Introduction
Hermes International was founded in 1837 by Thierry Hermes in France, offering a range of bridles, saddles, and other riding gear. The family-owned company has developed through collaboration with other firms to become a leader in high-end luxury products produced exclusively using traditional craftsmanship processes.
The Group’s financial performance reported €11,602 million in revenue for 2022, a 29% increase compared to 2021, with operating profit reaching €3,367 million. The payment breakdown by region was as follows: Asia Pacific excluding Japan (48%), Americas (18%), Europe excluding France (13%), Japan (10%), France (9%), and others (2%) (Fig. 1) (Hermes, 2022).
Approximately 80% of the corporation’s manufacturing operations take place in France, with 51 of the total 64 production sites located there. The remaining fabrication locations are distributed across the US, UK, Italy, Australia, Switzerland, and Portugal. (Hermes Paris, 2023; Nast, 2021). The company has approximately 300 stores located across 45 countries. This report, therefore, focuses on the global aspects of Hermes’ operations across different countries, with an emphasis on its value chain activities.
Hermes’ Business Model
Hermes’s business model is built on offering timeless and exclusive luxury products. According to Magretta (2002), a business model comprises three components: a business proposition, a customer cluster, and a revenue model. Hermes’ revenue model is based on exclusivity and limited-edition products.
Hermes carefully controls the supply of its products, creating scarcity or producing limited-edition products, which increases desirability and lifts demand (Donzé, 2020). The products have a long waiting list, creating a sense of exclusivity and status. The limited handmade products with a long heritage of craftsmanship make the product very expensive, reserving it for royalties, elites, and celebrities.
Hermes’ customer cluster comprises high-end luxury and affluent consumers with high disposable incomes who indulge in sophisticated, timeless, and elegant products (Bernat, 2021). High-end consumers are willing to pay for exclusive products crafted with attention to detail and fine craftsmanship.
The company’s value proposition is based on elegance, extravagance, and superior reputation. It generates revenue by selling limited factory-made goods through artistry and efficient operations to wealthy consumers and fashion enthusiasts (Hermes, 2022). The corporation’s primary activities include design, manufacture, sale, and image management. The corporation’s success is attributed to its rich heritage and expertise in dealing with leather and other luxury products.
Hermes has maintained a cohesive and consistent marketing strategy throughout its operational period. The plan aims to preserve the brand identity of stylishness and indulgence, ensuring its relevance to changing markets. Its merchandise focuses on classics and timeless designs through its strong heritage and artistic craftsmanship (Bloomfield et al., 2022). The organization’s classic brand position concept is associated with exclusivity and sophistication, which is maintained in its global market production, collaboration, and campaigns. With this concept, the business enterprise has maintained its customers’ attraction to the high-quality goods and services it offers.
Local Adaptation/Standardization
Product Positioning
Hermes has 80% control of its production, ensuring that the quality of the goods is satisfactory. Areas where the firm lacks expertise, such as watch and shoe manufacturing, are outsourced to other countries, including Switzerland and Italy. Most of the leather goods are hand-produced, based on the company’s tradition and the superior expertise of its employees, which ensures quality uniformity throughout the global supply chain. The fabrication process is labor-intensive, primarily in rural areas, and employs local workers who are trained in-house in workshops.
The business firm has a nearly vertical supply chain, sourcing its raw materials. The corporation controls the cost of raw materials through its affiliate companies, thereby ensuring quality and adequate sources for production (Fig. 2). The distribution channel for Hermes is primarily through its directly operated stores in the Americas, Europe, Asia, and Australia.
The corporation’s limited online presence makes its retail store a significant selling point. The benefits of directly interacting with clients in their now-operated stores ensure the company has control over the services offered to customers. The corporation has reduced its reliance on third-party distributors and focuses on operating its own stores and franchise stores to maintain brand integrity in the luxury segment.
Pricing
Hermes offers its products using a premium pricing strategy, targeting individuals with high social status. The system is based on the impact of the merchandise, which is associated with wealth, elegance, exclusivity, and extravagance. The cost of Birkin bags is high compared to other brands.
Additionally, mass-produced goods are often overpriced when compared to the costs of production, storage, transportation, and staff salaries. For example, manufacturing a Birkin bag costs about $800, but its retail price is more than $300000. Hermes relies on the margin per unit for its revenue by selling a limited number of products for higher returns (Bloomfield et al., 2022). The comparison of other trademarks and bags demonstrates that the company’s items cannot be purchased directly from the store; instead, the buyer must book an appointment to select the bag material, color, and other details that differentiate the item when placing the order.
The premium pricing strategy for Hermes products is based on higher quality, exclusivity, and luxury, which drives up their prices. The high pricing raises the product’s value and piques customers’ curiosity, prompting them to purchase the merchandise and thereby increasing sales for the company. The corporation promotes the rarity of its goods throughout its stores globally, raising costs and thus reducing consumption, while reserving them for the few wealthy individuals who value luxury (Donzé, 2020). The clients are attracted to the product’s unique features, which are exclusive and not commonly found. Hermes does not offer discounts to its consumers, regardless of the situation or occasion, creating a perception that the goods are reserved for people of the higher social class who can afford anything without a discount, thereby satisfying their emotions.
Distribution
Hermes employs an omnichannel distribution strategy, utilizing a multichannel system for its products. The company has developed an online sales platform that enables it to reach a large number of potential consumers. The digital offering provides complementary services to core business operations, which is viewed as an alternative channel that can be further developed to enhance the efficiency of business operations.
The online platform was created as a stand-alone channel focusing on sales and logistics services. The firm’s physical stores are spread worldwide, where customers can book an appointment to place and pick up their order. The major markets are the Asia Pacific, Japan, the United States, and Europe, which have helped it become one of the leading jewelry and luxury brands worldwide (Fig. 3). Launching a global entity store pushes the trademark image as an iconic luxury outlet.
The firm has created authentic products online and an international network of stores, each with its unique offerings. The physical store ‘house of objects’ differs, determined by the director offering the freedom. The director’s proximity to consumers ensures they can identify their purchasers’ needs and stock products that satisfy them.
The house identity is merged with local culture, featuring unique items that cater to the location’s needs and enhance the customer experience (Hermes, 2022). Across all the stores, there are no similar display windows, strengthening the uniqueness of the goods and services offered. Chanel, a significant competitor to the firm’s distribution network, operates on e-commerce platforms, exclusive stores, high-end supermarkets, and multi-brand stores. Sales channels are only available for luxury products that cater to celebrities and nobles.
Promotion
Unlike other brands, the company does not heavily invest in advertising its merchandise, nor does it have trademark ambassadors. The business’s product promotion is mainly influenced by its positioning as a rare, luxurious, and unique product. Hermes does not need to sell significant volumes compared to other brands, but a few items to realize the same profit.
The target market is wealthy individuals and royalty who occupy the top societal positions and promote and publicize the products. For instance, the two collections of bags, Kelly and Birkin, were named after two celebrities, Grace Kelly and Jane Birkin. Platinum was crucial for cementing the preciousness and rarity of the merchandise (Martin, 2021). The cost-effective approach ensures the targeted groups are reached, increasing the company’s sales.
Hermes conducts marketing campaigns to introduce new products and increase coverage for new customers. The most iconic campaigns include “Leather Forever” (2012), which celebrates the heritage and expertise of leather goods; “The Gift of Time” (2014), the holiday campaign for the brand’s watches; and “Hermes Beauty” (2019) (Donzé, 2020). Chanel advertises its products through Hollywood stars who have a large following. The stars wear custom-made Chanel merchandise during events, becoming the center of attraction, thus promoting the trademark image. The corporation also holds tour exhibitions showcasing its dealings worldwide, boosting its sales.
Geography and Location-Specific Advantages
The organization is committed to retaining most of its production processes in France based on creative craftsmanship. Approximately 80% of the company’s manufacturing takes place in France, with 51 fabrication sites out of 64 (Fig. 4). Hermes has preferred to choose rural areas for its locations and hire in-house locals trained in workshops that can accommodate up to 300 people (Reuters, 2018). The corporation works with local communities and authorities in the regions where production spots are located to revitalize their economies. The corporation fosters stable and close employment in rural societies by educating them in the artistic creation and development of high-quality goods.
Louis Vuitton, a significant competitor to Hermes, has production sites spread in the United States, France, Italy, Switzerland, and Spain. Switzerland specializes exclusively in watches, while France and Italy focus on sunglasses. Jewelry collections, candles, and fragrances in Grasse, France, are manufactured in France, Switzerland, and Italy. Leather items are produced in Italy, Spain, France, and the United States, while ready-to-wear products are made in Italy and France (Louis Vuitton, 2023). The geographical choice of manufacturing locations is strategic due to the availability of raw materials and experienced expertise in fabrication. Their location also enhances value chain operations, as it is centrally located across their primary markets in America, Europe, Asia, and Australia.
Hermes produces 100% of its leather bags, among other goods, in France, which is motivated by the high level of expertise and craftsmanship at its building sites. Also, having all bag fabrication spots in one country ensures easy supply chain management. Additionally, being close to the company’s headquarters improves the production process since the administration is streamlined due to close supervision.
Hermes shoes are produced in Italy, with a dedicated supply chain for raw materials to promote efficient manufacturing processes. Most of the leather is sourced locally, where the firm operates a tannery in Cuneo that specializes in exotic leather. Moreover, the cashmere and fabric suppliers used by clothing manufacturers are from Italy (Basso, 2021).
John Lobb Bootmaker, which has a site in the UK, was acquired by Hermes in 1976. It fabricates ready-to-wear shoes with the finest leather, including exotic hides (Dion, 2022). The acquisition was strategic for the Group as it expanded into the luxury shoe market. John Lobb has a strong brand heritage in the UK as a shoemaker and bootmaker, which makes it easy for Hermes to enter the country and other international markets.
La Montre Hermes, a company subsidiary, specializes in watchmaking in Switzerland. The production site was established in 1978 based on Parisian creativity, and most of its components are manufactured in-house. The tanneries and precious leather manufacturers outside France are located in Australia, the United States, and Italy, with six, two, and one sites, respectively. The division is responsible for purchasing, tanning, finishing, and selling watches and leather (Hermes, 2022). The chosen countries for the source of valuable leather are strategically located and offer competitive prices and quality merchandise. These regions have the advantage of an easy supply of leather sourced from goatskins, calfskins, and exotic skins.
J3L operates in France and Portugal, specializing in the manufacture and sale of metal parts used in fashion products. The goods comprise bracelets, eyelets, earrings, belt buckles, press studs, padlocks, and carabiners used in shoes, wallets, and handbags (Hermes, 2022). J3L Group goods are of superior quality and have consistently been recognized as the benchmark, ensuring the firm receives unparalleled quality metal products. The manufacturing locations are close to other Hermes production facilities that depend on metal parts to produce their items. The proximity reduces supply chain challenges and streamlines the movement of raw and finished goods from factory to factory and shop to distribution centers.
Hermes and Apple collaborated to develop the Watch 2015, manufactured with a shared vision of quality design and craftsmanship. The partnership brought cooperation between different companies in complementary industries. The goal was to offer buyers the best of both high-tech products and traditional craftsmanship. The target market consisted of fashion and tech enthusiasts, with the current merchandise finishes featuring titanium, ceramic, stainless steel, and aluminum (Spangler, 2023). The collaboration was successful, dominated the smartwatch industry, and overcame competition from companies like Fitbit and Pebble.
Centralization / Decentralization
The central decision-making in the fabrication process of Hermes Company is concentrated at its business headquarters in Paris. The firm was recognized for its entrepreneurial spirit, as demonstrated through creativity and continuous innovation. The corporation continues to open new places and stores worldwide to meet its global expansion goals. It operates using an internal quality approach, with more than 70% of the goods manufactured in-house (Hermes, 2022). The fabrication sites are concentrated in the French countries, producing dedicated products.
The robust family shareholding model and long heritage of craftsmanship in leather and other luxury products have enabled the company to retain most of its manufacturing activities within France, thereby preserving its cultural identity. The production positions in France produce most of the firms’ finished goods, including leather products (hats, handbags, belts, and shoes), perfumes, jewelry, tableware, furniture, and art of living, and men’s and women’s silk. On the other hand, Australia and the US produce precious leather, Switzerland has watches, Portugal manufactures metal parts, and Italy and the UK manufacture shoes (Hermes, 2023). The corporation’s value chain activities indicate that France deals with finished products ready to be supplied to the international market.
The store’s operations are offered independence, a strategy that gives store managers control over the procurement to satisfy the needs of their customers spread across different nations. Hermes organizes two events yearly to bring all the management teams from other stores, countries, métiers, and designers who showcase their items to the sales teams. The sales team, led by store managers, then selects the collections to create the unique feature of their store, based on the specific needs of buyers in the regions where they operate.
The freedom allows the manager to create a distinct mix of products, giving each country and store a diversified blend of unique goods (Hermes, 2022). The approach ensures that creativity and innovation are nurtured, developing new house references that suit the expectations and sophistication of consumers. It also offers independence in the financial management of house operations, including manufacturing activities, store networks, and cross-functional networks. The approach promotes the preservation of the company’s long-term operational strategy.
Hermes’ operations demonstrated interdependence between subsidiaries, which work together in production. For instance, the J3L group designs and manufactures products used in shoes, wallets, handbags, bracelets, or belts (Hermes, 2022). Different sites in France manufacture the finished merchandise.
Similarly, John Lobb Bootmaker relies on other suppliers within the Group for the high-quality leather used in crafting those shoes. John Lobb also depends on the J3L group to stock metal products used in shoe production. Additionally, La Montre Hermès, a subsidiary of the organization, specializes in watchmaking and relies on Vaucher for the supply of movement parts used in the manufacture of high-precision watches. Hermès still relies on other firm suppliers for leather straps used in its watches.
Other inventions promote its operations worldwide, in addition to the mentioned stores and supply points the company has established. For instance, Hermes launched its innovation hub in 2016 in Leeds, UK, to implement new technologies for the company (King, 2019). The innovative goods include intelligent delivery with self-tracking parcels, utilizing locational services. The second lab was launched in a New York store and was designed and developed using sustainable materials, showcasing the company’s commitment to eco-friendly practices (King, 2019). The innovation labs are part of the firm’s long-term strategy to extend its services to other stores, creating an interdependent model.
Conclusion
Over the years, Hermes has maintained its position as the leader in leather products and luxury goods for designers, manufacturers, and retailers. The success can be attributed to the long heritage of family-backed shareholders and dedicated artistry in leather and other extravagant items. Based on the organization’s local adaptation, the company should identify a production site in Asia to meet the immediate needs of its customers. Asia accounted for more than 50% of the company’s sales in 2022, and China, among other nations in the region, offers better prospects.
An additional recommendation is to establish more research and development centers. Hermes should establish R&D sites outside Europe in emerging markets to understand the sourcing of raw materials and manufacturing goods that meet the needs of its international purchasers. The approach ensures the corporation remains innovative and competitive by being the client’s choice in leather and luxury products. This has expanded the company’s global customer base.
References
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