Earlier this week, an intriguing article appeared on the website Business of Fashion about Hermes. This article was written by world renowned top luxury analyst, Luca Solca, head of luxury at BNP Exane Paribas. Recognizing Solca’s authority, in the past, PurseBop has shared many of his financial articles. The focus of his new article is laid out in the title: “Is Hermes Drifting?” By drifting, he means (in peril of) losing ground as the industry’s leader. According to Solca, Hermes is shifting away from two critical strategies that elevated the company above peers like LV or Chanel: demand frustration and category segregation. To him, if this shift holds, Hermes may not be as valuable as investors think. This is an interesting theory to present especially as Hermes’s stock currently is close to a 5-year high. So, what does Solca mean? Let’s talk about demand frustration and category segregation.
Demand frustration is industry jargon for what we’d all call exclusivity. As we know well, the primary allure of the Birkin or Kelly is the difficulty in acquiring one. To some, it seems Hermes doesn’t want to actually sell Birkins and Kellys. Lucky purchasers call it “scoring a bag,” as though it’s an accomplishment. Spouses are left confounded that you cannot simply walk into a store and buy what you want. Recall this light-hearted NPR story of a journalist on the quest to buy a Birkin (read: Bagging a Birkin).
Category segregation refers to the immense price gap between Hermes’s exclusive handbags and other categories like fragrances and scarves. The aim here is to offer a small slice of the Hermes pie to aspirational customers who may not be willing to shell out $10,000+ for a bag, but might be willing to buy a $400 silk scarf or a $100 perfume to display the bottle on the counter.
According to Solca, Hermes is moving away from both of these strategies. While we think there’s some merit to his overall argument, we disagree on some substantive points. As evidence for his notion that Hermes bags are becoming more available, Solca states that he was able to consistently find Birkins available for sale across Europe. Although this claim is quite broad, there is a degree of merit to it. Discussion platforms and highly engaged social media outlets are replete with stories of customers being offered bags without an extensive purchase history as in the past, or being given a selection of two or even three bags. We receive tons of emails from happy shoppers having scored that first Birkin or Kelly while traveling. As delighted as we are to hear these tales, we do wonder– has it perhaps become a little easier? Similarly, is it becoming easier for those willing to fork out 60K to purchase an exotic skin Birkin? Or maybe even get access to Special Orders? Perhaps not unrelated, we also are seeing diminishing margins for the resellers on new bags. A few years ago could you buy a new Birkin or Kelly for just a couple thousand dollars more than retail? We don’t think so.
But this anecdotal evidence fails to take into account the economic realities of the current global market. A huge slowdown in Asian sales over the past few years stemming from slow overall growth, currency crises and a crackdown on corruption, coupled with a severe weakening of the European market in 2016 after a series of terrorist attacks in France and Brussels and the UK’s Brexit vote, have pushed the luxury industry as a whole against the ropes. The fact that bags are more available shouldn’t come as a huge surprise. First, fewer buyers from or in Asia mean more bags available in other parts of the world, even assuming the same inventory. Second, Hermes did add a new factory a couple of years ago. Third, Hermes needs sales growth just like any other business. To do that it needs inventory readily accessible to the customer. This might be another reason we are seeing tons of leather goods available at Hermes.com, the Birkin and Kelly always being the exception of course.
Regarding category segregation, Solca argues that bag offerings like the Evelyne, Garden Party and Picotin, which he says are only slightly more expensive than €1,000, are bringing down the prestige of the more exclusive bags. By his logic, customers are meeting their desire to own Hermes by buying these bags instead of Birkins or Kellys. For starters, this premise is wrong: we cannot locate any Hermes bags for €1,000. Of the bags Solca mentions, the least expensive we have seen on line is US$2050 and it is not leather. Number disparity aside though, we don’t believe that anyone satisfies a Birkin/Kelly craving with an Evelyne, Picotin or Garden Party. Some people do prefer the less-recognizable designs while still appreciating Hermes quality. However, for most, the Evelyne/Picotin/Garden Party bags are more of a gateway drug, so to speak. Moreover, none of these bags have the history or legacy of the Birkin and Kelly. Devoted owners of these bags are well-familiar with the accounts of how Jane Birkin launched her name-sake bag and Grace Kelly bestowed Hollywood and royalty glamour on hers. And you can be sure that all owners appreciate these bags for the magnificent quality and the attention to detail. For all the emails we receive inquiring how to purchase Hermes bags, none are about Evelynes or Picotins.
As a final thought, Solca’s article was published in the Business of Fashion, which according to the founder and CEO’s “About” page is partially owned by Hermes rival LVMH. It took a minority stake in 2015 after BOF sought a Series A investment round. We’re not suggesting there’s any ulterior motive here, but the piece is curious. Solca dances around the idea that Hermes is overvalued, but he finally shows his cards at the end “…as the company’s business model becomes less special, should its multiple not reflect this?”
What do you think? Do you feel a shift in Hermes core strategy? Do you sense it is easier to get a Birkin and Kelly? Have you noticed an increase of availability in your market? Share your observations from around the world. We want to know…
Original Content Adapted from http://www.pursebop.com/is-hermes-still-playing-hard-to-get/