Recently British American Tobacco (BAT) reported their 2008 annual results where they posted a 21% rise in revenue and a 16% rise in profits. As one can imagine, this is a great feat in today’s economy where companies are showing record losses, let alone profits. Though BAT might be exception from the general lot, it’s not the only one – cosmetic companies like L’oreal and Beirsdorf also seem to be faring well.
What does this tell us – that during times of recession, consumers tend to cut down on big ticket items, but like to hold on to their small pleasures. This behavior is also called as the ‘Liptstick effect’ – during times of economic uncertainty, women load up on affordable luxuries as a substitute for more expensive items like clothing and jewelry. It’s a phrase coined by Leonard Lauder, Chairman of Estee Lauder, who saw a huge jump in lipstick sales after September 11th.
Personal products sector has been found to be more resilient in a downturn, as consumers are less likely to give up smoking or indulging in a chocolate bar or enjoying a drink, even when times get tough. On the contrary, during such times of pressure and low morale, consumers tend to consume more of such stuff that provides instant gratification. One can also see the Liptstick effect in the stock market performance of companies in these sectors. Though broadly all companies have done badly in the last few months, companies like L’oreal, Diageo, and BAT have better than the market in general.
Interestingly this theory can be extended even beyond personal products like lipstick and cigarettes. Perhaps a sign of changing times and how green minded consumers have become, the organic food sector is also proving to be quite resilient to recessionary economy. We all became used to high oil and energy prices through 2007 and starting of 2008. The reality of melting ice in the Antarctica and the Swiss Alps has made consumers more conscious, and as a result greener in what they consume. A recent survey by BCG revealed that even during the downturn, consumers are less likely to give up organic food and rather cut down on other spending. The reason is also because, being ‘green’ is not the only reason consumers want to buy organic food, but it’s also considered better quality and fresh. And thus also one of those affordable luxuries that consumers don’t want so easily to let go of, even during tough times.