The Beauty Bust Waterproof, smudgeproof.recession-proof? Conventional wisdom says lipstick and perfume do well in a recession. This time around could be very different.

Even when the market is slumping and wages are flat, it's not hard to justify the relatively cheap pick-me-up that comes with a buying a new lipstick or eye shadow. That's why historically the beauty industry has been one of the few businesses to fare well in recessionary times.

Not this time around (see related slideshow).

The weak economy couldn't come at a worse time for the makers of eyeliner, perfume, and lip plumpers. Diminishing department-store traffic-which has been declining about 1 percent annually for a decade-has hit the big companies, affecting sales of categories like color cosmetics, which has had virtually flat sales for the past couple of years. Younger buyers are throwing more dollars at iPods, cell phones, and other electronics-a problem when, like Sephora, the under-25 crowd makes up 50 percent of your clientele. And the rising price of oil doesn't just make gasoline more expensive, but cosmetics ingredients and packaging (often made of plastic) as well. No wonder L'Or�al's U.S. revenues fell 7 percent in the first quarter of 2008 and Procter & Gamble's stock has been in a slump all year.

On top of all those issues, daily news of the economic slowdown has made many consumers wary of spending too much on frivolous extras. "We don't think spending is going to come to a screeching halt, but people are waiting to see how this is going to settle and how long it is going to last," says Karen Grant, senior beauty analyst for the NPD Group. "With that uncertainty comes a certain amount of trepidation."

Not all sectors of the beauty industry are created equal, and that is especially true now. "Fragrance is getting it the worst," Grant says. "That particular category is the least recession-proof, at least in the U.S." Men's and women's fragrance sales declined last year to a total of $2.94 billion, according to NPD, their lowest level since 2003.

Since perfume doesn't have the visible results of lip gloss or wrinkle cream, and can have a comparatively high price tag, it is often the first beauty item consumers sacrifice when times are tight. "Fragrance is not something you have to have to look good," explains independent retail consultant Patricia Pao. "If anything is going to suffer in a recession, the fragrance industry generally has a harder time."

It had already been hurting since 9/11, in part because celebrity fragrances have also become industry drivers. They attract younger buyers, but require a huge (and expensive) marketing push at launch, and they don't have the lasting appeal of more classic scents. The past six months have been particularly tough for the fragrance sector, since it relies heavily on holiday sales. According to the National Retail Federation, the 2007 holiday sales season (overall, not just beauty) was the weakest since 2002, with sales rising just 3 percent to $469.9 billion. (One area that is doing well for some brands, like Victoria's Secret Beauty and Marc Jacobs: body fragrances, which are less expensive, says Larry Paul, a beauty-industry consultant.)

To make matters worse, there is growing competition for shelf space and consumer attention. Over the course of the last decade, the number of new fragrances launched annually has quadrupled. "It's daunting for the consumer," asserts Rochelle Bloom, president of the Fragrance Foundation, a New York-based trade group. "Everyone is affected by this: the suppliers, the retailers, the manufacturers, the consumer. It's a problem."

Across the beauty landscape, emerging brands are finding it more difficult than ever to stand out. Cheeky slogans, punchy packaging-it's all already been done. "It's a little bit like American Idol: Out of every 10 or 20 brands you see, one of them might be marginally successful," says Claudia Lucas, who oversees the beauty department at New York's Henri Bendel, which devotes over a third of its retail floor space to beauty. "When you get one of those breakout stars, it is literally like a talent contest."

"It's survival of the strongest, the fittest, and the people who continue to innovate," echoes Nicky Kinnaird, whose chain of beauty boutiques, Space NK, carries niche brands like Eve Lom and Zelens. She has noticed that customers have become more savvy about their purchases, thanks in part to the abundance of information on the internet. "No doubt there will be casualties in the marketplace: those that aren't making the progression and extra effort that the increasingly demanding customer is looking for with market conditions."

Niche brands are proactively changing to weather a challenging economic climate. Shiseido, for example, is cutting the number of its products by nearly a third over the next two years, discontinuing less-successful lines to place emphasis on popular offerings. Skin-care line Skyn Iceland has lowered the price of its key product launch for fall to make it more appealing to potential customers.

While consumers may be watching their wallets, purchasing continues to thrive in one area of the beauty industry: corporate acquisitions. Procter & Gamble recently decided to acquire Frederic Fekkai from private equity firm Catterton Partners Corp. for a reported $400 million. "I think the Frederic Fekkai decision is a very strategic one for the P&G house," explains NPD's Grant. "They've made it very public that they're looking to build their business in the prestige space, and the Fekkai business is the leader in hair in prestige. They're looking at it and saying, 'Wow, this is a huge opportunity.'"

For companies like Proctor & Gamble and L'Or�al, acquisitions like these are a means to expansion whether the economy is booming or tight. "It goes back to strategy," explains Melisse Shaban, C.E.O. of Chrysallis, Catterton's management company. "Big companies and big businesses have very long-term economic objectives. I don't think they adjust those objectives, per se, based on economic times."

And although the average consumer may be buying less overall, don't expect women to give up their beauty regimes entirely. "At the end of the day, whether you're employed or not employed and looking for gainful employment, you still have to look good," Pao observes. "You still need makeup, but you don't need as much of it. We're all getting older, and as we're getting older, our maintenance and our upkeep becomes less of an option and more of a necessity."