Flight to quality
Hermès has defied convention with consistently rising sales, despite the sky-high price tags, and is ramping up production… but not too much.
Luxury French fashion brand Hermès had a stellar 2023, bucking the trend of the wider industry, with revenues increasing around 20% across all its markets and with sales growth in all its divisions: fashion, accessories and perfume. Chief among these was leathergoods, which recorded a 19% sales increase in the first nine months of 2023, contributing €4.2 billion to the €10 billion group total. Sales were up by 25% year on year in Japan and by 21% in the rest of Asia. In the Americas and in Europe (excluding France), revenues were up by 20% compared to the same period in 2022. In the company’s home market, sales were “particularly robust”, Hermès said, growing by 22% “thanks to the loyalty of local clients and the dynamics of tourist flows”.
As a family company, founded by Thierry Hermès in 1837, tight-knit control over group decisions remains its strength. CEO Axel Dumas is part of the sixth generation of the founding family, and he is joined by cousins on the executive committee. Although there are outside shareholders, the family owns two thirds, and leather remains a strategic cornerstone, with its bags the most coveted in the world. “The [sales] results reflect the desirability of our creations in all the business lines, the exceptional quality of raw materials, exceptional know-how but above all, the highly integrated artisanal corporate model, putting the human at the centre,” says Mr Dumas.
Artisan focus
It is these artisans that are the focus of an investment spree, with the opening of five leathergoods factories in three years: two last year, Louviers (Eure) and La Sormonne (Ardennes); one at Riom (Puy-de-Dôme) this year, another at L’Isle-d’Espagnac (Charente) next year, and at Loupes (Gironde) in 2026. It has doubled the number of employees in its ‘metiers’ (workshops, or manufacturing facilities) in 10 years, with two thirds of these in France, where 80% of its products are made. “We continue to expand and value rare know-how, such as hand-painted wickerwork or leather marquetry,” says Mr Dumas.
The two most recent leather sites are the first two industrial buildings in France to be E4C2 certified, according to the company – a certificate that covers environmental performance as well as carbon emissions. This will help it reach its target of halving its carbon output by 2030 compared with 2018. The company is also investing in bricks-and-mortar retail, with nine new stores in 2023 and 14 undergoing major renovations and extensions. It operates more than 300 stores in 45 countries.
In 2023, the group hired more than 900 people in the first half of the year and expected a similar number in the second (full-year results will be published in February). This takes the total to more than 20,600 people worldwide, including 12,900 in France, of whom nearly 7,000 are craftsmen. Becoming an employee has new incentives: in addition to the one-time bonus at the beginning of the year, the company recently rolled out a free share plan, making it possible for all employees to become Hermès shareholders.
Youth-driven
The company has highlighted the Kelly Messenger and Maxi Kelly as holding particular appeal for customers in recent months, while new models the Geta and the RMS suitcase are also “meeting with great success”. Bags that easily retail north of £5,000 means Hermès products are out of reach of most people beyond the high-net-worths. For others, it is the aspiration and desire to be seen in this bracket that drives them to save up or stretch their finances. For a younger demographic, the exclusivity is the draw; some handbags have waiting lists stretching many years.
The steep prices of the bags are not based on demand, says Mr Dumas, but simply the cost of production. “It's something that is very important for Hermès and it's a kind of trust that we have between us and our clients. What determines the price of a bag is the cost of labour and materials that we put into it. It's not whether you like it or not. For us, it's about authenticity.”
Although the sales figures for 2023 were somewhat skewed by covid, as there were still some lockdowns and store closures in China at the start of 2022 and production was lower then due to staff absence, they still reflect an almost insatiable demand at the top end of the market. Previous years’ sales figures paint a similar picture: 2022 revenues of €11.6 billion was 29% higher than in 2021; revenues of €9 billion in 2021 was 39% more than in 2020.
So, what’s the secret? According to Mr Dumas, as well as its steadfast focus on the highest quality, two factors are aiding growth: a loyal customer base and the growing middle classes in Asia and the US. “This middle class is younger, more numerous and richer,” he comments.
More potential
It is an investor’s job to analyse companies to maximise profit, with some questioning whether the high prices are sustainable, especially against a backdrop of potentially slowing economic growth in the US, and compared with prices at luxury rivals. “We spend time going our own road, not looking at what other companies are doing,” Mr Dumas responds, “and we don't see any drop in the attractiveness of any of our products in the US. It is still a territory with many opportunities and a great deal of potential. French brands can continue making inroads and winning over new customers in the US. But during tough financial times, there's a flight to quality. Possibly, we reaped some benefits from that. Hermès is recognised for its quality regardless of other people's price positioning.”
The question has also been raised about some long waiting lists for bags: why not just make more, or focus on other parts of the business? Mr Dumas says bags take a long time to make by hand, and the company won’t compromise on the high quality of the manufacture. Its investments in new leathergoods workshops show they are boosting production. But it also remains in the interest of the company to balance volumes with exclusivity – to make enough but not so many that the bags are no longer aspirational and coveted. When second-hand Birkin bags are being sold online for £100,000, it is not a model that they will want to change any time soon.
Hermès bags are growing in popularity.
Credit: cristi dangeorge / shutterstock.com
