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Is Hermès Drifting?

Hermès appears to be moving away from the core strategy that made it special — and wildly successful.
Orange Hermès Birkin | Source: Hermès
By
  • Luca Solca
BoF PROFESSIONAL

LONDON, United Kingdom — There is no doubt that Hermès sells exquisitely made products, but so do many other luxury brands. What is most unique about Hermès is the company's decision to frustrate consumer demand, making it difficult for people to buy its most coveted products, namely its Birkin and Kelly handbags. It's a strategy that works incredibly well.

The fact that people consider the Birkin handbag to be genuinely exclusive is itself an astonishing feat considering that there must be more than a million Birkin bags in circulation. For this, Hermès deserves infinite respect.

Better still is Hermès’ skill at conjuring a halo of exclusivity over its wide range of other products, no matter how trivial they are. Fragrances that sell for $100 a bottle, silk scarves that go for $400; consumers can buy any of these products and leave an Hermès store feeling like a star.

Put simply, Hermès has pursued one of the most effective stratagems for marrying high sales volume with the perception of exclusivity — category segregation — by confining iconic, core-category products (like bags) to high-end price ranges while offering other categories (like scarves) at lower price points to aspirational consumers.

But now, Hermès appears to be moving away from this tried-and-tested formula of frustrating demand for its core products. In 2016, I was able to find standard Birkin handbags available in stores in Europe for the first time in years. The brand also seems to have moved away from the principle of category segregation, as consumers can now buy Hermès handbags at significantly lower prices, only slightly above the €1,000 threshold. Of course, at this price point, we’re talking about the Evelyne, Garden Party and Picotin ranges — not the Birkin or Kelly bags. But, even so, they are Hermès handbags just the same.

Demand frustration and category segregation were the two traits that set Hermès apart from its luxury megabrand peers. Without these elements, the genetic difference between Hermès and, say, Louis Vuitton is more difficult to discern. Hermès is still more desirable in the eyes of some consumer groups, especially the Chinese. But this seems more a difference of degree than essence. In fact, French consumers seem to have the opposite feeling.

Today, Hermès is valued significantly above the industry average based on the uniqueness of its strategy. But as the company's business model becomes less special, should its multiple not reflect this?

Luca Solca is the head of luxury goods at BNP Exane Paribas.

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