Why is the consumer staples sector at a pivotal moment?
Nik Modi: The sector's valuation premium relative to the S&P 500 has been eroding for over two decades. It now trades at a discount to the market, which is something we really haven't seen since the formation of the internet bubble in the late 1990s. That tells you the market is already pricing in lower earnings power than what companies are currently guiding to.
The sector has consistently failed to deliver against its own financial targets. At the same time, consumer preferences are shifting faster, geopolitical disruption is constant, GLP-1s are reshaping categories and AI is disrupting labor markets and consumer sentiment.
The old playbook of incremental cost cuts and modest innovation is no longer sufficient. The companies that will create value over the next 10 years are those that will have the courage to make decisions that others are not willing to make, whether that's transformative M&A, or radically recalibrating profit targets to reinvest back into brands, capabilities and organizational design.
"The companies that will create value over the next 10 years are those that will have the courage to make decisions that others are not willing to make."
Nik Modi, Global Co-Head of Consumer Research, RBC Capital Markets
How should brands respond to the K-shaped economy?
Modi: The K-shaped economy is one of the most important structural themes of our Imagine report. According to analysis of Federal Reserve data, the top 10% of earners now account for almost half of total spending in the U.S., the highest level on record. Income bifurcation is being deepened further by asymmetric access to AI tools, education and compounding wealth transfer.
What this means practically is that the average consumer no longer exists as a viable target. The middle is hollowing out.
At the top end, consumers are seeking optimization, identity expression, wellness experiences and increasingly living within closed ecosystems of subscriptions, direct-to-consumer platforms and personalized services. At the bottom end, it's pure value, private label, dollar channel and bulk formats.
For brands, a portfolio architecture needs to look more like a barbell and not a ladder. Growth accrues at the extremes now, not in the middle. Mid-tier brands with decent quality, elevated price and no clear differentiation face the most acute risk of volume leakage.
Most of the sector is still trying to serve the mass-market consumer, and that has essentially fractured.
"The average consumer no longer exists as a viable target. The middle is hollowing out."
Nik Modi, Global Co-Head of Consumer Research, RBC Capital Markets
How can brands reduce consumer decision fatigue?
Modi: In many instances, because there's so much variety, people get paralyzed at the shelf and don't buy anything.
The implication for brands and retailers is direct: reduce SKU complexity and move away from category-based shelf sets towards occasion-based layouts.
The way the consumer products industry talks about its strategies is oriented around categories. We as consumers don't wake up in the morning and mentally start thinking about what categories we're going to buy. We think about the occasions and what makes sense in those occasions.
Wine is probably the worst category to shop simply because there's so much variety and consumers are not properly educated on what to buy. Rather than organizing by varietal, organizing by cuisine type or occasion could make the category much easier to shop.
What does the rise of the "Eighth Continent" mean for consumer brands?
Modi: The Eighth Continent is one of the most interesting themes coming out of this report because it has completely flipped the model on its head. Historically, products started in retail stores and then migrated online. Now the opposite is happening. Things are starting online and then migrating into the brick-and-mortar environment.
YouTube has more than 2.7 billion monthly users and TikTok engages 1.7 billion people. These platforms have populations that surpass most nation states. They have their own governance through moderation algorithms, their own currencies through tokens and tips, and their own economies through influencer-led trade. They are, in effect, digital states and they are dictating the success and failure of consumer brands in the physical world.
Cultural relevance has overtaken traditional scale as a currency of demand creation. Brand awareness without cultural relevance no longer guarantees conversion.
For large consumer products companies, the prescription is very clear: design products for platforms, not just for shelves. Packaging, price points and messaging should be optimized for scrolling velocity and shareability.
Chief marketing officers need to take a dual role as chief cultural relevance officers. Many of them need to hire younger people who are more in touch with what's happening in the digital world.
Creator partnerships can no longer be treated as a marketing expense. They need to become economic partnerships with revenue sharing that aligns interests.
The companies that figure this out will structurally have higher-margin models over time by capturing value not just at the point of sale, but across the full lifecycle of engagement within these digital ecosystems.
"Cultural relevance has overtaken traditional scale as a currency of demand creation."
Nik Modi, Global Co-Head of Consumer Research, RBC Capital Markets
What should boards and management teams focus on next?
Modi: Companies need to abandon their financial algorithms.
With volatility and one-off events happening more frequently, publishing long-term targets that you can't hit consistently is destroying credibility and compressing multiples. Focus instead on building capabilities because 70% to 80% of market cap sits in the terminal value, and that terminal value requires companies to compete effectively in a different future landscape.
