Why Diageo plc Is Better Positioned For Long-Term Growth Than Unilever plc

Unilever plc (LSE: ULVR) (NYSE: UL.US) and Diageo plc (LSE: DGE) (NYSE: DEO.US) are two defensive consumer stocks that should have a place in any long-term portfolio.

However, as the retail industry becomes increasingly militant in the drive for sales, Unilever has been struggling to compete with its peers, holding back the company’s growth. On the other hand, Diageo’s portfolio of world famous alcoholic beverages has kept the company ahead of its peers without the need for aggressive promotion and discounting, implying that, over the longer term, Diageo could be the better bet. 

Trying to compete

Cut-throat competition within the food industry is the biggest issue that Unilever is currently trying to overcome . Indeed, Unilever’s food side of the business has been struggling to expand during the past few years as competitors slash prices.

Unilever’s management has been forced to follow suit and the company has followed peers by cutting prices and increasing promotional activity to maintain market share. Unfortunately, Unilever’s rising spend on promotional activity has constrained growth, specifically, the food side of Unilever’s business only reported sales growth of 0.3% last year.  

As a result of this tough retail environment, Unilever is selling off non-core, low margin and low growth food brands, diverting funds towards the company’s line of home care products. This side of the business is actually growing much faster; organic sales of home care products expanded 8% during 2013.

Still, Unilever is facing pressure within the home care market from discount retailers and overseas where local providers are now stepping up their game. All in all, Unilever has no choice but to keep alert and stay ahead of the wider market to ensure that sales keep growing, this is something Diageo does not have to worry about.  

Stronger market position

Diageo has a portfolio of brands that are much better positioned for long-term growth.  For example, Diageo owns Smirnoff Vodka, the world’s leading spirit brand as well as Johnnie Walker whisky, the world’s third most popular spirit brand and leading brand of Scotch.

Also in Diageo’s drinks cabinet are other world-renowned brands like Guinness, the world’s best-selling stout, Baileys the best-selling liqueur in the world and Captain Morgan the second best-selling rum in the world.

The great thing about this portfolio of world leading spirits, is the fact that the majority of Diageo’s brands actually sell themselves and are a staple of almost every drinks menu. Sadly, none of Unilever’s home care or food products have quite the same appeal.

What’s more, Diageo is set to benefit from the continued growth of the global alcoholic spirits market, which is expected to expand at an annual rate in the high single digits from now until the end of the decade. As I have already mentioned, Diageo is well placed to ride this growth with its collection of one-of-a-kind brands.