There are people with Birkin bags and there are the rest of us. Today on the show: the elaborate, upside-down strategy that has kept a $60,000 purse the "it" bag for 30 years.
PARIS, France — For consumers and investors alike, Hermès is the quintessential luxury brand, seen as having the most exclusive and desirable goods on the market. But real exclusivity is not much of a business model — Leonardo da Vinci paintings are exclusive, but trading in his artwork offers little scope for growth or profit. And yet, among the major luxury goods companies I monitor, including LVMH and Kering, Hermès has reported the highest return on invested capital and the best operating profit after tax in 13 of the past 15 years. Sure, Hermès sells exquisitely made products, but so do many other companies. So what makes Hermès unique?
The convenient explanation is capacity constraints. Hermès frustrates
demand and makes it difficult for people to buy its most coveted
products. But here, too, Hermès is not alone, even if it does push
things to the extreme. In today’s personal luxury goods sector, blending
craftsmanship and customisation and with modern industry and technology
has created the paradox of selling exclusivity by the million. And
Hermès is the world champion in the art of leading people to believe its
products are exclusive and unique. Indeed, Hermès has managed to appear
exclusive and to maintain that appearance for years, all whilst selling
a trainload of products every day with high margins.
The fact that people consider the Birkin handbag to be exclusive is
an astonishing feat. I calculate there must be more than a million
Birkin bags in circulation. Very few handbag brands can claim such
significant volume on any of their models and even fewer can claim to
have a luxury product with the exclusive reputation of the Birkin.
Better still is Hermès’ skill at creating a halo of exclusivity
around each product it sells, no matter how trivial: ties for €150,
scarves for €350, perfume for €85, fashion bracelets for €450. Consumers
can buy any of these products and leave the Hermès store feeling like a
million dollars. To achieve this, Hermès has implemented one of the
most effective stratagems for reconciling high sales volumes with a
reputation for exclusivity: category segregation. This involves
confining iconic, core category products to high-end price ranges only,
while focusing other product categories with lower price points on
Other companies have tried this approach, but none come close to
Hermès’ level of success. Cartier segregates its product categories when
it comes to advertising, featuring only exclusive pieces of jewellery
in its campaigns. Similarly, several large soft luxury brands are
attempting to segregate leather handbags, but the jury is still out on
whether they will stick to this strategy, given the fierce attack by
accessible luxury players such as Michael Kors.
The recent launch of Apple Watch Hermès is the nth example of the
luxury brand’s extraordinary ability to appear both impossibly exclusive
and widely available. For Apple, the partnership rescues the “cool
factor” of the Apple Watch, which was drawing perilously close to
appearing geeky despite the company’s attempts to build coolness around
its luxury-level gold model. For Hermès, it attracts attention back to a
category with which the brand has been struggling and offers an easier
entry point for aspirational consumers. It sells a little piece of the
brand — a Hermès leather band — at a very significant premium and, I
assume, a considerable margin.
That said, the future for the luxury market’s master of seduction
looks decidedly less assured. Over the past twenty years, Hermès has
achieved both high organic growth and very significant margin expansion.
Going forward, neither of the two is likely to continue, as the company
seems to be set on a course of mid to high single-digit organic growth
and is probably close to peak margins.