Hermes’ Asian markets, including China, were the worst performers, registering only 1% growth
The luxury business is going to get harder and harder.
According to Fashion Business Alert, French luxury goods group Hermes released its third-quarter results before the bell yesterday, with revenues up 11.3% at constant exchange rates to €3.7 billion, slightly higher than analysts’ expectations of 11%, and revenues for the first three quarters up 14% at constant exchange rates to €11.2 billion.
This result is a significant slowdown from 13.3% in the second quarter, 15.6% in the same period last year and 32.5% in the same period in 2022, although it still beats its peers.
LVMH, which reported earnings last week, saw third-quarter organic revenue fall 3% to 19.07 billion euros, with its core fashion and leather goods division recording its first sales decline since 2020, and third-quarter sales plunging 5%, well below analysts’ expectations.
Yesterday’s release of the earnings report of the Kering Group in the first nine months of revenue fell 12% to 12.8 billion euros, of which third-quarter revenue fell 15% to 3.8 billion euros, down 16% on a comparable basis, less than analysts had expected, accounting for half of Kering’s core brand Gucci third-quarter revenue fell 25% to 1.64 billion euros.
Hermes CFO Eric Du Halgouet was blunt in a post-earnings analyst meeting, saying that if anything has surprised the company over the past few quarters, it’s the resilience of Hermes, especially in China, in contrast to other brands in the industry.
Hermes Q3 detailed data by region and division
However, the figures show a serious decline in China, with the Asian market, which includes China but excludes Japan, being the worst performer by region, with growth of only 1% at constant exchange rates to €1,584 million, with South Korea, Singapore, Australia and Thailand being the standout markets.
Despite the decline in offline traffic in China since the end of the Chinese New Year, the group emphasized that the downward trend in traffic ended at the end of the second quarter and was maintained there. The negative impact of low traffic was offset by higher unit prices from loyal customers, so the Chinese market still secured positive growth from a high base in the third quarter of last year.
The Japanese market jumped 23% to EUR 380 million in the period, maintaining its strong momentum. Hermès management emphasized that foreign tourists contributed less than 10% of sales in the Japanese market, driven mainly by local customers.
Europe excluding France jumped 20% to €584 million, thanks to solid local consumer activity and continued growth in visitor traffic from regions such as the Middle East and the United States. France posted a 13% increase to €365 million, despite a slight drop in local store traffic during the Olympic Games, while the Americas rose 13% to €666 million, with growth rates close to those of the previous two quarters.
By division, sales in the leather goods and harness division, where Hermès platinum bags are located, rose 14% at constant exchange rates to 1.573 billion euros, the ready-to-wear accessories division rose 13.5% to 1.134 billion euros in the third quarter, revenues in Hermès’ other divisions, which cover jewelry and home furnishings, rose 13.6% to 455 million euros, and the perfumery and beauty division rose 10.6% to 129 million euros.
The relatively weak Silk Textile division recorded a 4% increase to €200 million, while Watches was the only division to record negative growth, with an 18% drop to €126 million.
The watch division plunged 18% and was the only division to record negative growth
Continuing a trend from the second quarter, Hermes again proved in the third quarter that entry-level products such as silk scarves and accessories are driving sales at a slower pace. Axel Dumas, executive chairman of the Hermès group, said at an analyst meeting last quarter that the number of aggressive consumers had declined, especially in China.
New launches in September somewhat boosted the fragrance and beauty division, which had previously been lagging behind, including Barénia, a new women’s fragrance designed by Christine Nagel, and Trait Hermès, the second part of the eye makeup line Le Regard.
But the watch division, which is still slowing down sharply and which had recorded high growth of between 23% and 46% between 2022 and 2024, will make adjustments to its watch designs as soon as possible, Hermès management admitted at the meeting, adding that the division has been affected to some extent by the overall slowdown in Swiss watch exports.
Meanwhile, the market continues to be concerned by the failure to sell small accessories such as silk scarves. Hermès management, which attributes the success of its silk products to design creativity and technical know-how, will continue to invest in silk development with a new production line at Pierre Beni Lyon.
It is easy to see that, in the face of the slowdown in sales driven by entry-level products, Hermès is trying to solve the problem from the aspects of product design and supply. Enhance the attractiveness of entry-level products to get rid of its role as a “supporting goods”, which is not directly indicated by the management, but a clear direction of development.
The issue has now become urgent. Although Hermes still attributes its outperformance of its peers to its unique business model, the company’s allotment system, which it is reluctant to admit publicly, has actually begun to loosen.
Three consumers from California filed a third lawsuit against French luxury brand Hermes this month, continuing to take aim at the company’s controversial allotment system, alleging false advertising and fraud in violation of antitrust laws by forcing consumers to purchase other high-dollar accessories before qualifying for a platinum bag, according to Reuters.
The class action lawsuit reflects the depth of consumer resentment against the Hermes distribution system.
Entry-level products such as silk scarves and accessories are driving sales at a slower pace
This year, luxury consumption overall cooling, Hermes can not be exempted from sales pressure. Many consumers reflect that this year, Hermes’ cash cow, cash cow BKC (i.e. Birkin, Kelly and Constance) in many markets around the world to reduce the ratio, the difficulty of purchasing declined.
Although some of the popular colorways are still difficult to obtain, the brand is beginning to change its attitude and be more transparent with consumers, as compared to the previous situation of not being able to get a handbag without matching, as some consumers have revealed that Hermès will be able to negotiate a match and purchase a handbag in stock this year.
This phenomenon, while exciting to many consumers who aspire to own a specific handbag model, also shakes the trust of this group of HNWIs in the outlook of the brand and the luxury market, after all, the Hermes ration is almost a barometer of the entire luxury market.
Unlike price-sensitive consumers, Hermès’ HNWI customers are not chasing individual items, but rather are in a position to recognize its top-of-the-pyramid brand positioning, and therefore the more expensive, the more they buy. If the brand overly caters to consumers, the brand may cause this segment of consumers to lose long-term trust in it, and some consumers may quickly pull out after currently acquiring their ideal handbags, bringing uncertainty to Hermès’ next performance.
Hermes management emphasized that the offsetting of the impact of low traffic by the growth in branded customer unit prices is not just a trend that is happening in China, but in the global market. The question is thus how much deeper Hermes can dig into the wallets of its loyal customers, a task that will only get tougher.
For most loyal customers, who most of the time already own more than one BKC bag, it is actually more difficult to get these consumers to buy more bags than it is to convince a beginner who does not yet own a platinum bag to buy their first platinum bag.
In addition to this, there is also a certain gap between the brand’s definition of loyal customers and the consumers’ understanding that not all loyal customers can follow Hermès for a long time, especially as other brands are competing vigorously for core VIC customers and offering more unique service experiences.
One of the plaintiffs in the Hermes class action lawsuit alleges that she has purchased tens of thousands of dollars of products from Hermes and owns more than one platinum bag, but when she inquired about another platinum bag in 2022 to a store salesperson, she was told that it was only sold to “customers who have supported our business.”
Therefore, although Hermes has the allotment system as a safety cushion for its performance, its next task is still to return to the development of diversified consumer demand and activate the appeal of non-handbag products, which is not fundamentally different from that of other luxury brands.
Hermes’ challenge is to activate the appeal of non-handbag products
By allowing other categories that are not handbags to be seen as ancillary, the brand is actually actively reducing the importance of these categories. For example, the brand’s heavily developed jewelry and watch collections, which had the potential to become Hermès’ second growth curve, were deemed not worth investing in by a number of small reddit users, partly blamed on the fact that these categories were treated as accessories to the purchase of handbags.
The question of how to optimize the appeal of the ready-to-wear, jewelry, and watch categories themselves to consumers, rather than forcing them to buy products they don’t appreciate, is one that even Hermes, at the tip of the luxury industry pyramid, hasn’t solved.
Hermes may have been able to get away with not having to bother with these issues during a time when platinum bags could easily drive business, but as more loyal consumers who are familiar with the brand settle in, they will be more demanding.
For example, its ready-to-wear category has not been sized appropriately for local consumers, especially in the important Asian market. In addition, even at a time when the quiet luxury trend has become the east wind of Hermès ready-to-wear collections, the brand, even with a creative director and seasonal runway launches, has lost out to the likes of The Row, Brunello Cucinelli, Loro Piana and others in the past round of competition in the high-fashion market.
Under pressure to secure the core position of handbags and develop multiple categories, Hermes is also following plans to boost production capacity and expand its sales network.
The group’s twenty-third leather goods workshop in Riom, France, opened in September to continue to enhance production capacity. And according to incomplete statistics, so far this year, Hermès newly opened stores, including the opening of Hong Kong Lee Gardens store in June, the opening of Melbourne’s Collins Street store in August, the renovation and expansion of the Shenzhen Vientiane City store in October, Japan in February and June the opening of the Azabu Daiyama and Ginza Mitsukoshi new store, the United States, New Jersey, opened in April, such as the new Princeton new store.
All of these moves will bring higher operating costs, and the market is watching closely to see if the problem of overcapacity is coming to Hermès. According to Le Monde, one of the factories working with LV has been cutting back on production hours over the past few months, with production capacity reduced by up to 20%, and a representative of the supplier’s factory staff said he had been asked by management to take a vacation.
As production capacity increases, inventory management will become an important challenge for Hermes. Regardless of the huge number of secondary markets, the growing sales network will test Hermes’ control of inventory levels, which the brand has seen fluctuations this year with rising inventories during the Chinese New Year and in June, and which management says have now stabilized.
At the same time, Hermès management said that the marketing budget for this year amounted to 650 million euros and that there were no budget cuts in any of the regions. In order to increase the appeal of non-handbag products and to present the full world of the Hermès brand, it is clear that the group needs to continue to strengthen its marketing communication.
There are signs that Hermès is trying to strengthen its brand image marketing in China, including the “Hermès, Flying Horses” fantasy theater in Shanghai last November and the 2024 summer men’s collection fashion show in April this year.
To date, the act of purchasing a non-handbag product purely because one appreciates Hermes’ design aesthetic is still considered mind-boggling in the country’s social media discussions, meaning Hermes has a long way to go in communicating its brand in the important Chinese market.
Of course, Hermes has another card up its sleeve in the form of price hikes, but the collective consumer backlash against luxury price hikes has peaked after a 9% increase earlier this year, and the group expects routine price hikes early next year should be lower than that.
The secret of Hermes is that instead of trying to cater to the masses, it has opted for scarcity and maintained the high quality of its products, but with a gradually drying wallet and an irrational allotment system, there’s no reason for a whopping 50x P/E Hermes to rest on its laurels as it once did.