger extent are highly and negatively impacted.