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Americans are still spending money, especially on beauty products, amid rising inflation.
According to the NPD group, the beauty category was “a rare bright spot” for retailers in 2022, and the only discretionary retail category to enjoy rising unit sales in the first half of the year. Makeup sales, including lipstick, are up by 20%, skincare is up 12%, fragrance is up 15%, and hair care is up 28%.
This is a phenomenon known as “the lipstick effect”
The lipstick effect is what occurs when consumers continue to spend money on small luxury items during times of economic stress.
The term was first coined by Estée Lauder’s former chairperson, Leonard Lauder. He observed how lipstick sales soared in the wake of the 9/11 terrorist attacks and theorized that the commodity must be a contrary indicator of an economy. A theory that holds up.
When people are strapped for cash or concerned about an ongoing cost-of-living crisis, they are unlikely to splurge on big-ticket luxury items. But they can likely find the cash to purchase smaller luxury items, such as premium lipstick, that don’t break the bank. More frequent, discretionary purchases allow consumers to temporarily forget about their financial woes and treat themselves to good-quality, long-lasting products.
While this economic indicator is most typically identified in the beauty sector, it is transferrable across industries. It explains why fast-food restaurants, movie complexes, and high-end alcoholic beverage companies also do well during an economic downturn. Consumers seek out these little indulgences when dropping cash on a five-star getaway or Michelin-star restaurant is out of the question.
Another driver of the lipstick effect, and one that applies to the beauty industry alone, is the fact that economic recession usually results in more competitive labor markets. As a result, job seekers may choose to invest in additional, or higher-quality, beauty products in a bid to influence how they are viewed by prospective employers. One study even suggests that wearing make-up can be linked to improved academic performance and a more positive mood, most likely due to the self-esteem boost that comes from doing so.
Knowledge of the lipstick effect is likely to influence business strategy. That’s because retailers producing the smaller luxury items popularized as a result of the lipstick effect may be immune to the effects of economic downfall. Walmart, for example, is investing in additional beauty products and rolling out new beauty displays at hundreds of locations, while Target is opening hundreds of Ulta Beauty shops within its existing stores. Perhaps other retailers will follow suit.
But cashing in on the lipstick effect is not quite as simple as investing in a ton of premium lipsticks. For one, it’s actually very difficult to access cosmetic product sales data at weekly or monthly intervals. Not only does this makes it more challenging to predict economic downturns based on the lipstick effect, but it’s also tricky for retailers to anticipate spikes in demand and effectively manage their inventory levels.
Then there’s the fact that the cosmetics industry is rife with supply chain complications. Among other things, players in this $532 billion industry must contend with supply chain disruption, customer demands for brand accountability and supply chain transparency, and the need for highly specific shipping and storage conditions. Are products being transported at the correct temperature? Do they arrive without damage?
Image Credit: Pavel L Photo and Video / Shutterstock.com
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