CVS and the "Lipstick Index"

CVS is taking the bold step of going upscale in the midst of a recession. According to this article, they have been trying for years to get prestige cosmetics and fragrance brands to sell through CVS, but were unsuccessful. Their solution is to open boutiques in the 2500-4000 square foot range, connected to but clearly separate from adjoining CVS stores. At present two are open, fifty are planned for 2009, with the possibility of up to 500 eventually (and talk of being a billion-dollar business).

According to Bloom, CVS shoppers had for years expressed a desire to purchase high-end cosmetics and skin-care products in a convenient location with great service. CVS certainly had enough convenient locations—60% of the female population in the U.S. lives within five miles of one of its 6,800 stores. The key was convincing the top brands to work with CVS. "Health and beauty is important to us, but suppliers have refused to sell us whole classes of products," says CVS CFO David Rickard.

Bloom enticed vendors with a retail environment that looks nothing like a CVS drugstore—white tiled floors, brushed-metal walls, and sea-foam color accents. (The stores measure between 2,500 and 4,000 square feet and are connected to adjacent CVS stores via a breezeway.)

In the course of the video interview attached to the article, a CVS exec refers to the "Lauder Lipstick Index" as part of the justification for the new stores. I had heard the term a couple times recently, but wasn't clear just what it was, so I did a bit of research: It's an idea, proposed by Leonard Lauder, head of the Estee Lauder company, in 2002, that consumers will cut back on big-ticket items in a recession, but will compensate by splurging on a few small "affordable luxuries". Thus a woman might make herself feel better about canceling a proposed winter holiday by buying an upscale lipstick from Estee Lauder.

It's an interesting idea, although The Economist gives it the kiss-off, so to speak, in this graph, which seems to indicate that there's little if any correlation between lipstick sales and the economy -- sales were up a bit in the 2001 recession, but sank in 1991 even worse than the economy did.

I don't know that Mr. Lauder meant his index to be taken quite so literally, though. The idea that people might compensate for foregoing big luxuries by indulging in little ones seems to make sense intuitively, and has obvious applications for a great many marketers in the current economic environment. It would be interesting to know if there is any proof for it, or if any research has been done.

To get back to CVS, their experiment seems like a worthwhile effort. Certainly the times demand innovation, and past history indicates that companies who innovate during recessions benefit disproportionately. Their timing is very good in one regard -- with the decline of department stores, historically the principal channel for prestige cosmetics brands, the suppliers are probably more open to the idea of working with someone like CVS than they were a few years back. They have signed on some leading brands, including Laura Geller, Paula Dorf, and Coty Fragrance.