Pepsi Co.

Case Study

Pepsico has been an early starter in engaging farmers in India. With an

elaborate contract-farming programme underway for the last 15 years, there
have been learnings along the way for the cola and foods major. Pepsico’s
Worldwide President and CFO, Indra Nooyi shares some of them with Chaitali
Chakravarty & Bhanu Pande. An excerpt.

Has Pepsi’s contract farming model changed in India?

It hasn’t changed but evolved over time. In 1989, when Pepsi came into India,
we set up a potato processing plant for our snacks business and a tomato
processing plant in Punjab for exports. The latter was primarily set up to meet
our export obligations. Pepsi’s entry into contract farming was triggered by
the need to make available sufficient quantities of tomatoes & potatoes of
the right quality for our domestic plant.

To start with, there was no blueprint available either in India or

internationally of an appropriate model which could be emulated to structure
our contract farming initiative. In that scenario, starting from the basics of
application research, we created a model which has evolved to its current
form. However, when you take up contract farming for different crops in
different areas, suitable modifications and adjustments have to be made to
ensure it’s relevant to local conditions.

Have the objectives changed?

The objective of contract farming is to backward integrate the supply chain to

ensure timely availability of right quality and quantity of materials. This basic
objective has not undergone any change.
Contract farming models rarely generate profits. Why then should an MNC
expend so much time and energy on them? What are the collateral benefits
of entering the rural economy?

Contract farming in itself is not a business. It is an integral part of a business

model which ensures that raw material is available at the right time
conforming to the quality standards in required quantity at competitive
prices.

All this to ensure the profitability of the business. Our snacks business
requires low sugar potatoes to produce the right quality of potato chips as
such varieties weren’t grown in India. So we had to introduce the suitable
varieties via contract farming. Our efforts were also made to increase
productivity to ensure higher income for the farmer and to reduce our
procurement costs.

In order to succeed we had to undertake extensive trials of various varieties

and evolve agronomic practices suited to local areas. We then put in place an
extension team to transfer these learning’s to the farmers. Efforts to increase
agricultural productivity also go a long way in improving farm incomes,
thereby bringing our efforts in sync with the national priorities.

Why has Pepsi not been able to scale up contract farming of various crops?
The latest seaweed project started out with a different objective. But it
suffered delays and is now being touted as a liquid fertiliser project. Doesn’t
this show the lack of clarity with which MNCs enter contract farming in India?

The contract farming programme gets scaled up in line with business needs.
Our potato programme starting from Punjab has a footprint across the
country to support manufacturing capacities established in Maharashtra and
West Bengal. Today, the number of farmers who participate in our contract
farming programme is higher than what we started with, and many of the
pioneers are still with us. Close to 50% of the potatoes processed by us come
from our contract farming programmes.

Do MNCs face any special hurdle entering the rural areas in contract farming?

The seaweed contract farming project is a path breaking initiative as

cultivation of seaweed in the open sea had never been undertaken before in
India. Initially, effectiveness of the technology to deliver a viable and
sustainable income model for the growers had to be established. Its efficacy
had to be demonstrated to the funding and partnering institutions, who would
manage the Self Help Groups undertaking this activity.

Last, being a new activity, regulatory clearances were required, which could
be granted only after due evaluation and observation of the trials. Only last
month, due to the efforts of the CM of Tamil Nadu and her team, Self Help
Groups have been given the go ahead to take up this activity. Very soon it
will work on a commercial scale. CSMCRI, which provided the technology for
this while working on the process optimisation discovered an additional
application of the weed. They discovered that it could also deliver a by
product — a liquid plant growth nutrient.

It made sense for us to acquire this technology for which CSMCRI had taken a
global patent. We hope to now make available this organic and cost effective
growth nutrient to the Indian farmers and we believe this will have a
significant impact on the yields and their incomes.

What kind of challenges, if at all, do you see in partnering with farm workers?

Any successful initiative requires clear understanding of the ground realities

of the terrain and the needs of its people; their resource base and their
constraints.
Any corporate, Indian or multinational entering this field has to make the
effort and spend time and money to learn in order to build a successful
partnership with the farmers. Indian farmers have no bias against the
multinationals and our 10 years of successful partnership with the Punjab
farmers is a testimony of the same.

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