In the Bag: How Hermes Beats the Recession

As other luxury brands close shops, Hermes profits by selling coveted handbags.

June 9, 2009, 6:04 PM

June 10, 2009— -- Somewhere in Australia, basking in the waning rays of a winter sun, lies a crocodile with Eileen Robert's name on it.

The fate of this crocodile, a Crocodylus porosus to get technical, is linked to international financial markets, a 1970s British actress who made it big in France, a 172-year-old company that started out making horse harnesses, the tastes of the world's super rich -- and if she's very lucky and very patient, perhaps, too, to a New York City grandmother named Eileen Robert.

Within days this porosus will be killed. Its hide will be tanned and sent to an atelier (because to call it a workshop would be declasse) in the French town of Pantin. There, one of a few dozen highly skilled craftsmen will spend 48 hours over two weeks using tools specifically made for this task. He will use his own hands, two needles, a trademark stitch and a proprietary linen thread soaked in beeswax to craft one of the world's most expensive and highly sought-after luxury goods: the Hermes handbag.

This will be one of about 3,000 coveted saltwater-crocodile-skin bags made this year and will fetch somewhere in the neighborhood of $50,000.

People put their names on lists and wait two to three years to own such a bag. They spend tens of thousands of dollars on scarves and jewelry and clothing just for the opportunity to spend thousands more on a crocodile-skin pocketbook.

It is that obsessive demand -- combined with an intentionally limited supply -- that has allowed Hermes to prosper in an economic environment that has decimated its competition.

While many of its competitors are suffering under the strain of the global recession, Hermes, an iconic brand famous for its silk scarves and handbags, had a remarkably good first quarter. As some luxury brands like Gianni Versace shutter their stores, Hermes plans to open several new shops this year.

The French-based company's sales rose 3.2 percent to $603 million over the first three months of the year. Much of that growth is attributed to sales of leather goods, which rose 21.7 percent to $287 million.

"Hermes' position is unique; it is at the very top of the pyramid in terms of luxury goods," says Francesca Di Pasquantonio, a Hermes analyst for Deutsche Bank in Milan, Italy.

"The goods are very expensive. They make you pay for the quality they provide and the brand is classic, an icon. Handbags are the core of the business and a successful product. They are produced only in limited numbers, never overwhelming the market," she says.

Enter Eileen Robert.

Robert already owns a crocodile Kelly bag, one of Hermes' two most sought-after lines and named for actress and princess Grace Kelly. As for the highly desired other line, the Birkin, she says: "I totally want a Birkin."

Robert, a New York City real estate broker who gives her age as "grandmother," is a self-described "handbag lover" who insists she is "not an indulgent person" but owns at least 75 bags.

Lately, she has been buying bags from Bottega, another company, but Hermes she says, is a cut above the competition.

"The appeal of an Hermes bag is its design and its usability. It is a true luxury item, but it's affordable in a way that a yacht isn't," she says. "It's really an investment. Everybody wants one, but not everyone can have one."

That's for sure. Prices for a Birkin bag, the company's flagship purse, made from leather, start around $7,500. Bags from more exotic skins can sell for prices into the six figures. The bags were named for British singer and actress Jane Birkin.

"The price is above and beyond everyone else," says Michael Tonello, author of "Bringing Home the Birkin," who spent six years circumventing Hermes' years-long waiting lists to get bags to wealthy clients when they wanted them.

"The people who can afford these goods are not affected by the recession," Tonello says. "Even if they lost millions of dollars in the market, they are still worth hundreds of millions of dollars. If you want something super special, if you want a handmade crocodile bag and you can afford it, Hermes is the only place you'll go."

"That's why," he says, "the brand is recession-proof."

The handbags, unlike some of Hermes less-expensive goods, such as perfume and watches, are sold exclusively through company-owned shops.

Sales of those goods, reliant on both middle-class customers and middleman retailers, were down in the first quarter.

The company's perfume sales fell 28.7 percent while watches fell 29.5 percent.

"Fragrances and watches are dominated by the wholesale distribution channel and are suffering the trends of everyone else given the credit crunch. Many of the third-party [vendors] have cut back on orders," says Di Pasquantonio.

"Handbags are produced in limited quantities. The handbags and silks are sold through company owned retails stores, which means they are not being hurt by middlemen. They have a direct relationship with the customer," she says.

Those cheaper goods, Tonello calls "aspirational merchandise for the middle class."

"These are goods for people whose spending is actually affected by the recession," he says.

The importance of handbags to the company -- particularly expensive exotic leathers like crocodile -- has led Hermes to farm its own animals in Australia.

Leather goods make up 40 percent of the company's profits.

"It can take three to four crocodiles to make one of our bags so we are now breeding our own crocodiles on our own farms, mainly in Australia," Patrick Thomas told Reuters at its Global Luxury Summit in Paris.

The company is also looking to train new craftsmen to add to the 1,400 currently employed by the company.

"We cannot face demand. We have massive over-demand. We are limited by our ability to train new craftsmen," Thomas says.

The Hermes bag has become a cultural touchstone. The Birkin bag was featured in an episode of the HBO series "Sex and the City." And the Kelly bag was used as a plot device in the 2003 film "Le Divorce." Numerous celebrities have been photographed toting Hermes bags, including singer Victoria Beckham, who reportedly owns $2 million worth of Birkin bags.

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