Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Hermès Defies Luxury Fashion Disruption
Transcript
- Lucas: So there's this number that's been stuck in my head for weeks. Hermès, the luxury house, reportedly has a waitlist for its Birkin bag that's so long, the company doesn't even officially acknowledge it. They just say 'we don't have a waiting list' — which is a very Hermès way of saying 'we have a waiting list, but we're not going to tell you how long it is.' Luna: And yet people wait years, right? I've heard stories of customers being 'invited' to purchase a Birkin after a certain spend threshold. That's not a transaction, that's a relationship test. Lucas: Exactly. And that's where the moat begins. Most companies build a moat by making it easier to buy. Hermès builds a moat by making it harder. The scarcity isn't a bug, it's the whole strategy. But the interesting thing is that scarcity alone isn't sustainable — any brand can limit supply. The moat is in what they do with that scarcity: the vertical integration, the internal ateliers, the refusal to chase growth at the expense of control. Luna: So it's not just about saying no to more production. It's about owning every layer of the production. I remember reading that Hermès owns its own silk mills and even has its own crocodile farms for the exotic leathers. That's a level of control that even LVMH doesn't have. Lucas: Right. And let's talk about the numbers, because that's where the moat shows up in financials. Hermès has maintained a gross margin north of 70 percent for years. In the luxury space, that's exceptional. And their revenue growth in the past decade has been remarkably steady — mid-teens compound annual growth rate on average, even in years when the broader luxury market stumbled. Luna: That's interesting. So while LVMH is out there acquiring and scaling, Hermès just keeps doing the same thing, and it's working. But what about the recent push into beauty? Isn't that a departure from the 'we don't need to chase you' philosophy? Lucas: It's a departure in category, but not in approach. Hermès launched its beauty line in 2020, and they were very clear: no dedicated beauty stores, no concessions in department stores. It's only available in existing Hermès boutiques, and they roll out very slowly. The Rouge Hermès lipstick is priced at premium, but the real point is to convert newcomers into the brand universe — and then maybe they buy a scarf or a bracelet later. It's a gateway, not a cash grab. Luna: So it's a funnel, but a very polite one. I do want to step back for a second. We talk about moats a lot on this show, and I think there's a temptation to romanticize scarcity. But isn't there a risk that Hermès is leaving money on the table? Especially in a downturn, when people might not want to wait years for a bag? Lucas: That's the million-dollar question, and it's one that analysts have been asking for a decade. But look at 2020. The pandemic hit, luxury sales dropped across the board — LVMH's fashion and leather goods revenue fell, Gucci's parent company saw a hit. Hermès? They had a single-quarter dip, and then they rebounded strongly. Their pricing power was intact, and that's because they've never discounted. They'd rather destroy unsold inventory than put it on sale. That's a philosophy that pays off in the long run. Luna: You mentioned the family ownership earlier. How much of this moat is actually about the fact that Hermès is still controlled by the founding family? I mean, if a hedge fund or a PE firm got a hold of it, wouldn't they be tempted to squeeze more growth? Lucas: That's a huge part of it. The family controls about two-thirds of the voting rights through a structure that's been carefully designed to resist takeover. In fact, there was a hostile move by LVMH in 2010 — they quietly built up a stake, and the family responded by creating a new share class that would only be sold to family members, ensuring they kept control. That kind of long-term thinking is rare in a quarterly earnings driven world. Luna: It's almost like they're building a moat against capitalism itself. But I wonder, is that sustainable? Eventually, the family might sell out or dilute. But I guess the structure they've set up makes that very hard. Lucas: Right. And that's the thing that makes this conversation valuable for anyone thinking about their own business. You can't just copy Hermès's scarcity if you don't have the underlying control and the long-term horizon. The moat isn't just the product; it's the governance, the supply chain, the brand narrative — all of it working together. That's a sophisticated lesson that goes beyond luxury. Luna: You know, that's something we hear a lot on this show, and it's why I love doing it. If these conversations have moved your work forward in some small way, or given you a new lens to look at your own strategy, consider supporting us. It's what keeps the show ad-free and allows us to dig into these cases properly. You can do that at buy me a coffee dot com slash fexingo. No pressure, just a sincere appreciation for those who find value here. Lucas: Absolutely. It's listeners like you who keep this going. So, getting back to Hermès — I think the most underappreciated part of their moat is the way they treat e-commerce. They were notoriously late to online sales. They only started selling their iconic bags online, selectively, in recent years. And even now, you can't just go to their site and buy a Birkin. It's still an invitation-only process, even online. Luna: That seems counterintuitive in an age where everyone's pushing for digital-first. But doesn't that mean they're leaving a lot of demand on the table? There must be a huge secondary market for Birkin bags, and Hermès doesn't see a dime of that. Lucas: They're aware of the resale market, and they've actually taken legal action against some resellers. But they see that secondary market as a feature, not a bug. The fact that a Birkin can be resold for more than its retail price is proof of the brand's value. And they don't want to flood the market and dilute that. They'd rather keep the brand halo strong, even if it means some customers buy from a reseller rather than the store. That's a long-term bet on brand equity over short-term revenue. Luna: So it's almost like they're managing the entire ecosystem, even the parts they don't control. That's a sophisticated moat. But I want to get back to the production side. You mentioned they own their own silk mills. How does that actually protect them? I mean, any competitor could buy silk from the same suppliers. Lucas: Good question. Owning the silk mill means they control the quality and the innovation in the fabric. They can develop proprietary weaves and dyes that competitors can't easily copy. And it also gives them supply chain security — they're not at the mercy of a supplier's price increases or production issues. That's a classic vertical integration moat, like what we saw with Intel owning its own fabs. But Hermès takes it further — they even own the ateliers where the bags are hand-stitched. Each artisan spends weeks on a single bag, and they're trained for years. You can't outsource that kind of craftsmanship. Luna: And that's why their waiting list exists, because they're not willing to compromise on that hand-stitching. I've read that each Birkin takes over 40 hours of work by a single artisan. That production constraint is their moat. Lucas: Exactly. And they've doubled down on that in recent years. They've been opening new ateliers in France, not in low-cost countries. They're committed to keeping production in France, which is a huge cost, but it also reinforces the 'Made in France' narrative that's central to the brand. They could easily move some production to Italy or Spain, but they don't. That's a strategic choice that preserves the moat, even if it caps the growth potential. Luna: It's fascinating to see a company that's so disciplined about saying no. In a world of hypergrowth, Hermès is like that friend who never posts on social media but somehow has the most interesting life. So, what's the biggest threat to this moat? Is it a fashion shift, or maybe the fatigue of waiting lists? Lucas: I think the biggest threat is actually a cultural shift in how luxury is perceived. Younger consumers are more concerned about sustainability and ethical production. Hermès has been criticized for its use of exotic skins — the crocodile farms, for instance. If that criticism catches fire, it could hurt the brand. But, they've been proactive, actually. They've invested in sustainable farming practices and transparency. And they're betting that true craftsmanship and timelessness will trump fast fashion's disposability. So far, it's working. Luna: There's also the question of the rise of the 'quiet luxury' trend. Hermès has always been about subtle branding, not flashy logos. That trend actually plays into their hands. But could it also make them seem outdated to a younger, more logo-obsessed consumer? Lucas: That's a real risk. But Hermès has a proven ability to adapt without losing its core. They've expanded into ready to wear and they've managed to stay relevant. And they're not the only ones playing that game — LVMH's Celine and Kering's Bottega Veneta are also betting on understated luxury. So the market is big enough for both approaches. The point is, Hermès's moat isn't just about one product or one trend; it's about a philosophy that transcends seasons. Luna: So, when you look at the long term, do you think Hermès can keep growing at that mid-teens rate? Or will they eventually hit a ceiling because they won't scale production? Lucas: I think they'll keep growing, but maybe not at that pace forever. The beauty line is a new revenue stream, and they're also expanding into new categories like home and jewelry. They can grow by adding customers at the entry level of their product pyramid — scarves, fragrances, even small leather goods — and then gradually move them up to the high-margin bags. The key is that they don't need to grow at 20 percent to be successful. They're set up for steady, profitable growth for decades. That's the kind of moat that investors should envy. Luna: It's almost like they've built a business that's designed to outlast trends and even outlast their own managers. I mean, the family control ensures that the long-term vision is preserved. It's a rare case where the moat is as much about governance as it is about product. Lucas: That's the perfect way to put it. And it's why this case is so interesting to us. When we talk about moats, we often focus on network effects or switching costs. But Hermès shows us that a moat can also be built on the deliberate choice to say no — no to growth, no to outsourcing, no to trends — and then protecting that choice with a governance structure that allows for it. That's a lesson that applies to any business, from a tech startup to a coffee shop. Luna: Yeah, I think a lot of founders could take a page from that book. It's tempting to scale fast, but Hermès proves that sometimes the moat is built by doing less, not more. Lucas: So, to sum up, the Hermès moat is a combination of scarcity, vertical integration, family control, and a long-term brand philosophy. It's not just about making expensive bags; it's about creating a system where every decision reinforces the others. And in a world of constant disruption, that's a rare and powerful thing. Luna: Well said. I think we've given our listeners a lot to think about. Maybe they'll look at their own 'scarcity' differently now. Lucas: Definitely. And with that, we'll wrap up this episode. Thanks for joining us, and we'll be back next week with another deep dive into a company that's built an impressive moat. Until then, keep thinking about what you're saying yes to — and maybe more importantly, what you're saying no to.