What Is the Lipstick Effect and How Could It Impact the Economy in 2023?
More often used to describe consumers’ tendencies to indulge in smaller luxury items during economic downturns, experts at Willis Towers Watson (WTW) are predicting a potential “lipstick effect” for 2023 when it comes to major mergers and acquisitions (M&A).
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According to a report by the insurance consulting and brokerage firm, in the third quarter of 2022, there were no massive mergers or acquisitions valued over $10 billion. This is the first time in three years that this has been the case.
Big deals valued over $1 billion have decreased, too. As CNBC reported, WTW found that there were 49 deals priced over $1 billion in Q3, compared to 67 completed in the same quarter last year.
Regardless of the discouraging global economic climate and the increasing threat of a recession across continents, the current slump may present huge opportunities for companies to expand and develop their business.
According to WTW M&A expert Massimo Borghello, takeover and purchase deals will endure into the new year, despite some degree of continued economic turbulence.
“The fundamentals that drive dealmaking are still in place and, with valuations moderating after the historic levels reached in 2021, strategic and financial buyers alike will take advantage of better-priced opportunities for growth,” said Borghello.
The Lipstick Effect
As Forbes noted, the lipstick effect (or index) was first discussed by economist and sociologist Julia Schor (author of “The Overspent American”), who suggested that when money is tight, women were more likely to purchase designer lipstick — and forgo luxury beauty items not worn in public — as a confidence booster.
“The concept is that in times of a recession and other economic stresses, women will indulge in discretionary purchases that provide an emotional uplift without breaking the budget,” wrote Forbes senior contributor Pamela N. Danziger. “Lipstick fits the bill.”
In an economic decline, the term is often more broadly applied to business transactions focused on smaller stakes. According to CNBC, when some companies look to tighten spending and sell off assets, others will look for chances “to expand product lines, services or supply chains at a reduced rate,” per the WTW report.
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On Dec. 12, CNBC cited the forthcoming 2023 fourth quarter merger between Danish bioscience corporations Novozymes and Chr. Hansen as an example of a large M&A deal on the horizon. The new group will have annual revenues of around 3.5 billion euros ($3.7 billion USD) and will be the biggest ever deal between two Danish firms — just one of potentially many large mergers to come in 2023.
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