Hermès has been a key player in the luxury world for nearly 200 years. It may not be the biggest or most widely known brand, but it has built a reputation as the ultimate status symbol—exclusive, highly desirable, and extremely expensive. Known among the elite, Hermès stands apart in creating a brand coveted for its exclusivity. Though Hermès offers a variety of products, its handbags, especially the Birkin and Kelly bags, are the most sought after. Celebrities, leaders, and even royals must qualify for the opportunity to buy these bags, which are estimated to contribute a quarter of Hermès’ total revenue and can fetch upwards of $100,000 on the resale market.
When evaluating luxury brands, desirability is a top metric, and Hermès consistently leads the list. It is the fourth-largest luxury fashion brand by revenue worldwide, and as of October 24, its stock reached over $22,000 a share, raising its market cap to more than $233 billion. Despite a global luxury slowdown, Hermès has seen impressive sales and growth while maintaining its centuries-old strategy of scarcity, fueling intense demand. The brand has masterfully balanced the role of a publicly traded company with strong sales and margins while preserving its exclusivity. Hermès has perfected the “luxury game,” crafting a distinct brand that people consider a privilege to own.
Hermès Background & Strategy
Founded in Paris in 1837 by Thierry Hermès, the brand initially crafted high-quality harnesses and saddles for European royalty. Later, it relocated to Rue du Faubourg Saint-Honoré, where it has operated since 1880. The Kelly bag, named after Princess Grace Kelly of Monaco, and the Birkin bag, inspired by a chance encounter with actress Jane Birkin, have become iconic. Hermès was also the first to introduce the zipper in France after bringing it from the U.S. With meticulous attention to quality leather and craftsmanship, Hermès maintains a deep understanding of the lifestyle its affluent customers seek, making it truly unparalleled in the luxury market.
The brand doesn’t rely on brand ambassadors and spends significantly less on advertising than its competitors. Even the elite must have connections, cultivating relationships with sales associates and making multiple purchases to be considered for a Kelly or Birkin. Only limited quantities are released each year, with quotas for certain styles; for example, a client can buy only two Birkin or Kelly bags per year. Owning a Birkin, especially a limited edition, signals not just a purchase but an accomplishment, as buyers have typically spent five to ten times that amount to reach eligibility.
Hermès is vertically integrated and still operated by the founding family. The company rarely grants interviews and declined CNBC’s request for one. Hermès ensures demand consistently exceeds supply by limiting store numbers, handbag availability, and online sales, which allows them to ride out economic cycles smoothly. They adhere strictly to what works and maintain their traditional approach. While other brands were swept up in the streetwear revolution, Hermès stayed true to its classic DNA, a decision that has paid off as trends fade. Though Hermès has fewer stores than its competitors, its revenue is significantly higher, with profit margins, growth, and status that lead the industry. This success is why Bernard Arnault once pursued the company so intensely.
The Run Frank is referring to is the four-year legal battle between Hermès and LVMH CEO Bernard Arnault began after he acquired more than a 20% stake in the company, making him its largest stakeholder. Today, LVMH holds no ownership in Hermès, though the Arnault family retains just under a 2% stake. Investors’ faith in a company’s future growth can often be gauged by its price-to-earnings ratio, with Hermès’s ratio now more than double that of several competitors. In the third quarter of 2024, Hermès reported double-digit revenue growth, while competitors like LVMH and Gucci’s owner, Kering, saw sharper-than-expected declines in sales. Hermès’s share price has risen nearly 10% since the start of 2024, while LVMH and Kering have experienced declines of 13% and 40%, respectively.
Hermès Market Projections
The luxury industry is currently experiencing a significant correction. The “aspirational” consumers, who are not necessarily wealthy but occasionally indulge in luxury items like handbags or shoes, haven’t disappeared entirely, but they have faded. While Hermès has been somewhat resilient, it did see slower sales growth across all regions in Q3 2024 compared to the same quarter the previous year. On an earnings call, the company noted lower foot traffic but observed that customers were spending more per transaction.
The luxury goods industry may face a prolonged period of weakness, as indicated by trends seen over recent quarters. Hermès has continued to grow at double-digit rates, but growth could slow in the coming year, depending on economic developments in regions like China, North America, and Europe. Since 2019, luxury prices have increased by more than 30%. The price of Hermès’s most popular model has risen by 16% in recent years, although their price increases have been more moderate than those of competitors like Chanel and Dior, with an 8% contribution from pricing this year—a helpful factor in an industry facing a global cyclical slowdown.
How Hermès Manage to Stay Relevant Amidst Legal & Eviromental Drawbacks
Timelessness is central to Hermès’s identity, yet the brand hasn’t introduced anything radically innovative beyond new materials and updated designs for classic products. While these items are classic and maintain the brand’s image, the company may eventually need to introduce new iconic products outside of leather goods, such as watches, to drive its own growth without cross-subsidization between product categories. Counterfeits also pose ongoing reputational and legal challenges. The counterfeit industry is valued at approximately $4.5 trillion, and Hermès has spent millions on legal efforts to combat it. Although the decrease in spending by aspirational buyers has not significantly affected Hermès’s margins, higher prices and long waitlists could deter even its most loyal customers. Falling share prices across the sector could indicate further challenges.
Hermès also faces sustainability and ethical concerns related to its use of wild animal skins. Climate change may impact the supply chain for materials like Brazilian silk and European leather. Moreover, the brand’s exclusivity, while contributing to its success, could also have drawbacks. In March 2024, a class-action lawsuit filed in California accused the company of requiring customers to spend large amounts before being allowed to purchase a Birkin bag, alleging this practice violates antitrust laws. Plaintiffs revised their case on October 14, 2024, providing additional details after the judge requested more evidence for the case to proceed.
Imagine a scenario where a customer enters a store, ready to spend $12,000 on a bag, only to be told they’re ineligible. They might then spend thousands more on scarves, belts, and other bags just to qualify for the desired item. While this business model may seem excessive to most, it remains a key factor in Hermès’s success.
