George Osborne’s £520m levy on sugar-sweetened drinks, announced in the March Budget, was a bitter pill to swallow for the beverage industry.

However, the ripple effect goes even further. The demonisation of sugar affects all corners of the food and drinks sector, from restaurants to takeaway chains, to food manufacturers and, of course, grocers.

One thing is clear: the Government is desperate to change the nation’s unhealthy eating habits.

The obesity crisis costs the UK economy £27bn a year, according to Public Health England. It is only natural that food brands and supermarkets alike are increasingly responding to the problem.

Just last month Dolmio-owner Mars Food announced it would divide its range into products that can be eaten every day or only occasionally, sparking a PR storm about the high levels of sugar found in some Dolmio sauces.

The media frenzy continued when it emerged other popular brands from various manufacturers contain even more sugar than Dolmio products.

46%

of Brits took action to reduce their sugar intake in the previous 12 months, according to a 2015 Mintel report

Stories like these have had a tangible impact on consumers’ dietary habits, according to a 2015 report from consumer research firm Mintel. It revealed 46% of Brits had taken at least one course of action to reduce their sugar intake in the previous 12 months.

More than a quarter (27%) had checked food labels for sugar content more often than before. And 25% said they were cooking from scratch more often in a bid to control sugar intake.

As a result, retail sugar sales slumped 14% in 2014 and are forecast to fall further over the next two years as the dangers of consuming too much of the sweet stuff continue to make headlines. Mintel estimates the retail sugar market will decline from a peak of £346m in 2012 to £258m in 2018.

No problem

So should food retailers be concerned about this drop in demand for sugary products? David Gray, senior analyst at researcher Planet Retail, believes not.

“I don’t see this trend as a negative for retailers,” he maintains. “Consumers might shift to healthier alternatives, but they will still be buying these alternatives from food retailers. Even during the financial crash of 2008/9, grocery sales held up. People will always need to buy food.”

“Consumers might shift to healthier alternatives, but they will still be buying these alternatives from food retailers”

David Gray, Planet Retail

If anything, the tendency towards healthier eating should be seen as an opportunity for food retailers, says Gray.

Ray Gaul, vice-president of research and analytics at Kantar Worldpanel, agrees. He points to Lidl and Aldi as examples of grocers that were quick to spot the trend for healthy food and have benefited financially from efforts to focus on this category.

“Lidl and Aldi have both been been highly proactive in reducing the percentage of sales they generate from unhealthy food categories and have taken risky and pioneering steps to move out of ‘sin’ foods and into healthy foods,” explains Gaul.

Ahead of the game

Lidl led the way in 2013 with its ‘healthy tills’ initiative. Treat items such as chocolate and sweets were removed from checkouts and replaced with healthier alternatives such as fresh fruit and nuts. Turnover at the healthy tills was 100% higher than standard tills as shoppers enjoyed the fact they were not being tempted.

Fellow discounter Aldi soon followed suit in reducing the amount of treat products at the till. Its current marketing programme is entirely focused on healthy eating via its sponsorship of Team GB for the Rio Olympics.

Sales of indulgence products, such as snacks, fizzy drinks, biscuits and confectionery, at both Lidl and Aldi have fallen from 29% of revenues in 2006 to 19% of revenues in 2016, according to figures from Kantar Worldpanel.

At the same time, sales from healthy categories, such as fresh fruit, vegetables and salads, have climbed from 12% of revenues in 2006 to 17% in 2016.

“[The discounters] saw the problem coming for many years, having operated in countries where obesity is an issue, such as Germany and the USA”

Ray Gaul, Kantar Worldpanel

This shift in focus appears to have boosted the coffers at both chains. The most recent Kantar Worldpanel grocery market share data, published at the start of May, revealed that Aldi and Lidl continued to be the fastest-growing grocers in the UK, with Lidl leading at 15.4% growth and Aldi at 12.5%

Lidl’s share of the grocery market has gone from 3.8% in the three months to April 26, 2015, to 4.4% in the comparable period this year. Aldi’s share was up from 5.4% to 6%.

Gaul believes the discounters were “ahead of the game” at focusing on healthy food because of insight gained from their experience overseas.

“They saw the problem coming for many years, having operated in countries where obesity is an issue, such as Germany and the USA,” he explains. “Other British chains, like Sainsbury’s, had less international exposure.”

Catching up

That said, British grocers – including Sainsbury’s – have been making inroads by reformulating their own-brand products, reducing sugar, fat and salt across all their ranges.

Market leader Tesco has pledged to cut the sugar content of all its soft drinks by 5% per year, on top of the 4.5 billion calories and 1,400 tonnes of sugar it has already cut from the range. It has also stopped selling children’s lunchbox-sized soft drinks with added sugar to help parents reduce the amount their children consume.

Waitrose has removed seven tonnes of sugar from its own-label chilled drinks, reducing the sugar content of undiluted juices, cordials and squashes by between 5% and 15% without the use of sweeteners and by between 10% and 30% for fizzy drinks.

“We believe the sugar tax is a step in the right direction and we’re continuing to call on the Government to widen the agenda on obesity to include the food and drink industry as a whole”

Sainsbury’s spokesperson

Sainsbury’s chief executive Mike Coupe has been vociferous in the fight against obesity, calling for compulsory targets to cut sugar and clear Government guidelines on portion sizes.

A Sainsbury’s spokesperson says: “We believe the sugar tax is a step in the right direction and we’re continuing to call on the Government to widen the agenda on obesity to include the food and drink industry as a whole.”

Sainsbury’s reported in its prelims this week that in each of the past two years it has removed more than 2,370 tonnes of sugar from own-brand soft drinks.

The retailer had already said that its Fabulously Fruity yoghurts had been reformulated, removing on average one teaspoon of sugar per serving. It recently relaunched its Oriental Ready Meals, removing 13.7 tonnes of sugar per annum.

Consumer reaction

But have consumers welcomed these changes to sugar levels or could there be a drop-off in demand as popular recipes change? Sainsbury’s insists its reformulated recipes are just as popular with shoppers.

“It’s important to us that our reduced-sugar products still taste good. In taste tests, some yoghurts scored higher than the older version of the product,” says a spokesperson.

There is little doubt that soft-drinks manufacturers will be the most affected by the sugar levy when it comes into force in 2018.

12%

The decline in sales of fizzy drinks when a similar tax was introduced in Mexico

When a similar tax was introduced in Mexico, sales of fizzy drinks fell 12%. Big-name brands from Coca-Cola to Irn-Bru’s owner AG Barr have come out fighting, stating they have been singled out despite efforts to reduce calories.

A major criticism made by some of the sugar tax is that it will only affect fizzy drinks. Pure fruit juices and milk-based drinks are not included, despite many of them containing just as much – if not more – sugar than some soft drinks.

But retailers look set to gain from the demonisation of sugar.

If shoppers really are increasingly going to shun processed food in favour of fresh, healthy ingredients, supermarkets can only cash in on the trend by investing in these categories.