In today’s Finshots, we see what lipsticks and fast cars tell us about the economy.

The Story

There’s a lot of gloom and doom surrounding the economy right now. Food inflation is expected to soar to 9% during the next few months. Fuel prices continue to burn a hole in your pocket and FICCI (Federation of Indian Chambers of Commerce and Industry) has cut its forecast for India’s GDP growth from 7.4% to 7% this year laying the blame squarely on geopolitical uncertainty.

But despite these ominous signs, a couple of industries are bucking the trend. So we thought we would take a look at these sectors and see what they’re actually telling us about the economy.

Let’s start with “lipsticks” or the beauty segment.

A few days ago, Nykaa, one of India’s prominent e-commerce players, noted that everything was fine and dandy in the beauty and makeup segment. As the company's beauty e-commerce CEO pointed out, “…beauty as a category is a small luxury. If you are sacrificing some of your large luxuries like maybe you’re putting off buying a car, handbag but beauty is part of your everyday routine it’s essential to your lifestyle.”

And he makes a good point. Even during an impending recession, you need to hold on to something to keep yourself from feeling low and despondent. And for a lot of people, it’s self-care that fits the bill. It helps maintain sanity!

And it isn’t the first time somebody is pointing this out. Back in the early 2000s, the US economy began crumbling after the dot com bubble popped in a rather spectacular fashion. Stock prices crashed and the country ran into a recession soon after. And Estee Lauder, a popular cosmetics brand in the US, observed an unusual rise in lipstick sales. Why lipsticks in particular? Well, as we said, people still wanted to look and feel good. And lipsticks were cheaper than many other beauty and fashion products. It was an affordable luxury. So that’s what women turned to and the phenomenon came to be known as the lipstick effect.

The same story played out during the pandemic. Revenues of Nykaa, MyGlamm, and the beauty and personal care divisions of companies like HUL soared. The feel-good factor of small indulgence worked its magic.

But what does this tell about the economy?

Well, despite the positive undertone, it’s still not a great look for the economy. For instance, one paper offers conclusive evidence to show that sales of cosmetic products skyrocket due to substitution. And in the case we outlined earlier, women substitute lipsticks for clothes and makeup for cars (as Nykaa’s CEO pointed out).

So if people substitute the more expensive products for something more affordable, is it safe to say that luxury products will be the worst hit?

Well, the trends are very interesting once again. Take Mercedes Benz India for instance. Contrary to popular notion, it’s having a phenomenal year so far. The company just recorded its highest ever second-quarter sales and they’re banking on the order backlog to boost sales even further. If things go well, this could be the luxury car maker’s best year ever in India.

Meanwhile, over in the fast lane, Lamborghini has the pedal to the metal. The sports car maker registered an 86% growth in India last year. And they seem quite confident that 2022 could also be their best year ever in the country.

All in all, in the last six months, luxury car makers have sold 55% more cars compared to the last year. So what explains this anomaly?

Well, one explanation is that a slowdown doesn’t necessarily affect the richest people in the country. And as a consequence, luxury car makers don’t feel the pinch as much. In fact, in one famous instance, the former Louis Vuitton Chairman and CEO, Yves Carcelle, stated, “[Louis Vuitton] doesn’t see any signs of slowing down whether it’s in Europe or in America. The world of luxury doesn’t obey the same rule.” By the way, he made this statement in 2011 when the world was reeling from the after-effects of the global financial crisis. So maybe, just maybe, luxury products are immune from any recessionary variables.

Another explanation is that these results are bunkum. We are not experiencing a recession right now and while growth is likely to moderate in the coming months, its effect hasn’t been as pronounced — especially in the luxury car market. In fact, there’s considerable evidence to suggest that an actual recession may have a detrimental impact on the luxury market as a whole. People become sceptical of flaunting their wealth when their neighbours struggle to nick a living. For instance, during the Great Depression, it was taboo to drive luxury cars. Some people even deliberately damaged their vehicles in a bid to remain non-conspicuous (invisible).

So yeah, even in a downturn, there will always be sectors that buck the trend. However, if you’re looking at these industries and making broad-based conclusions about the economy, then maybe that’s not the best way to go about business.

Until then…

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