When we talk about an Economy as a whole, we tend to talk about macro indicators. Terms like GDP, inflation and investments are used extensively to define macroeconomic concepts. Such indicators also help in predicting adverse shocks to a market and safeguarding its players. Just like in Perfect Competition, where the actions of a single player are too trivial to affect the economy, the buying and selling of low-value consumer goods are not as important as capital goods of high value. But one should not fail to notice the consumer patterns which result in major shifts in the market, that too in an integrated economy like of the 21st century. One such modern indicator which looks trivial by the name of it is the Lipstick Index. Yes, you read that right. In an economy, something as insignificant as the sale of lipsticks can help in generalizing consumer behaviour and protecting against risks during the times of uncertainty. Let’s dive deeper and understand what really is the Lipstick Index and how relevant it is in today’s economy, especially with the ongoing Covid-19 pandemic.
The Lipstick Index is an economic indicator which tells us that when consumers are uncertain about the future, they tend to indulge in small-ticket purchases such as lipsticks. If there is recession looming ahead, they would choose to substitute expensive purchases with low-cost expenses. The logic here seems sound – people would choose to spend less when the economy is down or when they do not feel confident about their currency. But the Lipstick Index does not talk about necessities in particular. It talks about the decreased spending on expensive luxuries such as clothing and substituting those purchases with economic choices. People would want to spend their money on affordable luxuries. Though, the transaction might not be as satisfactory but the elation derived from such small indulgences might give them some relief.
The term Lipstick Index was coined in 2001, by the then chairman of Estée Lauder – Leonard Lauder. After the terrorist attacks of September in the USA, a recession followed. But instead of decreasing, the cosmetic sales of the company, especially lipsticks, went up. In fact, they doubled in the months to follow. To prove it further, research cited that cosmetic sales increased by 25% during the Great Depression. Hence, the Lipstick Indicator was taken as a reliable metric during straining economic times.
In India too, the Lipstick Index proved its relevance last year. When the country was experiencing a major growth slowdown, companies like Lakme and L’Oreal reported large sales of color cosmetics. While the consumers put off spending on high cost capital goods like cars, they were not as reluctant to spend on small bargains. Though, many attributed this rise of double digits to the increasing millennial awareness about makeup products in which social media was a major catalyst.
Likewise, the Lipstick Index has received a number of backlashes over the years. Nowadays, it is not always considered a reliable metric to predict a recession. Moreover, it is hard to pinpoint and analyze the sales of lipsticks alone. Hence, little evidence can be collected to back up the phenomenon.
In fact, in some instances, the lipstick sales have decreased during a recession – which further proves that there isn’t clear correlation. Since the theory is hard to validate, it has been criticized for its viability in the last decade.
Even back in the 1920s, George Taylor came up with the Hemline Index indicating that women wore shorter skirts during bullish times. Further studies too showed that when the sales of longer skirts increased, the market would take a downturn. Nonetheless, with increasing complexities in the market and the ever-changing fashion statements, it too became obsolete.
Besides, in the wake of a pandemic that has engulfed 2020, the relevance of all such indicators is being questioned more than ever. With the fall in consumption levels all over the world and the uncertain times ahead us, it is hard to ascertain consumer behaviour. The advent of social distancing and quarantining oneself has pushed down the need for cosmetics. The compulsion to wear a mask while going out defeats the purpose of wearing lipstick. Therefore, spending the already meager savings on products that won’t be of much use in the near future would be unwise.
Several other indexes have tried to replace the theory of Lipstick Index over the years. The Nail Polish Index is one such example. It is considered to be more practical in the current decade. Similar trends like that of the lipstick sales were witnessed when close attention was paid to nail polishes.
In the April of 2020 too, when most of the nations were cloaked with a lockdown, the sales of Nail Polishes skyrocketed. Companies now are doubtful whether it is time to bid adieu to the Lipstick Index and welcome the predictions on the basis of the Nail Polish Index. Even better, since the eyes are prominently visible while wearing a mask, a Kajal Index is in talks as well!
Author: Yukta Sharma
Yukta is an Economics enthusiast and is pursuing a degree in Management Studies. She has grown up surrounded with books and tries to incorporate a creative style to her writing as well.