How the ‘lipstick effect’ can create a gloss in an economic downturn in Hong Kong

Economic theory shows that alcohol, sporting goods, cheaper daily necessities, cosmetics and personal care products are resilient to recessions

PUBLISHED : Friday, 25 March, 2016, 12:04am
UPDATED : Friday, 25 March, 2016, 11:35am

Certain types of consumer goods tend to buck the trend and do better in an economic downturn.

Alcohol-related products, sporting goods, and cheaper daily necessities are among those which have proven resilent to previous recessions. Cosmetics and personal care products have also tended to thrive as female consumers continue to buy them.

An economic theory, known as the “lipstick effect”, has been used to describe the ­phenomenon. The idea is that woman would buy cosmetics, such as lipstick, as an affordable indulgence while making cutbacks elsewhere.

Research by four American universities in 2011 on the “lipstick effect” found a positive connection between unemployment and spending on personal care and cosmetic products. As the unemployment rate went up, people allocated a larger portion of their monthly spending budgets on such products.

Financial results of big beauty groups also support the theory.

Amorepacific – South Korea’s biggest beauty company, with brands such as Sulwhasoo, Laneige in its portfolio – reported a 23 per cent jump in sales last year. Japanese player Shiseido also topped the market estimate in its 2015 sales, which the company said was benefited from the increasing wave of tourists to Japan.

Both New York-based Estee Lauder – whose founder Leonard Lauder first came up with the theory — and Paris beauty giant L’Oreal also beat analysts’ estimate in their latest quarter results, with sales up 7.7 per cent and 4.2 per cent respectively.

“Certain affordable treats, wine, chocolate, cheaper cosmetics, underwear – these sorts of items tend to do well during periods where overall spending is under pressure,” said Jon Copestake, chief retail and consumer goods analyst at the Economist Intelligence Unit.

He added that economic weakness in Japan led to an explosion of 100 Yen shops which have continued to proliferate. In Europe, the global and European financial crisis sparked what is known as the “Aldi effect” where hard discounters like Aldi and Lidl captured share from larger ­players. In the USA it was the local discounter Target which stole share from rivals in the fallout from the sub-prime debt crisis.

Meanwhile, it seems Chinese people have been drinking more wine than ever before, though the national economy is growing at its slowest pace in a quarter century.

According to data from China Customs, wine imports grew 34 per cent in value last year to a record US$2.04 billion while import quantities jumped 45 per cent, suggesting imported wine had become cheaper. A slower economy also prompted Chinese people to spend their free time exercising, which spurred a boom in sportswear consumption.

Adidas’ sales in China grew 38 per cent to 2.47 billion euros (HK$17.7 billion) last year. Nike also defied concerns about slowing economic growth in China, with revenue gaining 24 per cent to US$938 million.

One of the biggest domestic players Li Ning, reported a profit last year after three consecutive years of losses. Its revenue rose 17 per cent to 7.09 billion yuan (HK$8.45 billion).