The Birkin bag. A square silk scarf printed with horse bridles. A cashmere throw blanket splashed with the letter H. For years, Hermès' iconic products have been coveted by those in the know.
Now, its shares are also hot commodities, with their performance outpacing bigger luxury brands like Louis Vuitton owner LVMH and Gucci-maker Kering.
Over the past year, Hermès' stock has climbed more than 30% despite a slowdown in luxury spending amid economic uncertainty and dwindling pandemic cash, while LVMH barely gained and Kering's shares fell. Hermès's secret, experts say, is that it hasn't tried to meet the masses. Instead, it's embraced scarcity and maintained its quality.
"For other luxury companies, it was not such a good year," Axel Dumas, the sixth-generation CEO of Hermès, said earlier this month during its annual earnings presentation. "There seems to be a polarization in our industry: Those who are very successful and those less so."
But as the nearly-200-year-old family-run company opens more stores, grows its team to include thousands more artisans, and expands into cheaper — and easier-to-obtain — products like makeup, can it maintain its sheen?
"The curse of retail is everyone chases more," Simeon Siegel, a senior retail analyst at BMO Capital Markets, told Business Insider about luxury brands. "At some point, that hurts the brand."
Hermès' success has been driven by scarcity
While many luxury brands have espoused social media marketing and celebrity partnerships, Hermès — which started as a saddlery and which still hand-stitches the lion's share of its leather bags and silk scarves — hasn't. Its core products haven't changed much in decades, it does not have TikTok, and doesn't give celebrities free handbags.
That scarcity-of-product approach helped Hermès hit an annual revenue of $14.5 billion last year and gain a market cap of over $250 billion. With more willing customers than available goods, it epitomizes luxury. (The brand is equally controlled in its approach to the press and did not respond to BI's requests for comments).
"It's one of the very few areas in retail that's not trying to sell an infinite amount of units," Siegel said about the luxury sector. "Creating another handbag would be easy, and selling it would be even easier, but realizing that would be the wrong decision for the brand is a very impressive discipline that the most successful luxury brands have internalized."
The famous Birkin bag epitomizes Hermès' approach
The Birkin is more than a trendy accessory. Since soon after it was introduced in 1984, the bag — which has a starting price of around $10,000 but can run into the six figures — has been among the most covetable purses of the ultrarich.
It's not something one can purchase at a department store, walk in off the street and buy at a boutique, or order online, and specific styles sometimes rack up yearslong waitlists. To buy directly from Hermès, customers must cultivate a history with the brand. While there's no steadfast rule, experts say wannabe Birkin owners must shop loyally at Hermès for years — and some say spend hundreds of thousands of dollars — before they get the opportunity to spend another five figures or more on the bag.
When it comes to its iconic scarves, each made-by-hand item is part of a numbered, limited edition, meaning baked-in exclusivity.
"It's literally economics 101," retail industry expert and consultant Hitha Herzog told BI. "When you have short supply and high, high demand and the branding that goes with it — that is what fuels it."
"People desire what they can't easily obtain," Nicole Pollard Bayme, the founder of luxury styling firm Lalaluxe, told BI over email. "Crafting a playbook for marketing to the luxury consumer, Hermès sets the standard."
Hermès' limited products only add to the appeal
The brand is also consistent in its dedication to core products.
While unafraid of whimsical design, the Birkin and Kelly bags — two handbags that don't look all that different from Hermès' original saddle bags — and scarves remain dependable. Hermès' leather and silk products account for 41% and 7% of its revenue, respectively.
Other luxury houses, like Versace, owned by Capri Holdings, and Kering's Balenciaga, have been built more broadly around fashion and have taken a more mass-market approach, partnering with different brands and selling everything from socks to blue jeans. This leaves them vulnerable to the cyclical nature of fashion — which Hermès has resisted.
"Brand equity is much more diluted than Hermès'," Herzog said of brands like Gucci and Louis Vuitton. Hermès doesn't have a lot of "ancillary products," which is "very different than Gucci, which has shoes, socks, sweaters, perfume, makeup, a deal with North Face."
Hermès is 'fairly recession-proof'
Keeping it simple has helped Hermès hold its own as luxury brands start to lose their shine after a multiyear spending boom.
While brands like Gucci and Saint Laurent have more recently seen waning sales after a prior boost from "aspirational" luxury shoppers — younger, less affluent customers who flocked to these brands during the retail bubble of the past few years — Hermès's scarcity meant it was never for those shoppers to begin with. So, there aren't as many to lose at a time of recession worries.
"Being at the top of consumer desirability means Hermès will be the last brand consumers will give up. Hence its resilience," Bernstein analyst Luca Solca said.
Plus, while brands like Chanel and Louis Vuitton have been criticized for what consumers consider unfair price hikes, Hermès "had been very prudent increasing prices" from 2020 to 2022, Solca said. Between that and the company's attention to craftsmanship, the wealthy don't feel like they are being taken advantage of when inflation does cause price increases.
"It's fairly recession-proof because its key market audience that buys at the top end don't ride with the waves of recessions," Winston Chesterfield, the founder of Barton, a London consulting firm focused on the wealthy, told BI.
From the US to China, Hermès is expanding
But Hermès is growing. Last year, it opened two factories in France: one in Louviers, which will focus on the Kelly bag, and one in the Ardennes region. It also announced it will expand the Saint Junien facility in New Aquitaine (also France) which makes Kelly and Birkin bags. Plus, it opened storefronts in Aspen, Colorado; Naples, Florida; and Nanjing, China, and has one coming to Princeton, New Jersey, later this year.
That's raised concerns among some who've seen what happens if brands expand too fast.
"They're taking a really big step now, and in some cases, people might think it's risky because they are growing really fast," Herzog said, pointing to the 2022 opening of a boutique in Williamsburg, Brooklyn — not usually seen as a luxury destination.
Hermès also added more SKUs. In the beauty category, for example, it added eye palettes, mascara, and new lip colors, which are available at accessible prices compared to its other products. It has also announced a plan for a skincare line, and touted its new Maximors and Arçon bags in its annual earnings report.
While all of the above helped the company achieve revenue growth of 21% last year, it raises questions about losing the discipline that has made the brand so successful.
Hermès' family leadership may keep a tight leash on growth
One major factor that points to no change: The company's sixth-generation leaders — cousins Axel and Pierre-Alexis Dumas — who have been emphatic about maintaining a commitment to quality and brand equity. In fact, they were pivotal in defending against a takeover by Bernard Arnault's LVMH — which would have made them very, very rich.
"The Dumas family basically have just behaved as you expect them to behave, which is they control the ship and they maintain standards," Barton's Chesterfield said. "They've never gone after volume."
Like every generation before them (they are the great-great-great grandsons of founder Thierry Hermès), the Dumas cousins apprenticed in Hermès' atelier, learning the brand's signature saddle stitch and how to craft its most covetable items as they are still made today — by hand. For decades the cousins have resisted outsourcing, manufacturing techniques, and inexpensive materials that would boost profits but cheapen the goods. Instead, they've invested in growing the number of craftsmen, adding hundreds each year, opening schools and training centers to teach the art of stitching and how to screen print.
It's unlikely their stance would change now. Even the language around expansions — the company says it's opening workshops, not factories — points to the fact that its bags, scarves, and gloves will still be made by hand by Hermès artisans. With its current team of more than 7,000 craftsmen, there's still a hard and fast limit on how many Birkins, Kellys, and more can be made.
"We're not going to see Birkins manufactured at the rate of Coach. That's never going to happen," consultant Herzog said. "There's an element of scarcity that they will always have."
And while it is expanding into more affordable categories, those aren't its bread and butter. Beauty, for example, only makes up 3.6% of its revenue. So you may be able to afford a Hermès lip gloss — as many customers have always been able to afford a key chain or coin purse — but that doesn't mean you're getting anywhere near a Birkin or a Kelly.
As Herzog put it: "Go into Hermès today and say, I'd like to see a Birkin. See what happens."
And unless you are part of a very select group, expect to be mortified.