The economic downturn is going to result in long-term category growth for the beauty industry
If you're like me, all you hear is the doom and gloom about the state of the economy. Yes, it sucks. Yes, we all wish it hadn't happened on our watch or in our lifetime. But it did -- and I believe it will benefit the beauty industry.
When we look at our country's economic performance, the bulk of the burden falls on the U.S. consumer. In 2007 consumer spending as a percentage of total GDP had ballooned to 70%. That wasn't always the case. In 1977 consumer spending as a percentage of total GDP was only 63%; in 1987 it was 65%; and in 1997 it was 67%.
So how were consumers able to do this? The bulk of it came from consumers reducing the amount they save and increasing the amount they owe. Consumption since 1987 is up 213% but disposable income is only up 194% and personal savings is down 76%. The charts below show how consumption and savings as a percentage of disposable income have trended over the last 40 years.
This addiction to debt was a fundamental shift in U.S. consumer behavior that began with the proliferation of credit cards in the mid '80s and continued with inexpensive loans in the '90s and into the new century. This shift resulted in a consumer spending bubble that continued to expand over the last 20 years until it popped in 2008. That is now causing another fundamental shift in U.S. consumer behavior where saving is cool again and the resistance to buying the latest gadget feels good. This is evidenced by the consumption and savings habits we see emerging in 2008.
So how is all of this going to help the beauty industry? The answer is in the details; where has all the increased consumption gone? The majority of the increased spending over the last 20 years can be attributed to just a few of the more than 100 consumer expenditures the government tracks. The table below lists those top consumer expenditures and where beauty falls.
Disposable income and consumption in many other categories far outpaced beauty, which makes up such a small portion of the total consumption of consumers. This means that as consumers spend less and save more, the consumption decrease will come from other discretionary expenditures such as dining out, furniture and household equipment, recreation, clothing and shoes, recreational motor vehicles, and electronics and computers.
Our users are telling us that they will give up eating out, going out to the movies, new clothes, etc., but they will not give up their beauty products. We will most likely see some trading down and performing of certain services at home versus at the salon. Consumers who typically buy prestige will dip into mass. Consumers who typically buy mass will dip into store brands.
But not only will beauty consumption not decrease; it will actually increase in the long run. Our users are telling us they plan on "rewarding [themselves] with a new shade of lipstick or eye shadow" since they aren't spending a lot on vacations, eating out or gadgets.
As the Oracle of Omaha (aka Warren Buffet) said, "You only find out who is swimming naked when the tide goes out." Well, the U.S. consumer has been swimming naked for years -- and the tide is now out. We will see consumers getting back to basics and striking a healthy balance between savings and consumption. And beauty is not only a basic need, but also an inexpensive treat once in a while.
- Emrah Kovacoglu, Founder and CEO, Total Beauty Media, Inc.
