The lipstick index states that during economic downturns, sales for “affordable luxury” items such as lipstick, nail polish, and perfume increase.
This phenomenon is a theoretical financial indicator is used to forecast bear markets and recessions. The theory goes that consumers will curb discretionary spending in a gloomy economy but continue to buy lipstick, perfume, and other small, affordable luxury goods. If lipstick sales are growing, investors can, according to the theory, expect an economic downturn.
With inflation still high, buying a home, purchasing a new car, or going on vacation has become cost-prohibitive for countless American households – but buying a $30 Dior lip plumper hasn’t. Plus, affordable luxury purchases can have a positive psychological impact during stressful times – they can make you feel and look better in a period marked with stress and anxiety.
“People can absorb a 10% increase in the price of $10 but you can't do that with a home,” said Jeff Kreisler, Head of Behavioral Science at J.P. Morgan. “As inflation picks up and wallets are tightening, you want to make yourself feel better.”
Born in 2001
Leonard Lauder, one of the billionaire heirs to the Estee Lauder fortune, is credited with coining the lipstick index in 2001. At the time, the economy in the U.S. was reeling from a recession. But curiously enough, Lauder noticed sales of lipstick were rising, not decreasing. His theory was that sales of lipstick and the growth of the economy were inversely related – that as the economy worsened, lipstick sales improved.
While Lauder is credited with the creation of the lipstick index, we can trace the phenomenon back much further. After World War II, fashion houses such as Chanel, Dior, Yves Saint Laurent and Balenciaga pivoted toward a new generation of empowered women who desired affordable luxury. They couldn’t afford a designer bag or suit, but they could partake by purchasing cheaper designer goods such as perfume and cosmetics.
“With perfume and cosmetics, you tend to wear them every day,” said Deepti Nagulapally, Behavioral Science Specialist at J.P. Morgan. “Because when big things are out of reach you naturally go for the little things.”
Human nature’s role
As with all things that involve money, human nature plays a big role in the lipstick index. When the economy inspires stress, it makes sense to want to treat yourself. And what better way than with a lip gloss worthy of a name drop or a designer perfume that’s trending online? It may not be the most rational budget decision, but when it comes to money, rational thinking is often absent. There’s a reason why one of the leading behavioral economic books is called Predictably Irrational – human beings, by their very nature, are often imperfect decision-makers. Hence, their money decisions follow suit. Retail therapy, after all, is another real phenomenon.
Even if buying designer lipstick when your budget might want you to save that extra $30 might not make sense, it’s not always about what makes sense. “It's what we do to get through the days,” said Kreisler. “You can’t do the big American dream things, like buy a house. In some ways these little things matter more. They’re special and they can help you every day.”
Both Kreisler and Nagulapally agreed that there’s minimal harm in consumers allowing themselves small luxuries.
“Worry about the big stuff,” said Kreisler. “Don’t stress about little stuff and check in about the medium stuff.”
Is the lipstick index is at play now?
Maybe, maybe not, but listen to this: In the first quarter of 2024, LVMH (the French high-quality goods conglomerate that houses brands like Chanel and Sephora) saw perfumes and cosmetics profits rise by 3% since the previous quarter, smaller than the 11% rise in the first quarter of 2023.
That may not be proof, but it’s certainly interesting.
Related Posts
