Hermès S.A.

views updated

Hermès S.A.

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

Public Company
Founded: 1837
Employees: 2,700
Sales: Ffr 3.4 billion (US$694.2 million)
Stock Exchanges: Paris
SICs: 2300 Apparel & Other Textile Products; 3160
Luggage; 3170 Handbags & Personal Leather Goods; 3870
Watches, Clocks & Parts; 3110 Leather Tanning &
Finishing; 3150 Leather Gloves & Mittens; 3910 Jewelry,
Silverware, & Plated Ware; 5600 Apparel & Accessory
Stores

Known as “one of the world’s most elegant businesses,” Hermès 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 (about 36 percent of sales in the early 1990s), ready-to-wear clothing (12 percent), and perfume (7.5 percent). 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”). By the mid-1990s Hermès was one of the few French luxury goods manufacturers to remain under family control. The firm made its first public stock offering in 1993 but retained over 80 percent of its equity in the hands of 56 members of the Hermès family, six of whom owned 5-10 percent stakes. The familial stranglehold on control led Mimi Tompkins of U.S. News & World Report to dub the company “one of Paris’ best-guarded jewels.”

In the 1980s and early 1990s the business was led by Jean-Louis Dumas, a fifth-generation descendant of the founder. Stanley Marcus, chairman emeritus of Neiman-Marcus, has called Dumas “one of the brightest retailers in the world.” He’s been credited with building Hermès’s worldwide retailing empire by directing an intense program of geographic expansion. 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.

Hennès’s trademark caléche, or horse-drawn carriage (based on a drawing by Alfred de Dreux), harkens back to its original 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 has even been 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 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’s son Emile-Charles moved the family business to 24, rue du Faubourg St. Honor é —a site that would become one of Paris’s most prized pieces of real estate—and launched retail sales 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 began to diversify into travel- and sport-related leather goods, but he never abandoned Hermès’s “horsey heritage.” Saddlebags gave 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 man-hours, and each purse was made by a single artisan. This 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 remained in consistent demand, perhaps because of their association with these two international icons.

In the early 1900s Emile-Maurice bought a two-year patent on a Canadian invention, the fermeture éclair (zipper), and brought it back to France. The closure became so closely associated with Hermès products like 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 plate, 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 passed the family business on to his son-in-law, Robert Dumas. Dumas directed the design and production of the first Hermès carré, or scarf, in 1937. The custom-ordered accessory, called “Jeu des Ombinus et Dames Blanches,” featured white-wigged ladies playing a popular period game. Over the years the 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 was unveiling a dozen new designs each year.

Like the production of leather goods, Hermès scarf-making process was totally dedicated to the pursuit of quality. Vertical integration was an important factor in that cause. By the early 1990s 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 consumes a half-hour each, completes the process.

Notwithstanding this painstaking process, Hermès managed to put out two new scarf collections each year. Some designs reflected annual themes, like “the road” (1994) or “the sun” (1995), while other perennial favorites remained in circulation for decades. Scarf motifs have ranged from germane—the French Revolution, French cuisine—to the unexpected, like the flora and fauna of Texas. Some observers considered the scarves to be collectible works of art. Overall scarf volume multiplied from 250,000 in 1978 to 500,000 in 1986 and 1.2 million in 1989.

Hermès’s union of quality materials and time-consuming handcraftsmanship was reflected in its high retail prices. By the mid-1990s one Hermès scarf commanded $245, a tie cost $115, and a Kelly purse set its owner back about $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, like a calfskin fly-fishing tackle box, to the frivolous, like an ostrich-skin Walkman case. These limited-edition novelties didn’t come cheap, either: indulgences like $175 chewing-gum holders made of leather, $ 1,000 silk kites, $20,000 alligator golf bags, and $12,500 mink jogging suits were out of reach for most of the world’s consumers.

During the 1970s some observers feared that Hermès’s profitability was being sacrificed on the altar of quality. Its own dedication to classic, natural materials—silk and leather—and modest styles clashed head-on with the era’s love-affair with newer man-made materials—like plastic and polyester—and sexy fashions. Hermès’s five percent annual sales growth rate lagged France’s 15 percent inflation rate in the 1970s, and at one point, the company’s workrooms—familiarly called “la ruche” (the beehive) —fell silent during a two-week lapse in orders.

When Robert Dumas died in 1978, his son, Jean-Louis, 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.

His 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 Bergére and Bernard Sanz, to revive the apparel line. They added kinky new garments like python motorcycle jackets and ostrich-skin jeans that were 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 writer noted in 1986, “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 late 1990s.

The company’s explosive growth—annual sales multiplied from about $50 million in 1978 to $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 American “nouveau riche.” Although demand for luxury goods stalled somewhat in the early 1990s, the global market surged from $4 billion in 1988 to nearly $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 store locations and licensed boutiques in America, 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.

U.S. sales tripled from $20 million in 1986 to nearly $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 American consumer with the addition of a toll-free number, a customer-service department, and direct mail. When Fisher resigned in January 1993, Laurent Mommeja, a sixth-generation Hermès descendant, took over and announced plans to double U.S. sales by 1998.

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.

Perfume has been one of the few Hermès ventures to struggle. This business segment was launched by Jean Guerrand, a son-in-law of Emile-Maurice, with “Eau d’Hermès” in 1951. 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 Comptoir Nouveau de la Perfumerie was generating about Ffr 200 million ($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 bloomed from Ffr 1.4 million in 1992 to about Ffr 30 million by 1994.

The very nature of the product may provide insight into Hermès’s struggle to make it viable in the 1990s. While the vast majority of Hermès products are carefully fashioned to endure a lifetime of use, perfume is a mass-produced product with a decidedly ephemeral effect. Nevertheless, the retailer launched “24, Faubourg,” a scent named for the address of the company’s flagship store, in 1995 and 1996. 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’s 1994 revenues totaled Ffr 3.43 billion, 20 percent more than the previous year’s mark, and net increased 38 percent to Ffr 290 million. A growing advertising budget was partially credited with sales spurts in leather goods, watches, scarves, and other silk products. Same-store sales grew a whopping 16 percent.

Dumas planned to boost profits by reducing the number of Hermès “concessionaires” or franchisees. Specifically, Dumas 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.

Although observers inside and outside Hermès expected the luxury goods company to continue to enjoy annual sales and profit increases, they also forecast that the rate of increase would slip into single-digit percentages. Dumas himself expected “unfavorable exchange rates” and high marketing expenses for “24, Faubourg” to reduce profit growth to about ten percent in 1995 and 1996.