Hermès, the Most Desirable Brand in the World?

Discover what is behind the incredible success of the company

Hermès stands out as the premier company in the luxury sector, distinguished by its exceptional metrics and sustained growth even amidst economic downturns. What strategies enable Hermès to achieve such remarkable performance?

In this article we will understand the business model and describe the outlooks. The risks will also be analyzed. We will also compare Kering with its main competitors. At the end, after a SWOT analysis, we will estimate its fair price.

Company overview

The company is divided into several segments, depending on the product:

• Leather goods and saddlery is the main and oldest activity of the company. It represents more than 40% of the sales. It includes bags, riding, memory holders and small leather goods.

• Clothing and accessories is the second main segment. It includes Hermès Ready-to-wear for men and women, belts, costume jewellery, gloves, hats and shoes. It represents 28% of the sales.

• Silk and textiles is a smaller segment, separated for its specific processes and supply chain. It represents less and 7% of the sales.

• Other Hermes business lines is the third biggest segment with 12% of the sales. It includes Jewellery and Hermès home products (Art of Living and Hermès Tableware).

• Perfume and beauty is a small segment for Hermes, unlike other companies like LVMH or Chanel. It represents less than 4% of the sales.

• Watches is a separated segment and represents 4.5% of the sales. This separation from the jewellery segment (that is in other Hermes business lines) is interesting and shows the emphaze the company put in its watches expertise.

• Finally, other products segment represent around 2% of the sales. It includes the production activities carried out on behalf of non-group brands (textile printing, tanning…), as well as John Lobb, Saint-Louis and Puiforcat.

Hermes is often describe as a one-brand company. If it is roughly right, it is precisely wrong as the companies own different other brands. Unlike LVMH however, those other brands are very small very the rest of the activity.

The company is 66% owned by the family. As a comparison LVMH is closer to 50%.

The organization is interesting. The core activities of the company is creating, designing and selling products. 55% of the production is done in house or in exclusive workshops, meaning 45% of the production is subcontracted. For each segment, subsegments exist with specific activities like supply chain allowing more agility to the company.

Some key metrics illustrate the particularities of the company:

• 4.78% turnover rate - the low turnover is very a good sign as the expertise is a key of the performance.

• The company has long-term relationships with its suppliers (average of 19 years for its top 50) - this long-term relationships are very important especially for quality.

• The company has a strong environmental policy with 62% water consumption in the last 10 years, 70% of renewable energy, 30% scope 1 & 2 emission reduction between 2022 and 2023.

• More than 20,000 people are working in the company including 7,000 craftpeople

Geographical revenue breakdown

As we can expect for this kind of activity, most of the revenue of the company are in Asia (57% including Japan, 47% without it).

This concentration can be an issue. However, unlike other luxury brands Q1 24 results have been very robust even in Asia with 9.2% growth (8.9% in APAC and 10.8% in Japan). The geopolitical risk remains strong, especially when we consider a lot of the sales in France are made with Asian tourists. This geopolitical risk is inherent to the sector.

Strategy and performance of the model

The main strength of Hermes is its creation. Recognized above the other luxury brands, its creation manages to be both modern and elegant. The quality is also a strength of the company. Objects are designed to last, to be passed on from one generation to the next, and to be repaired.

Each year a theme inspires creators and artistic directors. This spirits of quality and innovation is very important for the company and an important part of its success.

A very integrated model with 7,000 craftpeople allows to master, preserve and transmit craftsmanship savoir‑faire, knowledge of materials and exceptional techniques. This also allows to be more agile and maintain higher quality standards than other less integrated luxury brands.

The distribution network with almost 300 stores operated directly by Hermes allows to offer a great customer experience.

Finally, the sustainable model is very important as it will allow the company to have a robust and sustainable growth.

Exclusivity and second hand

One of the reasons for Hermès' success is the desirability of the brand. It is perceived as extremely exclusive. The company even selects its customers, who sometimes must purchase other products to earn the right to buy the most iconic items.

This exclusivity persists even after the product purchase. The second-hand market is very dynamic; each piece, especially handbags, has its rating and price. Some models are more expensive second-hand than they were in stores. The durable products retaining their value over the years justifie a higher pricing. Therefore, the second-hand market assists Hermès in selling and justifying its price increases.

Competition overview

The comparison between Hermes is done here with LVMH, Richemont, Kering and Burberry. Hermes is clearly the most expensive and the high quality and growth. LVMH and Richemont are more balanced. Kering and Burberry are the cheapest - due to difficulties with their sales.

Outlooks