Hermès Banks on ‘Workshop’ Approach
● As it prepares to cross the threshold of 6 billion euros in revenues this year, the French luxury brand touts its artisanal roots.
PARIS — Though few will admit it, many luxury brands rely on marketing teams to drive design. Some deploy huge advertising budgets to launch new products. Hermès International, on the other hand, is making the human touch its main selling point as it prepares to cross the threshold of 6 billion euros in revenues this year.
Hermès chief executive officer Axel Dumas on Wednesday underlined the importance of craftsmanship as the
maker of Birkin bags and silk scarves reported a 15 percent rise in net profit last year on the back of strong demand for its products, especially among Chinese consumers.
The company hired 800 people, including 500 in France, to keep pace with the rise in activity, bringing its workforce close to 14,300 people. It has a series of new leather goods manufacturing plants under construction, with two sites set to open in 2020 and a third in 2021.
“We try to be a workshop,” Dumas said at a press conference at the brand’s headquarters here. “This is not the most widespread model, so it’s essential for us to show that this model, which is slightly different, can also produce strong economic results.”
It’s also the reason why Hermès prefers to keep its endeavors in-house, whether it’s the recent launch of its e- commerce site in China or the upcoming introduction of cosmetics and skin care beginning in 2020.
Noting that the brand does not have a marketing department — a point he hammered home repeatedly during the 80-minute presentation — Dumas said Hermès was not concerned with meeting the expectations of specific customers, such as Chinese Millennials, who are among the main drivers of its growth in Asia.
“Since we don’t have a marketing department, we don’t study these clients, whoever they may be, and we never design products for these clients,” he said. “We don’t do anything — we just wait.”
The approach appears to be working. The brand’s revenues in Asia-Pacific, excluding Japan, were up 13.7 percent at constant exchange rates last year, despite ongoing trade tensions. Dumas said the launch of its e- commerce site in China last October was so successful, Hermès ran out of stock.
Chinese consumers are snapping up shoes — the local web site touts men’s sneakers including the Team, Stadium and Trail models — and gold bracelets, he said. Explaining the company’s “if we make it, they will buy it” attitude, he noted that 85 percent of Hermès products are made in France, and 85 percent sell overseas.
“I think it’s important, despite our growth targets, despite our ambition, to keep this integrity of not having a marketing department,” the executive said.
“We are here to invent what they will desire tomorrow, thanks to our creations, rather than satisfying their desires today. The job of the house is to make Parisian products to sell across the world, not to make products for specific categories of people,” he insisted.
That includes accepting the possibility that some goods will not sell. “What makes the strength of a creative house is that we have the right to get it wrong,” Dumas argued. “It’s cheaper anyway to launch an artisanal product than an industrial one, and we never do a big global launch for a product with an ad campaign.”
It remains to be seen whether that will also be true of the new beauty ranges, which are being developed in-house but will be manufactured by third-party suppliers, mainly in France and Italy. Dumas signaled that Hermès has big ambitions in the segment, which is why — unlike rival brands such as Saint Laurent or Gucci — it hasn’t outsourced the running of the activity to a beauty giant like L’Oréal or Coty.
“It’s quite exciting: It’s a new activity, with all the risks that involves, so we will deploy it progressively, initially in our own stores mainly, in a limited distribution so that we can learn,” he said.
“Obviously, we hope to have the biggest scope possible. We are trying to do it humbly and cautiously, because it’s a big market that’s already full of strong players, and therefore we have to find our place in it, because we hope to sell a product and not a brand,” Dumas added.
“We have chosen to do it ourselves, whether for fragrances or beauty, so we will necessarily have a learning curve and it will involve a certain risk. But on the other hand, if it works, we will reap all of the margin and results,” he said.
Hermès posted a net profit of 1.4 billion euros last year, with sales rising 7.5 percent to 5.96 billion euros. At constant exchange rates, revenues were up 10.4 percent. “We see no change in trend,” Dumas said of the year to date.
The executive said the brand did well across soft and hard luxury, noting that both iconic handbag styles, such as the Birkin, Kelly and Constance, and more recent models, including the Mosaïque and 24/24, helped drive a 9.4 percent rise in revenues at constant exchange rates in the leather goods and saddlery division.
Ready-to-wear did “marvelously” well, while watches rebounded and jewelry enjoyed strong demand. The brand even branched out into esoteric products such as a jukebox, surfboards, skateboards and rollerskates, while one of the first sales on its revamped U.S. e-commerce site was a 12-foot couch, Dumas reported.
Hermès plans to raise prices by an average of 3 percent to 3.5 percent this year, following an average increase of 1 percent in 2018. Prices are set to increase 5 percent to 6 percent in China and Japan, and 3 percent in the U.S., Hong Kong and Macau, said Eric du Halgouët, executive vice president finance at the house.
The luxury brand reiterated its “ambitious” goal for organic sales growth in the medium term, despite growing economic, geopolitical and monetary uncertainties around the world. Dumas noted that Hermès tries to have a balanced regional mix in order to spread any potential risks, such as the impact from Brexit.
In 2018, Asia-Pacific accounted for 36 percent of revenues; Europe, excluding France, for 19 percent; the Americas, for 18 percent; France and Japan for 13 percent each, and other markets for one percent.
The company has seen a rise in tourist spending in London and Milan as travelers shun Paris due to the ongoing violent antigovernment demonstrations by the gilets jaunes, or yellow vests, protesters. Meanwhile, Hermès has stockpiled products in its U.K. stores ahead of Britain’s possible withdrawal from the European Union.
“The most worrying thing is the global effect that Brexit will have on the U.K. economy,” said Dumas, noting that if the promised benefits fail to materialize, British consumers could tighten their purse strings.
Hermès plans to keep splitting investments between traditional and emerging markets.
This month, the company unveiled stores in Orlando, Fla., and the Thai island of Phuket, and further openings are planned this year in New York’s Meatpacking District; Xiamen, China, and Warsaw, Poland, among others. E-commerce will be rolled out to Japan by the end of the first half, to be followed by the rest of Asia.
Hermès said operating profit in
2018 increased 6.4 percent to 2 billion euros, with an operating margin of 34.3 percent, down from 34.6 percent the previous year, with the company citing “particularly healthy growth and good cost control.”
The French luxury firm will propose a dividend of 4.55 euros a share at its general meeting on June 4, and has offered pay rises or bonuses to all its staff.
Asked whether he was concerned in the longer-term about a trend for people to consume less as part of an environmentally conscious approach, Dumas again returned to the concept of craftsmanship.
“I’m an Hermès fanatic, so I think we are part of the solution to the world’s problems, not the cause. Faced with reducing consumption, I want to say: if there’s one thing we do at Hermès, it’s making products that stand the test of time,” he said. “What could be better than a young girl coming to us with her grandmother’s Kelly bag and asking us to repair it so she can use it?”
"What makes the strength of a creative house is that we have the right to get it wrong.” AXEL DUMAS, HERMèS