This is a phrase meaning that something has been slightly modified to make it more "palatable", or easier to "swallow". The concept is enshrined in American culture in the film Mary Poppins, where it is the inspiration for a musical number about how a "spoonful of sugar helps the medicine go down".
The concept is most commonly applied to bad news which is cast in a positive light (or at least, a minimally negative one) in order to make it easier to accept. In a more physical, literal sense, many medications (especially over the counter (OTC) types) are sprayed with a thin sugar coating to encourage consumption.
Sugar coating is a common trend in processed foods, especially breakfast cereals. A quick visit to netgrocer reveals that there is a veritable cornucopia of sugared cereals available today, starting with Apple Jacks and ending with Trix. General Foods (nee The C.W. Post Company) is well known for this type of food, and in fact brought us some of the earliest examples, including Super Sugar Crisp and Sugar Coated Rice Krinkles, while The Kellogg Company apparently ended their crusade for health and began to sell Sugar Frosted Flakes - still on the market today, with a slight name change. Granted, the Sugar Coated Rice Krinkles introduced in 1928 are also still with us now - as Frosted Rice Krispies.