What is the 'Lipstick Effect'

The lipstick effect is when consumers still spend on small indulgences during recessions, economic downturns, or when they have little cash. They do not have enough to spend on big-ticket luxury items. However, most find the cash for purchase for small luxury items, such as premium lipstick. For this reason, companies that benefit from the lipstick effect tend to be resilient.

Leonard Lauder, the chairman of Estée Lauder, noted following the terrorist attacks of September 2001 that his company sold more lipstick than usual. As a result, he theorized that lipstick is a contrary economic indicator.

BREAKING DOWN 'Lipstick Effect'

The lipstick effect is one of the reasons that fast-casual restaurants and movie complexes typically do well amid recessions. Cash-strapped consumers want to treat themselves to something that lets them to forget their financial problems. They cant afford to escape to Bermuda. However, they’ll settle for a fairly cheap night out and a movie, adjusting their budget accordingly.

The lipstick effect also affects certain regions dealing with a prolonged economic contraction or austerity measures. For example, Brexit hit certain parts of the U.K. economy very hard, especially metropolitan areas in the north such as Liverpool. Some economists note a lipstick effect in parts of Britain amid the austerity, including spending on not only lipstick, but also certain wines and coffee at local bean roasteries.

The lipstick effect should not be confused with the term lipstick entrepreneur, which is a slang term that refers to self-employed business women who sell makeup or other female-oriented products and services.

Pros and Cons of Lipstick as an Indicator

Lipstick as an economic indicator makes sense. Unlike the Super Bowl indicator, which is a tongue-in-cheek market indicator that few take seriously, the lipstick indicator is based in economic theory. Lipstick and other small-ticket beauty items are not inferior goods, such as bus tickets that see higher sales in recessions. However, they are the little treats that consumers use as substitutes for the big treats they’re unwilling or unable to buy.

One of the only problems with the lipstick indicator is that the public cannot access sales data on lipstick and similar products at regular intervals, such as weekly or monthly. As a result, the lipstick indicator helps the chairman of Estée Lauder know how to plan his budget, but it’s of no practical use to a regular mom-and-pop investor, unless they also can easily track lipstick sales.

Also, of note, if an economic contraction is severe enough, consumers tend to eschew even small indulgences. Theoretically, at least, sales of lipstick or Starbucks coffee, fails to be predictive when sales of pretty much everything contract at the same time.

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