Put rumors of the luxury industry’s decline on hold for now… Hermès just released its financials for the 2016 calendar year and its performance knocked it out of the park!
This week Hermès reported that annual profit for 2016 was a record 1.1 billion euros and resulted in a final year end tally increase, in the words of CEO Axel Dumas, “better than expected.” If you remember, especially over the summer during the Brexit chaos and instability in Asian financial markets, Hermès tempered its hard target of 8% growth and provided guidance that earnings growth might fall short of historical trends. In the first half of 2016, Europe, Asia and the Americas experienced 6.9%, 5.7% and 6.9% increases in revenue over 2015, respectively, while the second quarter showed an increase of 6%, 5.2% and 8.7%, respectively, for the three continents (financial report here).
Hermès’ continued dominance as the luxury industry’s unquestioned leader was buoyed by a massive 14% sales growth from the leather division – which makes up around half of the company’s overall sales – and a 9% increase in perfume sales,. This profit growth came despite slow silk and textile sales, down 1% for the year, and a 3% decline in the watch division. What this indicates is that Hermès is hugely dependent on its leather products – which include bags like the Constance, Halzan, Lindy along with their iconic Birkin and Kelly – to hit growth targets. The wide variety of handbag models offered by Hermès is its strength.
Hermès recently increased production capacity at three manufacturing sites in Charente, Isère and Franche-Comté and has been looking for more investment options in the latter region. It’s 15th leather workshop opened in April 2016. This could explain the recent rise in availability of certain iconic bags deemed ‘exclusive’ and only available to Hermès’ most loyal clientele (read: Is Hermes Still Playing Hard To Get?)
Increased investment in and expansion of leather production facilities in France was also noted by a Bloomberg article. The need to control the supply of leather is not new to the luxury brands. One of the articles ‘The Race to Control the Luxury Leather Business’ highlights this in great detail . The gross margins in the leather goods department are extremely high. There is direct, positive and extremely high correlation between the ability to create the perception that a brand is using superior leather to make its leather products and the mark-up it can charge on these products. Luxury brands like LVMH, Hermès and Chanel, amongst others, have mastered this art. Leather goods are a key to sustained growth of the luxury brands in today’s market which makes the quality and quantity of leather supply crucial to the future success of these brands.
Could increased leather production by Hermès spell an end to the era of exclusivity attached to the Birkin/Kelly/Constance trifecta… something Hermès lovers may not be ready to hear or acknowledge. However, different times call for different measures. Change is the only thing constant in this world so companies must keep up with the times, or they will be nudged out of the market. Hermes core values focus on craftsmanship, quality and innovativeness. To be an enduring brand, it needs to say true to the core values and come up with strategies to adapt to the changing times.
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