Margins Under Siege: Unilever and Nestlé Navigate Cost Pressures and Slowing Demand in India

The Indian fast-moving consumer goods (FMCG) sector, a key growth driver for global giants like Unilever and Nestlé, is grappling with a perfect storm of rising input costs, intensifying competition, and slowing demand. Both companies reported weaker-than-expected results for Q1 2025, underscoring the challenges of sustaining profitability in a market where private-label brands are eroding market share and consumers are increasingly price-sensitive.

Unilever’s Struggles in Emerging Markets

Unilever’s Q1 2025 sales grew 3.0% year-on-year, driven by a modest 1.3% volume rise. However, executives admitted the performance in emerging markets—where the company derives a significant portion of its growth—was “nowhere near good enough.” Analysts flagged the growing threat from private-label brands, which now command nearly 20% of India’s FMCG market, up from 12% five years ago.

The company’s new CEO, Fernando Fernandez, has vowed to address these issues through “self-help actions,” including innovation and cost discipline. Yet, the path ahead is fraught: Unilever’s underlying operating margin guidance for FY25—projected to improve only modestly—hints at the lingering pressures of input costs and stagnant volume growth.

Nestlé’s Profit Squeeze Amid Rising Input Costs

Nestlé India’s net profit fell 5.2% YoY to ₹885.4 crore in Q1 2025, despite a 4.5% revenue increase to ₹5,503.88 crore. The culprit? Soaring costs for coffee and cocoa, key ingredients for its iconic brands like Nescafé and KitKat. Management warned that these pressures are likely to persist, with indirect tariffs and inflation adding to the strain.

The company’s domestic sales grew broadly across categories, but the lack of a standout performer signals a market where consumers are trading down to cheaper alternatives. Shares dipped post-earnings, reflecting investor skepticism about Nestlé’s ability to offset costs through pricing or product mix adjustments.

Common Challenges and Strategic Shifts

Both companies face similar headwinds:
1. Input Cost Pressures: Unilever cited rising raw material prices, while Nestlé highlighted cocoa’s 15% price surge in 2024.
2. Private-Label Competition: Discount brands like Dabur and Godrej are eating into premium product margins.
3. Slowing Demand: Urban and rural consumers are prioritizing affordability over brand loyalty.

To counter these trends, Unilever is doubling down on innovation—launching budget-friendly SKUs—and accelerating digital adoption to boost supply chain efficiency. Nestlé, meanwhile, is leaning on pricing power and premiumization, such as expanding its premium Nescafé Gold line, which grew 8% in Q1.

The Road Ahead: Can Cost Cuts and Leadership Revive Growth?

Unilever’s Fernandez has pledged to return the company to “sustainable, profitable growth” by 2026, with a focus on simplifying operations and sharpening brand relevance. Nestlé, for its part, has maintained a steady dividend payout—₹10 per share—despite margin pressures, signaling confidence in its liquidity.

However, execution remains critical. Unilever’s guidance of 3-5% underlying sales growth for FY25 is conservative compared to its 5-6% average over the past three years. Nestlé’s ability to sustain revenue growth while managing costs will hinge on its premiumization strategy and cost-saving initiatives like automation in factories.

Conclusion: A Test of Resilience in a Saturated Market

The Q1 results underscore a harsh reality for FMCG giants in India: growth is no longer guaranteed. With private labels and price-sensitive consumers reshaping the landscape, Unilever and Nestlé must balance cost discipline with innovation to retain their edge.

The data paints a clear picture: Unilever’s operating margin has shrunk from 18.5% in 2021 to an estimated 16.2% in FY25, while Nestlé’s net profit margin in India fell to 16.1% in Q1 2025, down from 17.8% a year earlier. For investors, the question is whether these companies can turn the tide before margins erode further.

While Fernandez’s “self-help” agenda and Nestlé’s premium push offer hope, success will require more than strategic tweaks—it will demand a fundamental shift in how these giants engage with India’s evolving consumer. In a market where affordability is king, the next few quarters will test whether legacy brands can adapt or if they’ll cede ground to nimbler competitors.