Tate & Lyle plunges as sales of sugar substitute turn sour

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Shares in the food ingredients group Tate & Lyle plunged 16 per cent after the company warned that sales of its Splenda Sucralose sugar substitute had been weak.

The apparent success of the sucralose product had previously driven the Tate & Lyle share price and the company has built new plants as it struggled to meet demand. Yesterday the group admitted that it had been hit by slower-than- expected take-up of the artificial sweetener by customers.

In particular, sales of Splenda to the US fizzy drinks sector have not met targets. The company suggested that drinks makers and other food and drink manufacturers were no longer in such a hurry to bring new products to market, after consumer excitement generated by the Atkins diet waned.

Iain Ferguson, its chief executive, said: "Since the Atkins diet three years ago, there has been a slowdown in the innovation rate."

He insisted that the slowdown was a timing issue. "We don't see any reduction in interest from our major customers," he said.

Some in the City however questioned the future potential of Splenda, which was launched five years ago, and would have accounted for over a quarter of group profits for the 2006-7 financial year before yesterday's downgrades.

Jeff Stent, an analyst at Citigroup said in a research note: "Management's previous bullishness was misplaced... it is hard from our revised standpoint to see why sucralose sales should now increase materially beyond [the year to March 2007]. Fully utilising the new Singapore plant now looks ambitious. The possibility of a further expansion (which Tate & Lyle commented on recently) now appears remote."

Tate & Lyle said that pre-tax profits for the year to March would be "modestly" below the City forecasts, which had stood at some £347m, as a result of the Splenda disappointment and also the weakness of the US dollar. Nevertheless, it said the results would still be "well ahead" of the £295m made last year. Analysts cut their pre-tax profit predictions by 5 per cent for the current financial year and by some 10 per cent for next year.

David Lang, an analyst at Investec Securities, agreed with the company that the problem was short-term, as the level of new product activity remained high. "Sucralose has had a hiccup," he said.

The Splenda product has about 26 per cent of the global market for artificial sweeteners. It is found in many fizzy drinks already, including Fanta in France and a version of Diet Coke in the US. Tate & Lyle is in the process of trebling production capacity for Splenda. Mr Ferguson said: "Until recently we've been rather disadvantaged in having insufficient stock to support any major launch. Now we've come through that period."

Tate & Lyle shares fell 112p to 608p, wiping £548m off the company's value.