Tate and Lyle PLC Tate and Lyle PLC is an international manufacturer of cane sugar, sucralose and renewable foods and industrial ingredients. Tate and Lyle was founded in 1921 by the merger of two companies: Tate, a sugar refining business started by Sir Henry Tate in 1859, and Lyle, a sugar refining business started by Abram Lyle in 1865. They are currently the only cane sugar refiner in the UK, and the largest in Europe. (Tate and Lyle, 2009) Tate and Lyle operate in four key markets: food and beverage, industrial, animal feed and personal care and pharmaceuticals.
The group operates mainly in Europe and North America. It is headquartered in London, UK and employs approximately 5,718 people. Net profit for the year ending March 2009 was ? 70 million. (Datamonitor, 2009) Tate and Lyle is part of an oligopoly within the UK sugar industry and internationally. British Sugar (a subsidiary of Associated British Foods) is the main UK competition. In 1998, after a ten year investigation by the European Commission, they were both fined for price fixing on the white granulated sugar market in the mid – 1980’s.
The commission uncovered 26 price collusion meetings, during this time the two companies accounted for around 90% of the sugar market in the UK. (The European Commission, 1998) Sloman and hinde (2007) describe oligopoly as ‘where there are only a few firms and where entry of new firms is restricted’. There are many differences in the structure of industries under oligopoly and there are many differences in the actions of firms. They may produce identical products, for example sugar, however the majority of oligopolists produce a wide variety of different products as do Tate and Lyle and British Sugar.
Oligopoly is characterised by two important features; the interdependence of the firms, with each firm being affected by its competitors decisions, (for example if Tate and Lyle were to lower their prices for sugar, British Sugar may feel the need to lower their own prices) and restrictions to entry which can take on various forms similar to those of monopoly. Legal protection would seem like the obvious barrier to entry, but there are many more that can affect entry into an oligopoly situation.
A few of the more relevant restrictive barriers to consider when trying to break into the UK sugar industry are; economies of scope and lower costs for an established firm. An emerging specialist sugar manufacturer for instance, with only one product, would find it difficult to enter the sugar industry when Tate and Lyle and other rivals are so large, established and have access to shared storage, transport, research and marketing across their range of other products. (Sloman and Hinde, 2007) This essay will analyse the market situation of Tate and Lyle PLC. Currently, the price of raw sugar has reached a 28 year high.
There are some underlying reasons behind this. In Brazil, the world’s largest producer of sugar, heavy rain has caused milling disruptions. Brazil also has a growing demand for sugar to be converted into Ethanol for fuel. Meanwhile, India, the biggest consumer of sugar, has had a sharp fall in the production of sugar and has gone from being a net exporter of sugar to an importer. (The Guardian, 2009) To make matters worse, the pending Indian sugar crop due late November 2009 is expected to be of poor quality since the crucial monsoon season had less rain and was uneven. BBC, 2009) ‘For financiers seeking adrenaline-driven price lurches, sugar has become the new oil’. (The Guardian, 2009) Demand curves for UK Sugar Industry November 2009 [->0] The demand curve shifts to the right as a non price determinant of demand has altered. As demand for sugar has increased, the demand curve shifts to the right, increasing the equilibrium price and quantity. As the demand curve shifts to the right, the result will be a shortage in sugar, at the new market price quantity demanded will exceed quantity supplied. (Sloman and Hinde, 2007) Supply curves for Sugar Industry November 2009
The supply curve shifts to the left as there is a shortage of sugar, increasing the price and decreasing quantity. As illustrated by Sloman and Hinde (2007), an Oligopoly by nature has price stability, even when there has been no collusion between firms. This theory is based on two assumptions. For example, if Tate and Lyle were to lower their prices, British Sugar and the other rivals would feel the need to follow suit to prevent losing customers to Tate and Lyle. Contrastingly, if British Sugar raised their prices, Tate and Lyle would not follow suit. They would keep their prices the same and gain customers from British Sugar.
The kinked demand model illustrates this. A kinked demand curve for Tate and Lyle as an Oligopolist Sloman and Hinde (2007) ‘For any firm changing its price, it is vital to know the likely effect on the quantity demanded’ Sloman and Hinde (2007). Tate and Lyle was thinking of increasing its prices after a decline in profitability due to the rising cost of oil which plays a big part in its energy costs. Tate and Lyle are in a market with very low price elasticity. Sugar is not a very expensive commodity and people will still buy it even if the price goes up slightly.
Another aspect is that people become accustomed to sugar in their tea or coffee for instance, so even if prices rose significantly, consumers would not give up their sugar consumption straight away. (Bized, 2005) Price elasticity of demand curve for Tate and Lyle % Increase in price will be high Tate and Lyle are in a good position to put up their prices as they could make substantially more profit on each unit sold and yet sell only very slightly fewer units. (Sloman and Hinde 2007). The graph above shows a price increase of 20%, the effects of this can also be shown as an equation. 10%/20%=- 0. 5 Income elasticity of demand theory works in a similar way, calculating the extent to which demand changes as consumers income changes. (Sloman and Hinde, 2007) As illustrated by Keith Eugene Maskus (1993) particularly for sugar as a relative FMCG, the income elasticity of demand is negative and again very low. Although it is not a necessity, it is neither regarded as a luxury as it is a low priced good. Consumers become accustomed to it in their tea, on their cereal, whilst cooking & baking and no amount of income related change will change that.
Everybody still has to eat, and when incomes fall, eating and drinking habits are not likely to change to that much of an extent that people will not buy their 75p bag of sugar. Cross elasticity of demand for sugar is also negative as illustrated by Baumol & Blinder (2008). For example, as sugar is complementary to coffee, when there is a rise in the price of coffee, people drink less coffee and ‘therefore demand less sugar to sweeten it’. Bibliography Baumol, J & Blinder, S (2008) Economics: Principles and Policy 11th ed. Connecticut: Cengage Learning Bized (2009) ‘Price Elasticity – 30 Sept 2005’ http://www. ized. co. uk [accessed 10th November 2009] Bized (2009) ‘Product Positioning – 12 March 2007’ http://www. bized. co. uk [accessed 10th November 2009] Bized (2009) ‘Sugar Markets and Models – 11 August 2009’ http://www. bized. co. uk [accessed 10th November 2009] Bized (2009) ‘Fairtrade – 27th February 2008’ http://www. bized. co. uk [accessed 10th November 2009] BBC (2009) ‘Sugar price reaches 28-year high’ http://www. news. bbc. co. uk [accessed 10th November 2009] Clark, A. (2009) ‘Sugar the new oil as prices soar’ The Guardian. p. 1. http://www. uardian. co. uk. [accessed 10th November 2009] Competition Commission (1991) ‘Tate & Lyle PLC and British Sugar plc: A report on the proposed merger’ http://www. competition-commission. org. uk [accessed 10th November 2009] Economics A-Level (2009) ‘Oligopoly’ www. economicsalevel. co. uk[->1] [accessed 10th November 2009] Maskus, K (1993) ‘The Economics and politics of world sugar policies’ University of Michigan Press. pp. 88-92 [->0] – http://en. wikipedia. org/wiki/File:Supply-and-demand. [->1] – http://www. economicsalevel. co. uk