‘The Hermès Game’: how the luxury house is defying the slowdown

In videos posted to social media, shoppers list products from lipsticks and sandals to chinaware and towels that they have spent thousands of dollars amassing to compete in what they call “the Hermès Game”.

The goal is to be offered the chance to buy one of the French luxury house’s ultra-exclusive Birkin or Kelly handbags, which start at about $10,000 and cannot simply be bought by walking into a shop. To achieve this, brand loyalists seek to endear themselves with sales associates over months or even years by spending small fortunes on less restricted items.

“It’s a girl,” one fan declares as she unwraps a pink Kelly handbag in a TikTok video captioned “When you’ve finally won the Hermès game”. Admiring comments beneath the post include “So happy for you!” and “Story time: tell us how you did it.”

The global economic outlook may look uncertain but the market for Hermès’s top-tier goods remains strong thanks to its premium positioning, classic styling, wealthy client base and tightly controlled production.

The family-controlled company and similarly high-end brands such as Brunello Cucinelli, where cashmere Fair Isle sweaters start from €5,000, have been the standouts in a sector where the pace of growth is slowing as a three-year luxury boom comes to an end.

In this more subdued environment, brand performance “seems very much correlated with who is serving big-spending customers, not just in terms of the item value but the overall annual spend, versus who is serving that large customer base that is only spending occasionally”, said Michael Kliger, chief executive of luxury ecommerce retailer Mytheresa.

“As you look at brand performance the correlation is clear . . . this luxury slowdown is really starting with the aspirational buyer.”

Luxury group Kering — whose brands are more fashion-driven and have a larger aspirational client base — warned last week profitability at its biggest business, Gucci, would fall this year and would not recover in 2024. Sales at LVMH, the world’s biggest luxury group and the industry’s bellwether, grew 9 per cent in the most recent quarter, a softer pace than the double-digit rates of recent years and slightly below investor expectations — a rarity for the owner of leading brands such as Louis Vuitton and Dior.

Hermès, by contrast, has more buyers than it can handle for its high-end handbags, largely insulating it from downturns. In its most recent quarter the company reported high sales growth in Europe and the US, markets where rivals’ revenues have softened.

Other premium brands have also outperformed. Brunello Cucinelli was one of the few to guide investors higher on its sales outlook for the year in its most recent results, while analysts and investors say LVMH’s Loro Piana — where a bomber jacket retails for €18,400 — has been a standout.

“The real luxury consumers continue to buy, maybe a little bit less, but what they don’t compromise is on the quality of what they buy,” said Enrico Massaro, head of consumer and retail investment banking for Europe, the Middle East and Africa at Barclays. “True luxury consumers don’t trade down.”

That consistency has led to much steadier growth over time at Hermès, with more moderate highs and lows than peers. “They may be growing less than others during peaks, but in that way they resemble Ferrari,” Massaro said. “They could have grown much bigger than they are but that’s how they manage to keep the brand exclusive.”

That perspective is reflected by the market. Hermès shares have consistently outperformed the Stoxx Europe 10 index of luxury goods since the sector began to decline from late spring as investors anticipated the end of the luxury boom. In recent weeks they have gained alongside those of Brunello Cucinelli while companies such as Kering, Burberry and Ferragamo have fallen.

Hermès has shown resilience during other downturns. While most luxury companies’ sales took a hit in China, the sector’s biggest growth market, at the start of the year because of Covid-19 restrictions that curtailed movement and spending, Hermès’s did not falter. In 2009, in the aftermath of the global financial crisis, sales at listed luxury companies declined by an average of 4 per cent, according to UBS, while Hermès revenues grew by the same amount.

Hermès’s lower exposure to tourist spending than rivals is a key factor. Local buyers make up more than 90 per cent of its clientele in Japan and about 75 per cent of its customers in New York City, according to one investor — an advantage during economic downturns as well as crises such as the pandemic.

“You don’t want to be as exposed to the travelling consumer as you are with locals, because [tourists] are often more fickle to spend,” said Zachary Sachs, analyst at Invesco.

Top brands such as Hermès tightly control their retail distribution, allowing them to manage product flows and pricing, with almost no distribution done through wholesalers who can react to tougher times by dumping excess product on the market at a discount.

But Hermès’s heavily restricted supply of its most coveted products, particularly in leather goods, is unique in soft luxury — leading to the kind of competitive shopping on display on TikTok, although the company says it “strictly prohibits the sales of certain products as a condition to the purchase of others”.

The company has as much as four to five times more demand than it can supply for its products, according to David Older, head of equities at fund manager Carmignac.

This also means Hermès bags retain their value on the secondary market — often selling for more used than new as buyers who cannot get their hands on a new Birkin turn to second-hand retailers and auction houses. It can also increase the appeal of the products as investments.

Zuzanna Pusz, head of European luxury goods at UBS, said: “With Hermès, there is the aspect of how much value it keeps and as the second-hand market becomes more visible, I think people start to think about that more.”

Hermès executives say limiting supply is not company policy but a result of their fabrication process, where bags are stitched by hand by highly skilled artisans in ateliers in France.

The company has set a target of expanding leather goods production by 6 per cent to 7 per cent a year as it opens new workshops and trains artisans, opening an average of one new production site per year. Hermès can only add about 250 to 300 new leather artisan roles at every atelier over time, chair Axel Dumas has said, because of capacity issues in workshops and the stringency of Hermes’s training.

Pusz at UBS said: “They’re definitely restricted but at the same time, it’s also not in the interest of the shareholders, of their customers and of the business overall to go in overnight and increase capacity in a way that would destroy their unique business model.”

Maintaining that scarcity is not without risks, however, and the company has faced some criticism from customers irked by the system.

“Some wait enhances the experience as it clearly signals rarity,” Kliger said. “But you also get some annoyed, rich customers who are not used to waiting anywhere.”