The ‘Lipstick Effect’ and how it applies to 21st-century India

On September 1, 2022, Moody’s Investor Services released a report on the Indian economy. As per the report⁽¹⁾, India’s real GDP growth is forecasted to slow down to 7.7% in 2022 from 8.3% in 2021 and slump further to 5.2% in 2023. Rising interest rates, uneven distribution of monsoons, and slowing global growth are expected to dampen economic momentum on a sequential basis.

In tune with Moody’s findings⁽²⁾, Morgan Stanley recently cut the FY23 real GDP expansion estimate for India by 0.40% to 7.2% on the back of slower global growth. The brokerage firm added that GDP growth will slow down to 6.4% in FY24, pointing out that this is lower by 0.30% compared to the earlier estimate.

With the economy not in its best health, and the immediate future not looking too good either, one would have thought thrift would be the order of the day for all. But Indians are surprisingly going for low-value indulgences, such as buying makeup and personal care products. At the same time, they are postponing expensive purchases, indicating a pattern of consumer behaviour known as “the lipstick effect”.

So, what’s the “lipstick effect” all about?

The term “lipstick effect” was coined by Leonard Lauder⁽³⁾, a former Estée Lauder Chairman, following the bursting of the dot-com bubble, which caused the US economy to go into a recession in 2000. In the aftermath of the 9/11 crisis of 2001, too, Lauder noticed that his company managed to sell more lipstick than usual. This phenomenon was observed again in 2008 when the subprime mortgage issue turned into a full-blown banking crisis. Yet again, cosmetics companies registered higher than average sales of lipsticks.

But the effect had been observed even before the term was coined. During the Great Depression of 1929 in the US, when stock markets crashed, unemployment shot up, and wealth started to get wiped out, an interesting phenomenon came into being. Bang in the middle of this financial crunch, it was observed that the sale of lipsticks in the US increased. This was because women were buying smaller luxury products such as lipsticks instead of more expensive stuff to comfort themselves.

Economics and sociology Professor Juliet Schor, in her 1998 book, The Overspent American, also talks about this phenomenon, saying that in times of a recession and other economic stresses, women will indulge in discretionary purchases that provide an emotional uplift without upsetting the budget too much.

Lipstick Effect in effect in today’s India

India seems to be exhibiting classic symptoms of the odd “lipstick effect”. The country has been undergoing a GDP slowdown since June 2018. Yet, some sectors have continued to exhibit growth. PVR Cinemas and Inox Leisures, two of India’s largest multiplex chains, have performed well, despite the slowdown. Cosmetics and fast-moving consumer goods companies such as Hindustan Unilever and ITC, too, have fared fairly well⁽⁴⁾.

In the apparel and accessories segment, brands such as Zara, H&M, and the like are performing better than high-end brands such as Prada, Dior, Gucci or Louis Vuitton. E-commerce websites such as Amazon and Flipkart witnessed a significant jump in revenues and profits in FY21, not only due to discounts but also because of no-cost or low-cost equated monthly instalments, exchange offers, and instant bank discounts. Sectors such as media, entertainment, travel and leisure-linked stocks are all exhibiting an upward trend amid a slump.

The trend of consumers shifting to smaller indulgences from expensive discretionary spending has been observed for a while now in India. It will be interesting to see how, and how far, this will play out.