Lipstick effect: Consumers turn toward affordable luxuries, ILO highlights inflation-induced inequalities

06 Dec 2022 --- According to the recent International Labour Organization (ILO) report, a severe inflationary crisis combined with a global slowdown in economic growth – driven in part by the war in Ukraine and the global energy crisis – is reducing the purchasing power of the middle classes and especially hitting low-income households in Europe. With a possible recession on the horizon, PersonalCareInsights looks at indicators of the “lipstick index” at play.

“The multiple global crises we are facing have led to a decline in real wages, placing tens of millions of workers in a dire situation as they face increasing uncertainties,” says Gilbert F. Houngbo, Director-General at ILO.

“Income inequality and poverty will rise if the purchasing power of the lowest paid is not maintained. In addition, a much-needed post-pandemic recovery could be put at risk. This could fuel further social unrest across the world and undermine the goal of achieving prosperity and peace for all.”

The Global Wage Report 2022-2023: The Impact of inflation and COVID-19 on wages and purchasing power shows that rising inflation has a more significant cost-of-living impact on lower-income earners. This is because they spend most of their disposable income on essential goods and services, which generally experience greater price increases than non-essential items.

The “lipstick index” is the idea that sales of affordable luxuries rise in economic downturns.Reports on the lipstick index
Financial Times reports that this is the first time since 2008 that real global wage growth has been negative.

The “lipstick index” is the idea that sales of affordable luxuries rise in economic downturns.

According to The Guardian, the lipstick effect, coined by Leonard Lauder of the Estée Lauder Companies, has proven true during previous economic downturns. A similar trend is emerging as consumers battle severe financial headwinds.

Around the time Lauder invented the index, lipstick sales at mass retailers had risen 11%, The Wall Street Journal had reported at the time.

Predicting recession?
PersonalCareInsights is providing tools and tips for businesses to navigate the economic hurdles as the holiday shopping season looms.

According to Tom McGee, president and CEO at ICSC, shoppers are particularly interested in deals and promotions, and retailers should make the most of it this holiday season.

“Consumers are continuing to spend despite inflation and economic headwinds, and while higher prices will drive some of the increase in holiday spending this year, overall, retailers are poised for a successful holiday season,” he says.

Moreover, Michal Benmayor, global VP of sustainability and naturals at Firmenich, shared that the lipstick effect is causing consumers to turn toward fragrances.

“What we see is the ‘lipstick effect’ – under economic restraints, people resort to fragrances as an opportunity to uplift their mood, to treat themselves to a touch of coveted luxury,” she explains.

Moreover, Nicolas Hieronimus, CEO at L’Oréal, shared his confidence that the beauty market will continue to be in good shape and grow even during a recession.

“The US was very competitive but overall positive in the summer. In Europe, we had seen no signs of anything in July as the markets remained positive and our shares have been good. We wish we had more fragrances to sell because our fragrances have been very dynamic, and we have been unable to ship everything.”

Proof is in the pudding
Although global inflation is putting a strain on purse strings, personal care and cosmetic companies have been performing well, as evidenced by the third-quarter sales reports of the industry leaders.A severe inflationary crisis combined with a global slowdown in economic growth is reducing the purchasing power of the middle classes.

L’Oréal reported strong growth, with sales of €27.94 billion (US$27.16 billion) achieved by the end of September. By September, L’Oréal Luxe reportedly outperformed the global luxury beauty market with 22% growth.

Hieronimus explained that the global beauty market remains dynamic, and consumers’ appetite for beauty products is intact. “The robust business model and agility combination allowed L’Oréal to outperform the market.”

Beauty consumers are still buying luxury and premium products from Amyris, the company flagged in its third-quarter report. The company noted that key beauty categories, such as clean beauty, are also buoyant.

According to the report, consumer revenue of US$46.6 million increased by 98% compared to Q3 2021.

Similarly, German personal care giant Beiersdorf showed resilience amid a complex economic environment with its flagship Nivea cream and dermo-cosmetics brands Eucerin and Aquaphor.

The company achieved an 11.1% growth in the first nine months of the year, reaching US$6.7 billion in sales, despite “macroeconomic and geopolitical challenges as well as ongoing price negotiation with retailers,” it said.

Lastly, FMCG leader Unilever’s latest sales report also showed a growth acceleration of 10.6% in the third quarter, raising sales guidance for this year to be above 8%. Personal Care underlying sales were up 8.9%, Beauty & Well-being grew by 6.7%, and the Home Care sector delivered 13.6% underlying sales growth.

By Radhika Sikaria

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