So-called sugar taxes imposed by countries including the U.K., Mexico, Ireland, and some U.S. cities were designed to change the behavior of companies like Coca-Cola Co. and PepsiCo Inc., as well as consumers.

They have—if not always in the ways intended.

The U.K.'s tax brought in 36 percent less revenue than projected in its first six months, government figures show, reflecting that sugar content in beverages is lower across product lineups. Mexico and Hungary have changed consumer behavior with their versions of the tax, said Gijsbert Bulk, global director of indirect tax at EY, and academic research has shown Philadelphia’s levy reduced consumption among heavy consumers of sodas.

The taxes have prompted innovation in the beverage sector and a binge of acquisitions in drinks other than soda. On the other hand, neither Coca-Cola nor Pepsi have changed the formulation of their flagship colas, and Coca-Cola Classic is being sold in the U.K. in smaller bottles for higher mark-ups, making it more profitable.

“Governments need to be careful when they are designing these taxes to ensure that there aren’t too many ways to get around the tax, because their primary aim is to change behavior or compensate society for the cost the damage to health they can cause,” Bulk said.

Making Lemonade

The U.K.’s soft drinks industry levy (SDIL), which came into effect in April, charges 18 pence (23 cents) per liter on drinks that have a sugar content of more than 5 grams but less than 8 grams per 100 milliliters.

For drinks that have a total sugar content of more than 8 grams, a levy of 24 pence per liter is charged.

The companies lowered sugar content in several brands and released new low- or no-sugar products in the two years before the government imposed the SDIL. PepsiCo responded to the tax by saying it would reduce the sugar content of its drink brands by two-thirds, through reformulating some of its existing brands and introducing additional low and no-sugar alternatives.

Sugar content in Sprite has been cut in half, from 6.6 grams to 3.3. 7Up’s sugar content is falling from 10 grams to 7, according to company websites. Fanta Orange’s sugar content is down from 6.9 grams to 4.6 grams. Among no-sugar brands, Coca-Cola’s Coke Zero Sugar had its best sales quarter in 10 years for the period ending in September.

The beverage giants left their customers with the choice of moving away from classic beverages or paying more for them. Coca-Cola, rather than change Coke Classic’s formula to avoid paying tax, shrunk its bottle sizes from 1.75 liters to 1.5 liters and increased prices by 20 pence in the U.K. Pepsi, while also not altering the formula of its flagship cola, increased the size of bottles on the no-sugar brands like Pepsi Max to 600 milliliters from 500, saying it was promoting “healthier” options by making these drinks “more value for the money.”

“What they have done is that they have innovated very quickly, but they were doing it anyway,” said Duncan Fox, a European equity analyst at Bloomberg Intelligence.

PepsiCo officials declined to comment and spokespeople for Coca-Cola didn’t respond to several emails seeking interviews.

Changing Flavors

These changes meant that the U.K. brought in only 153.8 million pounds ($194.6 million) from the SDIL from April to October 2018, according to statistics published by Her Majesty’s Revenue and Customs (HMRC), the U.K. tax authority.

That was 86.2 million pounds less than the amount predicted in HMRC’s impact assessment before the tax was implemented.

Coca-Cola’s reluctance to change the formula of its most lucrative beverage is partly due to its failed attempt to do just this in 1985, Fox said. The attempted change to so-called New Coke was a public-relations disaster, halted only when the company brought back the original formula as Coca-Cola Classic.

“Pepsi and Coca-Cola have taken their cues from this event and chosen not to attempt to upset the apple cart,” Fox said.

Mixing Drinks

Beyond changing their established brand recipes, the companies have been quick to branch out into beverages not subject to sugar taxes.

Since Mexico launched the first sugar tax in 2013, seven of PepsiCo’s nine acquisitions were in companies that sell healthy food and drink, while 16 of Coca-Cola’s 31 acquisitions were in companies that sell healthy drink alternatives.

Coca-Cola’s 3.9 billion pounds deal in August to buy the Costa Coffee chain was an attempt to adapt to the shifting landscape and the popularity of coffee, Bloomberg Intelligence’s Fox said.

Similarly, PepsiCo this month completed its $3.2 billion acquisition of Sodastream International Corp., which lets people make their own beverages from carbonated water.

“Expanding into low and no sugar beverages is important for these drink companies as sugar taxes are likely to only expand to other territories. But this is not necessarily a bad thing for them as drinks like water have a much higher margin,” Fox said.

Singapore, Canada, and Australia are rumored to be mulling their own sugar taxes, said EY’s Bulk, and some countries that already have them are considering changes.

Ireland has introduced a calcium minimum, a way of exempting milk-based products, which are specifically excluded from the U.K.’s soft drink levy.

Without a calcium threshold, Ireland’s tax could be levied on Starbucks Corp. coffees and milk-containing products that have high natural sugar content but are considered healthier options by regulators.

“The new calcium threshold comes into effect in Ireland in 2019 and these firms are eyeing no and low sugar alternatives like milk, coffee and mineral water beverages in the lead up to the introduction of these taxes,” said John Stewart, director of indirect tax at Deloitte Ireland.

Former New York City Mayor Michael R. Bloomberg has backed measures to curb sugar consumption and through Bloomberg Philanthropies has supported imposition of sugar taxes as part of obesity-prevention public health initiatives around the world. Bloomberg Tax is operated by entities controlled by Michael Bloomberg.