Yields On Long, Medium-Term Papers Spurt

Three years after it started selling its Ruffles brand of chips in India, Pepsi Foods hadn't even hit its first-year targets in terms of volumes. And five years after launch, the company made a Rs 15-crore loss.

For Pepsi's snackfoods business, the root of the problem was easy to spot. Instead of building the critical mass that would give it economies of scale, the company found itself stuck in the vicious cycle of high costs and low volumes.

To pull itself out, the company, over the past year, altered its product mix by introducing a range of Indian snackfoods (namkeens) and reworked its distribution strategy. This has seen volumes rise.And this year, Pepsi Foods hopes to achieve twice last year's volumes.

Despite the gains, the big question remains. Can the giant multinational ever hope to catch up with an industry that is effortlessly dominated by myriad producers of what is essentially a low-cost cottage industry? The issue is crucial because, for Pepsi, the rise in volumes has come at a huge cost especially in terms of advertising spends and distribution costs.

To understand Pepsi Foods challenges consider, first, its problems. It all began with a state-of-the-art plant that was set up at Zahura in Punjab at an investment of Rs 23 crore. This immediately put Pepsi at a huge cost disadvantage compared to the competition in the branded chips market which operated from fully depreciated plants.

This investment need not have been a major problem if the company had been able to build volumes. Its failure to do so was partly the result of, one, the challenges in the market and, two, the nature of the competition.

Building volumes in the branded potato chips business was a tough call because the product accounted for just 1.3 per cent of the snackfoods business