Extending the luxury brand to product ranges beyond its traditional areas of competence is a classic business-building strategy in the luxury market. Along the way, they take advantage of their reputation in one sphere to extend it to another they haven’t played before.
Strategy is so fundamental in luxury that JN Kapferer and V. Bastien devoted an entire chapter to it in their seminal book, The Luxury Strategy: Break the Marketing Rules to Build Luxury Brands.
Hermès is a brand that has stretched itself with a lot of poise. Since its founding in 1837 as a Parisian harness and saddlery shop serving the European aristocracy, it has ranged from its core competency in leather goods to silk scarves and ties, ready-to-wear fashion, perfume and beauty, jewelry , clocks and home furnishings.
Recently, it has spread into technology, not only as an alternative distribution channel, but also into products through its Apple Watch partnership. And now he’s set his sights on the metaverse as the next frontier.
In the contemporary luxury market controlled by multinational conglomerates, Hermès is an outlier. It remains largely family-owned, having successfully fought off Bernard Arnault’s ambitions to add it to his LVMH empire. It is run by Axel Dumas, a scion of the Hermès-Dumas family, and is vertically integrated with about half of its nearly 18,000-person workforce dedicated to production.
While following the luxury-lifestyle business model like many other luxury brands, Hermès hasn’t resorted to downgrading, unless you call $180 shoelaces or $300-plus key chains. And it only collaborates with brands that share its elevated aesthetic, like Apple and rolls royceunlike others that have borrowed Nike’s swoosh or Disney’s Mickey.
In its last shareholders meeting, Axel Dumas repeatedly described Hermès as a house of creativity driven by the pursuit of excellence. “We are remembering the central parts of creation as our model,” he stated. “We see the display of amazing amounts of creativity fueled by constant curiosity.”
Staying true to its commitment to craftsmanship and creative excellence, Hermès is the most aspirational brand, not in the commonly used sense of a brand that offers the look of luxury at a more affordable price, but a true aspiration because it is accessible only for the few not the many.
Maintaining the elusive quality of aspiration is what got Hermès where it is today and will keep it in the future. After suffering a 7% drop in sales during the pandemic year of 2020, it posted 33% growth at constant exchange rates in 2021 over 2019, reaching $9.6 billion. Net profitability went from 22.2% of revenues in 2019 to 27.2% in 2021. It closed the year with 303 stores.
Its growth in the first quarter of 2022, which ends in March, is even more impressive, up 72% from the first quarter of 2019, reaching $3 billion from $1.7 billion in the first quarter of 2019. Your most recent results indicate where your greatest opportunities lie.
For example, sales in the Asia-Pacific region doubled over the same period in 2019. The Americas saw a 66% increase, while Europe lagged behind, advancing just 21%.
In both years, leather goods and saddlery were its source of revenue, growing a dynamic 48% from 2019. But in 2022, Hermès is less dependent on the category than in the past, moving from 50% of revenue in the first quarter from 2019 to 43%. % in 2022.
Ready-to-wear and accessories, its second-largest category, nearly doubled in sales. Its other Hermès sectors, specifically jewelry and home, advanced 182% and watches were up 212%. Perfume and beauty and silk and textiles advanced 40% and 41%, respectively.
Stores take center stage
As important as Hermès’ e-commerce capability has been during the pandemic: fashion business reports that online sales in the US doubled from 6% of revenue before to 14% after, and its ability to reach new customers, with nearly 80% of customers online Classified as new in 2021, its stores are where customers can get the full brand experience.
Given its global footprint, each store is designed and marketed for the local community with new stores in Detroit and Aventura Mall in Florida opening last year. Internationally, it opened new stores in Shenzhen Bay (China) and Tokyo Omotesando (Japan) and expanded or renovated its store on Rue de Sèvres, Paris, along with stores in Lyon, Milan, Zurich, Brisbane, Shanghai Plaza and Beijing China World, Tokyo and The American Dream Mall in New Jersey.
Last month, Hermès opened an expanded 7,100-square-foot store in Costa Mesa’s South Coast Plaza shopping center with a Southern California feel. Also on deck this year is a new store in Topanga, north of Los Angeles, and an expanded flagship store at 706 Madison Avenue, just down the road from its current location. Next year there will be a store in Princeton, NJ customized for that Ivy League community.
“It’s going to be a lovely little store,” shared Bob Chavez of Hermès, who oversees the Americas, with fashion business, adding how physical stores complement the brand’s omnichannel efforts. “We’ve realized that customers want that localized convenience.”
So now Chavez is looking for locations in lower-wealth communities such as Aspen, Austin and San Antonino Texas, Tampa, Nashville, Minneapolis, the Williamsburg area of Brooklyn, and Portland, OR.
Housing offers strong growth potential
Stores open the door to sales in the expanded range of product categories where seeing is believing. Chance discovery, the “I didn’t know Hermès did that” phenomenon, happens more easily in the store than online.
The company sees a long way to go for housewares in particular. Hermès loyalists want not only to dress elegantly, but also to furnish their homes and set their tables with the brand.
Housewares are a particular workhorse for Chavez, who started in Bloomingdale’s housewares department. He reported that sales of home goods in the Americas outpaced growth globally with sales of blankets, pillows and tableware growing “massively” last year.
It took some persuasion for the head office to accept their vision for the house of Hermès, but they are convinced. “Even Paris was saying, why are you so focused on home? Now we have a booming furniture business. It started as a niche and now we can’t do enough,” he said.
welcome to the metaverse
Several luxury brands have already crossed over into the metaverse. For example, Gucci, Balenciaga, Burberry, and Dolce & Gabbana have released virtual goods for player avatars to wear and decorate their virtual worlds using NFTs (non-fungible tokens) as proof of ownership.
Hermès got a rude introduction to the metaverse late last year when NFT artist Mason Rothschild unveiled a virtual knockoff MetaBirkin bag. Reportedly, the artist’s initial MetaBirkin sold for $40,000. The company let slip the artist’s previous Baby Birkin that was offered in a single NFT. MetaBirkins, by contrast, come in volumes of 100 that can be resold on the secondary market.
The company moved quickly against artist MetaBirkin this January with a lawsuit filed in US District Court in southern New York alleging trademark infringement, business market dilution, and cybersquatting. The artist argues that he is simply exercising his First Amendment rights, as Andy Warhol did in the 1960s with his famous images of Campbell’s soup cans.
The case is yet to be decided, but the company sees the writing on the wall: the Hermès brand means something in the metaverse, and there’s huge money-making potential there.
At the shareholders’ meeting, Dumas announced curiosity and interest in the metaverse, but declined to go any further, saying it has potential as a “great media outlet,” with communications being essential to the branding process.
“At the moment, we are interested in seeing how this world evolves and changes,” he said. “But this is not a priority of ours. We are primarily interested in learning and monitoring, rather than rushing into the metaverse,” as the company remains committed to creating physical objects.
Given how quickly the metaverse is evolving, it’s likely that sooner rather than later Hermès will play there too, and probably for a lot more money than Rothschild saw in his work. That’s because Hermès understands better than most of the world’s biggest luxury brands how building consumer aspiration works.
“The luxury industry is built on a paradox: the more desirable the brand becomes, the more it sells, but the more it sells, the less desirable it becomes,” said former Hermès chief executive Patrick Thomas. “I think the Hermès vision provides a solution to the dilemma.”