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‘Lipstick effect’ starts fading for consumer beauty groups, Retail News, ET Retail

‘Lipstick effect’ starts fading for consumer beauty groups

In times of economic turmoil, beauty consumers still like to treat themselves – they just do it in moderation. In lieu of Botox treatments or body contouring to lift their spirits, buyers will instead splurge on a $30 face mask or tube of mascara. Beauty company bosses call this the “lipstick effect,” and use it to convince investors of their business’s resilience.

This year, however, persistently high inflation and gloomy economy forecasts haven’t led to a boom in impulse buys. In the US, there was a 2.1% drop in sales of face care items in the 12 months to Oct. 1 compared to a year earlier, NielsenIQ estimates, even as inflation helped push up sales in dollar terms. And in Europe, more than one in five consumers expect to spend less on make-up and skincare in the coming months, according to McKinsey & Co. Inc research.

Cosmetics makers are beginning to feel the squeeze. L’Oreal SA shares suffered the biggest fall in seven months last week after the group said its luxe division, which includes brands like Lancome and Shu Uemura, grew only 4.6% in the third quarter. This marks the first time since 2020 that the luxury unit’s growth fell behind L’Oreal’s mass market division, which produces lines like Garnier. Any sign of softer sales at US rival Estée Lauder, which reports its quarterly earnings on Nov. 2, could spook the market further.

For large companies, having a range of products at different price points has helped cushion the financial blow. L’Oreal CEO Nicolas Hieronimus made this case during a call with investors on Oct. 20, when he observed that although Yves Saint Laurent products continue to sell well, “we have also Maybelline and L’Oreal Paris for those who can’t afford an expensive mascara.” While the overall beauty market is growing at 6% in value terms, he observed, L’Oreal is expanding at twice that pace.

Less diversified businesses are suffering the most. Cult hair care brand Olaplex, a favorite among social media beauty influencers, is among those losing its shine. Olaplex Holdings Inc., whose shampoo sells for $28 a bottle, downgraded its outlook last week, causing shares to plunge 57%. On Thursday, Nivea owner Beiersdorf said that sales of its pricey La Prairie skincare line grew just 5.5% in the first nine months of the year, having previously reached 20% annual growth. The company’s overall sales rose 11.1%.

Higher SpiritsIn rosier economic times, premium skin and haircare are booming consumer categories, offsetting flagging growth elsewhere. While there are exceptions that still prove this rule –- including Unilever, whose prestige beauty business enjoyed another quarter of double-digit growth -– more consumer goods groups are trying out new ways to boost profitability.

To prop up their top lines, Nestle and Unilever have experimented with “premiumization” — promoting pricier versions of products such as mayonnaise and make-up. But that strategy also has its limits. Sales of Nestle’s premium Nespresso coffee pods fell this year, and last week the company admitted that customers are opting for cheaper products. Hieronimus, the L’Oreal CEO, said he had noticed the same among UK buyers shopping for skincare products.

One sector, however, has proven remarkably resilient. Spirit companies like Diageo and Pernod Ricard may be the biggest beneficiaries of the “lipstick effect,” a term coined by former Estée Lauder chairman Leonard Lauder to explain why lipstick sales shot up during the 2001 recession. After all, like lipstick, people turn to alcohol as a source of cheer and confidence when times are tough.

In addition to a post-lockdown boost and the return of travel, distillers have also benefited from the fact that their products don’t make up a large portion of household spending. In the US consumers mostly drink spirits on special occasions, and only spend an average of $4 a week on them, according to Numerator Insights. That may protect sales — for now.

“We haven’t seen any shift in that underlying desire of consumers to treat themselves to spirits,” said Alicia Forry, an analyst at Investec. But, she added, sales likely “will slow a bit as energy costs really start to hit disposable income more significantly.”

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