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Hermès Boosts Production to Meet Demand in Asia

The luxury goods company said it is expanding its network of French workshops that make bags like the Kelly and Birkin, as it reported revenue in the first quarter climbed 11 percent.
An artisan piecing together a leather handbag | Source: Hermès
By
  • Bloomberg

PARIS, France —Hermès International is hiring workers and investing in French production to meet surging demand for handbags in Asia, boosting the economy as presidential elections highlight the country's struggle to create jobs.

The Paris-based luxury-goods company is expanding its network of domestic workshops that make bags like the Kelly and Birkin, it said Thursday in reporting quarterly sales that beat estimates. Hermès plans to increase leather-goods production by 8 percent and to hire 250 workers in France this year.

The move to boost employment comes as presidential runoff contenders Emmanuel Macron and Marine Le Pen debate how to revive employment in a country where the jobless rate remains stuck at 10 percent despite a nascent economic recovery. In the run-up to the May 7 vote, the two finalists this week squared off over a Whirlpool Corp. factory near the northern city of Amiens, where workers are protesting plans to move production to Poland.

For Hermès, a “made in France” label is an intrinsic part of the appeal of its handbags, which are coveted in Asia and elsewhere as an emblem of French chic. The company said it’s investing in a third workshop in the Franche-Comte region, bringing the total number of domestic leather production sites to 15.

Local Challenges

Making handbags in France is not without challenges, including the country’s 35-hour workweek and labour laws that add costly social charges to the payroll and make it difficult to dismiss workers.

"The average bag takes them 16 hours to make," chief executive officer Axel Dumas said on a call Thursday. "We work 35 hours in France, so you can imagine."

It’s hard to bring on more than the 250 craftsmen and women the company plans to add this year, because training them requires taking another worker off the line to teach them, Dumas said. Overall, Hermès had 7,881 domestic employees in 2016.

Rival LVMH experienced work stoppages at some Louis Vuitton production sites this month after unions called on workers to protest salary increases they deemed insufficient. Such disruptions have been rare for the luggage maker, which added 370 workers in its French plants in 2016.

Hermès last year achieved productivity increases of 15 percent, and it’s targeting 8 percent for 2017. The company needs those kind of gains to meet demand for its handbags, silk ties and other goods in Asia and elsewhere.

Favourable Comparisons

Sales of leather-goods and saddlery, which account for roughly half of Hermès' revenue, jumped 15 percent in the first quarter. Revenue climbed 11 percent on a constant-currency basis, beating the 8.8 percent median estimate of eight analysts in a Bloomberg survey. Asia, minus Japan, led the way with a 16 percent gain.

France’s advantages as a production site were not matched in the company’s sales performance: revenue there climbed 4 percent, less than half the rate analysts estimated.

Overall, the results represent a marked uptick from a year ago, when flagging consumption in China and a terror-related downturn in European tourism saw the company report its slowest quarter in seven years. The luxury-goods industry has bounced back more broadly, with first-quarter results from LVMH and Kering surging past analyst estimates.

Berenberg analyst Zuzanna Pusz said the gains at Hermès underpin the industry’s recovery, even though the company cautioned that the growth rate could not be projected across the full year because of favorable comparisons in the first quarter.

“Hermès reported a very strong start to the year, pointing to the broader improvements in the luxury sector as well as a very solid underlying demand for its products,” Pusz said in a note.

By Robert Williams; editors: Eric Pfanner and Paul Jarvis.

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