Hermès Shines in a Scruffy Luxury Market
Demand for French brand’s products is booming thanks in part to an unusual strategy, as rivals struggle
Hermès RMS 0.42%increase; green up pointing triangle is a brand that shows its real mettle in a downturn. The secret to its steady growth might be the restraint it shows in good times.
The French handbag maker’s shares gained 33% in 2023, making it the luxury sector’s best-performing stock. Parisian rival LVMH Moët Hennessy Louis Vuitton LVMUY 0.30%increase; green up pointing triangle, which owns Christian Dior CDI 0.35%increase; green up pointing triangle and is also considered one of the safest bets in luxury, rose 8%. But across the industry, most large European luxury stocks ended 2023 in the red as demand for expensive baubles sputtered following a record three-year shopping binge.
What is it about Hermès that keeps shoppers buying through slumps, even as other brands’ stores empty out? The Birkin handbag maker’s sales climbed 16% from a year earlier in the third quarter of 2023, while others such as Gucci’s owner, Kering, reported a fall. That kind of growth is hard to achieve now that Hermès is bigger than it was. The brand was on track to generate 13.3 billion euros, equivalent to $13.9 billion, in sales for the whole of 2023 and has roughly doubled in size in three years.
Catering to the superrich, who are the last to feel the pinch, helps Hermès in lean times. Luxury brands that target status-loving but not necessarily wealthy consumers are struggling as these buyers rein in extravagant purchases. Hermès isn’t immune to the trend: Its perfume and makeup business grew at less than half the rate of the group overall in its latest quarter. But these entry-level products contribute less than 4% of total sales, and demand for its other products is strong.
Hermès’s discipline in good times, when competitors can get greedy, might make it more resilient in downturns. The brand avoids becoming overexposed. In 2023, Hermès was on track to reinvest 4% of its revenue in promotions, which is low for the luxury industry. LVMH reinvested 12% of sales in marketing over the first half of 2023. And Hermès spends most of its marketing budget on events such as the recent Hermès in the Making show in Chicago rather than on splashy billboard campaigns.
The brand keeps demand hot by producing too few of its best-known goods. Hermès could probably find three buyers for every Birkin or Kelly handbag it makes—the company’s most popular products. But it only increases output from the factories that produce its handbags by 7% each year.
Starving the market this way means there are always buyers, even in downturns. But it also creates a lucrative opportunity for resellers. Because it is rare for shoppers to stroll in off the street and score a Birkin in an Hermès store, the bags fetch a fat premium in the secondhand market.
This markup is a useful measure of the brand’s heat for investors. Resellers can currently sell a pristine Birkin 25 handbag for 2.3 times its original $10,400 price tag, according to data from luxury website The Real Real. This is down from 2.5 times at the peak of the luxury boom in 2022 but still a healthy sign.
Hermès also leaves some money on the table by not raising prices as much as it could. The brand charges more for its goods when it needs to offset higher manufacturing costs or exchange-rate shifts, but rarely to boost profits. When demand for luxury goods was high during the pandemic, some rivals saw an opportunity to boost their margins. The cost of Chanel’s medium-size classic flap handbag rose 64% between 2019 and 2022 in the brand’s U.S. stores, compared with a 2.5% increase for an equivalent-size Hermès Birkin bag over the same period, according to data from PurseBop.
This conservative approach means Hermès doesn’t grow as fast as it could, but keeps its performance consistent. Steady growth is one reason why the stock is so expensive. Hermès’s shares change hands for 45 times projected earnings, compared with 22 times and 17 times for LVMH and Kering, respectively.
Unfortunately for rivals that would like to mimic Hermès’s success, the strategy isn’t easy to copy. Hermès can afford to grow below its potential because it can count on a backlog of future demand. Only certain watchmakers including Rolex and Patek Philippe, with waiting lists for their products, have a similar dynamic.
In 2009, the global luxury market shrank by 7.5% as the world reeled from the financial crisis, according to data from Bain & Co. Hermès managed to increase its sales that year by 8.4%. The brand looks set to buck trends again in the latest slowdown.