Commentary: Shoppers, markets lose with Philly soda tax

Mayor Kenney has championed the tax. An analyst says the cost is higher than thought.

From an economic standpoint, the Philadelphia beverage tax is a lose-lose situation - for consumers and city grocery stores. One month into the new law, the effect on both is greater than many anticipated.

Consider the impact on consumers. Mobile consumers have the ability to drive to nearby suburbs and buy their beverages without paying the tax, as well as their other groceries. They'll save a little money, but take on the hassle of driving, spending money on gasoline, and adding to traffic. Proponents of the soda tax have suggested that after some period of time consumers will adjust and go back to shopping in their usual city store. I strongly disagree.

From my research and years in the food industry, I've learned that food shopping tends to be habitual. Once consumers get into the habit of going to a particular location, they will often continue to shop there. And, already it has been reported anecdotally that sales in city stores are down and sales in suburb stores near the borders have risen slightly. Consumers, who can travel, will. Wawa has claimed that people will drive miles to save a penny on gas. Look at how Wal-Mart changed the shopping paradigm. People travel miles to shop at Wal-Mart - because they believe they will save money. A few pennies saved makes a big difference.

So, who is hurt the most? The consumers who can't afford to travel outside the city to buy their untaxed beverages and groceries.

Many argue that the amount of the tax is not that significant. That may be true for a well-to-do professional, but for those living paycheck to paycheck, it can be significant. The supermarket industry knows that very small differences in prices can lead some consumers to shop around - why else would their weekly circulars be filled with reductions on food prices, often at smaller margins than the increase this tax introduces?

It is very unlikely that grocery store owners will ameliorate the effect of the tax on the thousands of items included by spreading the tax increase across other categories. This may not be Economics 101, but it is basic food marketing.

The manufacturers of untaxed product would strenuously object to raising their prices because a product in another category has a price increase due to a tax. One may argue that the grocer is free to set prices, but the manufacturer of the non-taxed products can decide to do significantly less promotion in those city stores. Most grocery stores rely on such promotions, so it would be a serious impediment for the city grocers. In fact, a grocer who would even consider "spreading out the increased costs across other items" would face significant costs in making these price changes, and most likely have to charge even more across the store to recoup the cost of the changes.

Another argument was that the grocers will absorb the tax themselves and not pass it on - this is also highly unlikely. First, the profit margins are already extremely low in the supermarket business, and this could have a significant impact on the ability to stay in business. A number of city supermarkets have closed in the last few years. This new tax has the potential to exacerbate the situation and make city food shopping more difficult. The impact might be lessened, say, if a different sector of the food business were subject to the tax, but the beverage category is one of the largest - and most important in the store. In a typical supermarket, a product like Pepsi might appear in up to 10 different places in the store.

Second, there is an issue of trust and transparency. Supermarket owners want to be transparent when it comes to prices, and should know the reason why prices are higher. For the supermarket, it's beneficial for consumers to know that the increase was due to taxes and not just the store raising prices.

As time goes on, a discriminatory tax like the beverage tax will continue to make life more expensive for city shoppers and more complicated for mobile city dwellers. It will make city supermarkets less competitive with suburban stores and potentially lead to their ultimate demise.

What seems like a small tax can have the potential for big consequences - none of them good.

John L. Stanton is a food-industry expert and professor of food marketing at St. Joseph's University

jstanton@sju.edu