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Hermès Is Primed for the ‘Californication’ of the World, Says CEO

Chief executive Axel Dumas unpacks what expansion in the Bay Area means for the French megabrand.
Hermès Palo Alto boutique | Photo: Frank Oudeman
By
  • Lauren Sherman

PALO ALTO, United States — Silicon Valley is a notoriously difficult market for fashion brands to crack. In a region that's home to tech giants like Apple, Google and Facebook, and where the median income is over $96,000 per annum — the highest in the country, according to the US Census Bureau — cajoling consumers to buy into traditional luxury brands isn't as easy as one might think.

Perhaps that’s because the standard-issue uniform is still the techie classic — a frayed hoodie and a pair of abused jeans, often worn with sneakers from venture-backed Allbirds. Status is instead symbolised in the form of company valuation. And sometimes, a car: The model-of-the moment, according to market sources, is a Mercedes-Benz "Sprinter" cargo van that has been converted to a custom limousine. (The richest, they say, bike to work.)

None of that, however, has deterred Hermès. This week, the French luxury brand — known for its discreet charm and effectively marrying high sales volume with the perception of exclusivity — is opening a store in Palo Alto's Stanford Shopping Center, a tony (and notably productive) outdoor mall off Sand Hill Road, the strip famous for housing some of the world's most successful venture capital firms. Palo Alto will be the first of Hermès' 38 US stores to debut the 181-year-old brand's new relaxed, lifestyle-driven merchandising concept: Products will be plucked from its varied métiers — or product categories — and arranged together rather than being segmented off into different departments.

The store’s technical marvels are far from typical. Instead of magic mirrors or iPhone charging stations, it will feature a conceptual digital display conceived by French artist Eric Vernhes, as well as a screen that rotates through images of the season's scarf patterns, painstakingly conceived to exactly match the colours printed on the silk. Another friend of the house, Eva Jospin, has created analogue cardboard landscapes inspired by the terrain of Northern California to dress the windows on opening day.

The approach illustrates what chief executive Axel Dumas believes makes Hermès right for the region: its relaxed take on luxury. "The casualisation — or the Californication — of the world is quite in tune with our brand spirit and image," says the executive, fresh off a flight from Paris. While Dumas acknowledges that local consumers may not be very interested in fashion with a capital F, the success of the brand's San Francisco flagship — the sixth highest-grossing store in the US and the 30th in the world — indicates there is an appetite for the sort of luxury he is peddling, even if Chinese tourists make up a significant portion of sales.

On Thursday evening, Dumas, a sixth-generation member of the Hermès family, will officially lay his claim to the region with a party. He has invited a mix of customers, tech-industry friends and partners from companies including Google, Flex, Facebook and Apple, as well as 80 or so of his relatives who have flown in especially for the occasion.

It’s no coincidence that a local store opening has become a grand family affair. Dumas has high hopes for the growth in the San Francisco Bay Area, and the US in general, which accounted for 18 percent of Hermès’ global revenue in 2017. (Last year, sales in the Americas reached €996 million, up 7.7 percent at constant exchange rates from 2016.) “Across the US, the percentage of local customers has gone up significantly. Yes, we have tourists, but compared to some markets — in Europe for example — we have less and less of that here," says Robert Chavez, Hermès’ chief executive in the US. "It’s become a very local clientele, which is healthy because that means the customers are shopping with us very regularly.” Palo Alto will be followed by a new store in New York’s Meatpacking District in 2019.

While Dumas says most of his competitors spend two-thirds of their marketing budgets on advertising and a third on public relations and events, Hermès does the opposite, an approach he says pays off in earned media. “What was once seen as a local event is now a global event, thanks to Instagram,” he says.

Hermès, which started selling products through its own website in 2002, has also invested in upgrading its digital experience — relaunching its US e-commerce platform at the end of 2017, Europe in March 2018 and China by the end of the year. Although it doesn't break out e-commerce sales from overall revenue, the web was the company's number-one store for sales of ties, jewellery, accessories and perfumes in 2017, and the second-best-performing store for silk scarves and women's shoes.

Like many brands, the company’s greatest concentration of online sales comes from regions where there is a physical store (80 percent), although half of the purchases are made by first-time customers. And price resistance is virtually non-existent. (One of the first orders on the refreshed, mobile-friendly US site was the $47,700 "Sellier" two-seater sofa.)

Strength in the US and China in particular contributed to a record year for Hermès in 2017, with nearly €5.6 billion in global sales, up 9 percent year-on-year, while operating margins hit another all-time high of 34.6 percent, up two percentage points from 32.6 percent — also a record — in 2016. However, Dumas is careful not to overstate the significance of this achievement, given the role of currency fluctuations that played in Hermès’ favour. (In comparison, sales in the first quarter of 2018 were impacted negatively by a strengthening of the euro.)

Actual scarcity of some products also had something to do with it. Global sales dipped a half a percentage point in the fourth quarter because the company could not produce enough handbags to keep up with consumer demand.

It’s a good problem to have, although Hermès is hoping it can remedy it in part by opening a leather workshop in rural France this year, and two more in 2020. And yet some argue that while increasing production may stimulate growth in the short term, it could have the opposite effect in the long term.

Analysts posit that Hermès is a master at frustrating consumer demand for its most coveted handbags in order to cast a halo of perceived exclusivity over other products, from fragrance to scarves. Dumas, however, insists that “you should not try to project an aura of exclusivity by increasing prices or creating fake waiting lists. Exclusivity is there because you have incredible, trained craftsmen using very particular fabrics and materials. Hermès is not snobbish. We are happy to sell on digital, in airports. The exclusivity is in the craftsmanship, in the construction. It’s not in something artificial.”

“Our goal is to create items that make sense in contemporary life,” he adds. “We are not a museum of craftsmanship.” But some say Hermès needs to innovate to stay ahead in a market that demands greater and greater newness and novelty.

“I believe Hermès has introduced some newness, but it is probably the megabrand which has been the slowest in updating its aesthetics to attract millennials,” says BNP Paribas luxury analyst Luca Solca. “In a way, they can afford it, as they occupy the top spot in brand desirability and their iconic products are still in very strong demand. But they need to do more, I think.”

Looking ahead, Dumas plans to apply what he believes to be a consistently conservative approach to expansion in an increasingly “fickle” luxury market. “There is a real polarisation of the industry,” he says. “You’re either in a desirable position or your sales are decreasing. I’m always cautious.”

Disclosure: Lauren Sherman travelled to the Bay Area as a guest of Hermès.

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