Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Hermes Built a Luxury Moat on Scarcity and Craft
Transcript
- Lucas: So last week a Birkin bag at a Christie's auction in Hong Kong sold for just under three hundred thousand dollars. That's a handbag. And it's not a celebrity-owned piece or a rare gem-encrusted edition. It's just a standard Birkin, retail price maybe twelve thousand. That resale premium is a signal of something structural. Luna: Structural is the right word. That kind of markup doesn't come from marketing buzz. It comes from a business model engineered for scarcity. Lucas: Exactly. And that's what we're drilling into today: how Hermes built what I'd argue is the most defensible moat in luxury. Not just among handbag makers — I mean across all of retail. It's a company that doesn't advertise, doesn't sell online for most of its history, and actively turns away customers. And yet it generates operating margins above 40 percent. That's higher than Apple. Luna: Forty percent margins with no ad budget? That's almost obscene. But is it repeatable? Could LVMH or Kering copy this? Lucas: That's the million-dollar question. Let's start with the mechanics. Hermes controls every layer of its supply chain. It owns its tanneries — it's one of the few luxury houses that still does. It owns its silk mills, its workshops, its retail stores. It even owns the forests where some of its raw materials come from. That vertical integration gives it total control over quality and, more importantly, over quantity. Luna: Right. If you control the supply, you can restrict it. And Hermes restricts production aggressively. They reportedly produce only about seventy thousand Birkin bags a year. For context, Coach sells millions of bags annually. Lucas: Seventy thousand Brikins — that's not a lot. And Hermes doesn't just cap production. It also distributes them through a system that feels almost opaque. You can't walk into a Hermes store and buy a Birkin off the shelf. You have to build a relationship with a sales associate. They keep waiting lists, but they don't publish them. The idea is that the bag finds you, not the other way around. Luna: That creates a kind of chase dynamic. The harder it is to get, the more desirable it becomes. And that feeds the resale market, which in turn reinforces the brand's cachet. But isn't there a risk that the resale market cannibalizes new sales? Lucas: You'd think so, but it doesn't seem to. Hermes has managed to position its products as investments. A Birkin bag, on average, appreciates about 14 percent per year. That's better than the S&P 500 over many periods. So people who buy one aren't just buying a fashion accessory — they're buying an asset. And that keeps demand far above supply. Luna: That's a powerful moat. But it's also a delicate balance. If Hermes ever increased production too quickly, that resale premium would collapse, and the investment narrative would unravel. Lucas: That's the core tension. And Hermes has been remarkably disciplined. In 2023, when other luxury brands were raising prices double digits and flooding the market after the pandemic rebound, Hermes only raised prices about 7 percent. And they kept production growth below demand growth. That restraint is rare. Luna: Compare that to Gucci under Kering. Gucci chased growth for years — doubled revenue between 2015 and 2019 — and then saw demand soften as the brand felt overexposed. They had to reposition. Lucas: Exactly. Gucci's moat wasn't as deep because it relied on trend cycles. Hermes's moat is built on craftsmanship and timeless design. The Kelly bag was introduced in the 1930s. The Birkin in 1984. They look almost the same today. There's no seasonal fashion risk. Hermes doesn't even do seasonal runway shows in the traditional sense — they show collections, but they don't swap out their core products. Luna: And that craftsmanship is incredibly labor-intensive. I read that it takes an Hermes artisan at least two years of training before they can even touch a Birkin or Kelly entirely on their own. The company has its own school — the Hermes Institute — to train leatherworkers. Lucas: That is a moat in itself. If you wanted to replicate Hermes, you'd need to invest decades in training a workforce that doesn't exist. Most luxury houses outsource production to third-party factories in Italy or Portugal. Hermes keeps everything in-house, mostly in France. That limits scale, but it guarantees quality. Luna: So the moat is a combination of: vertical integration, deliberate scarcity, craftsmanship investment, and an almost cult-like brand loyalty. But I want to push on one thing: does that moat hold up as younger consumers — Gen Z — shift toward sustainability, rental, and resale? Lucas: It's a fair question. Some analysts argue that Hermes benefits from the resale trend because it reinforces the asset value of its bags. A young buyer might not be able to afford a new Birkin, but they can buy a pre-owned one on The RealReal. And that still drives brand desirability. Luna: But rental is different. If people start renting Birkins for events instead of owning them, does that dilute the exclusivity? Lucas: It could, but Hermes has been aggressive about protecting its brand. They sued a resale platform a few years ago for using the Birkin name in marketing. And they don't sell wholesale to department stores — they control every point of sale. So rental platforms can't get inventory from Hermes directly; they have to source from individual owners. That limits the scale of the threat. Luna: Still, it's worth watching. If sustainability becomes a bigger factor, the idea of buying a new leather bag every year might fall out of fashion. But Hermes's emphasis on longevity — bags that last decades — actually aligns with that value. Lucas: That's the irony. The same craftsmanship that makes Hermes expensive also makes it sustainable in a way. A fast-fashion bag falls apart in two years. An Hermes bag can be inherited. The company even offers repair services — they'll restore a bag that's decades old. That builds customer loyalty that's hard to break. Luna: Let's zoom out a bit. How does Hermes's moat compare to other luxury conglomerates? LVMH has moats in scale and distribution. Kering has moats in brand portfolios. But Hermes is more focused. Lucas: Hermes is essentially a single-brand luxury house, though it has fourteen product divisions. But the brand is the moat. And that brand is so powerful that Hermes can charge a price premium that competitors can't. For example, a comparable leather bag from Louis Vuitton might cost two thousand dollars. An Hermes equivalent might be eight thousand. And customers still queue up. Luna: Part of that premium comes from the fact that Hermes never discounts. No sales. No outlet stores. No private sales for VIPs. That protects the brand's perception of value. Lucas: Right. And that's a discipline that most brands can't maintain. When revenue dips, the temptation is to offer 20 percent off to move inventory. Hermes just accepts lower sales. In the 2008 financial crisis, they didn't discount. Sales dropped, but the brand came out stronger. Luna: So the moat is partly about having the financial strength to withstand short-term pain for long-term gain. That's rare in public markets where quarterly earnings pressure is intense. Lucas: Hermes is still family-controlled. The family holds about 67 percent of shares. That gives management the ability to ignore short-term demands. They don't have to maximize same-store sales every quarter. They can focus on the brand. Luna: That's a structural advantage. Most competitors are part of conglomerates that have to show growth across dozens of brands. Hermes has one brand to protect. Lucas: And that protection has paid off. Hermes's market cap crossed two hundred billion euros earlier this year. That's more than BMW or Mercedes-Benz. A saddlery from 1837 is now bigger than most automakers. Luna: It's wild. And I think the lesson for other businesses — not just luxury — is that scarcity and control can be more valuable than growth. But you have to have the product quality to back it up. Lucas: Exactly. The moat only works if the product is genuinely superior. If Hermes cut corners, the whole edifice collapses. But they don't. That's why they can maintain that scarcity without it feeling like a gimmick. Luna: Before we wrap, I want to ask: is there any business outside luxury that has a similar moat? Where scarcity and craftsmanship create pricing power? Lucas: I think of Rolex in watches. They also control their supply chain, limit production, and have a waiting list model. Or Ferrari in cars — they deliberately cap production to maintain exclusivity. But Hermes is the purest example because the product is so simple yet so hard to replicate. Luna: It's a good reminder that some of the best strategies are the ones that go against the grain. While everyone else is chasing scale, Hermes stays small. While others advertise, Hermes stays silent. Lucas: And that discipline, honestly, is why I find this case so compelling. It's not about some secret formula. It's about saying no to a lot of good opportunities so you can say yes to the right ones. Luna: If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it really does make a difference. And we don't run ads, so listener support is what keeps us independent. But back to Hermes — I think the biggest takeaway is that a moat doesn't have to be technological or even scalable. It can be about the willingness to be unfashionably patient. Luna: Patient and a little bit stubborn. That's a good closing thought. Next time we'll look at a company that went the opposite direction — scaling fast — and see if they can build a moat that lasts. Lucas: Looking forward to it. For now, thanks for listening.