There's a theory out there, strange as it may seem, that lipstick sales rise in recessions. There is some evidence to show that this might be true - L'Oreal (OTC:LRLCF) showed rising sales, by 5%, in the 2008 recession. This has been dressed up itself into "The Lipstick Effect".
The Grocer media outlet described it as "a curious phenomenon that describes how female shoppers can display a stronger preference for buying beauty products during a recession. Typically, downturns are associated with cutting back on discretionary purchases and focusing instead on everyday staples and essentials. But for some reason, sales of some beauty products tend to buck this trend".
Well, OK, and there's an apparent psychological cause for as cited by Psychology Today
"Now a series of psychology experiments have confirmed for the first time that while tougher economic times decrease desire for most items, they also reliably increase women's yearning for products that boost their attractiveness.
Psychologists contend that this "lipstick effect" is operating largely below conscious awareness of men and women, and therefore require precise experiments to reveal them. The results suggest this phenomenon is driven by women's desire to attract mates with resources".
Now, that makes some sort of sense. But it's also possible that there's another explanation for the observed facts. A more economic and less evolutionary psychology one. Which is simply that we all like a little treat now and again and in the good times treats can and will be larger. A new outfit, or pair of shoes, if we are to concentrate just on young women. When the hard times arrive then those more expensive treats cannot happen and so they are substituted down to something less expensive - some new lippy.
We could just dismiss this as being something for the eggheads to worry about but it has its influence upon investment decisions as well.
Obviously, which explanation is correct doesn't matter about lipstick sales, this is something we've already observed. So, we could buy lipstick stock right now.
For we're really pretty certain that we've got some economic hard times coming. Yes, even after that lockdown thing. Interest rates are going to go up and so Is inflation likely to be much more than transient. Real incomes are going to fall therefore - exactly what we don't like about the effect of recessions upon sales.
OK, so which explanation of the Lipstick Effect does matter for other goods that might be subject to them. If it's all about finding a mate then we can constrain it just to lipstick. But if it's a wider issue about substituting for luxuries then perhaps it also applies to other products? As I've said elsewhere when considering Diageo (NYSE:DEO):
There’s also something called “The Lippy Effect” which is derived, of all things, from female behaviour in recessions. This is that often enough lipstick sales actually go up as those of fashion, handbags and so on go down. The observation being that we all desire a little luxury, a little pampering, and if we can’t have it on big and major things then we’ll take a little bit of it by buying smaller yet premium items. It’s easy enough to see how this could happen with spirits. That luxury of better whisky for a few pounds more when the tens or hundreds of pounds to spend aren’t available. As long as things don’t get so bad we’re all back to bathtub gin of course.
This can then be expanded out as far as we like. Maybe middle market dining chains will benefit from people avoiding fine dining. Perhaps supermarket take out foods will benefit instead? There is some - some but not enough to be conclusive - evidence that mid-range wines went up in sales for home consumption in 2008 and following for example.
The point here isn't to insist upon an investment in lipstick, or premium booze companies. Rather, it's to point to the complexities that economic theory can bring to investment decisions. Here, just the observation that lipstick sales rise in a recession isn't enough. We need to know why they do so as to be able to apply the observation properly across all the goods that might be so affected.
