Hermès International S.A.

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Hermès International S.A.

24, rue de Faubourg Saint Honoré
F-75008 Paris 08
France
Telephone: (40) 17 47 17
Fax: (40) 17 47 18

Public Company
Founded: 1837
Employees: 4,096
Sales: FFr 6.08 billion (US$1 billion)(1999)
Stock Exchanges: Paris
Ticker Symbol: HRMS
NAIC: 315999 Other Apparel Accessories and Other Apparel Manufacturing; 316991 Luggage Manufacturing; 316992 Women’s Handbag and Purse Manufacturing; 32562 Toilet Preparation Manufacturing; 315992 Glove and Mitten Manufacturing; 332211 Cutlery and Flatware (Except Precious) Manufacturing; 44815 Clothing Accessories Stores

Known as “one of the world’s most elegant businesses,” Hermès International S.A. is a manufacturer and marketer of upscale luggage, apparel, and accessories. From a 19th-century foundation in leather goods, the company (pronounced “air-may”) diversified into silk goods, ready-to-wear clothing, and perfume. Its ongoing dedication to family ownership and management, impeccable craftsmanship, and careful protection of the brand’s mystique set Hermès apart from many of its French luxury goods compatriots. With or without the venerable trademark, Hermès products are distinguished by their uncompromising quality, a concept summarized in a family credo: “Que l’utile soit beau” (“That the useful be beautiful”).

Founding a Luxury Dynasty in the 19th Century

Hermès’s trademark calèche, or horse-drawn carriage (based on a drawing by Alfred de Dreux), harkens back to its origins as a wholesale saddlery business. Founded in 1837 by Thierry Hermès, the firm gained renown as a producer of one-of-a-kind saddlery for European noblemen. It was rumored that coronations were sometimes postponed for years until Hermès could create original carriage designs.

The functional and decorative “saddle stitch” used by Hermès craftsmen to join pieces of leather together would come to represent the branded goods’ quality and simple elegance. When executed by hand (as it was throughout Hermès’s history), the technique involved punching holes through multiple layers of leather, then alternating needles at either end of a beeswaxed linen thread through the holes in a figure-eight pattern. The company continued to custom-make saddles, investing 20 to 40 hours in each, throughout the 19th and 20th centuries.

Thierry Hermès’s son Emile-Charles moved the family business to 24, rue du Faubourg St. Honoré—a site that would become one of Paris’s most prized pieces of real estate—and launched retail sales sometime before the turn of the 20th century. He sold his stake in the business to brother Emile-Maurice in 1922.

Faced with the ascent of the automobile and corresponding obsolescence of the carriage, Emile-Maurice Hermès began to diversify into travel- and sport-related leather goods. Still, he never abandoned Hermès’s “horsey heritage,” though saddlebags would give way to luggage, wallets, and handbags. The famous Hermès “Kelly” bag, named in the 1950s after Princess Grace (née Kelly) of Monaco, who was often photographed with the accessory, started out as a specialty 19th-century saddlebag and was reintroduced as a handbag in the 1930s. The attention to detail that had become a family hallmark was applied to every new Hermès product. The construction of each Kelly bag, for example, required 18 hours of work by a single artisan. The association with royalty and celebrities—the Hermès “Constance” purse was a favorite of Jacqueline Kennedy Onassis—helped burnish the brand image. Although the company introduced a dozen new handbag styles each year, these two designs-the Kelly and the Constance-would remain in consistent demand.

Another company innovation under the leadership of Emile-Maurice Hermès was his purchase of a two-year patent on a Canadian invention, the fermeture éclair, or zipper, which he brought back to France. The closure became so closely associated with Hermès products (handbags, jockey silks, and leather gloves) that Frenchmen came to call it a fermeture Hermès. One oft-repeated “zipper story” finds the Prince of Wales, a well-known fashion maven, requesting a zippered leather golfing jacket, thereby inaugurating the Hermès line of leather apparel. The family launched ready-to-wear clothing, leather-banded watches, and leather gloves in the 1920s as well.

Emile-Maurice Hermès passed the family business on to his son-in-law, Robert Dumas, who would direct the design and production of the first Hermès carré, or scarf, in 1937. The custom-ordered silk accessory featured a print of white-wigged ladies playing a popular period game in a design the company entitled Jeu des Ombinus et Dames Blanches. Over the years the Hermès scarves became ingrained in the French culture as a traditional heirloom. Although scarf production slackened in the mid-20th century, by the mid-1980s Hermès would be unveiling a dozen new designs each year.

Like the production of leather goods, Hermès’s scarf-making process was totally dedicated to the pursuit of quality. Vertical integration was an important factor in that cause. Hermès oversaw the entire process, from the purchase of the raw Chinese silk at auction, its spinning into yarn, and its weaving into a fabric twice as strong and heavy as that found in most scarves. Hermès scarf designers would spend years composing new prints, which were individually screen-printed with vegetable dye. In the process, each color is allowed to dry for one month before the next is applied. Hermès artisans would choose from a palette of over 200,000 colors; the most complicated design featured 40 colors. Hand-rolling and -hemming the scarves, which consumed a half-hour each, completed the process.

Despite this painstaking work, Hermès managed to put out two new scarf collections a year in the 1990s. Some were limited designs, part of annual themes, like “the road” (1994) or “the sun” (1995), while other perennial favorites remained in circulation for decades. Scarf motifs ranged from germane—the French Revolution, French cuisine—to the unexpected, including the flora and fauna of Texas. Some considered the scarves collectible works of art. Overall scarf production volume would multiply from 250,000 in 1978 to 500,000 in 1986 and 1.2 million in 1989.

The Hermès union of quality materials and time-consuming handcraftsmanship was reflected in its high retail prices. By the mid-1990s one Hermès scarf commanded US$245, a tie cost US$115, and a Kelly purse set its owner back about US$3,500. High demand added another element to the cost: customers were known to wait more than a year for orders to be filled.

Over the decades Hermès also earned a reputation for creating unique custom articles. Urging clients to faites nous rêver (make us dream), Hermès designers and craftsmen fashioned unusual special orders. The custom items ranged from the functional, such as a calfskin fly-fishing tackle box, to the frivolous, including an ostrich-skin Walkman case. These limited-edition novelties did not come cheap either; indulgences such as US$175 chewing-gum holders made of leather, US$1,000 silk kites, US$20,000 alligator golf bags, and US$12,500 mink jogging suits were out of reach for most of the world’s consumers.

Turnaround in the 1980s

During the 1970s some analysts suspected that the profitability of Hermès was being sacrificed on the altar of quality. The company’s dedication to modest styles and classic, natural materials (silk and leather) clashed with the era’s penchant for newer man-made materials—like plastic and polyester—as well as sexy fashions. During this time, the company’s five percent annual sales growth rate lagged France’s 15 percent inflation rate, and at one point, the company’s workrooms—known familiarly as la ruche (the beehive)—fell silent during a two-week lapse in orders.

When Robert Dumas died in 1978, his son, Jean-Louis Dumas, assumed the company’s top post. The younger Dumas had worked as a buyer for Bloomingdale’s before returning to the family firm in 1964, and this “outside” experience may have been the catalyst for the sweeping turnaround he engineered in the 1980s.

Dumas’s multifaceted strategy expanded and revitalized the product line, strengthened the brand’s youth appeal, extended vertical integration, and targeted the United States and Asia as fertile ground for growth. Dumas hired two young clothing designers, Eric Bergère and Bernard Sanz, to revive the apparel line, and together they added unusual new garments such as python motorcycle jackets and ostrich-skin jeans, which they characterized as “a snazzier version of what Hermès has been all along.” A 1979 French advertising campaign that featured a young, denim-clad woman accessorized with an Hermès scarf introduced the branded goods to a new generation of consumers. As one observer noted, “Much of what bears the still-discreet Hermès label changed from the object of an old person’s nostalgia to the subject of young peoples’ dreams.” By 1990 Hermès had expanded its array of merchandise to include 30,000 different items.

Dumas also revived the Hermès passion for vertical integration, which brought quality control at all phases of production under the family’s watchful eyes. For example, Hermès had launched a line of “art de vivre”—giftware and home furnishings—in 1954. In the 1980s Dumas strengthened the company’s hold on its suppliers, acquiring major stakes in such prestigious French glassware, silverware, and tableware manufacturers as Puiforcat, St. Louis, and Perigord. These tactics positioned tableware as one of Hermès’s most promising business segments for the 1990s.

Company Perspectives:

Over the course of the following years, Hermès will pursue its strategy based on the creativity and quality of its products, the reinforcement of its know-how in each of its markets, as well as the development of new client areas.

The company’s explosive growth—annual sales multiplied from about US$50 million in 1978 to US$460 million by 1990, and its net profit grew even faster—had as much to do with changing consumer values as with Dumas’s revitalization. The trend of the 1960s and 1970s toward synthetic materials reversed, and a wave of conspicuous consumption engrossed consumers, especially Japanese and U.S. “nouveau riche.” Although demand for luxury goods stalled somewhat in the early 1990s, the global market surged overall from US$4 billion in 1988 to nearly US$6 million in 1994, according to France’s luxury trade group, the Comité Colbert.

Dumas took advantage of the resurgence in Hermès’s popularity by boosting locations and licensed boutiques in the United States, Japan, Asia, and the Pacific Rim. The number of Hermès-owned stores quadrupled from 15 in 1978 to 60 in the early 1990s, as the total number of outlets worldwide grew to more than 225.

In the United States, sales tripled from US$20 million in 1986 to nearly US$60 million in 1988 under the direction of Chrysler Fisher, an American. Hermès had first entered the U.S. market in the 1930s, when its products were offered at Lord & Taylor’s New York store. The company later pulled out of the United States, only to relaunch a line of ties at Neiman-Marcus in the 1960s. Fisher, a former Neiman-Marcus executive, tailored Hermès to the convenience-oriented U.S. consumer with the addition of a toll free number, a customer service department, and direct mail. When Fisher resigned in 1993, Laurent Mommeja, a sixth-generation Hermès descendant, would take over leadership of American operations and announce plans to double U.S. sales by 1998.

Growth in the 1990s

Jean-Louis Dumas continued to head Hermès as it experienced on even greater growth in the 1990s. Stanley Marcus, chairman emeritus of Neiman-Marcus, called Dumas “one of the brightest retailers in the world.” Credited with building Hermès’s worldwide retailing empire by directing an intense program of geographic expansion, Dumas helped shift the company’s sales from its reliance on Europe to the United States and Asia/Pacific regions. Although more than 50 percent of annual sales were still generated in Europe in the early 1990s, the Asia/Pacific region contributed nearly one-third of annual revenues, and the United States pitched in 11 percent of yearly turnover. Hermès enjoyed average annual sales increases of 23 percent from 1984 to 1994 but expected that heady growth to slow to single-digit percentages in the mid- to late 1990s.

Under pressure from some factions in the extended family, Hermès made its first public stock offering in June 1993. The equity sale generated more excitement than the semiannual sales at Hermès’s flagship store: the 425,000 shares floated at FFr 300 (US$55) each were oversubscribed by 34 times. Dumas told Forbes magazine that the equity sale helped lessen family tensions by allowing some members to liquidate their holdings without squabbling over share valuations among themselves. By 1995 the shares were trading at FFr 600. The Hermès family nonetheless maintained tight control; some 80 percent of the company’s stock remained in the family, earning Jean-Louis Dumas and family a place on the Forbes list of billionaires. Such tight familial control prompted Mimi Tompkins of U.S. News & World Report to dub the company “one of Paris’ best-guarded jewels.”

Perfume was one of the few Hermès ventures to struggle. This business segment had been launched by Jean Guerrand, a son-in-law of Emile-Maurice, in 1951 with the introduction of “Eau d’Hermès.” The business was elevated to subsidiary status in 1961 concurrent with the introduction of “Calèche” perfume, named for the company’s carriage trademark. By 1993 this Comptoir Nouveau de la Perfumerie subsidiary was generating about FFr 200 million (US$40 million) in annual sales. Although the company’s line of fragrances for men and women had captured seven percent of global perfume sales, its annual losses mounted in the early 1990s. This segment’s sales peaked at FFr 254 million in 1990 and declined to FFr 200 million by 1994, while losses rose from FFr 1.4 million in 1992 to about FFr 30 million by 1994.

The very nature of the product provided some insight into Hermès’s struggle to make it viable in the 1990s. While the vast majority of Hermès products were carefully fashioned to endure a lifetime of use, perfume was a mass-produced product with a decidedly ephemeral effect. Nevertheless, the company remained in the perfume business, launching “24, Faubourg,” a scent named for the address of the company’s flagship store, in 1995. Hermès hoped that the light, fresh fragrance would appeal to a younger customer than its more traditional perfumes and recapture the essence of luxury that had infused its perfume business with success in the 1950s and 1960s. In the meantime, the company sought to achieve profitability by contracting its excess manufacturing capacity to others in the mid-1990s. Hermès continued to introduce new fragrances through the end of the 1990s, and would achieve considerable success with “Hiris,” launched in 1999.

Key Dates:

1837:: Company is founded, by Thierry Hermès, as a maker of saddles for horses.
1920:: Company launches a line of clothing, watches, and gloves.
1930s:: Leadership passes to Robert Dumas, son-in-law of Emile-Maurice Hermès; company introduces handbags and enters the U.S. market.
1937:: The first Hermès scarf debuts.
1954:: A line of giftware and home furnishings is launched.
1978:: Jean-Louis Dumas takes over leadership of the company.
1990:: Total Hermès stores, company-owned as well as franchised, reaches 225.
1993:: Company goes public.
1996:: An Hermès store is opened in Beijing, China.
1999:: Company acquires a 35 percent interest in Groupe Jean-Paul Gaultier.

Hermès’s 1994 revenues totaled FFr 3.43 billion, 20 percent more than the previous year’s mark, and net income increased 38 percent to FFr 290 million. A growing advertising budget was partially credited with sales spurts in leather goods, scarves, and other silk products. Same-store sales grew a whopping 16 percent during the period.

In the mid-1990s, Dumas planned to boost profits by reducing the number of Hermès “concessionaires” or franchisees. Specifically, he planned to cut Hermès’s total number of venues from 250 to 200 and to expand the number of company-owned stores from 60 to 100. This strategy would bring more control of venue under family hands. Although this move was expected to cost the company FFr 200 million in the short term, it would increase long-term profit potential. With over FFr 500 million in cash on hand, Hermès could afford the investment. Among the company’s new targets was China, where the company opened its first store in Beijing in 1996. Another unique, innovative move on the part of Dumas was to hire Martin Margiela, a modernist designer, to head up women’s ready-to-wear operations at Hermès.

In the late 1990s, Hermès maintained its course of reducing the number of franchised stores; in 1999, for example, the company bought up franchises in Marseilles, Padua, and Berlin, while at the same time opening new non-franchised stores, including locations in Las Vegas and Atlanta. A new store on New York’s Madison Avenue was scheduled to open in 2000; in that year the company also expected to add four new Hermès stores in Lisbon, Santiago, Barcelona, and Taiwan, while also opening its first John Lobb footwear store in New York. Meanwhile, the company had already begun renovation of its Tokyo Ginza-district store and the opening of a branch in Moscow. In September 1999, Hermès raised fashion eyebrows when it paid FFr 150 million for a 35 percent stake in the Jean-Paul Gaultier fashion house. The move, seen as part of a consolidation in the luxury goods market, was greeted nonetheless as a positive development both for the relatively small Gaultier group and for Hermès.