Beauty market

The ‘lipstick effect’ is starting to fade for consumer beauty groups

In turbulent economic times, beauty consumers still like to indulge, they just do it in moderation. Instead of Botox treatments or body contouring to lift the spirits, shoppers 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 company’s resilience.

This year, however, continued high inflation and bleak economic forecasts have not led to a boom in impulse buying. In the United States, there was a 2.1% drop in sales of facial care items in the 12 months to October 1 compared to the previous year, estimates NielsenIQ, even if inflation helped boost dollar sales. And in Europe, more than one in five consumers expect to spend less on makeup and skincare in the coming months, according to research by McKinsey & Co.

Cosmetics manufacturers are starting to feel the pressure. Shares of L’Oreal suffered the biggest drop in seven months last week after the group said its luxury division, which includes brands like Lancôme and Shu Uemura, rose just 4.6% in the third trimester.

It is the first time since 2020 that the growth of the luxury unit has been lower than that of L’Oréal’s consumer division, which produces lines like Garnier. Any sign of a slowdown in sales at US competitor Estée Lauder, which reports quarterly results on Nov. 2, could spook the market further.

For larger companies, having a range of products at different price points has helped cushion the financial blow. L’Oreal CEO Nicolas Hieronimus made the point during a call with investors Oct. 20, when he observed that while Yves Saint Laurent products continue to sell well, “We also Maybelline and L’Oreal Paris for those who can’t afford expensive mascara.While the overall beauty market is growing 6% in value, he observed, L’Oreal is growing twice as fast.

Companies that are less diversified suffer the most. Cult haircare brand Olaplex, a favorite of social media beauty influencers, is among those losing its shine. Olaplex Holdings, whose shampoo sells for $28 a bottle, downgraded its outlook last week, sending shares down 57%.

On Thursday, Nivea owner Beiersdorf said sales of its pricey La Prairie skincare line rose just 5.5% in the first nine months of the year, after previously hitting an annual growth of 20%. The company’s overall sales increased by 11.1%.

In times of economic prosperity, high-end skincare and haircare are booming consumer categories, offsetting sluggish 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 and more consumer goods groups are trying new ways to increase their profitability.

To support their best ranges, Nestlé and Unilever have experimented with “premiumisation” – promoting more expensive versions of products such as mayonnaise and make-up. But this strategy also has its limits. Sales of Nestlé’s premium Nespresso coffee pods have plummeted this year, and last week the company admitted customers were opting for cheaper products. Hieronimus, the CEO of L’Oreal, said he noticed the same among UK shoppers buying skincare products.

One sector, however, has proven remarkably resilient. Spirits companies like Diageo and Pernod Ricard are perhaps the biggest beneficiaries of the “lipstick effect”, a term coined by former Estée Lauder chairman Leonard Lauder to explain why sales of red Lipsticks exploded during the 2001 recession. After all, like lipstick, people turn to alcohol as a source of joy and confidence when times get tough.

In addition to a post-lockdown boost and the return of travel, distillers have also benefited from the fact that their products do not represent a large part of household spending. Consumers in the United States primarily drink spirits on special occasions and spend an average of just $4 a week on them, according to Numerator Insights. This can protect sales – for now.

“We saw no change in this underlying consumer desire to indulge in spirits,” said Alicia Forry, an analyst at Investec. But, she added, sales “will likely slow down a bit as energy costs start to hit disposable income more significantly.”