India’s FMCG Growth is Slowing
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In today’s edition of The Daily Brief:
Why FMCG Growth is Slowing in Cities
Volkswagen’s Mega Tax Battle in India
Why FMCG Growth is Slowing in Cities
Today, we’re going through the latest results from India’s biggest FMCG companies—Hindustan Unilever, Dabur, Marico, Nestlé India, and Tata Consumer Products.
How should we think about FMCG companies?
The FMCG sector is deeply woven into the economy. From food and beverages to personal care items, it deals with the products people buy and use more often than anything else. At its core, this industry is all about volume. Companies make money by manufacturing goods in bulk and selling them as widely as possible. To do this effectively, they focus on three key things:
Economies of scale – Producing more at a lower cost per unit.
Distribution networks – Getting products into as many hands as possible.
Brand recognition – Building trust so consumers pick their brands over others.
That’s why, beyond standard profitability and revenue numbers, we also look closely at how margins and distribution channels evolve in this space.
How does the FMCG sector move with the economy?
For the most part, FMCG is considered a ‘defensive’ sector—it stays relatively stable even when the broader economy is struggling. That’s because, even in tough times, people still buy essentials like food, beverages, and toiletries, even if they cut back on other expenses.
Of course, inflation and interest rates still play a role, as they do for any business. But compared to most industries, FMCG companies are known for their resilience and steady cash flows. In uncertain times, they tend to act as safe havens.
That said, there’s an important nuance here. Some parts of India have mature FMCG markets, with well-established brands and slow growth. But in other regions, companies are still expanding, reaching new customers as incomes rise and preferences shift. This side of the business is more sensitive to economic conditions—things like consumer confidence and overall growth rates can make a big difference.
Historically, the FMCG sector has grown at 7-9% annually, a steady pace that reflects both its stability and its ongoing expansion into newer markets.
What’s the context around this earnings season?
Heading into this results season, the FMCG sector was dealing with a few key dynamics:
1. Urban consumption has been sluggish.
Traditionally, around 65% of the FMCG industry’s demand comes from urban India. But lately, urban consumption has been weak. The silver lining? Rural demand has picked up, showing strong growth after years of stress. In fact, Q3 FY 2025 marked the fourth straight quarter where rural consumption outpaced urban consumption.
There’s an interesting paradox here. While urban consumption is slowing overall, India’s wealthiest consumers are actually spending more—especially on premium products. We’re keen to see how all of this plays out in FMCG companies’ results.
2. Shrinking margins.
Raw material inflation is running high globally, pushing up the cost of key FMCG inputs like tea, coffee, and palm oil. This puts pressure on profitability, even as demand grows. The big question is how companies are navigating rising costs without alienating India’s famously price-sensitive consumers.
3. A shift in distribution channels.
The rapid rise of e-commerce and quick commerce has completely reshaped FMCG distribution, particularly in urban India. This sector is expanding at a staggering pace—Indian e-commerce is growing at over 26% annually. For FMCG companies, adapting to this new reality means rethinking their traditional reliance on Kirana stores and embracing digital-first strategies.
How did these companies perform?
Here’s a quick look at how each FMCG giant fared in Q3 FY 2025:
HUL:
Growth was sluggish this quarter. Revenue rose 1.4% year-on-year, but PAT remained flat. Rising input costs squeezed gross margins, which shrank by 83 basis points year-on-year.
To offset this, HUL cut back on advertising, keeping its operating margin steady. However, both revenue and PAT declined quarter-on-quarter, by 0.6% and 3%, respectively.
Dabur:
Muted growth, but an improvement from the previous quarter. Revenue grew 3.1% year-on-year, while PAT increased by 1.5%. The good news? Compared to last quarter, revenue jumped 10.8% and net profit surged 23.5%. Inflation put some pressure on margins, with gross margins falling 55 basis points year-on-year. However, cost optimizations helped Dabur maintain stable operating margins of 19-20%.
Nestlé India:
Sales were up, but margins were under pressure. Net sales grew 3.9% year-on-year, but rising input costs—especially for cocoa, coffee, and edible oils—dragged gross margins down 2.2%. The EBITDA margin also slipped 1.05% year-on-year, leading to a slight 0.6% decline in EBITDA. Quarter-on-quarter, net sales fell 6.2%, while PAT remained flat.
Marico:
Marico delivered a strong quarter, standing out from the broader industry trend. Net sales jumped 12.4% year-on-year, with domestic volumes growing by 6%. However, margins took a hit—gross margins fell by 1.8% year-on-year due to rising copra prices, and EBITDA margins shrank by 2.1%. As a result, PAT grew by just 4% compared to the same quarter last year.
That said, performance improved slightly from Q2 FY 2025. Net sales were up 2.1% quarter-on-quarter, while PAT increased by 3.2%.
Tata Consumer Products:
Tata Consumer’s numbers are tricky to analyze because recent acquisitions have skewed its results. Revenue grew nearly 17% year-on-year, but only 9% of this was organic growth—the rest came from acquisitions.
On the profitability side, things weren’t as strong. PAT, adjusted for acquisitions, fell 11% year-on-year. A similar trend played out quarter-on-quarter—while revenues rose 5.4%, PAT declined 7.6%.
Margins also took a heavy hit. Gross margins dropped 2.73% year-on-year, while operating margins fell by 2.34%, largely due to rising tea prices.
Our Takeaways
This is a high-level snapshot of the FMCG sector—a lot is happening under the surface, and we encourage you to dig deeper. That said, here are five key trends that stood out to us:
1. The consumption slump is real.
Across the board, demand has been sluggish. Every company we looked at flagged weak urban consumption as a major challenge. There are even reports of intense price wars among FMCG giants, especially in e-commerce. Unless urban consumers start spending more—potentially boosted by recent tax cuts—growth in this segment is likely to remain muted.
On the other hand, companies with a stronger rural presence, like Dabur, have held up relatively well. Rural demand has been a bright spot, providing some cushion to the overall slowdown.
2. Premiumisation is still going strong.
Even as overall urban demand weakens, premium products are thriving, growing faster than mass-market alternatives. FMCG companies have been doubling down on this trend—HUL’s acquisition of Minimalist is a prime example of this push into the "mass-tige" (mass prestige) segment. Most companies expect further room to grow in premium categories, so we’ll likely see even more investments in high-end products.
That said, there are exceptions. Tata Consumer, for instance, has seen a shift in the opposite direction—customers are trading down from premium teas to more affordable varieties.
3. More consumers are opting for smaller packs.
While some are upgrading to premium products, others are downsizing their purchases—likely due to inflation. This is especially evident in discretionary categories.
Dabur, for instance, reported that customers are switching from 1-litre juice packs to smaller 200ml ones. Nestlé noted a similar trend, with its ₹14 Maggi packs growing faster than larger ones. HUL has observed the same shift.
4. Inflation is hitting margins hard.
Rising input costs are squeezing profitability across the sector. Consider this—milk prices have jumped 20% since 2020, and cocoa prices have doubled since 2016. Every company we analyzed has seen its margins shrink as a result.
FMCG majors are responding in different ways—some are raising prices selectively, others are optimizing procurement (including through AI-driven strategies), and some are cutting back on advertising to protect margins.
5. E-commerce is bigger than ever.
Online sales are surging. For years, FMCG companies relied heavily on Kirana stores as their primary distribution channel, but e-commerce is now gaining serious traction.
Take Nestlé, for example—its e-commerce sales grew 33% in the first nine months of this year compared to last. Marico saw an even bigger jump, with online sales up 50% year-on-year. This shift, combined with the premiumisation trend, has pushed many brands to invest in digital-first offerings—think Marico’s Beardo or HUL’s Minimalist.
Volkswagen’s Mega Tax Battle in India
There’s a new battle brewing—Volkswagen vs. India’s revenue department—and it's turning messy. In September 2024, Indian tax authorities issued Volkswagen a staggering $1.4 billion tax notice, accusing the automaker of underpaying import taxes for years.
As part of its strategy, Volkswagen imports car parts separately, assembles them in India, and then sells the finished vehicles.
Indian authorities claim Volkswagen found a way to avoid paying the higher tax rate on imported car parts. But Volkswagen insists it has done nothing wrong and has followed the rules. The company has now taken the matter to court, arguing that this tax bombshell threatens its future in the country.
Here’s what the Indian authorities are saying: Normally if a car company imports most of a vehicle in CKD (Completely Knocked Down) form—essentially in kits where all the main components are disassembled, similar to how Ikea sells its furniture—it faces a steep 30-35% import duty. This is because CKD units involve minimal local manufacturing, and India wants to encourage more domestic production.
However, if companies import individual car parts separately—like engines, axles, and body panels—and manufacture the car in India, they qualify for a much lower 5-15% tax rate.
The authorities believe Volkswagen was deliberately splitting up shipments to make it appear as though it was importing unrelated parts instead of CKD units. The government alleges that 700 to 1,500 parts per car were ordered in different batches to avoid the higher tax bracket. Essentially, India is accusing Volkswagen of exploiting a loophole in tax rules.
Volkswagen, however, completely denies this. In its court filing, the company argues that it never imports full car kits and has always broken up shipments—not to avoid tax but for logistical reasons. To illustrate this, they gave an example:
Imagine ordering a chair on Amazon. If it arrives disassembled in a single box with all the necessary parts, that’s a CKD unit—essentially a chair in disassembled form—which attracts a high tax rate. But if you ordered the same parts separately—the seat one day, the back the next, and the legs later—you’re not ordering a chair, you’re ordering individual parts that will eventually be assembled into one.
To make matters worse, Volkswagen claims that back in 2011, it had already informed the Indian government about its “part-by-part” import strategy. At the time, authorities provided official clarifications confirming that this approach was compliant with tax rules. Now, more than a decade later, they’ve reversed their stance, accusing Volkswagen of using this setup to dodge taxes.
Volkswagen argues that this sudden policy reversal erodes trust in India’s business environment. The company described the tax demand as a “body blow” to India’s much-touted “ease of doing business” initiative, warning that such surprises make global companies rethink their investments.
In plain terms, Volkswagen is saying: “This kind of surprise makes us—and other global companies—think twice about doing business in India.”
Volkswagen has a lot at stake here. It operates in India under Skoda Auto Volkswagen India Private Limited, a merged entity managing brands like Volkswagen, Skoda, Audi, Porsche, and Lamborghini. As part of its India 2.0 project, the automaker has committed €1 billion to designing cars specifically for Indian buyers—models like the Volkswagen Taigun and Skoda Kushaq are products of this initiative.
The merger of its operations under Skoda Auto Volkswagen India was meant to streamline production and strengthen its position in India’s highly competitive market. But despite these efforts, Volkswagen holds just around 2% of the market.
In 2023-24, Volkswagen reported $2.19 billion in sales but earned just $11 million in profit. Now, with this massive tax bill looming, its future plans in India could be in jeopardy.
But this isn’t the first time a foreign company has found itself in this situation in India. In fact, Volkswagen’s case bears strong similarities to the infamous Vodafone tax dispute.
In 2007, Vodafone acquired a controlling stake in an Indian telecom company through an offshore deal. The Indian government later hit Vodafone with a $2 billion capital gains tax, even though the transaction happened outside India. Vodafone fought back, and in 2012, India’s Supreme Court ruled in its favor.
Instead of accepting the verdict, the government retroactively changed tax laws to make Vodafone liable anyway. The move triggered global investor backlash and damaged India’s business reputation. It took nearly a decade—and an international tribunal ruling against India—before the government finally repealed the retrospective tax law in 2021. But by then, the damage was done. Vodafone’s current struggles can, at least in part, be traced back to how hard its financial condition was hit by the tax dispute.
Unfortunately, Volkswagen isn’t the only automaker facing trouble in India.
Nissan got entangled in a 2018 tax dispute over $770 million in unpaid incentives promised by the Tamil Nadu government.
Ford, after years of losses and regulatory hurdles, shut down operations in India in 2021.
Tesla has repeatedly delayed its India entry due to the country’s high import taxes on electric vehicles.
These cases paint a clear picture: while India promotes investment with slogans like “Make in India” and “Ease of Doing Business,” foreign companies often find themselves blindsided by shifting policies and tax disputes.
For Volkswagen, the stakes are even higher because this issue has already disrupted operations. After the tax notice was issued, customs authorities in Mumbai temporarily blocked more than 50 shipments of spare parts for Volkswagen’s luxury brands like Audi and Porsche. Some dealerships faced delays in getting critical components. While the shipments were eventually released, the damage to Volkswagen’s supply chain was already done.
So, what’s next?
Volkswagen has taken the fight to the Bombay High Court, with a hearing scheduled for February 5. The company is hoping to quash the tax notice and salvage its long-term plans in India.
But this case has wider implications. If India fails to provide a stable and predictable regulatory environment, other foreign companies may think twice before committing major investments here.
India’s ambition to become a global manufacturing hub depends on how disputes like this are handled. Will Volkswagen’s case turn into another Vodafone-like disaster, or will the government take steps to restore investor confidence?
Tidbits
India’s Manufacturing Purchasing Managers' Index (PMI) climbed to 57.7 in January 2025, up from 56.4 in December 2024, marking its highest level in six months. This strong expansion was driven by a surge in export orders—the sharpest in nearly 14 years—and the fastest rise in domestic orders since July 2024.
Allied Blenders and Distillers (ABD), the company behind Officer’s Choice whiskey, is set to introduce three new luxury brands in 2024 as it pushes deeper into the premium alcohol market. Currently, luxury spirits make up just 3% of ABD’s total sales volume but contribute over 20% of the industry’s profits, highlighting the high-margin potential of this segment.
India’s advertising industry is projected to grow by 6.5% in 2025, reaching ₹1.1 Lakh Cr. Digital advertising will drive this growth, accounting for 49% of total ad spends (₹49,251 crore). Meanwhile, TV’s share will drop to 28% (₹28,062 crore), and print will shrink to 17% (₹17,529 crore).
- This edition of the newsletter was written by Anurag and Krishna
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We also to capture Mondelez results as they sell premium products and economic products as well