Lipstick Theory

The credit crunch and the prospect of a global economic slump isn’t bad news for all companies. In fact, there’s an argument that some companies, or at least some products, can thrive.

While Leonard Lauder was chief executive of Estee Lauder, he noticed that sales of his firm’s lipsticks tended to rise during economic downturns – not what one might expect, particularly of a luxury good. The rationale is that people like to treat themselves, and when times are hard, a shopper may refrain from purchasing that pair of shoes she has had her eyes on and instead opt for a new shade of lipstick.

Some other companies that seem to be doing fairly well out of the credit crunch are McDonalds and Dominos, who have reported increased sales as people look for cheaper treats (not exactly luxury goods – perhaps more a case of comfort eating). Meanwhile Hershey on Wednesday reported the biggest jump in sales since 2006, while Cadbury’s expect higher profit margins than in H1 2007, and that’s despite a 40% jump in cocoa prices this year.

L’Oreal’s recent results were disappointing, although sales growth actually increased 3% in North America. If the theory holds, the deteriorating outlook on this side of the Atlantic should soon lead to that figure picking up.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Matthew Russell

Job Title: Fund Manager

Specialist Subjects: Corporate bonds and ABS

Likes: Travelling, gym, reading & pool parties

Heroes: John Nash, John Stuart Mill, Ari Gold

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