Few companies embody the fusion of heritage, craftsmanship and exclusivity as convincingly as Hermès. Founded in 1837 as a saddlery workshop in Paris, the French maison has evolved into one of the most admired and profitable luxury brands in the world, with operating margins that consistently exceed 40%. Yet what makes Hermès particularly intriguing isn’t just its financial performance, but the deliberate philosophy behind it — a philosophy rooted in time, restraint and an obsessive commitment to quality.
While other luxury players chase trends and scale through aggressive marketing, Hermès has built scarcity into its business model. Its leather goods, especially the iconic Birkin and Kelly bags, are not readily available, even for the ultra-wealthy. Waiting lists stretch for years, and production is intentionally constrained. Each bag is crafted by a single artisan who undergoes years of training before even touching precious leather. In a world of speed and automation, Hermès is a case study in strategic slowness.
That slowness is not inertia — it’s power. The company’s vertically integrated structure allows it to control quality at every step, from sourcing exotic leathers to finishing each object in its French workshops. This same approach has allowed Hermès to weather supply shocks that caught competitors off guard, and to double its EBIT in just two years following the COVID-19 lockdowns — without compromising on its core values.
In recent years, Hermès has also refined its communication model, opting for brand experiences over media saturation. Two-thirds of its budget is allocated to events like the elite equestrian show Saut Hermès, which blend heritage with exclusivity and reinforce the brand’s association with timeless elegance. This strategic emphasis on brand image — not visibility — explains why Hermès has no marketing department. Instead, its objects are born from artistic freedom, not market surveys.
But even a brand as revered as Hermès isn’t immune to long-term risks. Ethical concerns over animal-derived materials, shifting consumer preferences, and the rising importance of sustainability pose challenges to its legacy model. Can a brand defined by exclusivity and tradition continue to adapt without diluting its essence? That’s the question explored in this in-depth analysis.
"Remember, this is Hermès, so we do things slowly but surely."
Axel Dumas, CEO of Hermès.
Throughout its almost 200-year history, Hermès has transformed from a largely national company to one exporting 91% of its luxury goods. Spotting its iconic bags, scarves, or shoes is now more common in Japan than in France itself. This aggressive international expansion sharply contrasts with its strategy of concentrating around 80% of its production processes in France, a deliberate choice to ensure the durability of its craftsmanship model and differentiate itself from other luxury brands. While the company’s business model is undoubtedly special, its essence and unwavering attention to detail are what truly make it unique.
The horse-drawn carriage logo, inspired by French portrait painter Pierre-Alfred Dedreux, beautifully reflects the roots of one of today's most iconic brands. Founded in 1837 by Thierry Hermès, this once-small family business primarily focused on wholesale saddlery, supplying saddles and other leather equipment. Thierry Hermès quickly became renowned for the exceptional quality and finishes of his handcrafted products, attracting the attention of European noblemen. Leveraging the brand’s burgeoning reputation, Hermès expanded its portfolio of horse accessories and related products throughout the second half of the 19th century, then already under the control of Charles-Émile Hermès (Thierry's son). Its prestige grew so immense that it was even rumored some European coronations might have been postponed until Hermès completed the designs for the carriages commissioned for these celebrations.
Today, Hermès stands as one of the most profitable luxury brands globally, boasting operating margins exceeding 40%. Yet, building a nearly two-century legacy hasn't always been straightforward. The secret to its enduring success largely stems from strategic decisions being made exclusively by the Hermès family, which holds a commanding 66.59% of total shares (the second-largest shareholder owns only 1.5%). These decisions are consistently rooted in long-term thinking, prioritizing the company's resilience.
The first major crisis illustrating this foresight occurred in the early 20th century. The rise of the automobile and the subsequent obsolescence of the horse-drawn carriage jeopardized the company's foundational business. Émile-Maurice, the founder's grandson, astutely identified opportunity amid uncertainty. He chose to expand the product portfolio into new areas like fashion and sports, shifting the focus towards retail. In 1918, Hermès unveiled its first leather golf jacket for the then Prince of Wales. This was followed by its first handbags in 1922 and travel bags in 1925. While silk ties and Eau d'Hermès perfumes wouldn't arrive until 1937 and 1949, respectively, the French company emerged stronger from its initial crisis in just three decades.
Saddlery, which had been Hermès' primary activity for almost a century, was a business line that the company, perhaps unknowingly, allowed to decline. However, its true value wasn't merely in revenue but in brand image. Hermès had built its 19th-century reputation among European nobility primarily through innovative sewing techniques that ensured the superior quality of its equestrian products. Harnesses, saddles, and other accessories demanded the highest quality, as their failure could jeopardize a rider's safety.
Axel Dumas, a sixth-generation family member and CEO since 2014, recognized that the company’s legacy was its greatest marketing (or "communication," as the company prefers to call it) differentiator compared to other French luxury brands like Louis Vuitton, which have very different origins. Dumas has since opted to strategically relaunch this business line, aiming for Hermès to once again become a reference in the equestrian world—this time, in sports competitions.
Currently, the company sponsors 20 top-tier global riders (including Olympic medalists) and organizes an annual event in Paris, Saut Hermès, which gathers the world's best riders in an unparalleled spectacle (link). These elite events serve as the French company’s primary communication channel, akin to the sports experiences Ferrari orchestrates to bolster its brand exclusivity and reputation. Tickets for some of these shows sell out months in advance, partially self-financing the brand’s communication spending. Others, even more exclusive, are accessible only to the most loyal clients. The number of invitations per country is limited to about a dozen clients per nation, fostering a competitive environment where greater spending on Hermès products increases the likelihood of an invitation. Notably, contrary to the industry average, Hermès allocates two-thirds of its communication spending to events and only one-third to traditional media.
Hermès' communication policy has always been consistent with its foundational principle of brand exclusivity. The primary goal of its events isn't to sell specific items, but rather to enhance the company's image. Unlike other luxury brands, Hermès' creations aren't born from market research; instead, they emerge from an internal and, above all, artistic process where artisans and designers are given the flexibility and freedom to explore their creativity. An object that sells well isn't necessarily deemed a success; only those that meet the creator's vision and ambition are considered truly successful by the company. Ideas are born and creativity is fostered in workshops rather than offices.
Hermès doesn't even have a marketing department, a testament to the company's belief that its mission isn't to satisfy today's desires, but rather to invent the desires of tomorrow. When the company launches a new perfume, designs a new watch, or introduces a new scarf, no pre-launch survey is conducted to gauge interest from potential customers. Hermès has never followed any fashion trend, and there's never any pressure to launch new products. Christine Nagel, one of the company’s most relevant perfumers, encapsulated this philosophy: “I have been given the greatest gift: the gift of time. I never have a budget or a deadline. I have never done a focus group. You work for the creation, then you work for Hermès.” Thanks to this patience—a key element of the strategy to create successful objects—the company sells most of what it manufactures. This, in turn, contributes to low inventory levels and minimal working capital requirements, evidenced by operating cash flow accounting for 123% of net income.
Thanks to nearly two centuries of legacy and brand recognition, Hermès can innovate without fear of failure, keeping its entire team's creativity vibrant. Unlike an industrial model characterized by global launches backed by extensive marketing campaigns, Hermès can afford to make inexpensive mistakes. This is due to its diverse, limited-edition collections and its artisanal production model. It makes perfect sense for Dumas to emphasize that Hermès operates with a communication department, not a marketing department. Similarly, the company creates objects, not products, and caters to clients, not consumers. While this wordplay might seem merely semantic, these subtle distinctions profoundly shape the company's culture.
Hermès maintains a strong attachment to its French identity; it's not just "Hermès" but "Hermès Paris." The company's distinctiveness stems from the fact that most of its objects are produced in France, employing over 6,300 artisans (90% of its workforce). This strategy starkly contrasts with other luxury or semi-luxury brands that opt for manufacturing in Southeast Asia to leverage lower labor costs and boost short-term earnings. For Hermès, this commitment is crucial for upholding its fundamental principle of quality and respecting its philosophy, which revolves around its artisanal production model to justify prices that often defy conventional logic.
Hermès makes no compromises on quality. When the company manufactures outside of France, it's never for cost reasons but rather to tap into greater specialized knowledge or superior craft techniques in another country to perfect an object. The belief is that objects are best made when supported by genuine history and a strong craft culture. Consequently, Hermès' watches are manufactured in Switzerland, many of its shoes in Italy and England, and metal parts in Portugal. The dedication to an artisanal production model, prioritizing craftsmanship over mass production and outsourcing, ensures meticulous quality control throughout the entire manufacturing process. The level of oversight is so stringent that even the creative director, Pierre-Alexis Dumas, personally signs every single object before it leaves the workshop. In the words of Axel Dumas himself, Hermès doesn't have an image policy; it has a product quality policy. Customers don't visit any of the more than 300 stores worldwide (70% owned, 30% concessions) to verify quality, but rather to discover what's new.
For Hermès, a luxury object is one that can be repaired and passed down through generations. The object's inherent beauty must always be accompanied by a latent functionality, in the sense that it is built to be inherited. Objects are designed to last forever, with no hidden agenda of "planned obsolescence" or pressuring customers to buy new collections because previous ones are deemed outdated. Ensuring the quality of both the object and the leather used results in manufacturing costs higher than the industry average. Furthermore, the after-sales service, which restores or repairs any object regardless of its condition or age (Hermès handles over 220,000 repairs annually), also increases the unit cost of production. Despite these factors, Hermès has successfully built a brand resilient enough to transfer these costs to the customer, achieving impressive gross margins exceeding 70%.
One of the things I admire most about Hermès is how, despite small shifts in leadership, discourse, and management across six generations of the family, its core values have been preserved throughout its nearly two-century history. Among these values, vision stands out. The quality of Hermès' artisanal production process directly depends on the quality of its raw materials. Decades ago, Hermès made the strategic decision to invest heavily in vertical integration, a move that today grants it a privileged competitive position. This integration not only allows for stringent quality control but also helps secure the provision of materials that are often in short supply. The demand for luxury goods, which has consistently grown at twice the pace of global GDP since 1996, has inevitably pressured production capacity and the availability of high-quality raw materials. Over the years, Hermès has progressively tightened control over its supply chain by acquiring strategic suppliers, and it now controls or holds significant stakes in over 270 of its approximately 300 suppliers.
While vertical integration doesn't necessarily lead to immediately higher operating margins, it does increase the fixed cost structure, potentially leaving a company more vulnerable. This might explain why brands like Gucci, Armani, Saint Laurent, and to a lesser extent, LVMH and Chanel, have historically opted to outsource some of their production and supply access. Consequently, many of these companies were unable to fully capitalize on the parabolic growth in the luxury goods market post-lockdown due to their inherent lack of production capacity. Hermès, however, not only managed to do so but is also poised to nearly double its EBIT in just two years, thanks to its sound strategic decisions and, above all, its willingness to think in decades when competitors were thinking in quarters or merely a couple of years.
Having a management team with vision is just as crucial as possessing a globally admired and desired brand. Vision and a long-term mentality are indispensable in an artisan business, where expanding production capacity is inherently challenging. Hermès' objects, be they watches, bags, or coats, are profoundly dependent on the quality of their craftsmanship. This reliance means the company can't rapidly scale production to meet surging market demand. To join the leather division, which alone accounts for nearly 50% of the company's total turnover, a craftsperson must complete a mandatory two-year training program to master the trade. It will take another six years before they are deemed proficient enough to work with precious leather. After this initial training at an internal Hermès academy—which partners with artisan schools nationwide to attract talent—the novice artisan must then be mentored by a veteran for an additional year or two. This rigorous training process significantly impacts production capacity for two simple reasons: tutoring a novice reduces the veteran craftsperson's own production time, and crucially, Hermès mandates that each object be made by the same person from start to finish. Given that individual learning paces vary and Hermès refuses to compromise object quality by rushing training, the company's growth is intentionally limited. Compared to other luxury goods companies, Hermès' workshops exhibit a lower productivity level, as their production process involves no large machines or advanced technology. For context, while a car manufacturer spends between 18 and 35 hours assembling a car, Hermès dedicates 48 hours to crafting a single bag.
The leather division at Hermès hires only 200 artisans annually. Axel Dumas has pledged to increase production capacity by just 7% per year in the medium term, a figure clearly below current demand. This deliberate gap between demand and supply aligns perfectly with Hermès' philosophy of maintaining scarcity and its exclusive brand aura, which has always positioned its creations not merely as luxury goods, but as ultra-luxury goods accessible to a select few. Hermès pioneered the concept of patience as a fundamental part of its strategy—not only to achieve the highest quality but also to cultivate profound desire for its objects. Instead of controlling skyrocketing demand for its most iconic pieces with incremental price hikes, the company strategically employs waiting lists. Hermès is renowned for having the longest waiting lists in the entire luxury goods market for its Birkin and Kelly bags, stretching up to six years (significantly longer than even Ferrari's).
This waiting list strategy provides recurring and predictable cash flows, proving especially valuable during delicate macroeconomic periods (Hermès hasn't experienced negative growth in the last 20 years). It also ingeniously encourages cross-selling of other items. If a customer, regardless of their wealth or fame, enters a Hermès store intending to purchase a Birkin or Kelly, staff might inform them there are none in stock and suggest joining the waiting list. While there's no explicitly confirmed system for these lists, the notion has taken root among potential customers that their wait time largely depends on their loyalty to the brand. This implies that the more products they buy, the greater their likelihood of acquiring a bag, and doing so ahead of others. The company hasn't officially confirmed this mechanism, but it hasn't denied it either.
“Hélène Le Blanc, then a lawyer working in Paris, was initially rebuffed when she approached the flagship shop in Faubourg Saint-Honoré several years ago. Once she persuaded the saleswoman that she was serious, and willing to wait, she was presented with binders filled with leather samples and hardware options, and allowed to place an order. About two months later, she received a registered letter saying the bag was ready. Florence Paul, a public-relations consultant in London, says a friend of hers took up a collection to buy her mother a Birkin for her 60th birthday; it was ready for her 61st.”
Source: The Economist
Most consumer discretionary companies have honed their techniques to sell products, often to customers who don't truly need them. Hermès, however, operates in a league of its own, having perfected this art at prices that multiply production costs. Consider straw hats for €1,600, cashmere scarves for €2,800, or the iconic Birkin and Kelly bags, which can fetch €100,000 or even €352,000 on the second-hand market (link). A Birkin is one of the rare fashion items whose resale value almost always exceeds its original price, sometimes by several multiples for specific models.
What's the secret behind selling ordinary items at such extraordinary prices? A Birkin bag can be crafted from calf, ostrich, crocodile, or lizard skins, with both interior and exterior exhibiting the same meticulous appearance and quality, and metal parts plated in gold or palladium. While the bag is undoubtedly designed with attention to detail, no one buys a €100,000 bag purely for its quality. BNP Paribas estimates the production cost to be around €800; the remaining €99,200 is "justified" by social status, image, and brand value. It's likely Hermès would have achieved an equally stellar trajectory without its two most iconic items (the Kelly bag, created in 1930, and to a greater extent, the Birkin bag, created in 1984). Yet, these bags have served to keep customers perpetually hungry for the brand for decades. Both objects were originally designed for Jane Birkin, the Anglo-French singer and actress, and Princess Grace Kelly of Monaco, respectively. These two women inspired bags that became worldwide hits, attracting thousands of new clients. Ironically, those interested often had to settle for acquiring different Hermès objects, as the two most successful items were the ones the company sold least.
While no official numbers exist for annual Birkin production, some sources estimate Hermès produces as many as 70,000 annually, with perhaps as few as 1 million in circulation. Restricting the bags' production is a smart move because, unlike with other luxury items, waiting lists don't cause customers to lose interest and opt for another brand. Everything indicates that Hermès will continue to produce more Birkin bags without saturating the market. After all, the perception of exclusivity won't be affected if there are 2 or 3 million bags in circulation instead of just 1 million. What truly matters is that the ratio of eager customers significantly outnumbers the bags available for sale. In Hermès' case, much like Ferrari, it's clear there will always be one less bag than the market demands.
So, what could be the Achilles' heel of a company that appears to be flawlessly executing every strategy with such caution? What might jeopardize the brand's invaluable reputation? What could prevent Hermès from conquering the 21st century, just as it did the 19th and 20th? Investors, it seems, perceive no serious threats to the company's legacy, a sentiment reflected in its remarkably high terminal value, estimated at 50 times FCF. In essence, investors appear to embrace Taleb's Lindy effect theory in this particular case: the longer something has been around, the longer it is likely to stay around. Indeed, the global luxury sector is projected to continue growing faster than GDP, and despite fierce competition for skilled artisans, Hermès will likely continue to scout and retain the best talent in the market (the average employee tenure is an impressive 9 years). But what about the customers? Will Hermès maintain its status as a reference brand in the years to come? Obviously, I don't have a definitive answer—no one does. However, I remain skeptical about certain issues that I believe warrant careful consideration.
Australia is home to some of the world's largest crocodile farms. Known for reaching lengths of six or seven meters, Australian crocodiles thrive faster in the country's prevalent saltwater farms. This makes Australia a strategic location for the luxury goods market, as larger crocodiles yield more valuable skins. Crocodile skin, considered the most exotic and high-quality leather available, has seen its demand steadily increase due to its unique characteristics. Much like a human fingerprint, each leather is distinct, ensuring that every bag crafted from this material is one-of-a-kind, even if it's the same model. This uniqueness has further fueled the appetite of the brand's most eccentric customers. Given that a single crocodile skin isn't even enough to produce a wallet or belt, supply consistently trails demand. Hermès has historically faced significant challenges in sourcing this leather, which has notably impacted waiting lists for some of its most coveted items. Consequently, Hermès has opted to establish its own crocodile farms, a decision that has become a turning point in public opinion.
In today's world, modern societies are increasingly defined by their awareness of environmental sustainability. The fact that most of Hermès' raw materials come from animals now, more than ever, raises questions about the brand's ethics and the long-term sustainability of its business model. Several years ago, the non-profit organization PETA, with over 6.5 million members, severely jeopardized Hermès' reputation. They leaked a video allegedly from a Hermès farm, depicting breeding conditions described as shameful and procedures for obtaining crocodile skin that bordered on animal abuse. The scandal was so widespread that Jane Birkin herself threatened to remove her name from the crocodile-skin bags. Shortly after the media campaign against the brand, it was revealed the recorded farms were not, in fact, Hermès' own. However, by then, the damage had been done, and the undeniable truth remained that the company was indeed using crocodile skins for its products.
Before this controversy, Hermès' commitment to animal rights primarily involved implementing "better" farm procedures and repopulating regions where crocodile species were endangered. The incident with PETA seems to have prompted the Hermès family, known for its decades-long strategic thinking, to work more decisively towards a sustainable model and further enhance the company's long-term resilience. Currently, an impressive 95% of the leather used by Hermès comes from the food industry, meaning these animal skins are utilized rather than discarded. The partnership with MycoWorks to develop vegetable leather from mushrooms, with the first bag featuring this material appearing in the Fall/Winter 2021-22 collection, is a significant development. It clearly signals the company's future direction. The success of such initiatives, which seek alternatives to traditional materials, depends not only on retaining the current clientele but also on attracting a new market of customers who, for ethical or moral reasons, had previously chosen not to support the brand.
In the short to medium term, a dramatic shift in customer perception seems unlikely, especially considering that 60% of total sales originate from Asia, where consumers tend to prioritize human rights over animal rights. Nevertheless, it's crucial for Hermès to continue expanding into new or emerging sectors—such as furniture, cosmetics, and jewelry—and to keep exploring alternatives to traditional leather. Looking back, in the 1980s and 1990s, the leather division accounted for just 8% of total sales, while silk comprised around 55%. Today, leather represents nearly 50% of sales. Surviving for another 200 years is not only important for the company's legacy but also for its shareholders, who are willing to pay 50 times FCF for one of the world's most powerful brands, expecting decent returns on their investments.