With Recessions Looming, Cosmetics Are a Safe Haven

2008-04-15 | 05:48

With Recessions Looming, Cosmetics Are a Safe Haven

The U.S. is in a recession, housing prices in Europe are slumping and stock markets in emerging markets are getting battered. And that’s all good news for cosmetics companies.

Yup, more than a decade ago, Estée Lauder Chairman Leonard Lauder noticed a link between economic downturns and upticks in lipstick sales as consumers turn their noses at big-ticket items in favor of more economical indulgences like fine fragrances and color cosmetics.

While history seems to be on the industry side, just to be safe, cosmetics companies are rolling out new products and inking new deals with other retail channels.

Avon, for example, has signed deals with clothing design company Marimekko for a new colors cosmetic collection; with fashion label Emanuel Ungaro Maison for two new fragrances; and actor Patrick Dempsey to create another fragrance.

Meanwhile Estée Lauder said last month it would launch a new beauty brand exclusively for IAC/InterActiveCorp's HSN home shopping network and HSN.com.

"With the absence of overhead costs associated with department stores, home shopping is one of the most profitable distribution channels for beauty brands," observed financial analyst Wendy Nicholson of Citi Investment Research.

Estée Lauder's deal with HSN is perfect timing. According to a Piper Jaffray survey, customers are now more inclined to buy cosmetics and other related products at discount shops and drug and specialty stores rather than traditional department stores.

"Shoppers are more willing to buy through different channels," said Michelle Chang, an equity analyst with Morningstar Inc.

While other industry sectors suffer, cosmetics companies are making gains. For example, Revlon narrowed its first quarter losses, Estée Lauder reported a gain in second quarter earnings and Avon managed better-than-expected first quarter results.

Even Wall Street recognizes the resilience of the cosmetic industry. Estée Lauder's stock has climbed nearly 23% since hitting a 12-month low in January, while Avon's stock is up about 26% since reaching a 52-week low in September, according to the Associated Press.