How Hermès defied the luxury slump

The luxury industry has lost its sparkle. A slowdown in the Chinese economy and a cost-of-living crisis in the West have led to a slump in sales of fancy frocks and posh bags. If, after a pause announced on April 9th, the high levels of tariffs threatened by Donald Trump are enacted they could throw the industry into a tailspin. Kering, a French luxury group that owns Gucci, has posted a string of profit warnings in recent quarters. At lvmh, another French luxury giant which owns Louis Vuitton, sales of fashion and leather goods have gone into decline.

Yet one firm seems immune to the downturn: Hermès. Sales surged by 15% in 2024 to €15.2bn ($16.4bn). Citigroup, a bank, reckons that figure could rise to a symbolic €20bn by 2027 and soon overtake sales at Louis Vuitton. The s&p Global Luxury index has dropped by more than 20% over the past year, but Hermès shares have lost just 4%. What can other luxury groups learn?

First lesson: control supply chains. Hermès runs small workshops filled with highly trained artisans. Some 55% of its goods are produced in-house or in exclusive partnerships; Adam Cochrane of Deutsche Bank reckons that figure is around 35-40% for competitors. Even in ready-to-wear clothing, where the firm uses outside manufacturers, it keeps suppliers close. Stéphane Wargnier, who worked in communications at Hermès for 18 years, was told to invite suppliers to the firm’s internal Christmas parties. In recent years the likes of Chanel, lvmh and Prada have poured money into buying their suppliers.

The second lesson is that luxury groups benefit from disciplined price increases. In-house production at Hermès crimps supply. Waiting lists for the brand’s most coveted bags stretch for years even though it charges some of the highest prices in the industry (see chart). Yet Hermès hasn’t targeted ever-fatter margins; it raises prices in line with costs of production and currency fluctuations. Over the past decade that has led to average price increases of 6-7% per year, according to Bernstein, a broker. The price of its classic Birkin bag has risen by about 29% since 2016 to $12,100, according to estimates from Sotheby’s, an auctioneer, while the price of Chanel’s quilted bag has more than doubled.

That restraint puts the firm in an enviable position. Most brands raised prices dramatically after the pandemic as customers started “revenge shopping”. According to McKinsey, a consultancy, 80% of the increase in revenues in the luxury market between 2019 and 2023 came from price increases and only 20% from growing volumes. As consumer sentiment has turned, brands are being forced to discount existing products and introduce cheaper ones. Most luxury executives are jittery about tariffs and a global trade war squeezing margins further. Hermès’s boss, Axel Dumas, is sanguine. He plans to pass on the cost of any new duties. “Our American customers will understand,” he says.

The third lesson is that it is possible for luxury groups to sell less pricey lines to “aspirational” customers without destroying brand image. Though a large chunk of its wares are eye-wateringly expensive, Hermès also sells more affordable products, like lipstick and nail polish. Carole Madjo at Barclays, a bank, says the attitude is: “you buy a lipstick today but in ten years you might buy a Birkin bag.”

It is a tricky balancing act. Brands such as Gucci have churned out cheaper items, like socks and bucket hats, and destroyed their reputation for exclusivity. By staying small and restricting supply Hermès has avoided that fate. The group has fewer than 300 shops worldwide, compared with 530 or so for Gucci. It increases production of leather goods by just 6-7% a year.

Other luxury groups will struggle to copy the model entirely. Luca Solca of Bernstein says Hermès is “in a league of its own”. The firm, founded in 1837 and still in family control, has spent time and money training artisans to produce high-quality bags. But if there is a weakness it is that there are only so many shoppers looking for a €10,000 handbag. Hermès’s wealthy customers may be less affected by the economic cycle. But when recovery comes and consumers open their wallets again, luxury houses that cater to the “aspirational” middle classes may gain the most. 

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