Seeing red

A new car? Sorry, too expensive. New furniture, perhaps? Not really — we can hardly afford to hang on to the house. Well, how about a new lipstick? Hey, now you’re talking!

In difficult financial situations, people avoid spending money on expensive items such as cars or furniture. But many of them still go shopping to cheer themselves up. Instead of buying cars or carpets, they turn to cosmetics, a phenomenon that is known as the “lipstick effect”.

London financial analyst Dhaval Joshi of RAB Capital says that consumers all over the world are spending more on cosmetics while cutting spending on almost everything else. “The evidence shows that when budgets are squeezed, people simply substitute large extravagances for small luxuries,” Joshi told The Guardian.

"When budgets are squeezed, people buy small luxuries," says financial analyst Dhaval Joshi.

The lipstick effect was first noticed in the US during the Great Depression of the 1930s. From 1929 to 1933, industrial production dropped by 50 per cent, but sales of cosmetics rose. During the recessions of 1990 and 2001, sales of cosmetics went up in the US, while jobs in other manufacturing sectors were lost. In Japan, clothing sales have fallen by 25 per cent since 1997, but sales of accessories are up by 10 per cent.

Joshi says that, in Europe, personal care products are outperforming the rest of the stock market. “The European personal products index is an excellent proxy for the global cosmetics sector because it is dominated by L’Oréal and Beiersdorf ,” he says. “So far in the downturn, this index has already outperformed the broader market by 45 per cent.”