Unintended Consequences: The Economic Impact of the Sugar Tax on Small Stores and Bakeries in Mexico

You enter a small opening tucked in the corner of a busy street in Mexico City. To your left, you see small shelves lined with cans of beans, snacks, and produce. To your right, you can see a plethora of single-use personal care items crammed above a shelf of pet food. Your nose starts to tingle and you feel your eyes drawn to the counter where you see a basket of freshly baked goods. From behind the counter, a pair of weary-yet-pleasant eyes tracks your journey through the tiny space. You pay for your goods with a hundred pesos and thank the owner. As you exit the door, the glint of refreshing beverages waves you goodbye. These are the products commonly found in the small mom-and-pop type stores—often referred to as la tienditas—that make up the heart of the Mexican economy. With over 50% of food and consumer good purchases taking place in these non-traditional venues—which can take the form of a small store, a pop up table in a busy market, or even a simple presence in a doorway—both consumers and store owners are dependent upon the vitality of these businesses. However, the environment in which these stores thrive is fragile. Since the countrywide implementation of a beverage and food tax in 2014, thousands of these tiny shops have been forced to close down. In the first half of 2016 alone, 30 thousand stores closed due to financial insecurity, and a staggering 93% of the tienditas saw a fall in profits. Yet, even in the face of rising taxes and stagnating business, these storeowners soldier on. Lorena’s family first opened up their small mom-and-pop, La Nortenita, over 65 years ago. After the passing of both her parents and her sister’s sudden illness, Lorena was forced to quit her job as a university professor and take over the store. For the past 25 years, she has worked 10 hours a day seven days a week, created a reputation for herself as a trustworthy business partner with her suppliers, and amassed a loyal customer base. “I sell coffee, homemade bread, and give attention to clients,” Lorena beamed. “I want to be here [so] they can come talk about their problems.” Lorena’s story is not uncommon. With over 800,000 mom-and-pop type shops located throughout Mexico, hundreds of thousands of storekeepers and their families dedicate their lives to these stores. Much like Lorena, these families often embody a sense of close family ties, a strong sense of community, hardship and sacrifice. Many of these owners work from early morning until past midnight seven days a week, employing only their spouse, children, and other family members due to low wages. Jesus, who runs a store out of the basement of his house, is one such example. After having seen a decrease of 20% in business since his store’s conception, he now plans to move to another state and try his hand again at running a store. Similarly, Rudolpho, a former electrician from Los Angeles who owns the picturesque Aborrotes Mary, has seen a decrease of over 40% in revenue since 2014. This decline in revenue is nearly universal among tiendita owners. In the first half of 2015 alone, small stores across the nation saw an average of 15-25% decreases in sales. This trend is nothing new. Family run tienditas have suffered greatly in the face of these larger 24/7 competitors. The emergence of large competitors, the general stagnation of the Mexican economy, and difficulties with the tax system have all been cited as some of the largest obstacles a tiendita must face in today’s world. One of the first obstacles every storeowner faces is reporting taxes. In the past two years, Mexico has implemented a taxation system in which storeowners are required to keep electronic accounting records to be submitted to the government monthly. Many owners are hesitant to open bank accounts and hire accountants, as both require extra money that most owners do not have. And while it is possible for storeowners to balance their own taxes, most do not possess the training or capabilities required to use the new tax system. Although most storeowners reported paying taxes, statistics show that a large portion of owners do not. Many storeowners cited the complex reporting system as a reason why owners may not pay taxes, while others felt that the government was misusing their tax money and therefore felt no reason to pay. Most, however, simply felt that the tax burden was too much for a modest tiendita to handle. Interestingly, 38.8% of storekeepers perceive this recent decrease in revenue as being a direct affect of the 2014 sugar tax. In an effort to contain Mexico’s growing obesity problem, the Mexican government launched the National Strategy for the Prevention and Control of Overweight, Obese, and Diabetes (ENCPSOD) in 2013, eventually leading to a nationwide tax in 2014 on the production and services of sugary beverages and foods. With a tax of 1 peso per liter, this reform was created in order to prevent consumers from buying high-caloric beverages; however, many have begun to question the effectiveness of the tax. First and foremost, the tax on food and beverages simply does not seem to have met its public health objectives. Though sugary beverage purchases did fall during the initial onset of the sugar tax, the revenue accrued by these purchases has once again reached pre-tax levels, growing an average of 13.7% per year. Even if the sugar tax had been successful and the consumption of sugary beverages had permanently decreased, studies show that consumers would have only experienced a decrease in 10 calories per day, or 0.33% of their daily caloric intake. Instead of quelling the Mexican obesity epidemic, the implementation of the sugar tax has proven to be regressive, recessive, and inflationary. With sugary drinks playing such a major role in lower-income households—as defined by CONEVAL’s basic consumption basket—any increase in taxes on these products results in an increase in prices of the consumption basket by 5-6%. And with a 1% increase in the price of the consumption basket resulting in 500,000 people in poverty, a 5-6% increase would be simply disastrous. The most alarming aspect of all, however, is the effect the sugar tax has on other goods. Because consumers continue to purchase sugary beverages despite the price increase, they must make up for it by reducing their purchase of other products. Since the onset of the tax, yogurt, toothpaste, soap, and washing powder—all essential household items—have decreased, while purchases of sugary beverages have returned to pre-tax levels. Similarly, 43% of households have cut back on their budget used for entertainment outside the home. If households are still willing to purchase sugary beverages at the price of their entertainment and even certain necessities, perhaps a different approach is necessary to address the obesity epidemic in Mexico. Ultimately, the food and beverages tax has proven that taxing goods is not an effective tool for changing habits. With so many negative factors impacting Mexico’s traditional market—a stagnant economy, supermarket competitors, and a complex tax filing system—the addition of the sugar tax has proven to be detrimental, recessive, and wholly ineffective. However, there is still hope. Though these mom-and-pop shops have been thrust into a harsh reality, many have faith in a brighter future where family, community, and tradition lead the Mexican market to unprecedented heights. Editor’s Note: Over 55% of Mexican food and consumer goods purchases take place within a traditional market—mom and pop stores which may be resident simply as a presence in a doorway, a converted garage or a small shop. Store owners use cash on hand to purchase inventory from representatives of large consumer goods companies who daily walk through the neighborhoods, distributing small amounts of individual product, e.g., snacks, beverages, pet food, personal care products. Store owners have experienced a significant decrease of their cash on hand—and thus an inability to purchase inventory—due to the 2014 implementation of fiscal reform which included a sugar tax and the introduction of a complex reporting system. Alianza Nacional de Pequenos Comerciantes (ANPEC) estimates that between 30,000 and 50,000 of these micro businesses, many who make less than $5000 per year, as well as thousands of small bakeries were forced to close—an unexpected consequence of fiscal policy funded and promoted by key influencers in the United States. In Fall of 2016, Diplomatic Courier’s Advisory Board Member Ambassador Lisa Gable and Senior Photographer Michelle Guillermin embarked on an anthropological tour in Mexico, visiting and interviewing many of the owners of tienditas that have been impacted by the sugar tax. About the authors: Ambassador Lisa Gable is President Emeritus of Healthy Weight Commitment Foundation and an Advisory Board Member of Diplomatic Courier. Winona Roylance is Senior Correspondent at Diplomatic Courier. Michelle Guillermin is Senior Photographer at Diplomatic Courier and a Member of the National Press Club.