Wednesday, March 26, 2014

Hermès' Message to LVMH: Cash Out

 New Chief of Design House Says Family Will Fight to Remain Independent


PARIS—The founding family has taken the reins again at Hermès, battening down the hatches after facing an incursion from a rival. Last month, Axel Dumas, a 43-year-old former banker, took over as chief executive of the French luxury-goods house, succeeding Patrick Thomas, the only outsider to ever run the company, famous for its Kelly bags and silk scarves.
Mr. Dumas and his cousins, members of the sixth generation, have stepped into the breach in response to LVMH Moët Hennessy Louis Vuitton MC.FR +1.22% building up a 23% stake. The family pooled 50% of the company's capital in a trust to keep it out of the hands of the luxury juggernaut. But LVMH hasn't signaled any intention of backing down.
It is easy to understand why Hermès would be appetizing prey. The company is positioned at the top end of the luxury-goods category and has proven immune to the slowdown in China that is affecting many of its competitors. Hermès' biggest conundrum is how to keep up with demand.
In an interview from his eighth-floor office with a view onto Montmartre, Mr. Dumas sat down with The Wall Street Journal to discuss family unity, how he deals with the unwanted shareholder and why price isn't an indicator of exclusivity. Excerpts:
Family luxury-goods house Hermès is famous for its Kelly bags and silk scarves. Getty Images for IMG
WSJ: What does it change for Hermès to go back to being run by a family member?
Mr. Dumas: I'm the seventh CEO of Hermès, and part of the sixth generation [of the family]. When the board selected me, there was more of a discussion of an outsider or an insider rather than a family member or not. Eventually they decided on an insider who happens to be a family member.
WSJ: How did the family select you to run the company?
Mr. Dumas: We let our board members who are not part of the family select from the top 10 or 20 managers. If you try to organize a beauty contest between members of the family, it is a recipe for resentment a few years after.
'We are fighting to keep Hermès independent,' says Axel Dumas, chief executive of the luxury-goods house. 'It will be the fight of our generation.' Charlotte Gonzalez for the Wall
One thing which is always important in a family business is how you arrive at a decision. When you have a very small number of family members, it is easy to be in unanimity. When you are a very large family, more than 200, it is always the majority, you just vote on it. In my generation, there are over 40 members. So it's a mix of the two. We still long for unanimity.
WSJ: How does your family maintain its traditions?
Mr. Dumas: We've been raised together. With all my first cousins, we shared the same country house (in Normandy). But there was no specific time where we all would come together and wear nametags.
There's been a trend in Europe of consolidation, not only in luxury, where a family company, because of a question of size, is absorbed in a larger conglomerate. It is very important that the family is never complacent and keeps its entrepreneurial spirit.
WSJ: Was LVMH's entry into your capital due to the family being complacent?
Mr. Dumas: It surprised everyone. We are fighting to keep Hermès independent. It will be the fight of our generation. We are a company with 177 years of history. So we've seen struggle from time to time. We invested all our money in 1928 to open a store in New York, just before the Great Depression. It was 10 years of trauma for the family thanks to that.
WSJ: Now that you are the public face of the family, what kind of relationship will you have with LVMH?
Mr. Dumas: As a CEO, my role is to grow the company as much as possible, taking into account the global interest of all the shareholders.
WSJ: Including LVMH.
Mr. Dumas: The best benefit they can have is by realizing the capital gain on their shares.
WSJ: So you are encouraging them to sell?
Mr. Dumas: It would create great results that will increase their profit.
WSJ: Your sales have tripled in the past 10 years. Where will Hermès be 10 years from now?
Mr. Dumas: It is not about a set of figures by itself. It is about the growth of all our métiers [product lines]. We are going to continue to invest in our production facilities. We want to have Hermès be even more diverse and balanced. Likewise in our geographical expansion. In the 19th century, we were centered around the Atlantic Ocean. Probably in 20 years we will be centered around the Pacific Ocean. From the West Coast of the U.S. to China to Southeast Asia.
WSJ: There is a paradox in luxury, of selling lots of goods that have an aura of exclusivity. How do you manage this paradox?
Mr. Dumas: When we have had discussions about changing the way we do things to produce more, we always say no, to stay authentic. My great-grandfather Emile Hermès was sent to the U.S. during the First World War to buy some leather for the French cavalry and to look at Fordism—assembly line production. He was very impressed. He came back to Hermès and wrote a memo: "Never for us."
WSJ: Every year you are able to make more bags because you increase your production facilities. Even at your high price point, are you not concerned about the ubiquity of your bags?
Mr. Dumas: I don't think the price point is the relevant measure of our exclusivity. I am a little bit always taken aback when I hear, "We want to be more exclusive so we're going to sell more expensive bags." I think that the volumes that we have are still quite insignificant compared with the rest of the market.
WSJ: Your prices have risen much faster than inflation. To what extent are consumers beginning to resist these price increases?
Mr. Dumas: I think we are very reasonable because there is no price marketing at all. It is just due to wage increases in France and the cost of the material. The price of good cashmere has increased 20%. The divide is not based on price, it's based on what you get for the product. That's why you see that the high-end luxury market did well. The lower end of the market is doing well also. Because for the two of them you get what you pay for. The middle—when the construction is closer to the lower end but you sell it at a price closer to high end—suffers the most in our industry.
WSJ: You said that your prices are determined by costs. At the same time, you recently announced a record high operating margin. How do you justify that?
Mr. Dumas: It's our operating margin. I won't say we've seen a great change in our gross margin. In each métier, we try to have them the same profitability, so we can have a huge spike in one and a decrease in the other and it won't have a major impact on the operating margin.
WSJ: The crackdown on gifting in China has affected luxury-goods growth. How long do you think it will last?
Mr. Dumas: When the big anticorruption wave ends, the attitude toward consumption will be easier. We are less affected because we're very specific about what kinds of credit cards we take. When you're buying for yourself, usually you pay with your own credit card and not a gift card that has been given by someone else.
WSJ: How is Hermès affected by the slow economic growth in France?
Mr. Dumas: Our sales in December were telling of the evolution. We had more customers than before, but the average basket was lower. We see that consumers were quite cautious about the economic perspective. The main issue in France globally is our unemployment, which is at an unsatisfactory level. Sometimes we are very good in productivity, but it doesn't help employment.
WSJ: Your ancestors often ran Hermès until they were 80 years old. Is this a lifelong commitment for you?
Mr. Dumas: As long as the family will be happy, and as long as I believe I can serve Hermès in a good way, I will be delighted. I think it's the best job in the world.

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