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Feb 18, 2022
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Hermès, a victim of its own success?

Translated by
Feb 18, 2022

Hermès reported an outstanding 2021 financial year with growth of 41.8% reaching €8.9 billion, an exceptional operating margin of 39.3% and a net profit of €2.4 billion, up 76.5% (+60% over two years). As executive chairman of the luxury group, Axel Dumas, summarized, "after 185 years of history, we are having the company’s best year ever with a +33% increase compared to before the Covid pandemic.” Despite this, the share price was down at midday on the Paris stock exchange due to a slowdown in the fourth quarter, particularly in leather goods, its core business.

A Birkin bag, one of Hermès' iconic pieces - © Elisa Valenzuela

The company's organic growth strategy, based on the very high quality of its products and largely integrated production at the heart of its success, has paradoxically slowed Hermès down in the face of growing demand that the company was not able to fully meet. In the fourth quarter, sales amounted to €2.3 billion, up "only" 11% at constant exchange rates compared to 2020 (+13.3% on a reported basis) and 28.4% over two years.

The leather goods and saddlery, which account for nearly half of the group's revenues, fell by 5.4% (-3.3% on a reported basis) in the last three months of 2021 compared to 2020, while growing by 11.2% compared to the same period in 2019. At a conference with analysts during the publication of the annual results, Dumas acknowledged that there had been constraints and slowdowns last year due to the health situation, while reminding that Hermès leather "is made 100% in France. But the dynamism of production still allowed us to make over +23% in two years," he pointed out. Sales of leather goods have increased by 29% year-on-year however. 

A growth in all product categories

For 2022, Hermès forecasts volume growth of 6-7% for leather goods, to which increased prices will be added. The executive underlined the good momentum of all product categories. "What is new in this period of crisis is that all business lines have had an absolutely incredible demand, whereas in the past it was leather that absorbed the shock in times of crisis," he said as the group sold all its inventory. 

The watches business line, with +73% and +77% over two years, and the ready-to-wear and accessories (+59% and +44% over two years) saw unprecedented increases, as did silk and textiles (+49% and +15% over two years), perfume and beauty (47% and +19% over two years) and the other categories such as jewelry and home goods (+73% and +77% over two years).

To keep up with this growth, the equestrian brand has continued to invest heavily. "We never stopped investing in our production facilities, even at the beginning of the crisis," noted the CEO of Hermès International. The effort has been particularly intense in terms of structure and labor (€169 million invested in 2021). The group's goal is to open a new leather goods factory every 12 to 18 months.

Sales and profits jumped in 2021 - Hermès

In 2021, two new leather goods workshops opened in France, bringing the total number in the country to 19. The first was in Montereau (Seine-et-Marne) in June, followed by a second in Guyenne (Gironde) in September. The leather goods factory in Louviers (Eure) is scheduled to open in 2022, followed by one in Sormonne (Ardennes) in 2023 and a new location in Riom (Puy-de-Dôme) by 2024.

Its teams continue to grow, with around 1,000 new positions filled each year. As a result, more than 1,000 new employees joined Hermès in 2021. At the end of December, the Group employed 17,595 people, including 10,969 in France. This workforce, at the heart of Hermès' strategy, is at the center of management's attention, as Dumas illustrated by revealing that all craftsmen and salespeople received a gross increase of €100 per month in France, and that a bonus of €3,000 euros was rewarded to each employee in the group worldwide, for the total amount of about €70 million. "About 70% of our employees own Hermès shares. Since I took over, we have made free share plans, which have allowed us to distribute almost €800 million worth of shares to employees," he mentioned.

The other factor, which undoubtedly led to the slight slowdown at the end of the year, is linked to a lower price increase by Hermès compared to its competitors. "Our products are certainly expensive, but not too expensive," noted the head of the group. "We don't use prices to increase sales. There is real authenticity behind our products and a customer trust that I wouldn’t want to break. It's the whole appeal of the maison that works well."

"At Hermès, we set our prices mainly according to increases in manufacturing costs," he continued, noting that Hermès practices "a strategy of organic growth. It is perhaps less focused on scope growth and price growth, with the exception of increases related to production costs. That's something we're quite strict about compared to some industry practices. Therefore, we are increasing our prices by about 3%, which is our annual cost inflation. This year, we are around 3.5%."

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