Unilever India faces a new risk as discerning consumers reject big brands.

Unilever Plc's Indian arm is contending with decelerating revenue and profit growth, compounded by a share price that trails behind.

India's Hindustan Unilever Ltd, a subsidiary of Unilever Plc, has long been a prominent provider of everyday essentials to Indian consumers, ranging from detergents to instant coffee. However, as India's consumer class becomes increasingly discerning with rising disposable incomes, the company is facing headwinds. Revenue and profit growth are slowing, while its share price lags behind.

The emergence of a more sophisticated consumer base in India is driving demand for organic personal care brands, often propelled by savvy social media marketing campaigns. This trend has bolstered the success of companies like local newcomer Honasa Consumer Ltd, as well as global players such as Estee Lauder Companies Inc. and Clinique Laboratories LLC. In response, Hindustan Unilever is ramping up investments in product development and advertising.

These challenges mirror broader trends in the consumer goods industry, where giants like Procter & Gamble Co. and L'Oreal SA, along with their parent companies, have had to contend with the rise of niche brands that are eroding market share from established players.

Arvind Singhal, chairman of consulting firm Technopak Advisors Pvt., highlighted that established companies like Hindustan Unilever face challenges in agility and strategy compared to newer, more nimble brands. With challenger brands emerging across various price points, the influence of large brands is diminishing as they offer better margins to retailers. This trend encourages local shopkeepers to explore these alternatives.

A spokesperson for Hindustan Unilever declined to comment due to the company's earnings quiet period.

The personal-care sector in India is expected to grow significantly, reaching a market size of $33 billion by 2027, up from $20 billion in 2022, according to Redseer Management Consulting Pvt.

Hindustan Unilever, known for brands like Dove and Magnum, faces challenges on multiple fronts in the Indian market. While it caters to wealthier consumers, it's also dealing with price cuts on its lower-end products due to reduced spending among rural customers.

This double squeeze is reflected in the company's financial performance. Revenue growth slowed to 3 percent in the first nine months of the fiscal year, compared to 17 percent growth in the same period the previous year. Net profit also saw a modest increase of 4 percent, down from 14 percent growth in the prior year.

To maintain its market position, Hindustan Unilever has ramped up advertising spending, allocating 48 billion rupees ($576 million) to promotional costs in the April to December period, up from 36 billion rupees in the same period last fiscal year.

However, concerns about profit margins have led to downward revisions in earnings expectations by financial services firms like Emkay Global Financial Services Ltd and Centrum Broking Pvt. These concerns stem from the need to allocate more resources to counter new brands entering the premium segment.

Hindustan Unilever's traditional strength lies in its extensive distribution network, which reaches mom-and-pop stores and supermarkets across India. However, online direct-to-consumer sales by niche competitors present a challenge, bypassing the company's distribution channels.

While Hindustan Unilever has introduced new products and split its personal care division to enhance marketing efforts, it faces stiff competition from brands targeting specific demographic groups and leveraging social media influencers.

This intensified competition is reflected in changing consumer behavior, with individuals like Mumbai resident Karthik M opting for products from newer brands like Bombay Shaving Co. and Beardo, backed by Marico Ltd., over HUL's offerings.

Despite efforts to adapt, Hindustan Unilever's dominance in the Indian market is under threat. Retailers like Laxmichand Gada of Mumbai's Society Stores are diversifying their product offerings, favoring local and foreign niche brands over traditional HUL products.

Source: Money control