Latest / Building Brands with Fexingo: Identity, Reputation, and Long-Term Business Equity / How Hermes Built a Brand on Scarcity and Craft
Transcript
- Lucas: There’s a bag that costs maybe eight hundred dollars in materials and labor to produce, retails for over ten thousand dollars, and yet people wait years for the chance to buy one. And if you buy it, you might be able to sell it immediately for more than you paid. Luna: The Birkin. It’s essentially a financial asset disguised as a handbag. Lucas: Exactly. And it’s made by a company that has deliberately refused to scale production, refused to sell online for most of its history, and never pays celebrities to wear its products. That company is Hermès, and today I want to understand how they built a brand on scarcity and craft. Luna: It feels almost anti-business in the conventional sense. Most companies want to sell as much as possible. Hermès seems to want to sell as little as possible. Lucas: Right. And that’s the paradox at the heart of their brand. Hermès is a publicly traded company—it’s listed in Paris—and its market cap is over two hundred billion euros. So clearly, underproduction is working. But it’s a very specific kind of strategy that only works if you protect the brand’s mystique at all costs. Luna: Where does this begin? The Birkin was created in the 1980s, but Hermès has been around since 1837. Lucas: 1837, making harnesses and saddles for horses. So leather craftsmanship is in their DNA. But the modern scarcity model really crystallized in the 1990s and 2000s under CEO Jean-Louis Dumas and then Patrick Thomas. They realized that the brand’s value came from its rarity. If you flood the market, you destroy the perception of exclusivity. Luna: And they have the discipline to stick with that. Most companies panic when they see demand and want to capture it. Lucas: Hermès does the opposite. They deliberately underproduce. For the Birkin, they reportedly produce only a few thousand bags per year globally. The waiting list is so long that in 2010, the company actually stopped taking new orders for the Birkin because the list had grown to several years. They said, essentially, we can’t promise a delivery date, so we won’t promise one at all. Luna: That’s incredible. You can’t even get on the list. But that also creates a secondary market where resellers mark up the bags by fifty percent or more. Lucas: And Hermès does not participate in that market. They don’t auction their own bags, they don’t sell through third-party platforms. They control all distribution through their own stores. And they’ve been known to ban customers who they suspect are reselling. There’s a famous story about a woman in France who bought multiple Birkins and was then told she could no longer shop at Hermès. Luna: So they police their own scarcity. If you’re using the bag as an investment, they don’t want you as a customer. Lucas: Because the brand is about the experience of owning something rare and beautiful, not about flipping it for profit. That’s a very different philosophy from most luxury brands today. Louis Vuitton and Gucci have become much more accessible, with lower price points and heavy marketing. Hermès has gone the other direction. Luna: But doesn’t that create tension with shareholders? If you could double production and sell every bag instantly, you’d make more money in the short term. Lucas: It does. And Hermès has faced activist investors who push for faster growth. In 2010, there was a famous battle with LVMH, which quietly accumulated a 23 percent stake in Hermès through equity swaps. Bernard Arnault essentially tried a hostile takeover, and Hermès fought back hard. Luna: I remember that. Hermès created a holding company controlled by the founding family to block the takeover. Lucas: Yes. They restructured to give the family majority voting rights. The message was clear: we will protect the brand’s independence even if it means sacrificing some shareholder value. And the market has rewarded them—the stock has outperformed most luxury peers over the past decade. Luna: So the scarcity model actually generates better long-term returns. But it requires incredible operational discipline. How do they maintain craftsmanship at scale? I mean, they have dozens of leather workshops across France. Lucas: They’re very careful about how they scale. Hermès builds new workshops slowly, one or two per year, and each one trains its own artisans through a multi-year apprenticeship. An artisan might spend months just learning to stitch a single type of seam. It takes years to become qualified to make a Birkin. Luna: So they effectively cap production by the number of trained artisans they have. It’s a bottleneck by design. Lucas: Exactly. In 2023, Hermès opened a new workshop in Louviers, Normandy, with capacity for 260 artisans. But it took years to build and staff. And they’ve also acquired smaller leather goods companies to absorb their expertise. The point is, they never outsource. Every Birkin is made in France by a single artisan who stamps their initials on the finished product. Luna: That personal connection is what makes it feel authentic. You know who made your bag. Lucas: And that’s rare in luxury today. Many brands have moved production to lower-cost countries. Hermès has gone the other way, building new workshops in France and even opening a school to train future artisans. They’re essentially investing in their own supply of craftsmanship. Luna: It’s a very long-term view. And it pays off in brand equity. But I wonder—does this model only work for ultra-high-end leather goods? Could another brand copy it? Lucas: Part of the challenge is that Hermès has a 180-year head start. But there are lessons. The key insight is that scarcity isn’t just about limiting supply. It’s about making the product so desirable that people are willing to wait and pay a premium. That requires a product that is genuinely exceptional, not just marketed as such. Luna: And you have to be willing to say no to customers. That’s hard for most companies. Lucas: Right. Hermès famously does not do celebrity gifting or influencer marketing. They don’t send free bags to stars. In fact, they have a policy of not lending products for photo shoots. If you see a celebrity with a Birkin, they likely bought it themselves. That reinforces the idea that the product is so desirable that even rich people have to pay for it. Luna: It’s almost anti-marketing. And it works because it builds trust. The consumer knows that the brand isn’t trying to manipulate them. Lucas: And that trust allows them to maintain pricing power. In 2024, Hermès raised prices by about 7 percent globally, citing raw material and labor costs. And demand didn’t budge. In fact, their revenue grew 21 percent that year. Luna: So the scarcity model also gives them pricing power. If you can’t get the product, you’re less sensitive to price increases. Lucas: Exactly. And that’s a powerful combination. But it’s not without risks. One is that the secondary market could undermine the brand if it becomes too speculative. Another is that younger consumers might not have the patience for a waiting list. And there’s the challenge of e-commerce. Luna: Hermès was famously late to online sales. They only started selling the Birkin online in 2021, and even then, it’s a lottery system. Lucas: Right. You can’t just add a Birkin to your cart. You register for a chance to buy one. That preserves the scarcity even in the digital channel. But it also means they’re missing out on the convenience that many luxury shoppers now expect. So far, it’s worked because their core customers are willing to play by Hermès’s rules. Luna: I think there’s also a cultural element. The brand is French, rooted in a tradition of artisan luxury. That’s hard to replicate in, say, a tech company. Lucas: If today was actually useful to you, the way these conversations stay ad-free is listener support. You can buy a coffee at buy me a coffee dot com slash fexingo. It’s a small way to keep this going. Luna: Yeah, it really helps. And we appreciate it. Lucas: So back to Hermès. The bigger question is whether this model can survive the next generation. The founding family still controls the company, but as the business grows, there will always be pressure to monetize the brand more aggressively. Some analysts argue that Hermès is leaving money on the table by not producing more Birkins. Luna: But if they produced more, they’d risk destroying the very scarcity that drives demand. It’s a delicate balance. Lucas: And so far, Hermès has shown remarkable discipline. They’ve resisted the temptation to expand into lower-priced accessories, they’ve kept their brand architecture very focused—just Hermès, no diffusion lines. Compare that to brands like Armani or Ralph Lauren, which have multiple tiers. Hermès is one brand, one price point: very high. Luna: That simplicity helps maintain clarity. The customer knows exactly what Hermès stands for. Lucas: And that’s the ultimate lesson. Scarcity is a strategy, but it only works if you have a product worth waiting for. Hermès has invested a century and a half in making sure they do.