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'Lipstick Effect' puts gloss on cosmetics sales

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In hard times, customers forgo big luxury items but spoil themselves with small pleasures. Hard-pressed consumers seeking small pleasures are lifting cosmetic sales even though they are skimping elsewhere, but not all beauty product retailers are hitting the right note with customers.

"Makeup always does well in difficult times. Customers like to spoil themselves and even a great lipstick or trending nail polish colour does wonders to boost and uplift any consumer," an Edcon spokesman said this week.

According to the theory of the "Lipstick Effect" - a term coined by Estée Lauder chairman Leonard Lauder - consumers are likely to cut back spending on more expensive luxury goods during tough economic times, but buy smaller items such as lipstick, which is viewed as an affordable luxury.

Stefan Salzer, a partner and MD at the Boston Consulting Group, said most retailers had expanded into cosmetics to improve their sales performance.

"If you think about the operational part of it, it's a difficult portfolio to manage; you have very small, high-value items, so you have supply chain issues.

"It's not easy to get in and get it right, so if you are a pure apparel retailer, it's a tough extension to build, because what you also don't want to do in a tough trading environment is take the energy and the focus off the core of your apparel business.

"But if your core clothing offer is not competitive and if you stray away too far from your core, all that happens is that you really become bad in your core," said Salzer.

Even when consumers are buying little luxuries, they are still looking for good deals.

In Edcon's latest trading update, for the 52 weeks ended March 2016, cash sales increased 8.2%, driven in part by the performance of cosmetics.

The ailing retailer, which was recently bought out in a debt-to-equity swap deal valued at $1.5-billion (about R21-billion), suffered another blow, in its apparel division, as sales slumped.

Some analysts have suggested that to boost growth, nonperforming stores, such as CNA and Red Square, should be closed down.

But Edcon remains confident about the growth of Red Square stores, with a spokesman saying: "We are always looking for opportunities to drive sales, and strategic alignment of stores always forms part of that drive for momentum.

"Internationally, the key cosmetic houses have posted lower results than in past years, so we anticipate mid-single-digit growth on comparable businesses. However, there is still opportunity in South Africa for key international brands that have not yet reached our shores," the Edcon spokesman said.

Red Square, which has 47 stand-alone stores, stocks mostly higher-end cosmetics brands, such as Dolce & Gabbana and Narciso Rodriguez.

Discount competitors such as Clicks offer a wider range of products and prices, which could account for its recent strong sales growth.

Last month, CEO David Kneale said health and beauty were resilient markets and Clicks had a resilient business model, "so for us, we'll do what we've been doing. It's a tough environment but we'll trade our way through it."

Clicks owns beauty and cosmetics brand The Body Shop and has a number of brands under its Clicks banner. It reported 13.5% growth in the beauty and cosmetics divisions, which includes sales from GNC and Claire's.

Overall, the cosmetics market is looking robust relative to the anaemic sales growth seen in other categories.

According to StatsSA, sales of pharmaceutical and medical goods, cosmetics and toiletries rose 6.6% in August compared to a year prior.

Overall retail trade sales increased marginally, growing 0.2% year on year in August, following a revised 1.2% gain in July.

A report by global research firm Euromonitor on beauty and personal healthcare said many households had struggled financially in 2015 and sought to economise in beauty and personal-care products.

"This resulted in a shift towards larger pack sizes in many areas, while products that are viewed as nonessential saw retail volume sales decline, such as toners and after-sun," the report said. "There was also a tendency to shift to lower-priced options in some areas, with some consumers for example switching from shampoos to washing hair with bar soap in order to save money."

Kneale said cosmetic sales were likely to continue their momentum because, "in a tough economic climate, you may not choose to buy the new dress but you will still buy the lipstick".

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