Hermès/leather: even lux bag makers cannot hide from supply snags
The business is less stellar than peers but operating profit trumped analysts’ expectations
Hermès, the last of the big European luxury houses to report annual profits, spoiled the party. Its defining leather goods and saddlery division, which produces roughly half of turnover, took a tumble in the fourth quarter. Revenues dipped 5.4 per cent. Hermès blamed supply constraints.
There have been other signs that all is not well in the world of tanning and saddle stitching. LVMH and Chanel have both increased the price of handbags. In China the price of the locally dubbed “little mah-jong bag” reportedly rose by half as much again, unleashing complaints from outraged netizens.
Luxury leather goods companies are battling procurement issues just like your high street burger joint. Supplies of hides fell when restaurants, shuttered by lockdowns during the pandemic, reduced their consumption of beef. About 70 per cent of leather comes from cattle, and slaughtering fewer of them means fewer hides.
This winter, European abattoirs were processing about one-fifth fewer carcasses than is typical for the time of year. Tanners, reluctant to run machinery at low utilisation levels, add a further brake — as do shortages of processing chemicals used in the process.
Leather making is a highly globalised industry. Much of the trade relies on partially processed hides going from the US and Brazil to China. Higher freight costs and logistics delays have had an impact. Changing demand from other buyers — such as the automotive and aviation industries — has added to production volatility.
Yet investors who knocked 5.5 per cent off the price of Hermès’ shares in morning trade on Friday in Paris were surely overreacting. The business is less stellar than peers LVMH and Kering. But operating profit trumped analysts’ expectations.
This is an industry that cannot only bear sticker shock but turn it to an advantage, stimulating sales ahead of expected increases and adding to the cachet of goods. That owes more to marketing than it does to raw materials. After all, designer Stella McCartney’s vegan handbags can easily run into four figures without so much as a hint of leather.