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The Biggest Threat To Unilever plc & Diageo plc’s Future

With their global presence and multi-million pound marketing budgets, you would think that Unilever (LSE: ULVR) (NYSE: UL.US) and Diageo (LSE: DGE) (NYSE: DEO.US) would be able to squash the competition. 

However, these two consumer goods behemoths are struggling to compete with smaller, local peers. 

Cheaper alternativeDiageo

Diageo’s recently unveiled set of preliminary results revealed an interesting trend. In the majority of the markets where the company is operating, Diego is losing market share to local companies. 

For example, during the reported period volumes in the key Nigerian market fell 9% as customers opted for rivals’ cheaper beers. While in Kenya, sale of Diageo’s Senator Keg brand  fell 80%, after the government increased excise duties. 

Over in China, Diageo was forced to write down the value of its baiju spirit, Sichuan Shuijingfang as sales collapsed 78% last year. The writedown cost Diageo £75m and was a direct result of an ongoing price war with local Chinese peers. Diageo is now trying to rebuild its market share with cheaper versions of Shuijingfang baiju.

Meanwhile over in the US, Diageo’s vodka sales have slowed to a halt, as more than 200 competitors have entered the market over the past few years. These competitors are both local and international. However, Diageo’s regional whiskey sales have jumped as drinkers start to experiment. 

UnileverLocal dynamoes

Unilever is also struggling with what have been called “local dynamoes”. This phrase was coined by the OC&C. Boston Consulting Group, after the firm revealed that stiff competition from local companies had pushed sales at the top 50 global consumer goods companies, lower by 2.9% during 2013. 

Unilever’s management has in fact confirmed this threat, stating at a recent press conference that:

“Most of our competitors in the emerging markets are regional players.”

These local dynamoes could be blamed for Unilever’s recent sales decline. The company’s first half sales fell 5.5%, although the group did report a 15% rise in pre-tax profit for the period thanks to expanding margins. 

And it would appear as if it’s only going to get harder for Unilever to compete with local peers. Management has put in place a target that will see 75% of the group’s sales come from emerging markets. These markets are full of well-established local competitors. 

Fighting for market share

Neither Unilever nor Diageo are going to go down without a fight. Diageo recently gained control of United Spirits, India’s leading whiskey producer and distributor, which should allow Diageo to dominate India’s local market. 

Meanwhile, Unilever is also making local acquisitions. The group has acquired some local peers including Qinyuan, a Chinese water purifying business and Kalina, a Russian beauty group. Further, there has recently been some speculation that Unilever could make a bid for either US peer Colgate-Palmolive or UK peer Reckitt Benckiser to boost the group’s product offering and emerging market presence.

Two great picks 

Diageo and Unilever may not be everyone's cup of tea, but the two companies are industry leaders, which makes them a solid long-term investment.  

However, the best retirement portfolios need to contain more than two companies and finding companies with similar defensive qualities can be tough.

But never fear, The Motley Fool's top analysts have put together this free report entitled, "5 Shares You Can Retire On". All five opportunities offer a mix of robust prospects, illustrious histories and dependable dividends just like Diageo.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool owns shares of Unilever.