Author: Jennifer Fong
Blog Post: Courtney Hanmer
Interestingly, this wasn’t a onetime effect either. In fact, after the tragic events of September 11th, Leonard Lauder, Estee Lauder chairman, recognized that the company’s lipstick sales were in fact skyrocketing. According to the New York Times it was then that Lauder began discussing the “Leading Lipstick Indicator” with the public.[ii] According to Nancy Koehn of Harvard Business School the overall, cosmetic sales increased by 25% during the decade of the Great Depression and doubled during the economic downturn that followed September 11th.[iii]
Even investopedia.com is recognizing this widespread term and has defined the lipstick effect as “an indicator based on the theory that a consumer turns to less expensive indulgences, such as lipstick, when she (or he) feels less than confident about the future. Therefore, lipstick sales tend to increase during times of economic uncertainty or a recession.”[iv]
I know you are probably thinking that this seems extreme and can’t possibly be accurate. I was of that opinion too, until I realized that my recent purchase of over $200 in make-up from Sephora may actually help support the leading lipstick theory. Frustrated that I didn’t have the spending money to plan an elaborate trip to Europe like many of my friends, I found myself wanting to splurge on something. The answer was clear - why not spend those precious dollars left at the end of the school year on cosmetics that will at least let me fake to the outside world that I’m still holding up.
Apparently this concept can be expanded to beyond lipstick and I don’t mean that other cosmetics are leading indicators as well. Changing spending habits is difficult but necessary in recessions. Kyle Murray, director of the University of Alberta's School of Retailing says that "an easy way to spend less but not stop buying is to buy smaller items, less expensive items, smaller indulgences--so buying a latte at Starbucks or new lipstick, rather than spending money on a new watch."[v]
The implication of the leading lipstick indicator is clear for retailers of a great variety. Strong retailers will highlight their retail value proposition by offering a wide selection of goods. Retailers that sell goods that can be priced at a premium but that don’t break people’s wallets will rise above during days of economic strain. These retailers will have recognized that the experience of shopping for self-indulgences is what draws people into their stores. On the opposition, the retailers that were once first-class but have now adjusted their RVP using price reductions will soon realize that they have also reduced their premium image, thus damaging their experiential offering.
In the end, I think we all look for those little luxuries that we indulge ourselves with, especially in times of economic turmoil. Whether your vice is cosmetics or another moderately lavish item, investing in these goodies will often leave you feeling like you’re still doing something special for yourself - even if that treat can’t be as magnificent as pre-recession purchases.