The "lipstick index" is back, and this time it's gone upmarket. The term was coined by Leonard Lauder -- then-chairman of Estee Lauder -- during the 2001 recession. He noted that in the autumn of that year lipstick sales rose, indicating that women facing an uncertain environment turn to beauty products as an affordable indulgence while they cut back on more-expensive items. The thesis has recently taken on a high-end twist. Consumers may be thinking twice about buying a Louis Vuitton handbag, but they are happy to snap up Christian Dior cosmetics.
Growth in the market for luxury goods such as watches, clothes and accessories is slowing, while the premium beauty and personal care market -- which includes upscale makeup, skincare, haircare and fragrance -- is gaining ground.
Premium products were the fastest growing category at L'Oreal -- the global makeup leader -- in its first quarter, while underlying sales growth at Estee Lauder, which leads in the luxury segment, has recently outpaced mass-market brands.
It is a similar picture in fragrance, where premium perfumes are growing at a faster rate than mass and celebrity brands. Givaudan, a maker of ingredients used in beauty products, reported 10.1 percent organic growth in its fine fragrance division, its fastest rate of expansion for two years.
The shift is due to a confluence of factors. The downside for luxury groups' staple products stems from a more-restrained Chinese consumer and most recently a slowdown in U.S. demand. The upside for luxury beauty -- which is stealing customers from mass-market brands -- is being driven by its focus on product innovation and demand from the selfie generation.
The retail landscape has shifted, and there are few fashion trends in apparel that are strong enough to drive women to buy new clothes. The last big thing was skinny jeans, and that was about a decade ago.
It's the opposite with beauty, where technological innovation stokes the creation of must-have products such as makeup contouring kits. That is driving women to spend their money on makeup, possibly at the expense of clothing, where, as Gadfly has noted, volumes are flatlining at best.
The sector is all being oiled by the worlds of Instagram and beauty vlogging that are dominated by millennial shoppers. The innovation starts at pricier lines, and a better-looking selfie can't wait until advances trickle down to cheaper brands.
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More luxury groups are waking up to the lure of lipstick, with Gucci, shoe designer Christian Louboutin and Burberry all recent entrants to the market. The hope is that their beauty products will build awareness and encourage loyalty that will eventually transfer to costlier products such as handbags.
Yet the lipstick index is also a worrying sign. If even the rich are worried enough about the outlook to make trade offs, that doesn't bode well for a quick recovery in their core, higher-margin lines, such as leather goods.
The forward price-earnings ratio of Bloomberg Intelligence's luxury goods index has lost ground over the past year, and it's not clear if the global trends that are dragging it down will quickly turn around.
In the meantime, beauty products are a good defense.
So perhaps LVMH, which now trades in line with the BI luxury index, should be doing a bit better with investors -- it has a sizeable fragrance and beauty arm, which generated 14.1 percent of total sales in the first quarter. It also owns the fast-growing Sephora beauty retail chain which could generate about 18 percent of group revenue this year, according to Exane BNP Paribas.
Hermes could do worse than expanding on its success with its perfumes business, which accounted for 5 percent of sales in the first quarter. After all, it surprised the market with its venture into the wearables with the Hermes Apple watch.
Leonard Lauder was right: when times get tough, reach for lipstick.
To contact the author of this story: Andrea Felsted in London at firstname.lastname@example.org