Tuesday, January 13, 2009

The "lipstick effect" of the recession

Given the current economic conditions, one would be tempted to assume that sales in all sectors will plummet over the current year. This is not the case, according to Dhaval Joshi, analyst with RAB Capital. A natural consequence of a recession is that people spend less on goods that can be considered "luxuries", focusing their constrained budget on more essential items. This does not mean that they forgo luxury however. In the UK recently car sales and mortgages have collapsed, as we can imagine have the sales of a whole host of goods. One product group whose sales historically flourish during a recession is cosmetics.
The idea goes as follows: even in a poor economic climate, people like to treat themselves. In order to keep a similar level of satisfaction while economizing more, they scale down their expectations of what characterises a "luxury good", with cosmetics appearing to be an adequate source of comfort. Joshi points to 1930's USA and Germany, Japan of the last 20 yeas, and the European recessions of the early 80s, 90s and 2000s as examples of instances where industrial production generally was falling, while the cosmetics sector not only survived but grew. For the first half of this year L'Oreal posted sales growth of 5.3% amid incessant reports of doom and gloom elsewhere.
So if you see less Fendi bags and Mini Coopers floating around in the new year, take a look around to see if this substitution is indeed occurring...


Martin Ryan said...

Interesting post Fergal. My friend from school who has set up a company selling womens' skincare products will be quite heartened by the research that you mention.

Its interesting to take note of what succeeds in the market place during periods of recession. I've mentioned before that McDonalds is doing quite well. I wonder what else is?

You'll have to keep an eye out on the Fendi bags for me - I wouldn't be able to spot one!


Anonymous said...

I've done a bit of personal research on this topic and it is very interesting! Historically, alcohol, pharmecuticals, and 'personal grooming products' (cosmetics!) flourish even when the rest of the economy is in recession. I'm pretty sure it has something to do with drowning your unhappiness in alcohol, drugs, and...cosmetics; all ways to 'mask' the unpleasantness of life in a recession. As a woman, I simply know that I have a high standard that I hold my cosmetics to, and the pricier cosmetics truly are worth every penny. So in short, I will give up certain things so that I may continue to buy my cosmetics...recession or not!

Kevin Denny said...

& because you're worth it