By
Bloomberg
Published
Dec 9, 2023
On a chilly October day in Paris in 2010, Bertrand Puech got an unexpected call on his cellphone from Bernard Arnault, the founder of luxury giant LVMH Moët Hennessy Louis Vuitton SE and one of the world’s richest men. Arnault told Puech, the family patriarch at rival Hermès, that his company had amassed shares in the maker of the iconic Kelly and Birkin bags. The investment was friendly and aimed at offering Hermès strategic and operational help, Arnault would later say.
But to Puech and other Hermès heirs, his objective was clear: Arnault, whose often-ruthless takeovers of storied heritage brands have earned him the moniker “wolf in cashmere,” was out to conquer. For the fifth and sixth-generation Hermès owners, ceding their empire to a competitor would have been bad enough, but losing it to what they saw as Arnault’s flashy, marketing-driven group was “revolting,” Patrick Thomas, who was Hermès’ executive chairman, said at the time. Against formidable odds, the heirs repulsed Arnault’s advances, handing one of France’s most acquisitive businessmen a stunning defeat and preventing Hermès from becoming just another label in LVMH’s stable of about 75 brands that includes Louis Vuitton and Christian Dior.
Since that October day 13 years ago, Hermès International SCA shares have risen more than 1,000%, smashing the 600% gain at LVMH. Hermès’ market value has soared to more than €200 billion ($216 billion), about 60% of LVMH’s — with roughly one-seventh the revenue. Once vulnerable to predators as complacent family members got involved in other endeavors, Hermès’ success has provided the group its best defense. It has made the family, which now counts more than 100 members, Europe’s richest, with a combined fortune this year of about $151 billion, according to the Bloomberg Billionaires Index. That’s up about 59% from last year, making it the world’s third-wealthiest and putting it ahead of the US’s Mars and Koch clans, the House of Thani — the ruling family of Qatar — and the Al Sauds of Saudi Arabia.
“Hermès has been successful by keeping its originality and singularity,” said David Dubois, an associate professor of marketing at business school INSEAD, who teaches a class on value creation in luxury and fashion. “The family is one of the secrets and principal assets of the brand’s success. They are the keepers of its heritage and know how to make it evolve without a revolution.”
While Hermès has gained along with other major purveyors of high-end luxury goods — from Arnault’s LVMH and Richemont’s Cartier to the Wertheimer brothers’ Chanel Ltd. and Prada SpA — the family’s fortune has grown faster and is also proving more resilient as the sector’s post-pandemic boom begins to fade. Demand for high-end goods has cooled with the global slowdown, especially in once-sizzling markets like China, wiping more than $188 billion in market value off the sector’s top seven players since an April peak.
But Hermès — which can’t keep up with demand for some of its coveted handbags — has been largely spared so far. Its revenue has been growing in the double digits, unlike LVMH, where it has slowed to single digits. Hermès is “in a league of their own,” Thomas Chauvet, an analyst at Citigroup Inc., said after its strong third-quarter growth, including in China. A focus on craftsmanship, a finely calibrated perception of exclusivity and a mastery of scarcity — real or managed — have converged into a winning strategy for Hermès.
“We are proud of our model, but remain modest; it’s the result of the commitment and talent of our teams across the world,” Executive Chairman Axel Dumas, 53, a sixth-generation scion, said in an emailed response to a request for an interview. He declined to say more.
Hermès is by far the luxury sector’s best performer this year, with a 35% gain in its shares, compared with a 5.3% rise for LVMH and a 15% slump at Gucci-owner Kering SA. Most industry analysts still rate Hermès a “buy,” “hold” or “neutral.” But with the stock trading at a multiple more than double that of its peers, the market slump may eventually catch up with it, said Jelena Sokolova, an analyst at Morningstar. “I wouldn’t say that deceleration is completely unthinkable for Hermès,” she said. Morningstar has one of the few “sell” ratings on the stock because it’s considered expensive relative to future earnings.
Hermès seems unperturbed by a potential slowdown, and is determined to keep to the family’s well-trodden path.
“During tough financial times, there’s a flight to quality,” Dumas told analysts in July when asked how Hermès had managed to clock in a 20.5% jump in sales in the second quarter in the Americas when rivals took hits. Its performance was similar in the most recent period.
The crown jewel of the €362 billion global personal luxury goods industry, Hermès has thrived in large part due to its controlling family’s penchant for doing things in quaint ways that hark back to its nearly two-century-old heritage. Its top leather bags, which can go for anywhere between about $8,000 to well in the tens of thousands of dollars for a model with exotic skin like crocodile, are all handmade in ateliers dotting France.
Also, unlike competitors, the maison echews the bling of famous models and social media influencers, like Kendall Jenner at Gucci or actress Kristen Stewart for Chanel. When stars wear creations from Christian Dior or Balenciaga at red carpet events, the brands are quick to publicize it. Not Hermès. In a world of celebrity excess, Hermès’ advertising is conspicuously free of recognizable faces — something that’s spared them the turmoil when such personalities fall out of favor. Yet customers have been known to wait months — and sometimes years — for its Birkin and Kelly bags, which are nevertheless named after famous actresses.
“We don’t look too much at the competition because we might be influenced,” Dumas quipped during the July results presentation. When he listed the firm’s four core values, “independence” came first.
Created in 1837 by harness-maker Thierry Hermès — a Protestant in mostly Catholic France — the company has always been independent, run for the most part by family members. Known across Europe from its very early days for the exquisite craftsmanship of its creations, Hermès was passed down from son to son as it expanded from harnesses to saddles and other leather goods, sumptuous silk scarves and watches.
In 1951, Robert Dumas, a son-in-law of the third-generation Émile Hermès — who only had daughters — took the helm, and is credited with many of the company’s successes, including the Kelly bag — created almost 100 years ago, but made famous after Grace Kelly was shown carrying it in a photo on the cover of Life magazine. Robert’s son, Jean-Louis Dumas, followed him in 1978, and was the creator of the Birkin bag, inspired by the late British actress and singer Jane Birkin, who sat next to him on a flight and complained that she couldn’t find a handbag she liked. By then the company’s horse-drawn-carriage logo and signature orange boxes had become emblems of high fashion and class.
At the onset of the battle with Arnault, the Dumas, Guerrand and Puech branches of the family — descended from the daughters of Émile — held about 73% of the company. As a Société en Commandite par Actions, or SCA — a limited joint stock partnership that gives a shareholder with even a relatively small stake huge sway — Hermès was already well protected against predators. But LVMH had managed to stealthily accumulate about 23% of the company’s shares. LVMH, which now owns just under 2% of Hermès, declined to comment on the episode.
Just weeks after Arnault’s phone call, about 50 Hermès descendants got together and unanimously agreed on the creation of an even tighter ring-fence. To protect against heirs who might be tempted to sell their stake to a potential raider, they created a holding structure that now has around 54.3% of Hermes’ shares and the right of first refusal to buy from an additional block of shares that family members own.
That fortification put in place over a decade ago is still led by Julie Guerrand, the sixth-generation director who abandoned a banking career at Rothschild & Co. in 2011 to help mount the defense against Arnault. At the end of 2022, the clan owned nearly 67% of Hermès, according to its annual report. Their grasp appears ironclad and the company’s lofty market capitalization — nearly twice that of plane maker Airbus SE, a symbol of European engineering prowess — makes a hostile takeover remote.
“The Hermès family is a fantastic case study in the potential pitfalls of succession,” said Irina Curbelo, co-founder of family business consultant Percheron Advisory. “They were lucky to have been able to come together; many don’t.”
While the Hermès descendants came out on the winning side, the lessons learned from the fight continue to reverberate. Late last year, the heirs took a further step to unify their swelling fortunes by bringing together eight family offices and investment vehicles from various branches into a single entity called Krefeld Invest. Named for the village in western Germany where founder Thierry Hermès was born, it is charged with investing the personal wealth of its constituents.
The family declined to provide any information about the strategy of Krefeld. But a company representative commenting on Bloomberg calculations of the clan’s wealth said the constraints on the family’s ability to sell shares means any estimate of its fortune needs to factor in a discount of about 30%.
The fight with Arnault also jump-started the grooming of the next generation to run the company, with the executive committee now counting three heirs. Faced with an intruder, the clan was quick to join forces, but family members have sometimes clashed over what they have seen as the dominance of some. With the two top jobs at the company — that of the executive chairman and the chief creative director — both going to the Dumas branch, there have been jealousies at times from the other two branches, a person familiar with the matter said. In a bid to fend off criticism, Pierre-Alexis Dumas at first shared the artistic director role with cousin Pascale Mussard from the Guerrand lineage before she was edged out, according to the person.
But the group’s success and its generous dividends — €852 million in 2022 — have largely kept the family united. Under Axel Dumas, the nephew of Jean-Louis who’s been at the helm for a decade, sales have tripled and the share price has risen seven-fold. A former banker who has said he reluctantly joined the company, Dumas has cemented Hermès’ reach abroad — last year, the company opened a new Maison Hermès on Madison Avenue in New York.
Dumas has stuck close to the company’s heritage of quiet luxury rooted in artisanship rather than logos and monograms plastered all over products — like Louis Vuitton or Chanel. The only logo on most of the company’s handbags is a discreet “Hermès Paris” on the clasp. While Louis Vuitton has signed music superstar Pharrell Williams as a menswear designer, the creators of Hermès products tend not to be household names, and many of them have been at the luxury house for decades — Véronique Nichanian has been its menswear designer for 35 years.
“Others have been dependent on changes of CEOs, designers; in the case of Hermès, its signature on products, communications and people has always been consistent,” said Stefania Saviolo, a lecturer in fashion and luxury management at Bocconi University in Milan.
The company stubbornly indulges in practices that sometimes raise eyebrows. In a nod to its origins, this spring the main window display of Hermès’ flagship store on Paris’ fashionable rue du Faubourg Saint-Honoré included some horse dung. It wasn’t just any manure, Dumas told an audience at the equestrian competition Saut Hermès. It came from horses in la Garde Républicaine, an elite unit of mounted police officers who often protect dignitaries at official ceremonies.
The eccentricities don’t end there. The company’s earnings presentations are in French, an oddity in the world of high finance and at big companies, where English dominates — that’s even though Dumas, who attended an executive program at Harvard University, speaks English.
Attempting to perpetuate the myth of the company’s above-the-fray ways, Dumas told business school students in 2019 that Hermès doesn’t “do marketing.” Never mind that the company, like others in the industry, advertises and promotes products. Profitability could be vastly increased if changes were made in the way the company is run, but that’s not the Hermès way, Dumas said.
During the fight against Arnault, the family warned that if Hermès were part of LVMH, pressure for profits would undermine the craftsmanship and traditions that have defined the brand. Over the years, Arnault has changed the face of Louis Vuitton, bringing in the likes of Marc Jacobs, a young designer who updated the products with quirky designs, and pushing to produce more as demand soared.
At Hermès, each bag is still made by a single artisan who can spend up to 20 hours on one Kelly model, folding and sewing together pieces of calf or crocodile skin. People familiar with the firm say the clan’s Protestant culture permeates the strategy, infusing a sense of individual responsibility for, say, a bag that will make the artisan proud.
Unlike many rivals, Hermès regularly updates investors on its manufacturing capacity. Its stated goal is to boost the output of its leather goods by around 7% annually — with the opening of one plant a year in France. That’s even though demand has created a backlog of orders for some sought-after purses that far outstrip this increase.
The company’s ability to boost production is capped by the need for the right skills and savoir-faire, Dumas said during the opening of an atelier in the town of Louviers in Normandy, in northwestern France, in April.
“Training takes time,” he said. “Our best artisans become trainers so they’re no longer in production.” That’s why one opening a year is “optimal to not disrupt what we do while still growing.”
The group doesn’t reveal how many bags or scarves it makes each year, and shortages haven’t prompted it to hike up prices as much as it could. That in turn has spawned a juicy resale market for Birkin, Kelly and Constance models, consistently drawing rich mark-ups.
“Clients will pay a premium for these pieces as the handbags stand the test of time,” said Rachel Koffsky, the international head of handbags and accessories at the auction house Christie’s. “These pieces are considered classic, not trendy,” and have become “investment-worthy,” she said.
Two years ago, a Hermès bag broke a record at auction to become the most expensive handbag ever sold. The hammer came down at more than $500,000 for a diamond-encrusted Himalaya Kelly, a crocodile-skin handbag in mother-of-pearl white. At a Christie’s bag auction last month, 60% of the lots were sold above the highest estimates, with the auction house singling out the performance of Hermès, a sign of the brand’s client-following.
On a recent afternoon in front of the company’s flagship boutique in Paris, Kiki Liu described herself as a loyal customer, one who over the past decade has bought a number of Hermès bags, including Birkin and Kelly models. The Chicago resident on a family vacation was pleased about landing an appointment with a Hermès sales person to inquire about a purse.
“I have many different bags from various brands but I feel like the Hermès ones keep their value and are timeless,” Liu said, as she left the store with her children. “They’re a good investment and I feel like I can pass them on to my girls.”
