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Sunday, April 11, 2021

Will the COVID-19 pandemic give way to the ‘Lipstick Effect’ in India?

Despite the Indian economy being in a major slump even before the COVID-19 pandemic hit, analysts and economists have been quite hopeful in terms of small-scale consumption or reasonably priced indulgences. The Nifty Consumption index recently, a gauge of consumption-driven stocks on the National Stock Exchange (NSE) has rallied 42 per cent since March 23 when the market hit their recent low as compared to 51 per cent rise in the Nifty 50. This portrays an important point that even after the economic slowdown, the pandemic, all stocks that comprise the Nifty Consumption index have given a more or less positive return since then. From all of this what analysts and experts have drawn is that there might be a ‘Lipstick Effect’ in India soon given the current scenario. This is the reason why lipstick cannot be dismissed as a trivial or less important good, but actually an integral parameter which can show us how the consumers will spend when the economy is severely affected.

The pertinent question, however, that we ask now is will the Coronavirus pandemic, which has led to unending job losses and a drastically bruised economy, give way to ‘The Lipstick Effect’ in India?

What is the ‘Lipstick Effect’?

According to the definition on Wikipedia, “The lipstick effect is the theory that when facing economic crisis consumers will be more willing to buy less costly luxury goods. Instead of buying expensive fur coats, for example, people will buy expensive lipstick. The underlying assumption is that consumers will buy luxury goods even if there is a crisis. When consumer trust in the economy is dwindling, consumers will buy goods that have less impact on their available funds. Outside the cosmetics market, consumers could be tempted by expensive beer or smaller, less costly gadgets.” Thus, basically the point here is that when there is an economic crisis along with job losses and people with less to no cash in hand, consumers will tend to spend on cheaper/less expensive items rather than spending everything on a big-ticket retail purchase. At this point, in the Indian economy, this phenomenon might seem quite likely given the cash crunch amid consumers.

So, how did the ‘Lipstick Effect’ actually come about? It can’t just be purchasing lipsticks or is it? After the 9/11 attacks in the US, it was being circulated that lipstick sales had doubled. In a New York Times article published May 1, 2008, Leonard Lauder, the chairman of make-up company Estée Lauder is quoted as saying that he noted his company’s sales of lipstick rose after the terrorist attacks. However, he did not claim they became two times more. Juliet Shor in her book The Over Spent American talks to consumer’s purchase of higher-priced, more prestigious lipsticks, specifically Chanel, that are used in public, vs lower-priced, less prestigious brands that are used in the privacy of the bathroom. As a result of all these events, the ‘Lipstick Effect’ came into being.

In a recent study by four university researchers, the lipstick effect is also attributed to evolutionary psychology: “This effect is driven by women’s desire to attract mates with resources and depends on the perceived mate attraction function served by these products. In addition to showing how and why economic recessions influence women’s desire for beauty products, this research provides novel insights into women’s mating psychology, consumer behaviour, and the relationship between the two. Although the lipstick effect has garnered some anecdotal lore, the present research suggests that women’s spending on beauty products may be the third indicator of economic recessions — an indicator that may be rooted in our ancestral psychology.”

 

How does lipstick tell us about the economy?

Have we ever thought of lipstick as an economic parameter or something that could help in such a drastic manner? What consumers in this scenario typically would do is buy such smaller goods in substitute of big-ticket items that they are unable to buy during an economic downturn. The lipstick or small ticket items is what can be used to explain the psychology of consumers. For example, someone who wants a coffee and can just spend Rs 10 to get it from a vending machine, instead they indulge in a coffee latte from an uptown cafe or even indulging/splurging in a branded clothing apparel rather than something that is available at a much lower cost are also part of the ‘Lipstick Effect’ where the idea is to splurge in small acts of purchases that merely gives you a feeling of goodness in life.

The most interesting aspect of the effect is that even during an economic slump, people tend to trust in their age-old brands that they have been buying throughout. For example, ice-cream will still sell but whether people will choose Amul or switch a more localised brand is an important question. But given the trust in brands, people will treasure their trustworthy brands more in such times of crisis. What these brands need to keep in mind that they should be careful in maintaining their image and be all the more visible during bad economic instances. The brands that are already aware of these strategies will use them to their advantage and invest more in their customers, their advertising and make themselves even more lovable in order to sustain the already existing consumers and attract numerous others.

“We cannot paint the entire sector and the consumption pattern with the same brush. People will avoid lumpy/big-ticket investment and will focus on smaller items even if they are a bit indulgent – a classic ‘lipstick effect.’ Fast-moving consumer goods (FMCG) stocks will continue to do well as the demand is more or less intact. Investors should look for demand continuity, valuation of consumption stocks and balance-sheet strength of the companies before investing in consumption-driven stocks now,” suggests G Chokkalingam, founder and chief investment officer at Equinomics Research.

 

The other theory of pent-up demand

There is another theory of the pent-up demand, which is also a possibility that has been driving the stocks. “There are three types of demand trends working in tandem right now – normal demand, pent-up demand and inventory build-up. In automobiles, we saw a case of pent-up demand. In April and May 2020, nobody bought anything due to the lockdown. That said, personal mobility is a big thing now. One must also realise that India is an economy built on the consumption of ‘essentials’ and not ‘discretionary’ items. Once the demand is back fully, the market and economic recovery will be fantastic,” states Raamdeo Agrawal, co-founder and joint managing director, Motilal Oswal Financial Services.

Despite all the theories, the lipstick effect could prove to be beneficial for the economy. It might be the positivity we need right now to get us out of this crisis.

 

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