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Can the Lipstick Effect, or the Fragrance Effect for Some, Trump Inflation?

The price of beauty products is increasing, but consumers are continuing to open their wallets.

Soaring inflation across the U.S. is impossible to ignore. From the gas station to the grocery store to the home, every part of life is being impacted.

And that’s true for the beauty sector, too. In a slew of summer trading updates, global beauty companies cited inflation as a headwind that has caused price increases.

Coty Inc., whose brands include CoverGirl, Gucci Beauty, Lancaster, Kylie Cosmetics and Skkn by Kim, implemented low-single-digit price increases during the second half of fiscal ’22 and is now in the process of arranging more hikes, this time in the mid-single-digits.

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“That’s the way we are tackling this inflation,” chief executive officer Sue Nabi said in an August interview.

At the Estée Lauder Cos. Inc., executive vice president and chief financial officer Tracey Travis told Beauty Inc that while the firm usually increases prices across the board each year, it did more so this year due to inflation — at around an average rate of 5.5 percent. Some of that is reflected in new products that were introduced at higher prices.

And Ulta Beauty, to name one more, revealed that it received a large number of price increases from brand partners in the first half of this year. It expects to receive additional increases throughout the rest of the year.

So far, this has not appeared to impact consumption — even at the prestige level.

Coty’s prestige fragrances, for example, have been flying off the shelves, with particularly strong performances from Hugo Boss, Burberry, Chloé, Calvin Klein and Gucci Beauty, which delivered 20 percent growth in the fourth quarter and helped the overall prestige sector to grow of 16 per cent year-over-year, to $662.8 million.

At Ulta, both prestige and mass makeup delivered double-digit comp growth in its second quarter, compared to the same period a year earlier, leading the retailer to raise its full-year outlook.

Lauder, meanwhile, continues to see the prestige beauty market grow by double digits in the U.S., according to Travis.

Citing Leonard A. Lauder’s Lipstick Index, the mogul’s theory that beauty sales increase during tough economic times, she said: “We are a category that it is an affordable luxury, particularly when you’re making choices about what you would like to buy from a discretionary standpoint.”

Coty’s Nabi believes that its latest set of figures prove that it’s more a fragrance index rather than a lipstick one. “Fragrances speak to everyone — whatever the age, whatever the gender, and what we have seen, which is the reality of the data and statistics, is that this beauty market is lifted by the fragrance consumption and this is not female or male. It’s both and it’s mainly also Gen Z.”

But whatever measure you prefer, can this resilience last, even as inflation refuses to budge and recession fears mount?

According to analysts, the short answer is yes, even as the latest official figures showed that while consumer spending grew ever so slightly in July, it was at a slower pace than in June.

As has been seen in previous downturns such as the 2008 financial crisis, while there has been trade down during past downturns, generally no one leaves beauty.

Olivia Tong, an analyst at Raymond James, said that the resilience of beauty has been bolstered by a wide reopening after COVID-19, leading to more travel and going out, as well as innovation in the sector. She believes this trend can hold up — as long as there are no serious disruptions to household income such as a job loss.

“Beauty is an affordable luxury. It’s not a car, it’s not a handbag, it’s not a vacation and quite frankly a lipstick is cheaper than going out for dinner and lasts longer,” she said. “So to the extent that you get a little gift for yourself, provided that there’s not been a material disruption to your household, but assuming that you are in a relatively mild slowdown, then your patterns may not change as materially as in some other categories.”

Neil Saunders, managing director of GlobalData, added: “While the lipstick effect seems like a cliché, it is based on a truth that is still relevant, namely that consumers are very reluctant to give up little beauty treats and indulgences and, indeed, feel like these are deserved rewards for living through a more difficult time. Outside of indulgences, it is also the case that many beauty and skin care routines are very much embedded into people’s lives so there is great reluctance to cut back on any of the products associated with them.”

He sees some but not much downside risk to the beauty segment, which he thinks will be one of the winners over the lucrative holiday period.
So, while there may be trade down to come and retailers such as Ulta say they are prepared to adjust accordingly if needed, it is unlikely that there will be a mass exodus from beauty anytime soon.

As Olaplex’s president and chief executive officer JuE Wong puts it, “You still have to wash your face, you still have to wash your hair, you still have to shower.”

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