The Lipstick Effect- An insight into a rare economic phenomenon

There is a slowdown buzz all around the world and is visible also in India. Sectors such as automobile and real-estate are often making headlines and not for a good reason. It is only to report the falling sales figures, or slowing growth rates. In the latest quarter, non-oil, non-gold imports are down — indicating that Indians are buying less of imported goods too.

On the other hand, the movie business is doing very well. Union Minister Ravi Shankar Prasad has cited that Rs 120 crore business done by three Bollywood movies on a single day suggests the strength in the fundamentals of the Indian economy, but he was actually articulating a real economic phenomenon playing out in India currently.

It may be puzzling to see how few businesses such as Movies, and Electronics are performing so well despite the apparent slowdown in most of the other segments of economy.

It does not mean the movie industry is defying the slowdown. It’s the ‘Lipstick Effect’ at play. It was first observed during the great economic depression of 1930s. While stock markets collapsed, and consumer demand for most products plunged, marketers and economists stumbled across one interesting observation — demand for lipstick went up significantly. So, why were women scrambling to buy lipstick during a downturn?

The reason- lies in consumer behaviour. They do not have enough to spend on big-ticket luxury items during the downturns; however, most still find the cash for purchase for small luxury items, such as premium lipstick, a meal at a good restaurants, or a small electronic gadget to make themselves feel good. For this reason, companies that benefit from the lipstick effect tend to be resilient even during economic downturns.

Decoding the Lipstick Effect:

"Small joys, big appeal"

Economic situation and the behaviour of consumer under the economic situation both play a role in rolling out the lipstick effect. It is one of the reasons that fast-casual restaurants and movie complexes typically do well amid recessions. Cash-strapped consumers want to treat themselves to something that lets them to forget their financial problems. They can’t afford to escape on an expensive vacation. However, they’ll settle for a fairly cheap night out and a movie, adjusting their budget accordingly.

The lipstick effect also affects certain regions dealing with a prolonged economic contraction or austerity measures. For example, Brexit hit certain parts of the U.K. economy very hard, especially metropolitan areas in the north such as Liverpool. Some economists note a lipstick effect in parts of Britain amid the austerity, including spending on not only lipstick, but also certain wines and coffee at local bean roasteries.