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Why Diageo and Unilever are on my ‘best shares to buy’ list despite this threat

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Consumer goods giants Diageo (LSE: DGE) and Unilever (LSE: ULVR) have long been on my ‘best shares to buy’ list. They remain so today. This despite a threat to them from what advertising trade publication Adweek has called a “global megatrend.”

Some commentators believe this trend could undermine the growth of established brands powerhouses. Some even suggest the sun could be setting on their long era of dominance. I don’t want to underplay the threat, but I think Diageo and Unilever are well capable of countering it.

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Eating the big fish

Challenger brands pose a risk to my best shares to buy. It’s over two decades since the publication of Adam Morgan’s influential business book Eating the Big Fish: How Challenger Brands Can Compete Against Brand Leaders. The challenger brand phenomenon has exploded in the 21st century. Think of the spectacular rise of UK tonic waters and mixers firm Fevertree or Dutch chocolate market leader Tony’s Chocolonely. Both now rapidly expanding overseas.

Structural shifts in retail and media have dramatically lowered the barriers to entry for new brands. Big changes in consumer attitudes — “an appetite for experimentation and scepticism about traditional elites,” according to Jamie Matthews, boss of advertising agency Initials — have also played into the hands of challenger brands.

In the face of these sweeping changes, should Diageo and Unilever really be on my best shares to buy list?

If you can’t beat ’em…

Diageo and Unilever haven’t been resting on their laurels in the face of the march of challenger brands. One part of their strategy for dealing with the threat has been to do what they’ve always done. Use their financial might to pursue the age-old doctrine: If you can’t beat ‘em, buy ‘em.”

For example, Diageo’s acquisitions of recent years have included challenger tequila brand Casamigos and distilled non-alcoholic spirits firm Seedlip. Unilever’s have included direct-to-consumer challenger brand Dollar Shave Club.

My best shares to buy have challenger DNA

Diageo and Unilever have also been smart with the challenger brands they’ve bought. They’ve not only allowed the likes of Seedlip and Dollar Shave Club to remain fiercely autonomous, but also taken learnings from them. This has helped them inject challenger DNA into the wider group.

For example, a few years ago, Diageo-owned Gordon’s gin was faced with scores of new brands entering its market. It was reinvented with a challenger mindset. A new positioning, witty ads voiceovered by Phoebe Waller-Bridge, and the use of Instagram, Spotify and smart targeting all helped a 250-year-old legacy brand deliver challenger-like growth.

Best shares to buy for the future

Finally, both Diageo and Unilever are busy incubating next-generation brands through their venture capital arms (distillventures.com and unileverventures.com). They provide seed and development capital to ambitious founders with exciting brands.

In due course, Diageo and Unilever may wholly acquire the brands they’ve incubated. For example, Diageo exercised its option to acquire the aforementioned Seedlip which had been nurtured by Distill Ventures.

In summary, I reckon Diageo and Unilever are doing a very good job of mitigating the risks to their businesses posed by the rise of challenger brands. This is why these blue-chip giants remain firmly on my best shares to buy list.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, Fevertree Drinks, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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