As Margins Shrink And Loyalties Shift, FMCG Giants Hit Reset

In December 2024, Hindustan Unilever Limited (HUL) brought in a major shift to its supply strategy. The fast-moving consumer goods (FMCG) giant said that it would take over warehousing and logistics to supply to over 13 million kirana stores, while assigning distributors strictly to order management and payments — a bold move. The shift, HUL said, was aimed at reducing kirana store delivery times dramatically, from three days to less than 24 hours, while also easing credit constraints these small retailers often face.

Yet the move unleashed a storm of protest.

HUL distributors denounced the model as an attempt to encroach on their business domain. Dhairyashil Patil, national president of the All India Consumer Products Distributor Federation (AICPDF), told NDTVProfit in January that the model was "designed to mislead stakeholders while ignoring ground realities”.

HUL, meanwhile, defended its direct distribution strategy as "impactful" and a "win-win," necessary to maintain a competitive edge against rapidly expanding B2B e-commerce players such as JioMart, Metro Cash & Carry, and Udaan.HUL isn’t alone in pursuing this strategy; other leading FMCG players such as ITC, Parle Products, Britannia, and Tata Consumer have also significantly ramped up direct distribution efforts through 2024. Collectively, these firms now directly reach over a third of their retail outlets, a notable jump from approximately 20% two years ago, according to company executives quoted by Financial Express in a report in July 2024.

For HUL, recent quarterly performances reflect growing financial pressures. In the quarter ending March 2025 (Q4FY25), HUL’s EBITDA margin stood at 23.1%, down around 30 basis points year-on-year, impacted by high input costs. While net profit showed modest growth of 3.7% to Rs 2,493 crore.

HUL CEO Rohit Jawa acknowledged a tough market environment during the company’s earlier earnings call in Q3FY24. He signalled cautious optimism about demand, expecting a gradual improvement in FY26.

To protect margins amid these headwinds, HUL has now implemented selective price hikes in personal care and food categories, including tea and skin cleansing, due to higher input costs.

Behind HUL’s decision to bypass distributors and go directly to kirana stores lies a deeper churn in India’s FMCG landscape. Urban fatigue due to rising debt and lower income, increasing rural consumption, and fragmentation in various FMCG categories may force these companies to rethink their pricing or discounting strategies. As newer players nibble at the edges and consumer loyalties fade, the real question is: can big FMCG adapt to the shifting consumption behaviour of the Indian buyer?

Urban Spending Slows, FMCGs Feel The Strain

Across the FMCG sector, a narrative of slowing growth and squeezed profitability has emerged in recent quarters. Companies such as Britannia, ITC, and Marico reported muted performance.

In Q4FY25, Nestlé India saw slightly stronger revenue growth at 4.5% year-on-year, driven by a modest volume increase and selective price hikes. However, persistent inflation in commodities such as coffee, cocoa, wheat, and edible oils pressured margins, leading to a 6.5% year-on-year decline in net profit to Rs 873 crore.

Beneath the surface of flat toplines and thinning margins lies a deeper churn — urban consumption fatigue, sustained margin pressures, and a clear shift in consumer behaviour.

Particularly worrying is this trend of India’s urban consumption engine, which has long been the bedrock of FMCG growth. Over the past few quarters, leading consumer goods companies have flagged a slowdown in demand from city dwellers, attributing it to a combination of high food inflation, indebtedness, stagnant real wages, and rising living costs.

HUL has been vocal about this trend. In its December 2024 earnings call, Jawa said that this moderation is evident in consumer behaviour, with a noticeable shift towards smaller pack sizes.

Anand Ramanathan, partner and consumer industry leader at Deloitte India, noted that the urban slowdown wasn’t just a matter of subdued sentiment—it’s also about debt. “There is a lot of indebtedness… post the pandemic, people spent beyond their means — on travel, lifestyle, loans,” he told The Core. This stress, he explained, is now spilling over into consumption, particularly in discretionary categories.

“FMCG still sees less of an impact, except in categories like ice creams and chocolates,” he said, adding that companies will need to stay relevant not just through tactical pricing, but by rethinking channel strategies.

With such shifts, legacy FMCG companies are being forced to rethink how they approach channels and customer segments. Gross margins — typically 40%+ in FMCG — could also come under pressure, he said, as companies rechannel investments into R&D and last-mile distribution. “There’s a lot of attrition (among distributors),” he added. “I know of a couple of players who make more money in quick commerce than in other channels.”

Consumers Trade Down, New Players Rise Up

Experts also pointed out that although value-led growth from premium products continues at a modest pace for most FMCG brands, actual volume growth — the more telling metric of consumer demand — has remained elusive for most FMCG players. This, according to Nikhil Sethi, partner and national head, consumer goods at KPMG India, is a structural issue tied to how different income groups are now allocating their money.

Affluent consumers, he said, aren’t necessarily buying more shampoo, dips, or packaged snacks. Instead, their discretionary spending is shifting towards categories outside the FMCG universe: travel, dining out, and lifestyle experiences. “The spend basket is moving a lot more towards experiences, eating out, travel... and the bottom end of the spectrum is obviously struggling,” Sethi said.

At the other end of the spectrum, lower-income households are being forced to prioritise essential purchases. “A lot of their (lower income groups) spending is moving towards things which are more essential before they move into things which are less essential. So food is more essential than shampoos, for example,” he explained.

These changes in consumption behaviour come at a time when listed FMCG firms are under intense pressure to justify their valuations. “Companies have to manage their performance and manage their narratives in a way that it holds up prices,” Sethi said, referring to the balancing act between satisfying shareholders and maintaining financial stability. As a result, while companies have been able to push some premium products into the market, the broader industry has not seen widespread increases in sales volumes.

FMCG giants are also contending with an evolving form of competition: the growing preference among consumers for cheaper private-label produce (from local supermarkets and kiranas) and other options from new-age D2C brands.

According to Alok Chawla, founder of kirana digitisation platform Kiko Live, many kiranas and modern trade retailers have started leaning more on high-margin, fast-moving private label stock-keeping units (SKUs) — especially in categories like staples, home cleaning, and personal care. “Out of 4,000+ SKUs listed across platforms, only 300–400 drive 80% of monthly revenue,” Chawla told The Core. Retailers, he explained, are becoming more selective, stocking SKUs that give them better repeat cycles and margins—often at the cost of traditional FMCG brands.

Chawla further explained that kiranas are often hesitant to stock long-tail inventory unless the product moves fast or offers a price edge. In this environment, private labels from large retailers—and in some cases, hyperlocal brands created by kirana clusters—are beginning to fill the gap for cost-sensitive consumers.

Consumer Loyalty Is Changing

At the same time, digital-first D2C brands are carving out a niche, particularly in urban metros and Tier 1 cities. These brands often target health-conscious or premium segments, but are not aiming to replace HUL or Nestlé just yet. But they’re increasingly showing up in online baskets, wellness stores, and across offline shelves in supermarkets and hypermarkets.

“There’s been a real shift in rural and semi-urban aspiration,” said Reihem Roy, Partner at Omnivore, a venture fund that backs early-stage consumer and agri-tech brands. “Consumers are more aware, and regional players are building serious trust on quality. Distribution used to be the only bottleneck, but digital commerce is solving that.”

While these new FMCG entrants or startups rarely scale beyond Rs 100–150 crore in revenue without omnichannel muscle, Roy believes they’re not just competitors — they're future acquisition targets for large FMCG players looking to plug gaps. “Legacy FMCG is too big to fail, but too slow to pivot. That’s where some consumer goods startups win,” he said.

Hence, a combination of consumer buying trends — price-sensitive customers switching to cheaper private labels and affluent buyers experimenting with D2C offerings — could indicate that brand loyalty, once the moat of big FMCG, is also being chipped away from both ends of the consumer spectrum.

Digital-savvy consumers, particularly those shopping on q-commerce platforms or through other online mediums, are no longer loyal to specific brands — they’re loyal to convenience and availability. Even the slightest stockout can cost a sale, Chawla of Kiko Live explained.

“An online cart can built by the user after adding many products…can be abandoned the moment one item isn’t found, even if you have a 99% fill rate,” added Chawla.