The Kiss of Economic Death

Into the red: 'lipstick effect' reveals the true face of the recession

• Larry Elliott
• The Guardian, Monday 22 December 2008

Some say hemlines and heels rise and fall with the state of the stockmarket. But for those who really want to know how bad things are there is only one item that counts: lipstick.

When times are tough, consumers stop spending on big ticket items. Car sales are down by a third; the drop in demand for mortgages has taken its toll of spending on carpets and furniture.

But, according to one City economist, rather than lose the spending habit consumers simply trade down to cheaper items to cheer themselves up. What's more, this effect has held good in recessions of the past and in countries with different cultural traditions.

Dhaval Joshi, analyst with RAB Capital, said that the recent sales figures from the world's big cosmetic companies - L'Oréal, Beiersdorf and Shiseido - confirm that the so-called lipstick effect has returned as the global economy has headed into its first synchronised downturn since the early 1980s, with consumers increasing their spending on cosmetics even while economising on everything else.

In the first half of the year, L'Oréal showed like-for-like sales growth of 5.3%."The evidence shows that when budgets are squeezed, people simply substitute large extravagances for small luxuries," Joshi said.

The "lipstick effect" can be traced back to the Great Depression of the 1930s. In the four years from 1929 to 1933, industrial production in the US halved, but sales of cosmetics rose.

In Germany, the unemployment total rose to 6 million, but those working for Beiersdorf did not suffer. The company was able to boast that it did not lay off a single employee.

More recently, employment in the US cosmetics sector went up in the recessions of 1990 and 2001 while jobs in the rest of manufacturing were being shed. And while the squeeze on disposable incomes in Japan's long period of stagnation has seen department store spending on clothes fall by 25% since 1997, sales of accessories are up by 10%.

According to Joshi, the "lipstick effect" shows up in stock market performance, with the European personal products sector outperforming the broader market by an average of 100% in each of the three past recessions of the early 1980s, early 1990s and early 2000s.

"The European personal products index is an excellent proxy for the global cosmetics sector because it is dominated by L'Oréal and Beiersdorf.

So far in the downturn, this index has already outperformed the broader market by 45%."