High intensity threat

The challenge for Tate & Lyle will be to widen the market for its Splenda sucralose rather than fighting with suppliers of aspartame for ascendancy in the diet drinks sector, according to a controversial new report from analyst Credit Suisse.

In its report, 'Not so Splenda?' Credit Suisse analyst Charlie Mills said: "Diet Coke and Pepsi One (sweetened with Splenda) have both failed to take off, and Diet 7Up - the first major soft drink to be sweetened with Splenda - has relaunched, reverting back to aspartame. Will sucralose replace aspartame in diet drinks? Not on the evidence so far.

"However, aspartame has recognised shortcomings, all of which sucralose can address. Most notably, sucralose is heat resistant and able to widen the end user market to include products such as canned goods, sauces, baked goods and frozen goods."

His report was published as Tate & Lyle admitted that sales of Splenda were running below expectations, prompting fears that it may not prove to be the moneyspinner investors had hoped. While volumes to the US carbonated soft drinks sector had not met expectations, slower uptake in other products was down to "timing issues" claimed Tate & Lyle. "We have an extensive development pipeline with customers, but the reformulation process is complex and has taken a little longer than we expected."

Splenda contributes almost a fifth of Tate & Lyle's profits on 3.5% of its turnover, achieving margins of around 50%. This was unlikely to be sustainable as competitors entered the market, suggested Mills, who predicted that margins would slip to 33% by 2010.

However, there were good growth opportunities in new product sectors, he said.