Water, Water Everywhere, but Not a Proper Drink

3 mins. to read
Water, Water Everywhere, but Not a Proper Drink

As usual with government policy there is a mixed message. The Budget is no exception. Probably the headline news is the sugar tax about which Osborne said he introduced so that the next generation wouldn’t be able to say “We knew there was a problem with sugary drinks. We knew it caused disease. But we ducked the difficult decisions and we did nothing.” Interesting as it’s still perfectly legal to smoke in the same house, even the same room, as these very same children. I’m not a big fan of legislation, and even less so of taxes, as a method to solve social issues. To be fair I’m not a big fan of democracy either, but since we don’t live in a democracy that’s a moot point.

The knee-jerk reaction to the news of the sugar tax was a hit on soft drinks manufacturers. This shows how uncertainty affects markets and makes them overreact – and much too soon. (The tax doesn’t even come in until 2018. So it’s not going to affect profits until at the earliest some time into 2018 – two years away, and possibly as long as three years.) But I don’t think it’s only the obvious candidates that will be affected. Over and above soft drinks manufacturers there will be other casualties of this tax.

Pubs and bars have been coining it for years on soft drinks. The GP (gross profit) on soft drinks, and for that matter teas and coffees, is better than on most alcohol in a typical drinking hole. If you’ve bought a pint of orange juice then you’ll know it’s not that much cheaper than draught beer. It’ll affect alcopops too presumably. A double whammy there. Interestingly a lot of pubs aren’t encouraged to sell tea, as although it makes more GP it makes less turnover, and for many pub groups they are more interested in turnover than GP, which does seem to be a rookie business error. Perhaps a self-help motivational business life coach necromancer ponce taught them that on a course. Life and business coaches being the Hitler’s Astrologers of the scam that is Training, which is in turn the Emperor’s New Clothes of HR. One day I’ll explain why I would eradicate HR and sack all HR employees throughout industry if I only could.

It seemed odd to me that there wasn’t a cap on the price of soft drinks during the decades of campaigns to stop drink driving, and more recently the health campaigns trying to discourage alcohol consumption. With the number of units now reduced to 14 per week across the board this sugar tax is yet another example of government taking tax out of things that work and make profit, or build capital wherever they can find it.

I looked at brewers in June and then again in August. Fullers (LSE:FSTA) moved up nicely out of the congestion area and up 20% above it at £12. I suggested a possible upside to £16, but it’s certainly met resistance at £12. It’s not necessarily curtains though. If we look at Youngs (LSE:YNGN), which was at an ATH, I suggested that a pull-back to the Resistance level of the ATH from ’07 might be an entry point. Well it’s sort of done that but red bearish candles above the cloud is not a sign of the strength we’d like to see to be long Youngs. The Spirit Pub Company that I mentioned last June has since been acquired by Greene King (LSE:GNK). There’s another chart with an uncertain message. It’s recently hit a new ATH, in December last year, but isn’t sending a positive message at the moment.

FSTA 160316 GNK 160316 YNGN 160316

It’s a sector to watch because it should give a signal one way or the other quite soon. Uncertainty as usual is the enemy of buy and hold, but can create volatility for us to make shorter term trades. It’ll be a while before the effects of the diminished weekly alcohol intake figures hit the results. To be fair I am not sure anyone takes much notice of government health guidelines. It’s hard to see how the sugar tax won’t affect their bottom line, but then the brewing industry has proved particularly resilient in the past.

Should you drink anything they sell in a pub? Government computer apparently says “no”.

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