Pepsi Basix Partnership

Case Facts
 Case talks about the global strategic alliance between Pepsi and Basix, according to
which Basix would provide microfinance and guidance to farmers to produce potatoes,
which would then be bought by Pepsi under its contract farming model.
 In 2007 Fritolay, the food division of Pepsi led the 200 million dollars Indian branded
snacks market with a share of 45%, however the product require a special quality of
potato which has low sugar content and has right amount of moisture and specific oval
size which is conducive for the assembly line production, taste and presentation for end
products.
 India is a risk environment for Pepsi, especially “Indian Ceiling Act” which does not allow
foreign agri-business firms to own and cultivate land for their raw material requirement.
 Pepsi wanted to expand its base of potato sourcing and was scouting for producers who
could engage in contract farming.
 Pepsi mainly sourced potatoes for its Fritolay brands- Lays and Uncle chips from Kolkata
in West Bengal, Channo in Punjab and Pune in Maharashtra. Pepsi was considering
sourcing potatoes from Jharkhand and came into partnership with BASIX.
Pepsico’s Contract Farming Model
PepsiCo (formerly known as Pepsi Foods Ltd.) launched its agro business in India in 1989 with
special focus on exports of value added processed foods. PepsiCo follows the contract farming
model where the grower plants the company’s crop on his land, and the company provides
selected inputs like seeds/sapling, agricultural practices and regular supervision of the crops by
its technical team.
Business Model
Pepsi recommended the farming practices which would increase the yield of small scale farmers
by 4000 to 600kg per acre, the model is shown in exhibit 2 in the case. The wastage of 30% is
also included in this model, of which 2/3 rd could be sold at half the rate and rest for self-
consumption at 0.02$ per kg. Contract farming would increase cost up to a certain extent but
the benefits received from it outweighs the cost incurred. Original Process was to buy potatoes
from sellers, whoever they may be new process is working actively to expand suppliers by
working with the farmers, process innovation. By thinking outside the box, they were able to
increase their potential and make a Win/Win situation.

PepsiCo Contract Farmers versus farmers selling to Traditional Market (per acre)
Chip- Traditional
Cost of Cultivation for potatoes Grade Potatoes
Seed tubers(ATL) 16000 12000

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 Land Preparation 400 400
Fertilizer-N:P:K=100:60:80 3100 3200
Irrigation 900 900
Labor 4500 4500
Agrochemicals 3000 2000
Gunny bags 1280 1280
Organic manure-FYM-1mt 1000 1000
Cost of Cultivation per acre 30180 25280
10-12
Yield MT 10-12MT
8-10
Yield for chip grade MT ------- 
Market Price Rs/KG 3.6-6.4 2.8-5.5
34,400
- 28000-
Value of Output (yield 10 MT/chip grade 8MT) 62,200 55000
41,000 33600-
Value of Output (yield 12 MT/chip grade 12 MT) -75000 66000
4220-
Gross margin (yield 10 MT) 32020 2720-29720
11420-
Gross margin (yield 12 MT) 44820 8320-40720
(Source- Supply Chain Analysis of Potato Chips: Case Study of PepsiCo’s Frito Lay in India, United Nations Food and
Agricultural Organization New Delhi, figures -2008)

From the above table we can see the gross margin is quite high in chip grade potatoes as
compared to that of traditional potatoes farming.
A typical marketing chain for horticultural produce consists of several players as shown in figure
1, below. In the traditional supply chain where the produce of several farmers is aggregated,
there is no premium for quality produce.

Consolidat Semi
Farmer Wholesaler Retailer
or Wholesaler
Figure 1 – Supply Chain for horticulture produce in India

The Dilemma
 Basix developed a growth strategy, as the number of farmers desiring to work increased
as well as the amount of land to harvest
 Due to shortage in seeds, the farmers were unable to produce the amount of potato
Pepsi asked for. This caused a substantive conflict as there were disagreements between

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 the farmers and the Basix, as the farmers began secretly selling potatoes in the open
market.
 Pepsi, Basix and farmers attempted to compromise as Pepsi wished for a higher quality
potatoes while the farmers were giving them the leftover after selling in open market.
Many farmers sold produce under the cover of night.
Recommendations

Source 1- “Partners in Progress model adopted by Fritolay” www.slideshare.net/princesahilkhanna/contract-farming-pepsico

 Pepsi provides advanced generation quality seed tubers to the farmer’s organization
which is distributed to the farmers.
 Company provides direct support to the farmers in terms of extension services for chip
grade farm practices through the qualified agronomists and scientists
 Agronomists keep in touch with the farmers on day today basis either via direct field
visits or cell phones. Agronomists also keep record for the field practices adopted and
stages of the crop.
 Company should provide some additional benefit to farmers for their loyalty.

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 Pepsi should identify input companies to make bulk supply of inputs on reduced rate
and benefits are passed on directly to the farmers.

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