The ‘Lipstick Effect’ explained

What can the lipstick effect tell us about the economy today?

There really is a day for everything… even National Lipstick Day! And while it might be a tenuous link to investing, lipstick has been used as an economic indicator. Let me tell you more.

What is an economic indicator?

Economic indicators are used to understand how an economy is faring. They provide valuable information about the overall health and direction of a country and include things like people’s spending habits, the number of jobs available and the prices of goods and services.

They are a bit like puzzle pieces and when put together can help economists understand the bigger picture. It’s important to remember that economic indicators are not magic crystal balls that can perfectly predict the future. Sometimes they can be a bit tricky to interpret because different indicators might show different things.

What is the Lipstick Effect?

The Lipstick Effect – first posited in 1998 by economics and sociology Professor Juliet Schor – refers to the idea that, when faced with economic uncertainty, while people tend to cut back on their spending and become more cautious about their expenses they also still indulge in small, affordable luxuries instead of splurging on big-ticket items.

In other words, they may be hesitant to buy expensive cars or go on fancy holidays, but they still treat themselves to little luxuries like cosmetics, chocolates, or even a cup of coffee.

What does the Lipstick Effect tell us today?

Although the UK isn’t in an official recession, people are certainly feeling the pressure of higher costs. While some consumers are turning to cosmetics for the affordable luxury factor, growth in the category as whole is slow.

Admittedly, lipstick probably isn’t a reliable recession indicator — there are plenty of times when cosmetics sales have boomed during times of relative economic prosperity and dipped during downturns. However, it can offer insights into consumer psychology and behaviour during uncertain times — and when used in conjunction with another economic indicators helps provide a clearer picture of consumer sentiment in an economy.

It’s also nicer to talk about than its counterpart — the men’s underwear index! — yes, that’s a real thing too…

The cosmetic companies that could benefit from a boost to ‘little luxuries’

A fast-growing company in the cosmetic space recently has been e.l.f. Beauty, supported by celebrities such as Alicia Keys. A holding in Premier Miton Global Smaller Companies fund, the company focuses mainly on low-priced cosmetic products for the eyes, lips, and face. The lower price point could be attractive for those looking to cut costs from a full range of luxury cosmetics.

L’Oréal, a holding in FTF Martin Currie European Unconstrained and Estee Lauder, a holding in FTF Martin Currie US Unconstrained, are two of the most well known in the space. French-based L’Oréal is the world’s largest cosmetic company with products for everything from hair colouring to sun protection, makeup and more. Estee Lauder, the American equivalent, is the second largest cosmetic company.

German-based Beiersdorf AG, a holding in BlackRock European Absolute Alpha, focuses primarily on developing, manufacturing, and marketing skin and personal care products, including major skincare brands since as Nivea and Eucerin.

Shiseido Company, a Japanese cosmetic company and holding in T. Rowe Price Japanese Equity, is one of the oldest cosmetic companies in the world and is made up of over 30 different brands at various price points.

Those looking for one stop shopping for every brand might consider Ulta Beauty, a US based chain store and holding in abrdn SICAV I Global Mid Cap Equity. Ulta sells everything from cosmetics, skin and hair care products, even offering salon services in store. The chain is poised to benefit from strong consumer demand to a range of brands, price points and products.

While you won’t find Sephora listed on any stock market – the brand is wholly owned by LVMH – if you wanted exposure to the brand, you could also buy LVMH shares as part of your portfolio. LVMH is a top ten holding in several Elite Rated funds including BlackRock European Dynamic, Comgest Growth Europe ex UK, CT European Select, GAM Star Continental European Equity and Janus Henderson European Focus.

_{Photo by Marek Studzinski on Unsplash}