Hermès is perceived as the most exclusive luxury brand in the World, recognized by its luxury peers and high-end luxury customers for its superlative manufacturing, traditional craftsmanship, brand exclusivity and family values. The group itself is a unique example of a successful premium business model. The group’s sales have grown by more than 180% over the last 10 years while the EBIT grew by more than 230% to reach EUR 1,3bn in 2014. The share price has been multiplied by 60 since 1993 and unlike other luxury brands, the group proved resilient during the crisis returning superior returns to its shareholders, who for 73% of them are heirs of the founding family. (Appendix 1 &2)
The Business Model:
Founded in 1837, by Thierry Hermès, a French harness maker, the company subsequently cautiously diversified, across different product categories to satisfy the needs of its loyal traditional wealthy customer base and limit the company dependence on any business line or region while preserving its brand equity. The group always maintained an extreme control over its development (limited M&A, internal funding..), production and distribution network, focusing on superior quality, keeping a very long-term perspective, seeking higher profit on a lower sales volumes and considering Group’s duties beyond financial return to be the preservation of a certain human and cultural capital (Appendix 3) .
The business is integrated, centered on a unique brand strategy, rooted in its longstanding history of producing ultra-high quality distinguishable products requiring high levels of craftsmanship, mixing an essence of understated elegance, creativity, and inimitable service. The group production is organized by “Metiers” – the artisanal divisions (Leather, Ready-To-Wear (RTW), Silk, Fragrances, Watches, Petith) but customers are the same, Human capital and IT systems are common, and processes are centralized, with a very high involvement of the family. (Appendix 4)
The group distinctive positioning, combines a unique pricing power (though management emphasizes that it charges only costs plus a fair margin) –and commands superior pricing points – with the ability to sell entry-level items such as silk products, jewelry or small leather goods so as to capture not only the value it creates for its core target group but also the value generated by inviting aspirational customers in the group’s base.
The Operating Model:
- Supply Chain Management:
Sourcing: The Group is almost completely vertically integrated to control the quality of its raw materials their costs, and ensure adequate supply.
Production: Hermès controls the production of c.80% of the products it sells (zero licensing policy), using few carefully selected sub-contractors only in segments for which it lacks expertise e.g RTW (France or Italy), Watches (Swiss)… Hermès still hand-produces in France most of its products leveraging its tradition and the superior craftsmanship of its employees. (Appendix 5 & 6 – Video ). This handcraft is a very labor intensive process (e.g min. 15 hours for Kelly or Birkin handbag) and contributes to the long lead times certain items, creating a bottleneck.
Distribution: Hermès has a limited online presence as distribution mostly happens through directly operated stores, where the company can control the level of care a client receives (Appendix 7). Over the years, Hermès has grown its network of DOS and franchise stores while reducing distribution through third-party retailer as a way to preserve its brand integrity.
This unique model is reflected in higher employees’ costs than the sector average (22% of sales vs 19%), a lower level of working capital (16% vs 26%) and higher capex targeted toward the production capacity and the store network.
2. Innovation Management:
Innovation: Ranked #13 on Forbes’ list of the world’s most innovative companies (ahead of Netflix) Hermès changes every six months a third of its c. 50,000 SKUs thanks to freelancer’s creativity (60% of the Group’s designers). The innovative character of the group is exemplified by its new division, Petith featuring one of a kind objects made from rejects (cf Video).
The constant stream of innovation maintains clients’ interest and acts a good protection against counterfeit; a crucial point as the group places great importance on the protection and defense of its intellectual property rights.
3. Human Capital management
HR policies: Human capital is core to Hermès model. In order to recruit new craftsmen, Hermes has entered partnerships with schools and put a strong emphasis on a long internal training process (incl. cultural trainings such as the “Inside the Orange Box”). Thanks to its significant investments in Human Capital development, its Group cultural recognition of Know-How and empowerment of Artisans, there is limited turnover (Appendix 8) .
The operating model is thus fundamentally aligned with the group business model: it both supports and feeds it. However such model is limited in terms of growth and scalability, and flourished thanks to Hermès unique capital structure, which might be endangered should the control exercised by the founding family diminish.
“A press officer recently asked me: Do you have a Director of Quality at Hermès. To which I answered: No we don’t. At Hermès everyone is a guarantor of quality.’ Christian Blanckaert, Executive VP in charge of International Affairs
“The quality is in the eye and the hand of the artisan,” Axel Dumas, chief operating officer
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