Hermès looks beyond bags to stores, home and the metaverse for growth
Stretching the luxury brand into product lines beyond their traditional areas of expertise is a classic strategy for building businesses in the luxury market. Over time, they take advantage of their reputation in one sphere to expand it into another where they have never played before.
Strategy is so fundamental in luxury that JN Kapferer and V. Bastien devoted an entire chapter to it in their seminal work, The luxury strategy: breaking the rules of marketing to create luxury brands.
Hermès is a brand that has stretched with great aplomb. Since its founding in 1837 as a Parisian harness and saddlery shop serving the European aristocracy, it has expanded from its core competence in leather goods to silk scarves and ties, ready-to-wear, perfume and beauty, jewelry and watches and furnishings.
Recently, it has branched out into technology, not just as an alternative distribution channel, but into products through its partnership with Apple Watch. 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-run, having successfully fought Bernard Arnault’s ambitions to add it to his LVMH empire. It is run by Axel Dumas, a descendant of the Hermès-Dumas family, and is vertically integrated with around half of its approximately 18,000 employees dedicated to production.
Although it follows the luxury lifestyle business model like many other luxury brands, Hermès has not resorted to downscaling unless you call it $180 laces or $300+ keychains. And he only collaborates with brands that share his elevated aesthetic, like Apple and Rolls Royce, unlike others who have borrowed the swoosh from Nike or Mickey from Disney.
During its last general meeting, Axel Dumas never ceased to describe Hermès as a house of creativity driven by a quest for excellence. “We remember the central parts of creation as our model,” he said. “We see the unfolding of an incredible amount of creativity fueled by constant curiosity.”
By staying true to its commitment to craftsmanship and creative excellence, Hermès is the ultimate aspirational brand, not in the commonly used sense of a brand that offers the semblance of luxury at a more affordable price, but true aspiration because it is only accessible to a few, not many.
Maintaining the elusive quality of aspiration is what has brought Hermès to where it is today and will keep it going into the future. After suffering a 7% decline in sales in the pandemic year 2020, it posted 33% growth at constant exchange rates in 2021 compared to 2019, reaching $9.6 billion. Net profitability increased from 22.2% of sales in 2019 to 27.2% in 2021. It ended the year with 303 stores.
Its growth in the first quarter of 2022, ending in March, is even more impressive, up 72% from the first quarter of 2019, reaching $3 billion compared to $1.7 billion in the first quarter of 2019. Its most impressive results recent developments point to where its biggest opportunities lie. .
For example, sales in the Asia-Pacific region doubled compared to the same period in 2019. The Americas recorded a 66% increase, while Europe lagged behind, advancing only 21%.
Over the two years, leather goods and saddlery have been its cash cow and have seen dynamic growth of 48% compared to 2019. But in 2022, Hermès is less dependent on the category than in the past, growing from 50 % of revenues in the first quarter of 2019 to 43%. % in 2022.
Ready-to-wear and accessories, its second category, almost doubled its sales. Its Other Hermès Sectors, notably jewelry and home, grew by 182% and watches by 212%. Perfumery and beauty and silk and textiles grew by 40% and 41% respectively.
Stores take center stage
As important as Hermès’ e-commerce capability has been during the pandemic – Business in vogue reports that online sales in the United States have doubled from 6% of revenue before to 14% after – and its ability to reach new customers, with nearly 80% of online customers classified as new in 2021, its stores are where customers can fully enjoy the brand experience.
Given its global footprint, each store is designed and marketed for the local community with new stores in Detroit and the 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 in Paris, as well as stores in Lyon, Milan, Zurich , Brisbane, Shanghai Plaza and Beijing China World, Tokyo and New Jersey’s American Dream Mall.
Last month, Hermès opened an expanded 7,100 square foot store in the South Coast Plaza mall in Costa Mesa with a Southern California vibe. Also on deck this year are a new store in Topanga, north Los Angeles, and an expanded flagship store at 706 Madison Avenue, just up the street from its current location. Next year there will be a store in Princeton, NJ, customized for this Ivy League community.
“It’s going to be a lovely little store,” shared Bob Chavez of Hermès who oversees the Americas, with Fashionable Business, adding how physical stores complement the brand’s omnichannel efforts. “We realized that customers want this localized convenience.”
So now Chavez is looking for locations in smaller wealth communities, like Aspen, Austin and San Antonino Texas, Tampa, Nashville, Minneapolis, the Williamsburg area of Brooklyn and Portland, OR.
The house offers great potential for growth
The stores open the door to sales in the expanded range of product categories in which it has expanded where seeing is believing. Chance discovery – the “I didn’t know Hermès made this” phenomenon – happens more easily in-store than online.
The company sees a long trail for housewares in particular. Hermès devotees not only want to dress in her finest finery, but also furnish their homes and set their tables with the brand.
Homewares are a particular workhorse of Chavez who got his start in Bloomingdale’s home goods department. He said homeware sales in the Americas outpaced global growth, with sales of blankets, pillows and tableware rising “massively” last year.
It took a bit of persuasion to convince the head office of his vision for the house of Hermès, but they are convinced. “Even Paris was like, why are you so focused on home? Now we have a booming furniture business. It started with a niche and now we can’t do enough,” he said.
Welcome to the Metaverse
A number of luxury brands have already crossed into the metaverse. For example, Gucci, Balenciaga, Burberry, and Dolce & Gabbana have launched virtual goods that gamer avatars can wear and decorate in their virtual worlds via NFT (non-fungible token) as proof of ownership.
Hermès got a rough introduction to the Metaverse late last year when NFT artist Mason Rothschild showed off a MetaBirkin virtual copy bag. The artist’s initial MetaBirkin reportedly sold for $40,000. The company let slip the artist’s first Baby Birkin which was offered in a single NFT. MetaBirkins, on the other hand, is available in volumes of 100 which can be resold on the secondary market.
The company acted quickly against artist MetaBirkin in January with a lawsuit filed in the US District Court in Southern New York alleging trademark infringement, trademark 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 Campbell Soup Can images.
The case is not yet decided but the company sees the writing on the wall: the Hermès brand means something in the metaverse and there is great potential for earning money there.
At the shareholders’ meeting, Dumas expressed his curiosity and interest in the metaverse, but refused to go beyond the fact that it has potential as a “great medium of communication”, communications being essential to the brand building process.
“At the moment, we are interested in seeing how this world develops and changes,” he said. “But that’s not our priority. We’re 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 moving, it’s likely that Hermes will be playing it sooner rather than later and likely for far more money than Rothschild has ever seen from his work. Indeed, Hermès understands better than most of the biggest luxury brands in the world how the construction of consumer aspirations 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 Patrick Thomas, former CEO of Hermès. “I believe that Hermès’ vision provides a solution to the dilemma.