Stretching the luxury brand into product ranges beyond their traditional areas of competence is a classic business-building strategy in the luxury market. Through the stretch, they cash in on their reputation in one sphere to extend it into another where they haven’t played before.
The strategy is so foundational in luxury that J.N. Kapferer and V. Bastien devoted a whole chapter to it in their seminal book, The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands.
Hermès is a brand that has stretched with great aplomb. From its founding in 1837 as a Paris harness shop and saddlery serving European aristocracy, it stretched from its core competency in leather goods into silk scarves and ties, ready-to-wear fashion, perfume and beauty, jewelry and watches and home furnishings.
Recently, it’s been stretching into technology, not just as an alternative channel of distribution, but in products through its Apple watch partnership. And now it has set its 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-owned, having successfully fought off Bernard Arnault’s ambitions to add it to his LVMH empire. It is headed by Axel Dumas, a scion of the Hermès-Dumas family, and is vertically integrated with about half of its nearly 18,000-strong workforce dedicated to production.
While it is following the luxury lifestyle business model like many other luxury brands, Hermès hasn’t resorted to moving downmarket, unless you call $180 shoelaces or $300+ key chains such. And it only collaborates with brands that share its elevated aesthetic, like Apple and Rolls Royce, unlike others that have borrowed the Nike swoosh or Disney’s Mickey.
In its latest shareholders meeting, Axel Dumas repeatedly described Hermès as a house of creativity driven by a quest for excellence. “We are recalling the central parts of creation as our model,” he stated. “We see the deployment of amazing amounts of creativity fed by constant curiosity.”
By staying true to its commitment to craft and creative excellence, Hermès is the ultimate aspirational brand, not in the commonly used sense of a brand that offers the pretense of luxury at a more affordable price, but true aspiration because it is accessible only to the few not the many.
Maintaining the elusive quality of aspiration is what got Hermès where it is today and will keep it going into the future. After suffering a 7% drop in sales during the 2020 pandemic year, it posted 33% growth at constant exchange rates in 2021 over 2019, reaching $9.6 billion. Net profitably rose from 22.2% of revenue in 2019 to 27.2% in 2021. It ended the year with 303 stores.
Its growth in first-quarter 2022, ending March, is even more impressive, up 72% over first-quarter 2019, coming in at $3 billion from $1.7 billion in first-quarter 2019. Its most recent results hint at where its biggest opportunities lie.
For example, sales in the Asia-Pacific region doubled over same period in 2019. The Americas garnered a 66% increase, while Europe lagged, advancing only 21%.
In both years, leather goods and saddlery were its cash cow and grew a dynamic 48% from 2019. But in 2022, Hermès is less reliant on the category than in the past, down from 50% of revenues in first-quarter 2019 to 43% in 2022.
Ready-to-wear and accessories, its second-largest category, virtually doubled in sales. Its Other Hermès Sectors, specifically jewelry and home, advanced 182% and watches boasted a 212% increase. Perfume and beauty and silk and textiles advanced by 40% and 41%, respectively.
Stores take center stage
As important as Hermès’ e-commerce capability has been through the pandemic – Vogue Business reports online sales in the U.S. doubled from 6% of revenues 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 get the full brand experience.
Given its global footprint, each store is designed and merchandised for the local community with new stores in Detroit and Florida’s Aventura Mall opened last year. Internationally it opened new stores in Shenzhen Bay (China) and Tokyo Omotesando (Japan) and expanded or renovated its Rue de Sèvres, Paris store, along with 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 sq. ft. store in Costa Mesa’s South Coast Plaza mall with a Southern California vibe. Also on deck this year is a new store in Topanga, north of Los Angeles and an expanded 706 Madison Avenue flagship store, just up the street from its current location. Coming next year will be a store in Princeton, NJ customized for that Ivy League community.
“It’s going to be a small, charming store,” shared Hermès’ Bob Chavez who oversees the Americas, with Vogue Business, adding how physical stores complement the brand’s omnichannel efforts. “We’ve realized customers want that localized convenience.”
So now Chavez is in search of locations in smaller wealth communities, like Aspen, Austin and San Antonino Texas, Tampa, Nashville, Minneapolis, Brooklyn’s Williamsburg area and Portland, OR.
Home offers strong growth potential
The stores open the door for sales in the expanded range of product categories it has stretched into where seeing is believing. Serendipitous discovery – the “I didn’t know Hermès made that” phenomenon – happens more easily in the store than online.
The company sees a long runway for home goods in particular. Hermès loyalists not only want to dress in its finery but furnish their homes and set their tables with the brand as well.
Home goods are a particular hobby horse of Chavez’s who got his start in Bloomingdale’s housewares department. He reported home goods sales in the Americas outpaced growth globally with sales of blankets, pillows and tableware growing “massively” last year.
It took some persuasion to get headquarters on board with his vision for Hermès home, but they are convinced. “Even Paris was like, why are you focusing so much on home? Now we have a booming furniture business. It started off niche and now we can’t make enough of it,” he said.
Welcome to the metaverse
A number of luxury brands have already crossed over into the metaverse. For example, Gucci, Balenciaga, Burberry and Dolce & Gabbana have launched virtual goods for gamers’ avatars to wear in and decorate their virtual worlds through NFT (non-fungible token) as proof of ownership.
Hermès got a rude introduction to the metaverse late last year when NFT artist Mason Rothschild introduced a MetaBirkin virtual copycat bag. Reportedly the artist’s initial MetaBirkin sold for $40,000. The company let the artist’s earlier Baby Birkin slide which was offered in a single NFT. MetaBirkins, by contrast, come in volumes of 100 that can be resold on the secondary market.
The company moved swiftly against the MetaBirkin artist this January with a lawsuit filed in U.S. District Court in Southern New York arguing trademark infringement, trademarket dilution and cybersquating. The artist argues he is simply exercising his First Amendment rights, as Andy Warhol did in the 60s with his famous Campbell Soup Can images.
The case has yet to be decided but the company sees the writing on the wall: the Hermès brand means something in the metaverse and there is big money-making potential there.
In the shareholders’ meeting, Dumas announced curiosity and interest in the metaverse but declined to go beyond saying it has potential as a “great means of communications,” with communications being essential to the brand-building process.
“For the time being, we’re interested to see how this world evolves and changes,” he said. “But this is not a priority of ours. We’re mainly interested to learn and monitor, rather than rush into the metaverse,” as the company remains committed to creating physical objects.
Given how quickly the metaverse is evolving, it is likely to be sooner rather than later that Hermès will play there too and probably for a lot more money than Rothschild ever saw from his work. That’s because Hermès better than most any of the world’s largest luxury brands understands how building consumer aspiration 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,” former Hermès CEO Patrick Thomas famously said. “ I believe Hermès’ vision provides a solution to the dilemma.”