Hindustan Unilever’s Margin Moat Now A Muddy Trench

Hindustan Unilever’s much-publicised turnabout from profit-first discipline to volume-driven growth is being sold as a strategic masterstroke. In truth, it’s more of a white flag than a battle cry - a retreat from a fortress of margin protection that’s finally running out of moat. 

For over a decade, HUL was the poster child for cost cuts and price hikes, squeezing out margins that made its shareholders happy. But, in the past year, the company found itself compelled, rather than marching, into the messy world of volume growth.

The real story begins in London, not Mumbai, where Unilever’s global shareholders staged a mini-mutiny in 2023, rejecting a chunky pay hike for the then-CEO and sending a clear message. The company responded by scrapping operating margin as a performance metric and tying incentives to the old-fashioned parameters of profit and volume growth. 

This is now applicable to 15,000 managers worldwide.

Back home, the numbers tell a story of diminishing returns. 

HUL’s underlying sales growth limped along at 2%. The company, which once set the pace for price hikes and premiumisation, is now guiding for lower operating margin of 22-23%, down from the earlier 23-24%. There is anecdotal evidence that any business that consistently generates margins over 16% is scalable, and not too technologically complicated, usually attracts competition. Take the recent case of competition in the paints business, where market leader Asian Paints is facing competition from new entrants.

After two years of relentless price increases by HUL, estimated at 25%, the Indian consumer has started to push back. Premium toothpaste is giving way to sachets. Rural demand is softening. Price-led growth has hit a ceiling, and HUL, once the price setter, is now facing a market that’s saying let’s look at other products.

This is not just HUL’s private dilemma; it’s a reality check for every legacy FMCG player. 

When cost control and premiumisation run out of steam, the only way forward is through unpredictable, margin-diluting volume growth. That means venturing into lower-income segments, betting on rural revival, and slugging it out with local upstarts who aren’t wedded to 20% margins or global KPIs.

For now, the market seems to approve. Brokerages like Goldman Sachs and JP Morgan have given HUL’s new direction a cautious nod. But execution risk is sky-high. The January–March quarter results show a company with a clear strategy but a loose grip on execution. In Beauty and Wellbeing, HUL’s acquisition of Minimalist signals intent, and there’s double-digit volume growth in Hair Care. But mass-market brands like Lakme and Pond’s are slipping, unable to keep pace with evolving consumer tastes. E-commerce is booming, but it’s still a sliver compared to digital-native competitors.

Personal Care is another sore spot. Growth is still mostly price-led, not volume-driven. Urban consumers, squeezed by stagnant wages and food inflation, are trading down or defecting to value brands. Meanwhile, startups like Patanjali and Mamaearth are making off with the “naturals” and “herbal” categories, leaving HUL’s iconic brands like Lux and Dove facing volume declines. The innovation pipeline in Ayurvedic and clean-label products simply isn’t keeping up.

Home Care isn’t faring much better. Commodity deflation has forced price cuts and squeezed margins. Urban demand, which accounts for most Home Care sales, has slowed to a crawl. Regional brands like Ghadi and Nirma are undercutting HUL in rural markets, where volume recovery is outpacing HUL’s own execution.

The foods segment, especially nutrition drinks, is struggling with category challenges and shifting pack-price structures. While tea and coffee offer some solace, packaged foods like ketchup and mayonnaise are only eking out mid-single-digit growth. Regional players such as Ching’s Secret and MTR Foods are steadily eating into HUL’s share in high-growth categories like soups and condiments, while innovation lags rivals. Margin pressure remains acute, and price cuts in staples haven’t sparked a volume revival.

Yet, HUL still has formidable strengths like unmatched distribution, deep brand equity, and supply chain scale. Macroeconomic tailwinds, such as prospects of remunerative crop prices, lower interest rates, and softer crude prices, could help. But the real challenge is cultural and strategic. Volume growth is inherently less efficient and more unpredictable than margin expansion. It requires a willingness to get your hands dirty in lower-income segments and to innovate in affordability, not just in premium products.

The company needs to rediscover agility. Legacy brands must move at startup speed, and HUL’s innovation pipeline in clean-label and Ayurvedic products must catch up with companies such as Honasa Consumer, makers of Mamaearth products, and Patanjali. Distribution networks built for rural dominance must adapt to the realities of e-commerce and modern trade. HUL will need to tailor more offerings and messaging for hyper-segmented, value-conscious consumers.

Because in business, as in life, sometimes you don’t choose the chase, the chase chooses you. And if HUL had waited too long, even the margins might have stopped showing up.