Certain products, notably alcohol and tobacco, have been demonized at various times in American history. These periodic demonizations typically have many “unintended” consequences.[1]
 
So What?
When products are “demonized,” trouble can follow. Consumers may shun the products, taxes may cut into sales and margins, and regulations may further restrict or curtail the market.
 
The net effect can take a toll on investors who don’t get out of the way.
 
An understanding of what has happened in the past can shed light on what is possible.
In this post, we look at the history of Prohibition, perhaps the worst such demonization, and explain why we think companies based on products containing high sugar could be at risk.
 
The Disaster of Prohibition
As most Americans know, after nearly a century of agitation by progressives and a religiously motivated temperance movement, alcohol was banned in 1919 in the United States by the Volstead Act.
 
The results, to the surprise of the backers, were widely disastrous. Thousands of businesses were destroyed; billions of dollars (many billions in today’s money) were lost by investors and business owners, tens of thousands of jobs were lost (in alcohol production, distribution, restaurants, bars, and all the industries that support them); the federal government lost $11 billion of in tax revenue.[2] And to top it all off, rates of death increased!
                                                                                                     
Here’s a graph showing the death rates:[3]

If you are familiar with the history of government regulation, you may not be surprised that banning alcohol wasn’t even effective at accomplishing the supposed goal of reducing alcohol consumption except for a single year. Here’s a graph showing total per-capita alcohol consumption in the US for the years leading up to Prohibition, and the first seven years of Prohibition.[4]  From 1913 to 1919, alcohol consumption was trending down. Then Prohibition was implemented. And from 1921 to 1927, alcohol consumption trended up.

But this post isn’t about Prohibition.
 
It’s about the latent risk to whatever industry happens to become perceived as the villain (whether rightly or wrongly) in a complex political-social-economic dance.
 
Alcohol prohibition was nominally about health. So is the war on smoking.
 
We want to ask,
 
“Is Soda the New Tobacco?”[5]
 
That is the question posed by an increasing number of people. Among them are the ironically named Marion Nestle, a “public health advocate” and emerita professor at NYU. Nestle is the author of many books whose basic message is that sugary drinks are the new tobacco.
 
The claim is, more or less, that it is “known” that sugary drinks cause obesity,[6] and that the soft-drink (and related) industries are actively covering up this alleged fact. But the question that matters to investors is not primarily whether the claim is true, but whether politicians see an opportunity to benefit, and whether the public believes the claims.
 
Many politicians, famously including former New York mayor Bloomberg, believe sugary sodas should be taxed. The Urban Institute reports that there are eight states and localities (including Philadelphia and the District of Columbia) that currently have sugary-drink taxes.
 
Coca Cola has spent nearly $100 million lobbying Congress since 2008.[7] Why would a soft-drink company need to lobby Congress? Some critics suggest that the lobbying money is to fend off proposed soda taxes.
 
But that claim seems wide of the mark. Instead, it seems likely that Coke (as do other similar companies that produce highly processed sugary foods) sees it as a good investment in standard return-on-investment terms.
 
Government Part of the Problem?
What single payer do you suppose spends more money on sugary drinks than any other?
 
If you said the hapless American taxpayer, you’d be right. An estimated $12 to $18 billion a year is given by the federal government, in the form of food stamps (now called supplemental nutritional assistance program) and is spent by recipients on sugary drinks.[8] The US government itself reported that of every dollar of food stamps, “20 cents was spent on sweetened drinks, desserts, salty snacks, candy, and sugar.”[9]
 
This situation, in which the federal government is handing out cash that is spent on sugary drinks and snacks to the tune of at least $12 billion (food stamps is only one program of many), has drawn the attention of a variety of politicians from both major parties.[10]
 
An op-ed written by three former Secretaries of Agriculture (under Clinton, Bush II and Obama) makes the claim:
 
“There has never been a more important time to refocus the farm bill on nutrition. Diet-related disease is the leading cause of death in the United States, surpassing tobacco, drug, and alcohol usage. More than 1000 deaths every day are due to poor diets. Emerging science on the global cancer burden points to proper nutrition as the most important way after not smoking to protect against cancer. And of course, these diseases come with a hefty price tag, putting tremendous pressure on an already overburdened health care system.”^[11]
 
And Congress is considering acting, though the proposed legislation has not gotten much support (yet?). US Senate bill 1485 seeks to remove from the food stamps program:
 
“Soft drinks, candy, ice cream, prepared deserts such as cakes, pies, cookies, or similar products,”
 
which would put them into the same demonized category as “alcoholic beverages and tobacco.”
 
Is a Trend Developing?
It took almost a century for the temperance movement to finally succeed in the full demonization, and banning, of alcohol.
 
It took decades for the demonization of smoking to reach critical mass such that many special punitive laws and taxes were imposed. (For the record, we have never smoked, and do not encourage smoking, nor do we consume sugary sodas, but believe that each adult should be allowed to make that decision for himself or herself without interference by government at any level.)
 
We want to bring to your attention the possibility that a similar wave of demonization may be in progress with sugary snacks as the target this time. In addition to the above noted political statements and taxes, the Gallup polling organization has measured that opposition to “soda or pop” by people in their own diets has grown from 41% in 2002 to 61% in 2018[12] which is the most recent year we could find polling for.
 
If people vote the same way they behave in their own lives, that could spell trouble for companies like Coca Cola and Pepsi-co, which are both household-name soda companies that have earned billions of dollars by selling the sugary products. Other companies that are purveyors of highly processed, high sugar-content products, could also become targets.
 
Coca-Cola in particular could represent more risk than reward. The stock is trading near an all-time high, and trades at about 23x earnings. This is not outrageous, but it also doesn’t seem cheap given that the company’s earnings per share have grown slowly since 2009, compounding at about 3.8% per year since then.
 
How to Sell a Stock with a Big Gain and Not Pay Tax
If you or any of your clients hold a concentrated stock position in a company that could find itself in the anti-sugar crosshairs, including but not limited to Pepsi or Coca-Cola, you may want to sell that stock in a tax-efficient manner.
 
And there might be more than you think. Perhaps surprisingly, given Warren Buffett’s “white knight” reputation, Berkshire Hathaway is a huge player in the “junk-food” industry, not only through its huge holding of Coca Cola, but also through its 26.5% ownership of Kraft[13] and Heinz, as well as other “junk food” companies.  If you’re concerned about the risk, it might make sense to go through client portfolios to see where there are major holdings that could be exposed.
 
Please call us to see whether a Stock Diversification Trust might be a good solution. You can also ask us for a free copy of one our Advisor Guides. Click here for a free copy of our Advisor’s Guide to Stock Diversification. Please call 703 437 9720 and ask for Connor or Katherine, or email us at [email protected].

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[1] https://www.econlib.org/library/Enc/UnintendedConsequences.html

[2] Economic Results of Prohibition, Clark Warburton, Columbia University Press, 1932

[3] Louis I. Dublin, Has Prohibition Improved the Public Health? American Journal of Public Health, Vol. 18, No. 1, January, 1928

[4] Economic Results of Prohibition, Clark Warburton, Columbia University Press, 1932, data on page 198, Table 94.

[5] https://www.ajmc.com/view/is-soda-the-new-tobacco-an-expert-and-new-cdc-data-say-yes

[6] The concept of causation in the sphere of public health is controversial and vexed. Our point is independent of whether “in fact” sugary drinks cause obesity.

[7] https://www.opensecrets.org/federal-lobbying/clients/summary?cycle=2021&id=D000000212

[8] https://www.pewresearch.org/short-reads/2023/07/19/what-the-data-says-about-food-stamps-in-the-u-s/ and https://www.npr.org/sections/thesalt/2018/10/29/659634119/food-stamps-for-soda-time-to-end-billion-dollar-subsidy-for-sugary-drinks

[9] https://fns-prod.azureedge.us/sites/default/files/ops/SNAPFoodsTypicallyPurchased-Summary.pdf. We calculate the $12 to $18 billion by assuming that of the “20 cents” between 10 and 15 cents was spent on non-sugary items, and then we multiplied by the approximately $120 billion food stamp budget in 2022.

[10] Contrary to widespread belief, the federal government – mainly through import quotas – causes the US price of sugar to be significantly higher than it otherwise would be. This policy (like so many bad policies) goes all the way back to the New Deal. The sugary product called “high fructose corn syrup” owes its market largely to the federal sugar price supports. Most of this high fructose corn syrup produced in the US goes into sugary drinks.

[11] https://thehill.com/opinion/healthcare/401209-focusing-on-nutrition-is-paramount-to-getting-a-sound-bipartisan-farm-bill/

[12] https://news.gallup.com/poll/6424/nutrition-food.aspx

[13] E.g. see the Journal “Addiction” research report dated July 13, 2023, which explicitly ties Kraft to tobacco (Kraft was owned by Philip Morris for a number of years).