20804555Ruby Kerr20804555Ruby KerrTate and Lyle PLCTate and Lyle PLC is an international manufacturer of cane sugar, sucralose andrenewable foods and industrial ingredients. Tate and Lyle was founded in 1921 bythe merger of two companies: Tate, a sugar refining business started by Sir HenryTate 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 operatesmainly in Europe and North America. It is headquartered in London, UK and employsapproximately 5,718 people. Net profit for the year ending March 2009 was £70million. (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 bothfined for price fixing on the white granulated sugar market in the mid - 1980’s. Thecommission uncovered 26 price collusion meetings, during this time the twocompanies accounted for around 90% of the sugar market in the UK. (TheEuropean Commission, 1998)Sloman and hinde (2007) describe oligopoly as ‘where there are only a few firms andwhere entry of new firms is restricted’. There are many differences in the structure of
20804555Ruby Kerrindustries under oligopoly and there are many differences in the actions of firms.They may produce identical products, for example sugar, however the majority ofoligopolists produce a wide variety of different products as do Tate and Lyle andBritish Sugar. Oligopoly is characterised by two important features; theinterdependence of the firms, with each firm being affected by its competitorsdecisions, (for example if Tate and Lyle were to lower their prices for sugar, BritishSugar may feel the need to lower their own prices) and restrictions to entry whichcan take on various forms similar to those of monopoly. Legal protection wouldseem like the obvious barrier to entry, but there are many more that can affect entryinto an oligopoly situation. A few of the more relevant restrictive barriers to considerwhen trying to break into the UK sugar industry are; economies of scope and lowercosts for an established firm. An emerging specialist sugar manufacturer forinstance, with only one product, would find it difficult to enter the sugar industry whenTate and Lyle and other rivals are so large, established and have access to sharedstorage, transport, research and marketing across their range of other products.(Sloman and Hinde, 2007) This essay will analyse the market situation of Tate andLyle PLC.Currently, the price of raw sugar has reached a 28 year high. There are someunderlying reasons behind this. In Brazil, the world’s largest producer of sugar,heavy rain has caused milling disruptions. Brazil also has a growing demand forsugar to be converted into Ethanol for fuel. Meanwhile, India, the biggest consumerof sugar, has had a sharp fall in the production of sugar and has gone from being anet 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
20804555Ruby Kerrquality since the crucial monsoon season had less rain and was uneven. (BBC,2009)‘For financiers seeking adrenaline-driven price lurches, sugar has become the newoil’. (The Guardian, 2009) Demand curves for UK Sugar Industry November 2009The demand curve shifts to the right as a non price determinant of demand hasaltered. 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 willexceed quantity supplied. (Sloman and Hinde, 2007) Supply curves for Sugar Industry November 2009
20804555Ruby KerrThe supply curve shifts to the left as there is a shortage of sugar, increasing the priceand 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 twoassumptions. For example, if Tate and Lyle were to lower their prices, British Sugarand the other rivals would feel the need to follow suit to prevent losing customers toTate and Lyle. Contrastingly, if British Sugar raised their prices, Tate and Lyle wouldnot follow suit. They would keep their prices the same and gain customers fromBritish Sugar. The kinked demand model illustrates this. A kinked demand curve for Tate and Lyle as an Oligopolist Sloman and Hinde (2007)
20804555Ruby Kerr‘For any firm changing its price, it is vital to know the likely effect on the quantitydemanded’ Sloman and Hinde (2007). Tate and Lyle was thinking of increasing itsprices after a decline in profitability due to the rising cost of oil which plays a big partin 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 pricegoes up slightly. Another aspect is that people become accustomed to sugar in theirtea or coffee for instance, so even if prices rose significantly, consumers would notgive up their sugar consumption straight away. (Bized, 2005) Price elasticity of demand curve for Tate and Lyle % Increase in price will be high
20804555Ruby KerrTate and Lyle are in a good position to put up their prices as they could makesubstantially 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%, theeffects of this can also be shown as an equation. -10%/20%=- 0.5Income elasticity of demand theory works in a similar way, calculating the extent towhich demand changes as consumers income changes. (Sloman and Hinde, 2007)As illustrated by Keith Eugene Maskus (1993) particularly for sugar as a relativeFMCG, 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 pricedgood. Consumers become accustomed to it in their tea, on their cereal, whilstcooking & 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 notlikely to change to that much of an extent that people will not buy their 75p bag ofsugar.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 arise in the price of coffee, people drink less coffee and ‘therefore demand less sugarto sweeten it’.
20804555Ruby KerrBibliographyBaumol, J & Blinder, S (2008) Economics: Principles and Policy 11th ed. Connecticut:Cengage LearningBized (2009) ‘Price Elasticity – 30 Sept 2005’ http://www.bized.co.uk [accessed 10thNovember 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 10thNovember 2009]BBC (2009) ‘Sugar price reaches 28-year high’ http://www.news.bbc.co.uk [accessed10th November 2009]
20804555Ruby KerrClark, A. (2009) ‘Sugar the new oil as prices soar’ The Guardian. p.1.http://www.guardian.co.uk. [accessed 10th November 2009]Competition Commission (1991) ‘Tate & Lyle PLC and British Sugar plc: A report onthe proposed merger’ http://www.competition-commission.org.uk [accessed 10thNovember 2009]Economics A-Level (2009) ‘Oligopoly’ www.economicsalevel.co.uk [accessed 10thNovember 2009]Maskus, K (1993) ‘The Economics and politics of world sugar policies’ University ofMichigan Press. pp. 88-92