Hermes's Midlife Crisis

July 27, 2018 8 mins read
Hermes's Midlife Crisis

In an era alive with post-90s, post-95s and post-00s, as well as with KOL and Apps flooding the screen, what shall the post-70s and post-80s who used to be the main consumers do? In their middle age facing the rapid changes, and called by the younger generation as uncles or aunts, they feel uneasy or even anxious about the fact that they might be left behind the times. And the same is true with luxury brands.

In an era alive with post-90s, post-95s and post-00s, as well as with KOL and Apps flooding the screen, what shall the post-70s and post-80s who used to be the main consumers do? In their middle age facing the rapid changes, and called by the younger generation as uncles or aunts, they feel uneasy or even anxious about the fact that they might be left behind the times. And the same is true with luxury brands.

Let us take a look at Hermes, an outstanding luxury brand. There was a time when Chinese consumers took a great fancy to Hermes, making it more popular in China than Chanel, Louis Vuitton and other similar luxury brands. It is thanks to Chinese consumers’ strong demand that Hermes has continued its input in new factories and increase in production capacity.

Within two years, Hermes had built three new leather factories, with a plan to boost its capacity by 8% by 2017. The Hericourt, which was set up in 2016, is specialized in the production of Kelly handbag. So far, Hermes has 15 production bases around the world. By 2020, it is expected to build two new factories in France to meet consumers’ growing demands for leather products. However, it may prove not a good thing for a brand to pursue increase in output at the expense of other considerations. Also, the overall landscape for luxury goods has undergone huge changes.

The biggest news in the industry last year was that Hermes was overtaken by Gucci, just in two years. For the first time since the second quarter of last year, Gucci's quarterly revenue surpassed Hermes's. Then in 2017, Gucci's 6.2 billion Euros sent an announcement that it exceeded Hermes. In terms of the Group's share price, Gucci's parent company, Kering Group, also outperformed Hermes for the first time in terms of share price increase last year. While in this year, a look at the performance of Hermes, LVMH and Kering Group in capital market shows that Kering saw the biggest increase in share price, with a cumulative growth of 25% at 475 Euros per share. At present, its market value is about 60.8 billion Euros, exceeding Hermes's 55.3 billion Euros. While two years ago, Hermes led Kering by 10 billion Euros.



Kering Group's stock price growth has outperformed Hermes's since 2017.


























Hermes’s Revenues and profits over the past three years


In recent years, as is the representative case of Gucci, a trend towards youth is sweeping the luxury sector from design to marketing. Soon, Prada, Dior and Louis Vuitton started to follow the trend. Still, Hermes could not make a decision about how to strike a balance between adhering to brand scarcity and following the trend, which raised doubt whether Hermes’s strategies were out of date.

From 2010 to 1012, riding the wave of the rapid growth of Chinese luxury market, Hermes also harvested an “explosive growth”, as evidenced by an annual sales growth rate of around 25%, and an over 20% fast growth of operating profits in three years. Entering 2013, however, due to the unstable global politics and economy, the luxury market as a whole has suffered slowdown or even shrinkage. Against this backdrop, Hermes also experienced a single-digit growth.

In fact, under the influence of the youth-oriented luxury market, since last year Hermes has started to change its attitude towards e-commerce. In October 2017, Hermes’s first limited-time shop was set up on its WeChat Official Account, where Apple Watch Hermès Series 3, co-developed with Apple, was sold. In December, it started to sell four types of men's and women's shoes through WeChat, of which the Player, a women’s sports shoe, was available only in mainland China. These trial efforts, reflecting to some extent the company’s consistent prudence, further suggested that, as the trend of luxury digitization gains greater momentum, Hermes also accelerates its efforts to enter online market, with a growing focus on Chinese market, which is the most dynamic in the world. The Asia-Pacific region, including China, has become Hermes's largest market in the world.


The figure shows the sales proportion of various products of Hermes in 2017, with leather goods and handbags contributing to 50% of its total revenues.

Some analysts point out that, there exists a danger for a brand to be washed out if a luxury brand ignores the digitization and disregards consumers’ needs. Of course, with a market value exceeding 50 billion Euros, Hermes won’t let this happen to it by any means, which is one of the reasons that it has started to view e-commerce from a different perspective

In addition, Hermes seems to have invested more in creativity and promotion of brand image, by launching exhibitions, such as artist cooperation showcase to constantly impress the young people with its new image. Notably, in Hermes's creative team a women's world art director and a men's world art director are appointed, in a bid to coordinate and supervise the team to build a richer and more interesting creative image for the brand.

In April 2017, Hermes hosted an exhibition titled "Wonderland Walk" at Power Station of Art, as catering to young audiences by "packaging" exhibition space and products together became the most popular marketing method during that period. In April 2018, it held the “Fast Forward Men” 2018, a spring summer men's world show in Shanghai, incorporating installations and live performances into an exhibition of high artistic level.

In China’s market today, the trend of conspicuous consumption still holds some ground. However, the Millennials have a completely different view of consumption, together with a greatly weakened loyalty to the brand. For them prices constitute no problem, which means a brand has to rely on their products to reach them, whose taste is changing quickly while their focus on value stays firm.

Bearing this fast-changing market landscape in mind, Hermes intensifies its efforts to promote transformation. Though being a traditionally conservative brand, it starts to adopt a strategy for online and offline expansion. Apart from first-tier cities such as Beijing, Shanghai and Guangzhou, its footprint has spread into quasi first-tier city like Hangzhou, Chengdu, and Changsha. Still, what matters the most is an insight that luxury goods have been redefined as the Millennials take over the dominance of consumption from the previous generation.

According to a report by Deutsche Bank at the Fashion & Luxury Summit hosted by Pambianco, an Italian consultancy, total revenues for the global luxury sector were expected to reach 250 billion Euros in 2017. It said that Millennials constitute the main customers of luxury consumption, accounting for 27% of the total number of luxury consumers, and the proportion would increase to 33% by 2020, while in China such consumption group was estimated to be 200 million. According to a study by Pambianco, Millennials now account for 25 per cent of luxury consumers, and the figure will rise to 40% in the next five to seven years.

In 1837, when Thierry Hermes, a Frenchman, set up a harness factory in Paris, he didn’t intend it to appeal to the mass. Horsemanship, as the core of Hermes, has long been considered an aristocratic sport, and that is why Hermes has long positioned itself as a class division brand. There is no doubt that Hermes's attitude can be attributed to its sticking to this brand positioning and its continuous effort to draw on the luxury scarcity. Once, its consumers had the greatest fancy and loyalty for the luxury brand. But now, they have become more reasonable, making it hard for the brand to enlarge its fan base. As the luxury retail faces growing risks, Hermes is promoting transformation actively. Though it has no intention focus its efforts to influence the Millennial and younger groups like KOL, it risks being eliminated from the mainstream if it ignores the future main consumers, as the luxury industry is undergoing profound changes. Let us wait and see how Hermes, the most iconic brand in the luxury industry, will solve its midlife crisis.

Marlon Mai's picture
Managing Director, Greater China