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Markets & trends

Credit crunch: who believes in the lipstick index?

In various historical occasions, from recessions to revolutions, the cosmetics industry demonstrated its ability to address times of economic uncertainty or political crises. Compared to many other sectors, cosmetics are known to offer a better resistance to downturn cycles, but is this crisis similar to previous ones?

A recent Consumer Sentiment Study based on a demographically balanced set of 2,000 households showed that U.S. consumers are planning dramatic shifts in their personal spending through the end of the year and into 2009. According to L.E.K. Consulting, the consulting firm who performed the study, these anticipated shifts in spending vary by category, but the changes appear to be more dramatic than in previous downturns.

Discretionary vs. non-discretionary expenditures

Until the recent disruptions, consumers believed that they were accumulating wealth in real estate and the market - and this persuaded them to save very little and spend a lot. This trend represents a startling reversal, with huge implications for the economy," said Andrew Rees, L.E.K. Vice President and co-author of the study. In practice, if saving rates increase, in clear if consumers save more and spend less, huge amounts of money will be taken out of the consumer economy. For instance, if they save at a rate of 10 percent, which has historic precedent, it could take as much as US$ 200 billion out of the U.S. economy each quarter.

The study findings further revealed how consumers rated various categories of expenditures from "least discretionary" to "most discretionary." Staple goods such as groceries, household cleaning supplies, and health products were rated least discretionary, while items such as jewellery, sporting equipment, and home decor accessories were rated most discretionary.

Digging down deeper, the research reveals a host of interesting choices that consumers are now making about their purchases. For example, although “Cosmetics" and "Intimates" rank fairly close together - that is, on the lower end of the discretionary-spending scale - it turns out that consumers intend to cut their spending on cosmetics by less than 10 percent, but are prepared to cut their spending on intimates by between 10 and 20 percent: i.e., twice as much. “Therefore, consumers may define cosmetics as ‘discretionary,’ but they’re not yet prepared to give them up,” Dan McKone, L.E.K. Vice President, and co-author of the study noted.

Lipstick in, economy out?

Such findings could help giving consistency to the “Lipstick Index” theory. The “Lipstick Index”, also referred as the “Leading Lipstick Indicator”, is an economic indicator that you will hardly find in the pages of microeconomics textbooks.

This frivolous financial barometer says cosmetics sales tend to be inversely correlated to economic health. Lipstick sales in particular would rise in direct relation to free-falling finances. As the economy crumbles, the Lipstick Index is jumping. Leonard Lauder, Chairman of the Estée Lauder group, is reputed having coined the indicator when he observed that during tough economic times the sale of lipsticks booms.

Lipsticks would be typical of what do women want when they aren’t allowed to want too much. "There seems to be some kind of correlation - when times are tough, gloss [and] lipstick sales seem to boom," confirmed Shawna Weinman, a spokeswoman for the Toronto-based Cargo Cosmetics to CBC News.

However, not all figures are that optimistic. The cosmetics category’s economic immunity is relative. The sector may be recession resistant but certainly not recession proof. Last month, L’Oréal, the world’s biggest beauty products group, cut its full-year sales forecast and saw a steep decline in North American comparable sales in the third quarter.

At the same time, Avon, the world’s largest direct seller of cosmetics, posted a quarterly profit that missed Wall Street expectations, after a 3 percent drop in North American sales.

In October too, Estée Lauder lowered its sales forecast to between 3 percent and 5 percent, below its previous expectations for sales growth of 6 percent to 8 percent.

However, other cosmetics giants such as Procter & Gamble, Beiersdorf and Unilever seemed less affected and have posted good results for the quarter.

Price sensitivity

Actually, the “Lipstick Index” theory points out the importance of the price factor in periods of economic turmoil. When female consumers face a dismal financial outlook, they seek something affordable to make them feel better about themselves.

In 2009, the beauty industry will therefore undergo its own cleansing regime. Mintel market researchers predict a year of consolidation.

The 21st century has been marked by the introduction of many new beauty companies, all claiming to make us look younger, thinner and more attractive in their own unique way. But the tougher economic climate will mean that only the strongest brands, which can really prove their worth, will earn their place in our beauty cabinets. 2009 will be all about survival of the fittest in the beauty industry. Consumers are going to demand real value for money as well as visible results, and they will stick to the select number of brands they can truly trust,” comments Nica Lewis, Head Consultant of Mintel Beauty Innovation.

In brief, we are entering an era of “austerity chic". As few women are prepared to ditch their make-up bags and brave the world bare-faced, they may just stop indulge in all their previous beauty whims for amusing novelties, and get back to basics.

Luxury facing recession

A recent study from consulting group Bain & Company found that the growth of global luxury goods sales will slow sharply to 3% in 2008, compared to a 9% growth in 2006 and a 6.5% growth in 2007. Turning to 2009, the business of luxury could face its first recession in six years. The study predicts as much as a -7% decline in global luxury sales for 2009 using constant exchange rates, in contrast to a possible -2% decline when using current exchange rates.

However, the cosmetics industry might be less impacted than other sectors. According to Claudia D’Arpizio, the author of the study: “Fragrance growth will be cut in half in 2008 to +2.6%, while cosmetics will be less impacted by the weak 2008 holiday season. Year-over-year growth for cosmetics in 2007 and 2008 remains steady at +3.0%”.

Fast growing markets

Of course, the trends in emerging markets will certainly be different but developed countries weight for two-thirds of the industry’s global sales. Mature markets even contribute to nearly 80% of worldwide sales of high-end and luxury items.

However, as emerging markets including Brazil, Russia, China and India are likely to be less affected by the recession, cosmetics companies that have already built strong positions on these markets will benefit from a competitive advantage.

This may also explain why a company like Oriflame just had its best historic quarter and does not feel affected by the current crisis. The company considers there is no growth opportunity for its products in European markets in the future, and is therefore making heavy investments in Asia and Latin America.

We are actually the fastest growing cosmetics company in the market, and were last year too, growing globally at 26 per cent. We don’t see any issues, any slowdown anywhere in the world right now,” said Jesper Martinsson, CEO, Oriflame Cosmetics to the Indian online daily Businessline. Here is a businessman who certainly believes in the “Lipstick Index” theory.

Vincent Gallon

© 2008 - Premium Beauty News - www.premiumbeautynews.com
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