The current economic slowdown affected many industries heavily. However, certain industries stand strong despite the challenging landscape. While numerous sectors experienced lowered revenue projections, the beauty industry thrives and seems recession-proof.
his phenomenon relates to the lipstick index.The concept of the lipstick index was introduced by Leonard Lauderand in the early 2000s.
We aim to understand its significance in the current economic climate of 2023. Explore how recession-proof investments, such as those in the beauty industry, defy the odds and maintain their growth even in uncertain times.
What is the lipstick index?
The lipstick index refers to the trend of increased sales of beauty products, particularly lipstick, during economic downturns. The lipstick index has been studied for many years and has even been used to predict economic trends. The theory behind the index is that during difficult times, consumers are more likely to spend money on small indulgences, such as a new lipstick, rather than on more expensive luxury items like cars or vacations.
As a result, the beauty industry is more recession-resistant than other industries, as people continue to purchase these small indulgences even when tightening their belts in other areas.
Although it is an interesting theory, there is not always a correlation between lipstick sales and the economy’s health. However, it can help us better understand customer behavior and motivations during economic downturns.
Beauty industry trends
In the United States, sales of beauty products in the mass market, typically sold in drugstores and grocery stores, amounted to $30 billion in the previous year. This is a solid increase of 4% from 2021. Meanwhile, prestige beauty brands recorded nearly the same amount, with $27 billion in sales and a significant year-over-year growth of 15%.
The beauty industry continues to grow, and there is no stopping. LVMH, the company that owns popular brands like Sephora, saw a substantial 11% increase in perfume and cosmetics sales during the first quarter of the year. Based on these figures, people are still buying and enjoying beauty products, especially luxury products where the customers are not price-sensitive.
According to Statista’s data, the beauty and personal care market is expected to grow annually by 2.60%. At the same time, Statista predicts that 36.6% of total revenue will be generated through online sales by 2023. Therefore, the industry shows promising signs and suggests that it will continue to grow in the coming years.
Making money in an economic slowdown
There are three ways how you can take advantage of this trend.
Broadening your investment portfolio
The most straightforward way to make money on these trends is to invest in well-known beauty brands. Nowadays, beauty companies receive minor attention from the media and may be overlooked by investors. However, the beauty industry can provide a unique opportunity for investors to invest in a mature industry still experiencing solid growth.
At the same time, there is a possibility of receiving a solid dividend income. Considering the current market risk on financial markets, high-interest rates, and the continuous layoffs at tech companies, the beauty industry seems like a good alternative.
Professionals recommend companies focusing on sustainability and organic ingredients. Statistics show that more than 65% of consumers are looking for environmentally-friendly brands, and 55% are willing to pay more for sustainable products.
But keep in mind that while customers pay attention to sustainability efforts, the same research shows that 72% of the same shoppers are skeptical and think companies are overstating their sustainability efforts.
As a result, finding the right company that is in line with its promises can be a tough challenge.
Industry professionals frequently recommend Ulta Beauty, which does well during high inflation and recession fears. The company increased its revenue by 18% in 2022 compared to the previous year, and its gross margin also increased from 39% to 40%. On the other side, Ulta has a trailing P/E of almost 22, significantly higher than the S&P 500’s long-term average of approximately 15 to 16. This suggests Ulta is being valued more than the broader market.
However, some investors may argue that Ulta is a growth stock and justifies its higher valuation. It is worth looking at the growing companies in the beauty industry, as it can prove to be an exciting investment opportunity.
Using social media to boost sales
Social media purchases are most popular among consumers aged 18 to 44, and beauty products rank high on their list of preferred items. According to experts, almost 50% of social media users are expected to make at least one purchase on a social platform this year.
This means that many people are using social media not just only for browsing but buying products and services. As a result, this trend can offer a valuable opportunity to reach new customers and drive sales.
I recently published an article on social media trends and how the user base evolves. It is really fascinating to see that the #beauty hashtag on TikTok has gained an enormous 175 billion views. So, TikTok become a significant driver of beauty product purchases. 89% of users said they bought beauty products after seeing them on TikTok.
This gives us a great example of how social media platforms like TikTok can influence consumer behavior and highlights the potential of influencer marketing for beauty businesses.
While there is massive competition for views on social media regarding beauty products, this industry is not for everyone. But considering the current trends, it is safe to say that there is a high business potential if you can stand out.
Starting a beauty brand
The economic downturn affects the customer’s wallets, but investors are still bullish about the resilience of specific services. There is an increasing focus on accessible beauty services such as Botox and bikini waxes, as these businesses offer easy scalability.
In parallel with this trend, Gen Z and millennials spend more time and money on beauty services than previous generations. These generations actively use social media, which offers a cost-effective way for businesses to market their services and reach a wider audience.
With the beauty industry currently enjoying favorable market conditions and investor attitudes, starting or expanding a beauty business now could be a promising option if you are familiar with the industry.
Financial markets in 2023
Considering the current economic slowdown and the fact that technology companies are attracting az investors’ attention, it is worth looking at the other options on the market.
There are no such 100% recession-proof businesses, but in times of economic downturn, the best thing you can do is diversify your investment portfolio.