In times of economic turbulence, consumers of beauty products still like to treat themselves, they just do it in moderation. Instead of Botox treatments or body contouring to lift the mood, shoppers will splurge on a $30 face mask or tube of mascara. Beauty company bosses call this the “lipstick effect” and use it to convince investors of the resilience of your business.
This year, however, stubbornly high inflation and gloomy economic forecasts have not led to a boom in impulse buying. In the US, there was a 2.1% drop in skin care sales in the 12 months to Oct. 1 compared with a year earlier, according to NielsenIQ estimates, even as inflation helped drive dollar sales. And in Europe, more than 1 in 5 consumers expect to spend less on makeup and skincare in the coming months, according to research from McKinsey & Co.
Cosmetic manufacturers are starting to feel the pinch. L’Oreal’s shares suffered the biggest drop in seven months last week after the group said its luxury division, which includes brands such as Lancôme and Shu Uemura, grew just 4.6% in the third quarter.
This is the first time since 2020 that the luxury unit’s growth lagged behind L’Oreal’s mass-market division, which produces lines like Garnier. Any sign of weaker sales at US rival Estée Lauder, which reports quarterly earnings on November 2, could spook the market further.
For large companies, having a range of products at different price points has helped cushion the financial blow. L’Oreal CEO Nicolas Hieronimus made this case during an investor call on October 20, when he observed that while Yves Saint Laurent products continue to sell well, “we also have Maybelline and L’Oreal Paris for those who they can’t afford expensive mascara.While the overall beauty market is growing 6% in value terms, he noted, L’Oreal is expanding at twice that rate.
The least diversified companies suffer the most. Cult hair care brand Olaplex, a favorite among social media beauty influencers, is among those losing its shine. Olaplex Holdings, whose shampoo sells for $28 a bottle, downgraded its outlook last week, sending shares tumbling 57%.
On Thursday, Nivea owner Beiersdorf said sales of its pricey La Prairie skincare line grew just 5.5% in the first nine months of the year, having previously achieved 20% annual growth. . Total company sales increased by 11.1%.
In more upbeat economic times, premium skin and hair care are booming consumer categories, offsetting declining growth elsewhere. While there are exceptions that still prove this rule, including Unilever, whose prestigious beauty business enjoyed another quarter of double-digit growth, more consumer goods groups are testing new ways to boost profitability.
To shore up their core lines, Nestle and Unilever have experimented with “premiumization,” promoting more expensive versions of products like mayonnaise and makeup. But that strategy also has its limits. Sales of Nestlé’s Nespresso premium coffee pods have fallen this year, and last week the company admitted that customers are turning to cheaper products. Hieronimus, the CEO of L’Oreal, said he had noticed the same thing among UK shoppers buying skincare products.
However, one sector has proven remarkably resilient. Spirits companies like Diageo and Pernod Ricard may be the biggest beneficiaries of the “lipstick effect,” a term coined by former Estée Lauder chairman Leonard Lauder to explain why lipstick sales soared during the US recession. 2001. After all, like lipstick, people turn to alcohol for a source of joy and confidence when times are tough.
In addition to the post-lockdown boost and return to travel, distilleries have also benefited from the fact that their products do not account for a large part of household spending. In the US, consumers drink spirits mostly on special occasions and only spend an average of $4 per week on it, according to Numerator Insights. That may protect sales, for now.
“We haven’t seen any change in that underlying consumer desire to indulge,” said Alicia Forry, an analyst at Investec. But, she added, sales are likely “to slow down a bit as energy costs really start to hit disposable income more significantly.”
This story was originally published on bloomberg.com. Read it here.
Source: news.google.com