Is a recession imminent? Economists suggest considering women's lipstick choices.
Leonard Lauder, the former chairman of Estée Lauder, coined the term "lipstick index" during the economic slump after September 11, 2001. He observed that the sales of cosmetics, particularly lipsticks, would rise during difficult times as a replacement for more costly purchases. The concept gained traction, with lipstick sales skyrocketing by 11% in fall 2001, and overall cosmetics sales increasing by 25% during the Great Depression.
During the 2020 pandemic downturn, Estée Lauder's CEO, Fabrizio Freda, replaced the lipstick index with the "moisturizing index" as people masked up and worked from home. However, recent trends suggest a return of the lipstick index phenomenon. Sephora reported a record sales year, with prestige beauty growth even surpassing mass beauty sales, rising 9% and 2%, respectively, in the first quarter of the year.
While the lipstick index is a less scientific and more entertaining way to measure economic downturns, it's worth noting as spending begins to taper off in the US.
Before the Bell spoke with Neela Montgomery, CEO of Overeon, a collective of high-end cosmetic brands like BareMinerals, Laura Mercier, and Buxom, about the future of the beauty industry amid uncertainties in the economy.
This conversation has been edited for length and clarity.
Before the Bell: It seems that Americans are starting to curb their spending due to the current economic climate. Yet, prestige beauty sales have outpaced mass, lower-priced beauty sales. What's your take on that?
Neela Montgomery: The beauty industry shifted recently, with a more self-care-focused approach, making it more resistant to broader economic trends. It's less likely that people will cut back on beauty compared to other discretionary purchases like fashion or very high-priced products. Beauty is constantly innovating, maintaining a fast-paced, trend-driven vibe. Take, for example, BareMinerals’ Lip Gloss Balm, a small indulgence for $24. I believe this is the reason it's more resilient. It's a matter of price comparisons and how customers perceive the value of the products.
Has the industry been resilient or experienced a surge in sales?
The prestige beauty market has not only been resilient but has also thrived across all demographics, including age and income groups. Skincare used to lead the charge, but now skincare, fragrance, and makeup are experiencing a resurgence. The category is still significantly more popular than expected, considering the uncertain times we're in.
What role are social media platforms like TikTok playing in driving sales? And have you adapted to these trends?
Brands like Laura Mercier emphasize a flawless face, so popular trends like "glassy skin" might not work for us. The "latte look," on the other hand, could resonate. Currently, we're planning to launch a caviar matte lipstick. Matte lipstick has experienced a massive comeback and is also popular in Asia, a crucial part of our business.
We keep tabs on broader trends and adapt our approaches accordingly, allowing us to reach a wider audience through social platforms like TikTok. We're not quick enough to respond to every microtrend but will certainly alter our marketing strategy if it aligns with our brand ethos.
But it's not just about adapting to trends. TikTok also introduced a new sales model, social selling. Around 20% of our e-commerce sales come from social selling now, which is a significant leap in consumer engagement. The most impactful aspect of TikTok is the word-of-mouth factor. Modern brands must focus on how customers talk about their products instead of what they say about themselves.
What do you anticipate driving the beauty market in the second half of the year?
There's a resurgence of makeup and fragrance, so we anticipate these categories taking the lead. It's a testament to the consumers' willingness to spend on self-care despite the uncertain economic climate.
Clean has turned into a popular phrase in the industry, but the whole notion of no-tox (anti-botox) stays a significant factor... The market is dividing between a natural, real-looking approach and those who opt for more cosmetic work. There's a requirement for more effective products for individuals who don't want to go the cosmetic procedure or injectables path. Also, the popular style is a natural girl with a splash of color, like a red lip. We are witnessing an increase and expansion of this look.
What captivates me, though, is the growing awareness of components - whether it’s a sesame seed extract in a lip gloss or employing sea buckthorn or being educated about some of these natural ingredients that may not match the same efficacy, but possess efficacy as well compared to more prevalent options like retinol.
Recurring investigation: FTC scrutinizes Microsoft’s acquisition of AI startup
The Federal Trade Commission is currently examining Microsoft’s recent acquisition of artificial intelligence startup Inflection, according to a source familiar with the situation, as US antitrust officials increase their focus on the rapidly expanding AI sector.
Microsoft disclosed in March that it had recruited Inflection’s co-founders and several of its staff for its Copilot program. Additionally, Inflection said its AI model would be hosted on Microsoft's cloud platform. A portion of this agreement involved Microsoft paying Inflection $650 million. Initially, Microsoft branded this as only a hiring decision, not an acquisition.
The investigation initiated by the FTC revolves around whether Microsoft’s acquisition of Inflection was undisclosed, the source revealed.
These investigations are part of a larger push by antitrust officials at the FTC and the Department of Justice to regulate AI titans such as Microsoft, Google, Nvidia, OpenAI, and more. A deal is nearly complete this week where the DOJ will assume control over examining Nvidia, and the FTC will handle Microsoft and OpenAI. The DOJ is likely to maintain its authority in overseeing Google. All investigations will focus on the possibility that these companies have used their dominant status within the AI sector to hinder competition through their abusive and illegal behaviors.
Such enforcement measures revealed by the FTC and DOJ emphasize their readiness to engage in a comprehensive crackdown on the most recognized participants in the AI industry, said Sarah Myers West, managing director of the AI Now Institute and a prior advisor to the FTC.
"Approval processes similar to this typically mark the start of an investigation," West said. "This is certainly a sign that they're moving quickly here."
Microsoft opted out of commenting on the DOJ-FTC arrangement but had a statement regarding its relationship with Inflection.
For more details, please refer to CNN's Brian Fung's report here.
Coming attractions
Monday: The United States Department of the Treasury holds auctions for 3-year notes.
Tuesday: The Organization of the Petroleum Exporting Countries (OPEC) Monthly Oil Market Report gets released.
Wednesday: The Federal Reserve makes public its latest interest rate decision while divulging the latest set of economic projections, which is set to be followed by a news conference with Jerome Powell. Furthermore, the US Bureau of Labor Statistics will share May’s Consumer Price Index.
Thursday: Earnings from Signet Jewelers. The US Bureau of Labor Statistics issues the Producer Price Index for May.
Friday: The Federal Reserve Board releases written reports to Congress on "the conduct of monetary policy and economic developments and prospects for the future."
Read also:
In light of the economic downturn, Estée Lauder's CEO, Fabrizio Freda, shifted the focus from the "lipstick index" to the "moisturizing index," recognizing the demand for skincare and beauty products even during challenging times. Investors looking for business opportunities in this sector might consider targeting prestige beauty brands that prioritize innovation, trend-consciousness, and value-driven pricing strategies.
Given the US antitrust officials' increasing scrutiny of AI acquisitions, businesses involved in artificial intelligence should carefully evaluate and disclose mergers and acquisitions to avoid potential investigations from regulatory bodies such as the FTC. Investors should monitor developments in the AI industry and stay updated on any regulatory measures to ensure sustainable growth in their investment portfolios.
