Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Hermes Board Controls the Birkin Supply Chain
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- Lucas: So earlier this week, Hermès — the Birkin bag people — opened a new leather workshop in Louviers, Normandy. That's their twenty-third 'maroquinerie' in France. And I think that one factory tells you almost everything about how the Hermès board thinks about supply. Luna: Twenty-third? That feels like a lot for a company that, you know, deliberately starves the market of product. Lucas: Exactly. Most luxury brands outsource production to cut costs. Hermès does the opposite — it builds its own tanneries, trains its own artisans, and it refuses to ramp up output beyond what those artisans can produce. The board has a formal policy that capacity growth cannot exceed artisan training capacity. So when they opened Louviers, they started by training sixty leatherworkers over two years before a single bag was made. Luna: That is almost anti-capitalist. I mean, they could easily double Birkin production and sell every unit. Lucas: They could. But the board — and this is a family-controlled board — views scarcity as the product. Not as a marketing tactic, but as the actual core of the brand's value. If you can walk into any Hermès store and buy a Birkin off the shelf, it's no longer a Birkin. So the board's job is to protect that tension between demand and supply. Luna: Let's talk about the board itself, because Hermès governance is unusual. It's not like LVMH or Kering where the founding family has diluted control. Lucas: Right. In 2010, Bernard Arnault at LVMH quietly accumulated a 17% stake in Hermès through equity swaps. The Hermès family was blindsided. And their response was to create a holding company called H51 — named after the original address of the Hermès store on Rue du Faubourg Saint-Honoré. They pooled 54% of voting rights into this entity and locked them in for twenty years. That effectively made a takeover impossible. Luna: So the family went from being divided — there are over sixty family members — to acting as one block. Lucas: Exactly. And the board itself reflects that structure. Today, the Hermès board has twelve members. Six are family representatives, including executive chairman Axel Dumas. Three are independent directors. And three are 'censeurs' — non-voting observers, typically from the family's next generation. The independent directors include people like a former CEO of Danone and a former French finance minister. So there's outside rigour, but the family retains strategic control. Luna: And what's the board's biggest strategic tension right now? I assume it's growth versus scarcity. Lucas: It's exactly that. Hermès has been growing revenue at about 15% annually for the last five years. That's faster than the industry average. And some investors want them to push harder — especially in China, where demand for the brand is intense. But the board has repeatedly said they won't exceed a 6% to 7% annual production increase. That number is based on how many new master artisans they can train. It's a hard cap. Luna: So the board is essentially saying: we will leave money on the table to protect the brand. Lucas: That's the bet. And it's paid off so far. Hermès's operating margin is around 40% — the highest in luxury. Compare that to Gucci, which is around 30%, or Louis Vuitton, around 35%. The scarcity model creates pricing power. A Birkin now starts at about $12,000. On the secondary market, a rare one can go for ten times that. The board is effectively managing a luxury asset, not a consumer goods company. Luna: But can they hold that line if the economy slows? If Chinese luxury demand dips, would the board feel pressure to ease the cap? Lucas: Historically, no. In 2020, when the pandemic hit, Hermès did not discount. It did not fire a single artisan — they kept paying them even when workshops were closed. The board saw it as a long-term investment in skill retention. And when demand came roaring back in 2021, they had the same trained workforce ready. They didn't have to scramble to rebuild. Luna: That's a very different philosophy from, say, Kering, which cut costs aggressively during the pandemic. Lucas: Completely different. And it's possible because the board doesn't answer to quarterly earnings pressure the same way. H51 gives them the stability to think in decades. When they approved the €300 million investment in new leather workshops in 2023, that was a ten-year payback horizon. Most luxury boards wouldn't touch a project that slow. But for Hermès, it's standard. Luna: I want to stay on that workshop investment for a second. Three hundred million euros — that's real money. Where's it going? Lucas: Two new sites: one in Louviers, which just opened, and another in Riom, in central France, opening next year. Each will employ about 250 artisans. But the board also committed to building two new tanneries — because Hermès controls its leather supply from the hide onward. They own stakes in cattle farms in France and Australia. They buy the entire hide, not just the best part. That's vertical integration on a level that no other luxury brand attempts. Luna: That reminds me of something — and pardon the shift, but you know, these conversations require resources to put together. We keep the show ad-free because we think listeners deserve the unvarnished deep dive without a commercial break. If these conversations have moved your work forward in some small way, you can support that choice at buy me a coffee dot com slash fexingo. No pressure, just if you find value in it. Lucas: Appreciate that, Luna. And yeah, it's a small way to keep the show exactly what it is. Anyway — back to the tanneries. The board's logic is that controlling the hide means controlling the quality and the scarcity. Most competitors buy leather from third-party tanneries, which means they compete for the same raw material. Hermès essentially insulates itself from that supply chain volatility. Luna: So the board is effectively managing a vertically integrated ecosystem. That's rare in any industry. Lucas: It is. And it creates a moat. But I want to talk about a specific crisis the board navigated well. In 2022, there was a scandal involving animal welfare at one of their supplier farms in Australia. Undercover footage showed mistreatment of crocodiles used for the Birkin Himalaya bags. The board acted quickly: they suspended all orders from that supplier, launched an internal investigation, and publicly released the findings. They also committed to building their own crocodile farm, which is now operational, so they can control standards entirely. Luna: That's the same vertical integration logic applied to crisis management. They don't just fix the problem — they buy the problem. Lucas: Right. And that's only possible because the board has both the patience and the capital. Hermès carries very little debt — net debt is basically zero. So when they need to make a strategic acquisition, they can do it without financing pressure. The crocodile farm cost about €40 million. That's not nothing, but for a company with €12 billion in revenue, it's manageable. Luna: I want to push back a little. Isn't this model fragile? It depends on a few master artisans, on a specific supply chain, on the family staying united. What happens if the next generation doesn't agree? Lucas: That's the existential risk. The H51 agreement runs until 2030. After that, family members could theoretically sell their shares. If a faction wanted to cash out, the whole governance structure could weaken. The board is aware of this — they've been grooming the next generation, bringing them onto the board as censeurs, making them part of the narrative. But it's a real vulnerability. Luna: And there's also external pressure. Competitors like LVMH are investing heavily in their own leather craftsmanship. They bought the tannery association in France. They're building workshops. Could LVMH replicate the Hermès model? Lucas: They're trying. LVMH launched a Métiers d'Excellence program to train artisans. But here's the thing: they're scaling for volume. Hermès trains an artisan for two years before they touch a product. LVMH trains for six months. The difference in skill is meaningful. Hermès's board isn't worried about competition on craftsmanship because they believe the gap is structural and takes decades to close. Luna: So the board's role is to protect that time horizon. To make decisions that look bad on a five-year spreadsheet but great on a fifty-year one. Lucas: Exactly. And that's the lesson from Hermès for any board: scarcity is not just a tactic, it's a governance philosophy. It means saying no to easy revenue, no to fast growth, no to the temptation to be everything to everyone. The Hermès board says no more often than it says yes — and that's its competitive advantage. Luna: So the question for the next decade is whether that 'no' holds. Whether the family stays united, whether the artisans stay motivated, whether the market stays willing to pay $12,000 for a bag. Lucas: And whether the board can keep saying no when the pressure to say yes gets louder. That's the test.