The Taste by Vir Sanghvi: Why Hermes is now worth more than the whole Louis Vuitton group
As the Chinese market falters and the US imposes tariffs, real luxury is overtaking label-mania.
Even if you have no interest in the luxury market, you will have noticed the number of luxury- related posts that are suddenly turning up on Instagram and other social media. Also read | The Taste by Vir Sanghvi: Why it’s time Indian tourists took a second look at Malaysia
Usually the point of a typical luxury post is to push the ‘impossible dream’ aspect of designer goods and to make you lust after things you can’t really afford.
But this time around, the posts are mostly focused on China. The Chinese, it is claimed, are now willing to reveal, in the midst of their trade war with America, how most luxury products are manufactured in China and then exported to the West where fancy designer labels are plastered on them and prices multiply. A bag that cost $200 to make could easily sell at $2500 in US retails stores.
The subtext of the posts is: luxury brands are ripping customers off.
Though it has now broken through to a wider audience the allegation itself is not new. One of the greatest achievements of the luxury industry over the last 30 years has been to make the label more important than the product. Once the luxury companies know that customers are willing to pay for anything that is labelled Louis Vuitton or Gucci, they are less concerned with the product itself and focus mainly on brand building.
Price is no longer a reflection of cost plus a profit margin. Instead price is determined solely by what the market is willing to pay. Even if a product costs say $50 there is no shame in selling it at $2000 because the market is able to bear that price. Though this has frequently been written about it has made no difference to the luxury goods market: till now.
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Last month Wall Street was startled to discover that profit margins at Louis Vuitton, the world’s largest luxury conglomerate, were falling.
The reason appeared to be a softening of the Chinese market one of the cornerstones of Vuitton’s profitability. Several reasons were offered for the drop in Chinese sales but an important factor was the gradual disillusionment of customers with labelmania. People were less willing to pay very high prices for mediocre goods. (And the Chinese have a better idea than the rest of us about how high the mark ups can be.)
Instead they were spending money on experiences such as travel. They wanted to create memories, not fill their closets with overpriced handbags that would soon be out of fashion anyway.
The shift had been anticipated (Louis Vuitton has invested heavily in the hotel sector to make the most of the new preferences) but many had thought it would take longer to gather steam. And now there is a new crisis: if Donald Trump goes ahead with import tariffs (especially against goods manufactured in China) then the American market for luxury goods could collapse.
Without China and America the designer labels could well be perched at the edge of the precipice.
What has surprised and angered the large luxury conglomerates the most however has been the stunning success of Hermes in the midst of all this gloom.
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Within the luxury industry Louis Vuitton and Hermes are seen as guarding opposite ends of the spectrum. Vuitton is a huge diversified conglomerate that does not hesitate to buy factory-made goods from third parties. Hermes focuses on craftsmanship. Something like 55 percent of the most coveted Hermes products are produced in house, often at a series of small workshops.
When it does use outside suppliers (for its ready to wear clothes, for example) it sticks to a small group of companies it has worked with for years and which have almost become part of the larger Hermes family.
This creates supply chain constraints. Many Hermes products are in short supply and waiting lists can get longer and longer. But, remarkably, customers are prepared to wait. They know that this approach guarantees quality.
A decade ago, this business model was considered outdated and on the verge of extinction. Vuitton tried very hard to take Hermes over dividing the many cousins who own the business.
Hermes beat off the takeover attempt and this year, something that nobody thought possible actually happened. As the Chinese market has weakened and the American market seems endangered, shares in LVMH (the Vuitton conglomerate) have slumped. Hermes is now worth more than Vuitton.
It’s hard to explain how Hermes has triumphed except to argue that people appreciate quality and craftsmanship. Yes, prices are high but Hermes does not do demand pricing. Its prices go up when costs go up not when there is hype around a product. The price of its classic Birkin bag has risen by 29 per cent since 2016. In that same period the price of a Chanel quilted bag has doubled.
Does this tell us something about the luxury market? Will people prefer quality and craftsmanship to labels?
Honestly, it is too early to say. But yes, my sense is that in the years ahead a more discerning customer will emerge, driven less by name of the brand and more by the quality of the product.
