Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Hermès Built a Moat on Scarcity and Supply Chain Control
Transcript
- Lucas: There is no company that protects its brand the way Hermès does. They are a 186-year-old company that still owns its own silk farms in Brazil, its own calfskin tanneries in France, and its own watch movement factory in Switzerland. Most luxury brands outsource production to cut costs. Hermès does the exact opposite. Luna: And that is a deliberate choice, because the conventional wisdom in luxury is to license your name, outsource manufacturing, and focus on marketing. That's what most of their peers do. Lucas: Exactly. And those peers have higher profit margins in the short term. But Hermès has something they don't: pricing power that has held for decades. A Birkin bag today costs about ten times what it did in the 1980s, adjusted for inflation. And the waiting list is still years long. Luna: Wait — is that waiting list real, or is that part of the mystique? I have heard that Hermès deliberately underproduces to keep demand high. Lucas: It is both. The waiting list is real, but it's also managed. Hermès does not publish production numbers for Birkin bags, but analysts estimate they make fewer than 100,000 per year globally. That is tiny for a brand with that level of recognition. And they have no plans to increase output. Luna: So why don't they just make more? The demand is clearly there. They could triple revenue overnight. Lucas: That would destroy the moat. If you can walk into any store and buy a Birkin off the shelf, it stops being a symbol of exclusivity. The scarcity itself is the product. Hermès understands that the perceived value of a bag comes partly from the difficulty of acquiring it. They are selling status, not leather. Luna: Right. And that only works if you control the entire chain. If your tanneries or silk farms were owned by a third party, they could sell to competitors and flood the market. Lucas: That is the key insight. Hermès owns the upstream supply. They have 52 production sites in France alone, including their own silk workshops in Lyon and their own watch dial makers in Switzerland. They even own a crystal factory for watch faces. That vertical integration creates a moat that is nearly impossible to copy, because a competitor would need to build the same infrastructure from scratch. Luna: And that takes decades. You cannot buy a tannery and instantly produce leather that matches Hermès quality. Their craftsmen train for years. Lucas: Their apprenticeship program is intense. A leather worker at Hermès trains for two to three years before they are allowed to touch a finished product. The company has its own school, l'École Hermès des Savoir-Faire, which teaches traditional techniques that have been passed down for generations. That is an enormous barrier to entry. Luna: It also means they cannot scale quickly. If demand spiked tomorrow, they physically cannot produce more because they don't have enough trained artisans. That is a constraint most companies would see as a problem, but Hermès treats it as a feature. Lucas: And it protects them from the volatility of the fashion cycle. When the luxury market slows down, companies that outsourced production often have to cancel orders and pay penalties. Hermès just slows down their internal production. They have fixed costs, but they are not at the mercy of third-party suppliers. Luna: That also gives them pricing power during downturns. They don't have to discount because their costs are stable and their brand is protected. Lucas: Exactly. In the 2008 financial crisis, most luxury brands slashed prices or ran sales. Hermès did not. They actually raised prices. And their revenue grew that year. That is the luxury of control. Luna: So is vertical integration the only moat Hermès has? Or is there something else in how they manage the brand? Lucas: There is definitely a brand moat too, but the vertical integration is what makes the brand moat durable. If you outsource, you risk quality erosion. Hermès can guarantee that every single product meets their standard because they control every step. That consistency is rare in luxury. A Chanel bag made in 2026 might be very different from one made in 2006 because they changed suppliers. A Hermès Kelly bag from 1990 and one made today are nearly identical in quality. Luna: That consistency creates customer loyalty that is almost generational. People pass down Hermès bags. They don't throw them away. Lucas: And that is partly because the materials are so good and the construction is so robust. But it is also because Hermès has deliberately avoided planned obsolescence. They even have a repair service that will fix any Hermès product, no matter how old. That reinforces the idea that their products are investments, not disposable fashion. Luna: It is interesting — this model is the opposite of fast fashion. But it is also the opposite of most luxury conglomerates. LVMH and Kering own dozens of brands and often centralize production to save costs. Hermès is almost alone in maintaining this level of integration. Lucas: They are. And it is worth noting that Hermès is still family-controlled. The founding family owns about 67 percent of the shares. That means they can make long-term decisions without worrying about quarterly earnings pressure. A public company with activist investors could not run Hermès this way. Luna: So the moat is really a combination of vertical integration, scarcity, quality, and family ownership. Each element reinforces the others. Lucas: Right. And if you try to replicate just one piece, it doesn't work. You can produce limited quantities, but if the quality isn't there, it's just hype. You can have great quality, but if you overproduce, you lose exclusivity. The system is self-reinforcing. Luna: Speaking of systems that reinforce each other — this kind of deep focus on craft and long-term thinking is something we try to bring to this show too. Every episode, we dig into a specific strategy and try to understand what makes it work. And if that kind of thinking has helped you see your own business differently, we'd love for you to consider supporting the show at buy me a coffee dot com slash fexingo. It's what keeps these conversations ad-free and independent. Lucas: Yeah, it really does. And we don't have any sponsors, so listener support is how we keep going. But back to Hermès — there is one more piece of their moat that is worth mentioning: their legal strategy. Luna: What do you mean? Lucas: Hermès is extremely aggressive about trademark protection. They have sued companies for using the word 'Birkin' or 'Kelly' in product names. They have gone after counterfeiters relentlessly. And they have won. That legal moat is another reason competitors can't get close. Luna: So the moat is also legal. They have locked down the brand name and the design patents. Lucas: Exactly. But the design patents expire. The real lasting protection is the supply chain and the craft knowledge, which can't be patented but also can't be copied. Luna: So is there any business outside luxury that could learn from this model? I mean, vertical integration is not new, but the way Hermès uses it to create scarcity is unusual. Lucas: I think there are lessons for any company that sells a premium product. If you control the inputs, you control the quality and the narrative. Patagonia does something similar with their supply chain transparency. But most companies are not willing to invest the capital it takes to own the whole chain. Hermès spends about 200 million euros a year on capital expenditures, mostly on production facilities. That is a commitment most companies won't make. Luna: So the moat is expensive to build. But once built, it is incredibly hard to attack. Lucas: Exactly. And that is why Hermès has one of the highest operating margins in luxury — around 40 percent. They earn that margin because they have pricing power, low discounting, and a loyal customer base that is willing to pay full price. Luna: And that loyalty spans generations. When I think about the moat, that is the ultimate test: would a customer wait years and pay a premium for your product? If yes, you have a moat. Lucas: Right. And Hermès has passed that test for over a century. Not many companies can say that. Luna: So what do you think — is the Hermès model transferable to, say, a tech company? Could a software company build a similar moat by controlling its own hardware, like Apple does? Lucas: Apple is probably the closest parallel. They control the hardware, the operating system, the chips, the retail stores. They are vertically integrated in a way that most tech companies are not. And they have similar pricing power. But Apple's moat is more about ecosystem lock-in than scarcity. Hermès's moat is about scarcity and craft. The two are different, but both are powerful. Luna: Fair point. And maybe the lesson is that a moat doesn't have to be about technology or patents. It can be about how you organize production and what you choose to own. Lucas: Exactly. Hermès proves that a company built on craft and control can be as defensible as any tech giant. And in an era of mass production and outsourcing, that is a refreshing counterpoint.