Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Hermès Turned Scarcity Into a Luxury Moat
Transcript
- Lucas: You can walk into a Hermès store on any given Tuesday, ask to buy a Birkin bag, and they will politely tell you no. Not because they're out of stock. Because there is no stock. There never is. Luna: And that's not a supply-chain failure — it's the whole point. Lucas: Exactly. Hermès has built one of the most durable moats in luxury by doing something almost no other brand dares to do: they deliberately make less than the market wants. Every single year. And they've done it for decades. Luna: I mean, most companies would see line of customers and think 'scale up'. Hermès sees that and thinks 'keep the line'. Lucas: Right. And the numbers are pretty wild. A standard Birkin 30 in Togo leather retails for around $10,000 to $12,000. Analysts who've tried to reverse-engineer the cost of materials and labour put the production cost somewhere between $700 and $1,000. So gross margin is enormous — over 90 percent. But Hermès doesn't maximize volume. They produce maybe 70,000 Birkins a year globally. That's roughly one bag for every 110,000 people on earth. Luna: And that scarcity creates a secondary market where the same bag sells for $25,000 to $40,000. Hermès captures exactly zero of that markup. Lucas: Zero. And they're fine with it. Because the resale premium reinforces the brand's aura of exclusivity. Every time someone pays triple retail on The RealReal, it's free advertising for Hermès. The message is: this thing is so desirable, people will pay a 200 percent premium just to skip the line. Luna: But let's be honest — is this really a competitive moat, or is it just brand heritage? I mean, Hermès has been making saddles since 1837. They've got a century and a half of craftsmanship cachet. Can you build this moat from scratch today? Lucas: Great question. Let's separate the moat from the history. The moat, as I see it, is a system of constraints that are self-reinforcing. The first constraint is production. Hermès only trains new artisans in-house, and it takes seven years to become a fully qualified leather worker. They have a school in France — the École Hermès des Savoir-Faire — that graduates maybe 50 to 60 craftspeople a year. They literally cannot scale faster than that. Luna: So the bottleneck is human. Not machinery, not capital. Lucas: Exactly. And that's a moat, because you can't just throw money at training skilled leather artisans. It's a constraint that takes years to loosen. Competitors like LVMH or Kering could try to replicate it, but they'd need a decade and a massive investment in training infrastructure. Most won't bother because their business models are built on faster growth. Hermès grows revenue at about 7 to 10 percent a year — consistently. LVMH's fashion and leather goods division has grown at double that pace some years. So Hermès is leaving money on the table by design. Luna: Which brings us to the second constraint: distribution. Hermès doesn't sell Birkins or Kellys online. You have to go to a store. You have to build a relationship with a sales associate. There's a whole unwritten code about how you get offered one. Lucas: Right. And they've never changed that, even during the pandemic. While every other luxury brand rushed into e-commerce, Hermès kept its top products offline. That creates a physical gate. And it means the brand experience is controlled. No anonymous browsing, no comparison shopping, no 'add to cart'. You have to invest time and social capital just to be considered. Luna: Now, I want to push on the third constraint: product range. Hermès is famous for leather goods, but their silk scarves, ties, and fragrances are much more accessible. Those lower-priced items act as entry points. But they also depend on the halo of the Birkin. Lucas: Absolutely. The Birkin and the Kelly are loss leaders in a sense — not financially, they're hugely profitable, but they're marketing tools. They generate the prestige that lets Hermès sell $500 silk scarves and $100 perfumes. Those product lines have much higher volume and decent margins. In 2025, Hermès reported revenue of about €15 billion. Leather goods and saddlery were about half of that. ready to wear and accessories were around a quarter. So the moat isn't just about the handbag — it's a pyramid where the ultra-exclusive top supports a much broader base. Luna: But here's the thing I wonder about: how durable is this moat in 2026? China is still the biggest luxury market, but the Chinese consumer is changing. They're more informed, more value-conscious. There's a growing 'smart luxury' trend where buyers want to know what they're paying for. Could Hermès's opacity backfire? Lucas: It's a real risk. Hermès's opacity is central to its mystique. But if younger Chinese consumers start demanding transparency — like, 'show me the artisan who made my bag, tell me the exact sourcing of the leather' — Hermès would have to adapt. They actually are quite transparent about their tannery and their commitment to French production. They own their tanneries. They source from specific farms. So they have the raw material to tell that story. The question is whether they can do it without demystifying the product. Luna: And there's another threat: the resale market itself. If Birkins become too widely available on the secondary market — if the mystique of 'getting the call' fades — does the primary market lose its magic? Lucas: That's the paradox. The resale market currently supports the brand, but if it grows too large, it could dilute exclusivity. Hermès has actually sued some resellers. They've also tried to limit sales to known customers who they believe aren't flipping. But it's hard to control. I've seen estimates that the total number of Birkins in existence is maybe half a million to a million. That's not nothing. If resale inventory keeps growing, eventually supply might catch up to demand. Luna: So the moat is real, but it's not unassailable. It depends on Hermès maintaining the gap between desire and availability. Lucas: Right. And that's a delicate balance. One thing I find interesting is how Hermès's moat compares to LVMH's. LVMH owns 75 brands — Louis Vuitton, Dior, Fendi, Celine. Their moat is portfolio diversification and scale. They can cross-subsidize, leverage trends, and shift capital. Hermès has essentially one brand with a few sub-lines. Their moat is depth, not breadth. Which is more resilient in a downturn? We don't really know, because both sailed through the pandemic pretty well. Luna: Speaking of the pandemic — Hermès actually raised prices during Covid. And sales still grew. That's pricing power. Lucas: Huge pricing power. In 2020, when most luxury brands saw sales drop 20 to 30 percent, Hermès's sales only fell about 6 percent. And in 2021, they bounced back 40 percent. Their customers are so loyal and so wealthy that price increases don't seem to deter them. That's a hallmark of a strong moat. But it also makes them vulnerable if the ultra-wealthy ever decide to shift their status signalling to something else. Luna: Like what — travel experiences? Private jets? Crypto art? Lucas: Exactly. Status signalling is competitive. A Birkin is a signal, but so is a first-class ticket to space. Or a rare NFT. Hermès is competing for a share of the ultra-wealthy's attention, not just their wallet. If the next generation of billionaires decides that a handmade bag is an old-money signifier they don't care about, the moat weakens. That's why Hermès is investing in their watch division, in home furnishings, in beauty. They're trying to become a total lifestyle brand so they capture multiple signalling moments. Luna: And they're also investing in digital — carefully. They launched a beauty line online, and they have a website for ready to wear. But still no Birkins online. Lucas: Right. They're selectively digitizing. The core moat — scarcity, craftsmanship, relationship selling — stays offline. Everything else can be digital. That's smart strategy. It protects the most valuable part of the brand while still capturing some growth. Luna: So let's bring it back to the big question: can anyone replicate the Hermès moat? Or is it a one-of-a-kind historical accident? Lucas: I think elements can be replicated, but the whole package is hard. The production constraint is real — you could start a school, train artisans, limit output. Rolex does something similar with watchmaking. They produce about a million watches a year but deliberately keep supply below demand. But Rolex benefits from a product that is more standardized. A Birkin is handmade, each one slightly unique. That's harder to scale than a Submariner. Luna: And the brand history is irreproducible. You can't buy 180 years of heritage. Lucas: You can't. But you can build a modern myth. Look at what Apple did with the iPhone — initially, it was scarce, expensive, and controlled. They limited distribution, created lines outside stores, built a mystique. That's a version of the same playbook, applied to technology. So the principles — controlled supply, premium pricing, relationship selling — can be applied in different industries. The difference is that Hermès has maintained it for generations. Most companies abandon the strategy once they see revenue opportunities. Luna: Because it takes discipline to say no to money. Lucas: Exactly. And that's the rarest thing in business. Hermès is still family-controlled. The founding family owns about 66 percent of the shares, and they've been able to resist pressure from public markets to grow faster. That's a structural advantage that most companies simply don't have. So the moat is partly a product of governance. If Hermès were owned by a private equity firm, they'd probably have squeezed more growth out of the brand and risked diluting it. Luna: That's a great point. The moat isn't just operational — it's embedded in the ownership structure. Lucas: Right. So the lesson for strategists is: a moat that depends on restraint requires a governance model that rewards restraint. If you're incentivized for quarterly growth, you'll eventually break the scarcity. Hermès's family ownership gives them the freedom to stay disciplined. Luna: OK, one more thing I want to ask about — the competition. LVMH has been trying to build a Birkin competitor with products like the Capucines bag. But it hasn't really worked. Why is it so hard to copy? Lucas: Because the moat is a system. It's not just the bag — it's the training, the store experience, the reputation, the resale market, the history. LVMH can make a beautiful bag. They can even limit supply. But they can't create the decades of customer relationships and mystique overnight. And customers can sense when a product is engineered for scarcity versus when scarcity is organic. Hermès's scarcity feels authentic because it's rooted in real production limits. A competitor trying to mimic it may feel like a gimmick. Luna: So authenticity is part of the moat too. Lucas: Absolutely. And that's hard to fake. But I'll leave you with this: Hermès's moat is strong, but not eternal. The biggest threat is probably a shift in cultural values. If the next generation rejects conspicuous consumption altogether, even the best-crafted scarcity won't matter. That's why Hermès is moving into lifestyle categories and emphasizing craftsmanship over luxury. They're trying to position themselves as preservers of artisanal heritage, not just purveyors of expensive goods. That may be their best hedge. Luna: So the moat evolves. Interesting. Alright, I think we've scratched the surface. Good episode. Lucas: Yeah. Thanks for the conversation.