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Rising potato price eats into profit margins of Indian Potato chips manufacturers

July 13, 2009
A sudden shortage of potatoes accompanied by sharply higher prices is eroding profit margins for large potato wafer brands and could force several smaller ones to temporarily exit the snack foods market. Prices of chipping potatoes used to make wafers have risen by 60% in recent days and companies, such as PepsiCo, are trying to cope with it by improving their storage so that stocks last longer.

“Still, as the biggest potato processor, margins are under pressure in the second half of the year,” said Gautham Mukkavilli, CEO of Fritolay India, the snack foods division of PepsiCo. Fritolay owns brands such as Lay’s and Kurkure.

Offtake by the small processors has fallen by almost half, according to industry estimates. Hot weather and diseases resulted in a fall in the crop output by a fifth and also affected the quality of the tuber. Poor quality meant that the crop could not be stored for a long period.

The shortage of chipping potatoes is likely to worsen in the coming seasons because of a growing demand-supply gap. More and more companies are entering the Indian wafers market, one of the fastest-growing categories among snack foods, but farmers are unable to keep pace.

Pepsi is preparing by teaching farmers to produce chipping potatoes to ensure a steady supply of reasonably-priced raw material.

“We have made significant efforts in Uttar Pradesh and Gujarat through contract farming and expect more and more farmers would take up chipping potatoes,” Mr Mukkavilli said.
Companies in this Article
Frito-Lay North America (FLNA) includes Pepsico's snack operations in the United States and Canada where the company dominates the market with a range of savory snacks brands including Lay's, Ruffles, Doritos, Tostitos, Fritos, Cheetos and Sunchips
ITC Limited is an Indian telecommunications giant and cigarette manufacturer diversifying in the Consumer Packaged Goods market, including the snack foods sector with its brand "Bingo!". Bingo managed to capture an 11% market share of the Indian snack market within 6 months of its launch.