New data suggests the “lipstick effect” has lost its luster. Consumers have been known to spend money on small indulgences during recessions, economic downturns, or personal financial hardship. When they don’t have the cash to spend on a vacation or costly designer goods, they invest in little luxuries, like premium lipstick. The lipstick effect is an established economic indicator for consumer confidence in the markets, but recent evidence tells a different story.
Unilever Group, the global company responsible for brands like K18, Dove, Paula’s Choice, and more, reported a turnover of €31.1 billion for the first half of the year, marking a 2.3% increase compared to the previous year. Unilever’s Beauty & Wellbeing division reported a sales growth of 7.1% and volume growth of 5.5%. Executives referenced a slowdown in the US beauty markets in their comments on the first-half results, with the prestige beauty category being the most affected.
LVMH fell short of analyst estimates for the first half of 2024 despite strong growth from Sephora, highlighting a slowdown in the luxury sector. Net profits fell by 14%, with organic revenue growth of just 1% in the second quarter. In the earnings call, LVMH CFO Jean-Jacques Guiony acknowledged that this shift wasn’t something that the brand saw coming. The first-half results forced the brand to moderate its expectations for the rest of 2024.
“It’s quite complicated and difficult to anticipate what will happen in the second half of the year,” says Guiony. “We have no reason to be pessimistic, but being optimistic would be quite bull at this point in time.”
L’Oréal also missed expectations, reporting a 5.3% increase in second-quarter sales. Dermatological beauty brands, including CeraVe and La Roche-Posay, outperformed other beauty categories, with sales up 10.8% like-for-like, but still falling short of the expected 17.4%. In May, The Estée Lauder Companies Inc. reported Q3 fiscal 2024 net sales of $3.94 billion, a 5% increase year over year. Nine-month sales for fiscal 2024 totaled $11.74 billion, a 5% decrease year over year.
“With our third quarter results and fourth quarter outlook, we are confident that the second half of fiscal 2024 will prove to be an inflection point for our company performance," says Fabrizio Freda, president and CEO of The Estée Lauder Companies Inc.
Circana data for Q1 pointed to a category slowdown after a prolonged period of growth. According to Circana, US prestige beauty industry saw revenue grow 9% in the first quarter, compared to the same period in 2023, while mass-market beauty sales increased just 2% year over year.
“The beauty industry has had unprecedented double-digit growth year-over-year-over-year, especially in prestige,” said Larissa Jensen, Global Beauty Industry Advisor at Circana. “The expectation has always been that at some point, the industry performance would soften. That’s what’s happening.”
Makeup is still prestige beauty's largest category and grew by 5%, while the category at mass saw a 5% decline. Prestige hair saw 11% growth, while the mass market saw just 1% growth. The fragrance category grew 13% in prestige and dipped 2% in mass.
“The slowdown in growth that we are seeing in the beauty industry is a reflection of an industry stabilizing after strong double-digit performance for the past two years,” said Jensen. “But we should not underestimate its strength, as sales grew by over $600 million in Q1. There is a lot of excitement in beauty, from trending brands and new product launches to growing engagement from younger consumers.
The prestige category is a bright spot in an otherwise decelerating market. The "premiumization" trend in beauty and fragrance is expected to be a buoy for the beauty industry in the coming years. McKinsey & Company anticipates the prestige beauty category will grow 8% per year between 2022 and 2027, versus a 5% growth rate for mass beauty. In an earnings call held in April, Ulta Beauty CEO Dave Kimbell noted “a slowdown in the total category" and said the company plans to focus on this segment throughout the rest of the year.
"We have, on the prestige side, 1,000 new points of distribution in prestige area that is having some impact on our business," says Kimbell. "But we're confident in our ability to go through. Our intent, of course, over time is to gain share in every part of our business."
While it's too soon to tell if this slowdown is a harbinger of worse to come, concerns about inflation and the high cost of living are undoubtedly impacting the beauty industry, affecting trends, consumer behavior, and channel distribution. On a recent episode of the The McKinsey Podcast, Sajal Kohli spoke at length about some of the large-scale shifts happening in the global consumer landscape and emphasized the importance of brands staying nimble in the face of uncertainty.
"Consumers are continuing to defy expectations and behaving in atypical ways," he says. "It’s keeping consumer goods companies, retailers, and consumer-facing businesses on their toes."
