One post tagged with "luxury"

In the world of luxury brands, Hermès stands out as a true original. While other brands race to boost production, chase celebrity endorsements, and make a lot of noise, Hermès has chosen a path that seems almost contrary to the times. They don't focus on pumping out products, rely on endorsements, or even have a dedicated marketing department. Yet, they remain a favorite among top consumers worldwide. Just look at their iconic Birkin and Kelly bags, which have waiting lists stretching for years just for the chance to buy one.

The journey of Hermès hasn't always been smooth. Founded in 1837, this French company has reinvented itself at least three times over its nearly 187-year history. The most recent and dramatic change came after 2010, when LVMH and its head, Bernard Arnault, attempted a hostile takeover. Facing this aggressive "wolf," the Hermès family adopted a bold strategy—emphasizing craftsmanship. This move transformed what was once a "sleeping" family business valued at around $10 billion into a European luxury powerhouse now worth over $200 billion. For entrepreneurs, Hermès' rise is packed with valuable insights.

The DNA of Hermès: From Saddlery to Luxury​

The story of Hermès began in 1837 when Thierry Hermès opened a high-end saddlery store in Paris. At that time, carriages were the primary mode of transport for the nobility, and Hermès quickly gained a reputation for exceptional craftsmanship, becoming the go-to choice for Parisian aristocracy. Like Louis Vuitton, Hermès also served Empress Eugenie, wife of Napoleon III, establishing a strong aristocratic foundation for the brand.

Thierry's son, Charles-Emile, expanded the business into saddle-making and moved the workshop to the now-famous 24 rue du Faubourg Saint-Honoré in Paris. This address remains the global headquarters and flagship store of Hermès, carrying the brand's history and legend.

The brand's first true reinvention occurred under Charles-Emile's son, Emile. In 1916, Emile was sent by the French military to the United States to study industrial production. There, he visited Henry Ford and saw the automobile assembly line. He foresaw the coming of the automobile era, which would change the world, and cleverly introduced American "zipper" technology to France, applying it to clothing and bags. More importantly, he realized that the "Haut à Courroies" bag, originally used for saddles and riding boots (the predecessor of the Kelly and Birkin bags), would perfectly suit the needs of the automobile era.

Subsequently, Hermès began producing handbags, ready-to-wear, jewelry, and watches. Although initial growth was slow, under the leadership of Robert Dumas (Emile's son-in-law), Hermès entered an era of "art and whimsy." In 1935, Robert redesigned the "Sac à Dépêches" (later known as the Kelly bag) and launched the classic Hermès scarf in 1937. These scarves became famous for their exquisite craftsmanship (each scarf requires 300 cocoons, and over 20 colors are hand screen-printed) and unique artistic design. By 1988, the scarf business accounted for 55% of the company's sales, while leather goods accounted for only 9%. Robert also created the iconic orange box and carriage logo, which have become indelible marks of the Hermès brand.

Unique Business Strategy: Lessons for Entrepreneurs​

The success of Hermès is no accident; it's the result of its distinctive business strategies. These strategies not only set the brand apart in the fiercely competitive luxury market but also offer valuable lessons for entrepreneurs seeking enduring success.

1. Reverse Positioning Against Competitors: Gaining Respect Through "Constancy"​

The most significant characteristic of Hermès is that it almost "runs counter" to all its competitors.

• Not pursuing supply-demand balance, but creating scarcity: Faced with strong demand, Hermès does not increase production but maintains strict quotas and long waiting lists. This "hunger marketing" creates extreme scarcity, making consumers crave the brand and its products even more. The market prices of Birkin and Kelly bags are often higher than retail prices, and even with money, they are hard to buy immediately.
• Not relying on loud brand logos (IYKYK): Hermès products rarely feature exaggerated logos, promoting "Quiet Luxury" that those in the know naturally understand. This understated stance highlights the brand's confidence and the consumer's taste.
• No celebrity endorsements: Celebrities queue up like regular consumers to buy Hermès bags, which is more convincing than any endorsement. The brand attracts celebrities through the allure of its products, not by enhancing product image through celebrity effects.
• Almost no marketing department: Hermès rarely advertises, letting the quality of its products and the brand's history "speak" for themselves. They prefer to convey the brand philosophy through carefully curated events and window displays.

2. Commitment to Craftsmanship and Quality: The Soul of Handcrafting​

The soul of Hermès lies in its almost obsessive commitment to craftsmanship.

• Unique "Saddle Stitch": This unique stitching technique is not only extremely time-consuming (can only be done by hand) but also exceptionally sturdy. Even if the thread breaks, the stitches won't unravel. A leather product is completed by a single craftsman from start to finish.
• Rigorous artisan training system: Becoming a Hermès artisan requires at least two years of specialized training, and those who can make Birkin and Kelly bags need an additional three years of experience. This transmission of knowledge and skills is the cornerstone of Hermès' core competitiveness.
• Incredible production scalability: Despite insisting on handcrafting, Hermès has found a path to scalable hand production. Today, Hermès has 7,000 artisans worldwide, adding 500 new artisans annually (7% annual production capacity growth). They do not set up large factories but distribute production across 31 small workshops in France, each with no more than 250-300 artisans to ensure that every artisan knows each other, maintaining a "family" atmosphere in the workshop.
• Lifetime repair service: Hermès promises lifetime repairs, regardless of how long the product has been used. This not only reflects confidence in product quality but also establishes a long-term trust relationship with customers. The company repairs 120,000 products annually and has 15 dedicated repair centers worldwide.

3. The Art of Scarcity: Pricing Beyond Economic Laws​

Hermès products, especially Birkin and Kelly bags, are considered typical "Veblen Goods." This means their demand increases as prices rise because higher prices themselves represent higher social status and uniqueness.

• Market price higher than retail price: Birkin bags are often sold below the market clearing price, with the "consumer surplus" not fully captured by Hermès but converted into deeper consumer loyalty to the brand and motivation to purchase other Hermès products.
• Cautious price adjustments: Despite its lofty brand status, Hermès is very restrained in price increases. Over the past decade, the average price increase of its product lines has been about 7% annually, far below the aggressive price increase strategies of some competitors. This maintains the brand's "intrinsic value," avoiding being seen as purely "hyped goods."

4. The Power of Silent Marketing: Building Connections Through "Storytelling"​

Hermès' marketing strategy is unique, as it rarely engages in traditional advertising. The company emphasizes "everyone is a marketer," building brand influence through brand stories, word-of-mouth, and unique customer experiences.

• Focus on event marketing and experience: Hermès spends 4.5% of its revenue on "communication," with two-thirds used for events. They advertise in ballet theater programs or host million-dollar parties instead of overwhelming mass media with promotions.
• Reject celebrity endorsements but attract celebrities to buy: The brand's allure itself attracts era icons like Grace Kelly and Jane Birkin, whose use adds a halo to the products.
• Mystique and community culture: The "allocation" culture around Birkin bags, waiting in line, and not displaying these bags in stores add a layer of mystery to the brand, sparking online discussions about "Hermès allocation strategies," further expanding brand influence.

5. Family Legacy and Long-Term Vision: Withstanding the "Wolf at the Door" Test​

Hermès has been family-run for nearly two centuries, and this long-term vision and loyalty to brand philosophy enable it to resist short-term temptations and external pressures.

• LVMH takeover battle: In 2010, Bernard Arnault gradually increased his stake in Hermès to 22.6% through secret equity swaps, attempting a hostile takeover. Facing this threat, the Hermès family took unprecedented action: over 50 of the 80 family members pooled 50.2% of the shares into a cooperative entity called H51 and signed an agreement pledging not to sell these shares for at least 20 years. This resolute response ultimately repelled LVMH's takeover, preserving Hermès' independence.
• Wisdom of generational succession: Each generation of Hermès leaders, like the fifth-generation head Jean-Louis Dumas and the current sixth-generation CEO Axel Dumas, undergoes rigorous apprenticeship training. They not only understand business but also grasp the essence of craftsmanship, ensuring smooth transitions and innovation across different eras.

6. Cautious Innovation and Adaptation: Finding Balance in Tradition​

Hermès is not static; it cautiously innovates and adapts to the market, always ensuring that brand core values are not compromised.

• Cross-industry collaboration: In 2015, Hermès collaborated with Apple to launch Apple Watch straps. Although priced (at $540) far below its traditional leather goods and not entirely handcrafted, it is seen as a "timely elegant object," attracting new young consumers into the Hermès ecosystem, with 70% of online consumers being new to Hermès.
• Petit H project: This project, started in 2010, repurposes leather, silk, and other scraps to create playful and artistic mini accessories. It reflects the brand's commitment to sustainability and creativity, allowing consumers to experience Hermès craftsmanship at a more accessible price.
• E-commerce and airport store strategy: Online sales and airport stores are seen as channels to attract new customers and "lower the threshold." These new customers are more likely to engage with the brand and gradually build a connection with Hermès.

Financial Performance: The Hardcore Data Behind Luxury​

Hermès' financial data is equally impressive, revealing the strong profitability of its business model.

• Stunning profit margins: In 2022, Hermès' revenue reached €11.6 billion, with an operating profit of €5.7 billion, a gross margin of 71%, and an operating profit margin of 44%. This rivals software companies' profit levels, yet Hermès does not require high R&D costs.
• Continuous revenue growth: Under Axel Dumas' leadership, the company's revenue grew from €3.5-4 billion in 2013 to an expected €14 billion in 2023 (based on the past 12 months' data), achieving nearly 400% growth.
• Cash-rich: Hermès has $10 billion in cash reserves, and the company insists on using one-third of net profit for dividends, one-third for capital expenditures (mainly for opening new workshops), and one-third retained as cash. This shows that capital is not a growth constraint but rather its unique operating model and commitment to scarcity.
• Business composition changes: Today, leather goods and saddlery are Hermès' largest revenue sources, accounting for 43%; ready-to-wear and accessories account for 27%; and silk and textiles, which once dominated, have declined to 7%. Perfume and beauty, as well as watches, each account for 4%.
• Global layout: Currently, 85% of Hermès' business is sold outside France. Sales in France have fallen to 9%, with the Japanese market accounting for 10%, and the Asia (excluding Japan) market capturing an astonishing 48% of sales, highlighting the significant contribution of the Chinese market to Hermès.

Controversies and Challenges: The Other Side of Luxury​

Despite its brilliance, Hermès is not without controversy.

• Animal leather sourcing: Hermès faces criticism from animal protection organizations for using exotic leathers like crocodile skin. Although Hermès claims its farming methods are sustainable and releases some farmed crocodiles to replenish wild populations, this remains a sensitive aspect of its product line.
• Destroying defective products: To maintain brand image, Hermès destroys products that do not meet its high standards. In today's environmentally conscious world, this practice has also drawn criticism.
• Brand dilution risk: Products like Apple Watch straps and perfumes, while helping attract younger consumers and new customers, have sparked discussions about whether the brand's purity might be diluted due to their lower prices and mass production.

Conclusion: Lessons for Entrepreneurs​

The story of Hermès conveys a profound lesson to all entrepreneurs: success does not have only one path. In an era that pursues speed, scale, and digital marketing, Hermès has chosen a completely different road:

1. Adherence to core values: The relentless pursuit of craftsmanship, exceptional quality, and unique aesthetics is the foundation of Hermès' enduring success.
2. Embrace scarcity: Not all products need to meet all demands; moderate scarcity can enhance brand value and consumer desire.
3. Create unique experiences: Compared to direct advertising, the brand "dream" and "soul" created through store design, events, and interpersonal interactions are more penetrating.
4. Long-term vision: Family management brings a long-term perspective, enabling investment in brand building and talent development rather than merely pursuing short-term profit maximization.
5. Differentiated competition: When all competitors move in one direction, reverse operations may open up new blue oceans and establish insurmountable competitive barriers.

Hermès proves that even within the same product category, you can establish a completely different business model. Although it is a luxury giant like Louis Vuitton, its operating philosophy, brand strategy, and customer base are vastly different. For entrepreneurs hoping to build a truly unique and enduring enterprise, Hermès is undoubtedly a living textbook, teaching us that true luxury lies in the dedication to craftsmanship, the protection of dreams, and the insistence on self-identity.