The Lipstick Effect

When studying A level Economics, you learn the difference between a luxury good and an inferior good. A luxury (normal) good is a good for which an increase in income leads to an increase in demand. The good is not necessary for living, but is deemed as highly desired within a society. An inferior good is a good for which an increase in income levels leads to fall in demand.

The lipstick effect is the theory that during periods of recession or economic downturn, consumers will be more willing to buy less costly luxury goods over more expensive luxury goods. For example, rather than splashing out on a new fur coat, women are more likely to seek material solace in small indulgences such as lipstick. L'Oréal saw its UK sales grow 5.3% in 2008, the heart of the most recent recession. People still buy luxury goods during economic hardships, but they are more likely to choose goods that will have less of an impact on their discretionary incomes. 

It explains why it is often the case that restaurants and entertainment industries do well during a recession. Consumers that want to treat themselves during a time of financial difficulty settle for a relatively cheap night out, for example through a cinema trip or meal out, over a more expensive experience such as a holiday.

In May of this year, "China Daily" reported that the lipstick effect had hit China as the Chinese economy began to slow. China's GDP rose 7.8% in 2012, the first time that the country's growth rate was below 8% since 1999.As the industrial and manufacturing sectors declined last year, fashion brands soared. The retail value of the beauty and personal care sector grew from 184.1 billion yuan in 2011 to 202.1 billion yuan in 2012. Again, L'Oréal saw its market share grow from 10.8% in 2011 to 11.2% in 2012.