To outsiders, high fashion is a curious
industry where consumers seem to irrationally shell out hundreds and thousands of dollars for
sneakers, handbags, wallets, or T-shirts.
But take a step inside, and you’ll
find the world of high fashion is more like a game of thrones with Italian,
English, and French houses like Gucci, Louis Vuitton, YSL, and Balenciaga fighting to
be the king. For the houses that get to sit on the throne, they don’t last for long. Brands like
Versace, Tony Burch, and Coach once dominated in the 2000’s. Fast to the 2020’s and today’s
top players are Gucci, Louis Vutton, YSL. And competition has heated up by resurging
smaller brands like Moncler, whose puffer jackets have taken over Tik Tok, Balenciaga,
whose sneakers have become a crowd favorite, and Louboutin’s timeless red-bottom stilettos .
The world of high fashion appears fragmented with so many brands, but in reality, it’s an industry
of oligopolies. Gucci, YSL, Louis Vutton, and Balenciaga are not independent brands
anymore. They’ve been acquired by conglomerates and converted into their subsidiaries. Let’s
say you buy a pair of Alexander McQueen’s 600$ sneakers, pick up a $4000 Gucci
bomber jacket to go with your $2,500 YSL bag. In this example even though you’ve bought
3 items from 3 different brands, your money is actually going to the exact same company.
The biggest conglomerate is LVMH, who owns Dior, Fendi, Givenchy, Marc Jacobs, and Louis Vuitton.
The second biggest conglomerate is Kering, who owns Balenciaga, Bottega Veneta, Gucci,
Alexander McQueen, and YSL. LVMH is the clear winner with annual earnings of $54B, over
4X the amount of Kering’s revenue. While Kering would seem like a far off second place
with an annual revenue of only 13B euros, Kering is challenging the throne in a different
way. Kering’s portfolio is spearheaded by blue chip fashion houses Gucci, YSL, and Balenciaga.
These 3 brands today enjoy exceptional popularity amongst millennials. When people are trying
to flex these days, they’re usually sporting the red-and-green flip flops, silver-laced
YSL purses, or Balenciaga sneakers.
If you look at the operating strategy of Gucci
or Louis Vutton, you’ll find that both businesses operate very similarly. They go for scale
by branding, licensing, and selling as many products as possible, from watches, perfumes,
flip flops, sneakers, hats, belts, eyeglasses, children’s clothing, skateboards,
furniture, and even playing cards.
These brands spend hundreds of millions of
euros every year on celebrity endorsements, sponsorships, advertising, and product placement.
They boast white glove high-end stores that make consumers feel special. They sell wholesale to
department stores and operate outlets to sell discounted items to consumers who want the
status, but don’t want to pay full price.
When it comes to business, Gucci leads
the way. Their aggressive advertising, successful branding, and blitzkrieg strategy
has enabled them to grow like a rocketship, earning from 4.3B to a record 9.6B euros in
3 short years. That’s a growth of over 35%, or 2B euros every year. Even in a down year
with the pandemic, the company grossed 7.4B euros in 2020. Gucci operates nearly 500 stores
worldwide. With the most physical stores of any high fashion brand, Gucci’s strong offline
presence and massive product mix make retail its strongest arm. Over 85% of Gucci’s sales has
come from retail for the past 5 years. To maintain the brand’s popularity amongst millennials,
Gucci spends a reported 12% of its revenue or 1.2 billion euros every year on advertising
across social media, print, and television. This approach is paying off as over 50% of Gucci’s
customers today are 35 years old or younger.
Gucci takes a fast-paced and aggressive
approach when it comes to R&D. Whether you are the conservative connoisseur who wants
only traditional timeless looks or the modern shopper who wants the brand but styled in
a contemporary, present-day cook, there’s something for you at Gucci. The company frequently
rotates and updates its products and marketing to capitalize on trends. Gucci reportedly rotates
half of its product mix on an annual basis, maintaining 50% of its bestsellers and releasing
new or refreshed products as the other 50%. This strategy has paid off with new products
accounting for 30% of Gucci’s total business. With an amazing 40% operating margin, Gucci
is clearly at the top of the game.
YSL is a French brand best known for its black
leather bags that retail in the $1,000-2,000 range and its iconic silver emblem. Unlike Gucci, YSL
is a traditionalist that prices at the mid-range and operates conservatively. It’s rare for YSL to
make changes to their core product mix beyond a few seasonal items. While YSL does wholesale to
department stores, the company doesn’t operate outlets or participate in licensing. There are
only 200 YSL stores worldwide. As a result, YSL has grown slowly from 1.5 billion euros to just
2.1 billion euros in 3 years. That’s a growth rate of 12% or 200M euros every year. While the company
has tried to win over millennials by appointing K-pop star Rose as its brand ambassador, YSL still
has a difficult time balancing tradition versus the fast modernization that millennials look for.
The company’s operating margin stands at 25%.
If we look at the smaller players like Moncler,
we see that apples don’t fall far from the tree. Moncler is best known for its shiny $1,500 puffer
down jackets and the company has grown its revenue at a similar pace of 15% or $200M euros every
year. Moncler grew from 1.2B euros to 1.6B in the span of 2 years. Moncler has an
identical footprint to YSL with roughly 250 stores worldwide. As a newer independent
brand, Moncler has a smaller war-chest, spending only 6% of its revenue on marketing every year.
Moncler’s operating margin hovers at 28%.
Now what if I told you that there’s a high
fashion brand that’s more lucrative and successful than Gucci, YSL, Moncler, and Louis
Vutton? A fashion brand whose products are so in demand that they’re never available, never sold
online, or displayed publicly in stores. A brand who only sells its products to a carefully curated
list of only its highest spending customers, takes no preorders or waiting lists, refuses
to expand inventory, or scale its production. A brand whose products are so elite and elusive
that they actually appreciate thousands of dollars over time and can be resold for profit.
A brand that does not ever allow returns, refunds, or exchanges after purchase.
A brand who has remained independent, manufactures its products entirely by hand,
spends the least amount of money on marketing, and yet still grosses very close to
what Gucci makes every year.
That brand is Hermes and they are the current
king in high fashion. Hermes operates their business with a playbook and style that no
other brand can even come close to emulating.
Hermes has quietly grown in just 3 years, going
from 5.5B euros to 6.8B euros in just 3 years. Their growth rate has doubled in the same
timeframe going from 7% to 15%. Hermes has a moderately-sized retail footprint with 300 stores.
But if Gucc has nearly triple the growth rate and higher revenue, what makes Hermes the king?
Hermes to this day remains independent, free of the M&A and Game of Thrones that has
dominated the industry in past decades.
Hermes is best known for its leather bags.
The company takes what it calls an independent craftsman model to manufacturing. 80% of all
Hermes products to this day are manufactured by hand exclusively in France, where the company owns
and operates 44 factories. In today’s day and age, businesses ruthlessly focus on improving speed,
technology, efficiency, scale, and automation. Lower costs, increase production, sell faster,
involve as few humans and as little manual work as possible, break down complexity into simple
steps, avoid single points of failure, and follow assembly line production.
Hermes doesn’t do any of this.
Each Hermes bag to this day is handmade by
a craftsman in France from beginning to end. Before they can start working on a bag,
a craftsman must be formally trained for 4 years at a vocational school, graduate
from one of Herme’s in-house tanning schools, and undergo 18 months of mentorship from a
trainer. The concept of an assembly line does not exist at Hermes. Each bag is cut from hides
and entirely hand-stitched with needle and thread by the same individual craftsman from beginning
to end. Depending on the intricacy of the design, a craftsman takes anywhere between 25-48
work hours to create a single Hermes bag. A craftsman makes at most 2-4
Hermes bags every week.
Instead of asking its employees to work faster or
introducing machinery to reduce the manual labor, Hermes takes the extraordinary viewpoint
that less is more. Hermes employs 5,600 craftsmen across its 22 leather factories in
France to hand make its leather bags.
This craftsmanship naturally demands a high
premium. Hermes is the highest priced of any high fashion brand with their leather bags retailing
to the tens and hundreds of thousands of dollars. But here’s the magic - Herme’s bags are not just
expensive, they’re also elusive. They’re never shown or sold online, never available
publicly in stores, never on display, and only available in private closed doors
to an exclusive set of clientele. If you want to buy or even see a Hermes Birkin, Kelly,
Constance - no matter what style, size, color, design - you must earn that opportunity.
Since supply is limited, production is slow, and quality is high, Hermes allocates their bags based
on customer loyalty. To buy a bag, you need to have a relationship with your local Hermes store.
You must be a regular and show extreme loyalty by regularly buying Hermes products that aren’t
bags- whether those are shoes, scarves, perfume, jewelry, furniture, or watches. At some point
once you’ve proven your loyalty with enough spend and purchase history, you will be offered
that rare chance to purchase a bag.
A store will serendipitously notify you and then
take you to a secret enclosed room in the back where they will present you with the
bags available. In these situations, the bag you’re presented with may not be in the
size, color, or style that you want. While you can choose to decline the bag you’re offered,
you run the risk of losing loyalty points, being seen as unworthy, and never being
offered the opportunity to buy a bag again. The system essentially pressures you to buy the
bag that’s offered to you no matter the price, even if it’s not the one you want.
This means spending thousands of dollars on items you may not really want for the hope that
you get the bag. What you buy and how much you spend will unofficially influence how fast you
are granted the opportunity to purchase a bag. It’s a completely irrational way of selling but it
works for Hermes. To be so exclusive that you can get people to spend thousands of dollars endlessly
buying things that they don’t want in the hopes of one day being given the chance to buy the one
thing they do want is unprecedented.
Hermes spends only 4% of its revenue on
marketing and advertising and the brand is on track to clear 7B in 2021. Yet Gucci on the
other hand spends 3X that amount on advertising and budget every year to sustain its popularity.
Given the constrained supply, slow production, and hot demand for Hermes, the company’s bags
carry value even post-purchase. Since so many people are unwilling or unable to become the loyal
customer that Hermes requires, that demand gets routed to the secondary market, where bags are
constantly resold. It’s reported that Hermes bags appreciate on average 14.2%, which is a higher
rate of return of the S&P 500 and the gold.
This is why it’s Hermes, not Gucci, who sits
on the throne today as the quiet king of high fashion. While it may not be as loud in its
marketing as Gucci and its top-line may not be as high, the reality is Hermes has a magic that
no other brand will ever be able to replicate.
