DO HOUSEHOLDS SUBSTITUTE AMONG LUXURY GOODS? THE IMPACT OF THE GREAT RECESSION ON FRAGRANCE CONSUMPTION

Abstract

The 2008 Global Financial Crisis fueled a steep decline in the U.S. luxury goods market. According to Euromonitor, retail sales fell from a record $62.8 to $52.5 billion over 2007-2009. Interestingly, the “Lipstick Effect” suggests that small, affordable luxury goods fare better during an economic downturn since consumers seek to maintain wellbeing and enhance attractiveness. The study employs a subset of the Kilts-Nielsen Consumer Panel Dataset (KNCPD) for the period 2004-2011, data on households that consume a particular good of affordable luxury, fragrances. Evidence reveals that perfumes do not adhere to the lipstick effect during the recession, perhaps because fragrances are purchased as gifts more frequently than most beauty products. The study further shows how households alter buying behavior among perfume qualities. Findings imply that during the crisis, households substitute towards premium and private-label fragrances and away from mass-market perfumes. Compared to wealthy households, those of low-income exhibit relatively higher price sensitivity, lower opportunity cost of time, and greater shopping effort. Low-income households benefit more from price reductions on premium goods. The recession-induced, heightened preference for affordable, private-label fragrances explains the latter shift in purchasing patterns.