Spending in essentially every category of non-essential offerings declines during economic meltdown. The recent (2008) worldwide recession did affect the luxury goods sectors with questions of how well luxury brands like Hermes was able to perform well during this economic downturn, and what sort of strategies did the luxury brand managers execute so as to manage its operation during this economic meltdown. The economic slump of 2008 might be over but the subsequent slump and recession globally has shaken the performance of corporate and consumer behaviour worldwide.
Though the downturn might have adversely impacted several businesses globally, there have been discussion relating to the luxury goods sector more so Hermes and how the luxury goods sectors reacted to the recession (Nguyen, 2014) .This paper will focus on both the previous and current strategies that Hermes used/employed during the economic meltdown. The paper will also focus on theories or models on managing luxury brand in a downturn. Lastly, the paper will also offer some recommendations that could strengthen the company’s ability to improve its profitability and consequently manage its brand efficiently in turbulent environment.
Hermes is a high fashion luxury goods producer which was founded back in 1837 (Tran, 2012). The company specializes in manufacturing luxurious products such as leather, lifestyle accessories, home furnishing, perfumes, jewellery, watches and ready-to-wear cloths. Hermes is a multination company that has outlets spread out in various countries. Towards the end of financial year 2016, the company posted revenues worth $ 5.4 billion and it has an estimated workforce of 11,719. The competitors of Hermès include LVMH, Richemont and PPR Burberry among others. (Kapferer & Tabatoni, 2011, pp 259). Based on the 2015 BrandZ rankings (done by Millward Brown), Hermès was ranked as the 2nd most valuable luxury brand and which had a valuation of USD 19 billion (Teofilo Killip, 2012).
Brand philosophy of Hermes
The brand philosophy of Hermès’ may be concluded in just a single sentence and which is derived from the words of the initial CEO Jean-Louis Dumas who pointed out that, Hermes does not have a policy of image, but it has a policy of product (Roll, 2011). The brand philosophy is solidly grounded on the basis of “quality” and “refinement”. It’s on these aspect that the brand has always been against mass production lines and outsourcing (Roll, 2011). The owners, management and leadership of Hermès might have changed or gone through different generations of the family of Hermès, but the principles of the Hermès brand have never changed. Every product made by Hermès puts more emphasis on quality.
Hermes’ initial brand strategy
Hermès has never at any given time sought to have celebrity endorsements as a brand-building technique. It has actively declined to utilize this technique as a means of marketing itself (a practice which is mostly utilized by its competitors like LVMH). The main reason why Hermès does not rely on celebrities to endorse its products is grounded on the fact that fact that only A-list celebrities and very are in a position to afford and gain access to its premium and exclusive products is in itself an authentic endorsement of the brand. In its development stages, Hermès concentrates on ensuring that its products are of high quality. It only employs skilled and well trained artisans’ men and women and who are relied upon to create unique products. The organization knew very well that for it to be successful, it must hire skilled crafts men and women. Hermès went ahead to ensure that its crafts men go through additional training to ensure that their skills are at par with changing taste and preference of the end consumers.
Diversification of products was also part of Hermès earlier strategies so as to enhance its performance and improve its market share. Hermès had several product lines like: leather products, silk, clothing, watch and perfumes among others. All these goods have their own strengths and which contributed greatly to the bottom line and net income of Hermes’s (Du, Q. 2009, p, 27). Hermes International is not focused on the quality of its products but also about the tastes of their customers.
The last two brand strategies relate to aggressive marketing and developing many outlets both locally and globally. Aggressive marketing went a long way in ensuring that customers become aware of the products hence enabling it to capture a significant market share. Inward and outward expansion was meant to ensure that more customers have access to the products of the company. Moreover, it enabled the company to improve its bottom line, gain access to additional resources and attract newer customers.
Hermes’ current brand strategy
Based on Hermès annual report, its products are sold based on the following section – leather items and saddlery, male and female ready-to-wear, shoes, belts, gloves, silks and textiles, jewelries, furniture, furnishing fabric, tableware, fragrance, watches and petit. Its brand strategy is consistent across all its goods sections in which it has presence. The methods which the firm follows and utilizes guarantees that the feeling of uniqueness and which is solidly tied within its goods (Colchester, 2009). Some of the current methods which constitutes Hermès brand strategy are:
All the newly hired staffs undergo a three-day training session which is referred to as “Inside the Orange Box” (Roll, 2011). The primary goal of the training is to trace back the origin of the firm back to its founders and the history of the production of each product category (Roll, 2011). The 2nd objective of the training is to ensure that every staff of Hermès feels close, included in and easily identifies with the culture, principles and values of the organization.
Twice a year, more than a thousand store representatives from its global outlets meet in Paris for an event called “Podium”. All flagship are asked to pick at minimum one item from the 11 goods categories. This is an initiative by the firm to compel every flagship outlets to showcase and sell products that goes beyond their common category (handbags, scarves, perfume, jewelry, watches etc.) (Roll, 2011). This method goes a long way in adding allure to the brands of Hermès since not every items are available in all outlets and the online store only offers a limited number of the products of Hermès.
Hermès is against following the technique of launching regional-particular collections or product offers. This is because the same product collection are sold everywhere globally.
Hermès has a 2 year mandatory training program for its craftsmen before they can start working on any of Hermès product portfolio (Roll, 2011). This aspect indeed does slows down the production time in the firm but the firm’s philosophy has always been to retain scarcity and exclusivity. Hermès’ leather product section hires roughly two hundred craftsmen yearly.
Hermès doesn’t allow machines/technology to be used during the production process of its products. It’s for this reason that technology hasn’t in any way interfered or altered the operations of the organization significantly. When compared to other companies, Hermes has minimal productivity. A case in point, Toyota spends an estimated 30 hours producing a car, while the craftsmen Hermes spends roughly 2 days to complete manufacturing a handbag (Jeffrey Hays, 2009, p, 424). Though the productivity of Hermès is low, it does not mean that it needs to change it. Consumers who purchase luxury items expect to purchase goods which are not only excellent but are of high quality and they are willing to pay extra cash to own a limited edition, lifetime guaranteed handbags etc. As things stand currently, technology doesn’t pose any significant threat to Hermes hence the reason why it hasn’t been greatly integrated within its entire structure and operations.
Hermès has always being significant proponent and user of the “limited edition” technique and also limits the supply of its goods within its outlets. This aspect conforms to its philosophy of scarcity and exclusivity (Phau, & Prendergast, 201, p, 125). Hermès recently launched “patience” as a very solid value and aspect in its brand management technique. Consumers cannot expect to walk into any of outlets owned by Hermès and walk out with a Birkin bag. Instead, the clients are expected to place an order and wait for roughly a month before they can come and collect their product.
Partnering with the designers is part of Hermès strategy, more so within the section of home furnishing. The primary objective is for both the designer and the company to benefit from the reputation and expertise of one another. Partnerships goes a long way in enabling Hermès and its partners to share the risks and costs involved in the partnerships. A case in point of a company that Hermès partnered with is Louis Vuitton. This partnership was meant to minimize competition amongst themselves and establish a great partner for Hermes International.
Independent supply constitute part of the current competitive methods utilized by Hermes. Hermès has its own crocodile farm that supplies it high quality materials at a cheaper price. This resource is very valuable, scarce and costly to imitate. As a result, Hermes has gained some loyal clients who are ready and willing to buy the products at a higher price due to the quality that comes with its goods. Some of the wealthy customers like to own a $7,000 to $140,000 Birkin Bag irrespective of the fact that they will have to wait for roughly 6 years/longer to own the items. This fact proves how loyal Hermes’s clients are. They don’t mind waiting for a long time to own the products that they want since they know it is worth it.
In line with the company’s heritage and links with horses (and based on the fact that it was established as a saddlery producer), Hermès sponsors several horse racing events globally. In 2014, Hermès became the main sponsor of America’s Show Jumping Team. Its flagship event in the equestrian world is the annual Saut Hermès show-jumping event. The firm has been sponsoring and managing this events since 2010 and uses it as a chance to market its fine leather products and its longstanding relation with horses. It also an opportunity for Hermès to market itself among the wealthy clients of these events.
Besides offering innovative products that are of superior quality and variety, Hermes also provides world class customer services to its clients. Clients who go to shop in any outlets owned by Hermes shall at first be greeted by friendly and helpful sales staffs. These employees go the extra mile in assisting the customers to search for products that the client is searching for. Stores owned by Hermes provide many options to customers. These stores customize the products so as to align with the tastes and preferences of the clients (Kapferer, and Bastien, 2009, p315). Kelly is the name of Hermes’s well recognized handbag and which has a lifetime warranty. Clients are provided with the opportunity to send the handbag back to a Hermes workshop in Paris and whereby they are refitted and returned back to them in a brand new form .This excellent service is among the wide reasons why customers keep on shopping at Hermes irrespective of the fact that their products are very costly when compared to the products offered by their rivals.
Strategies used by Hermès during the economic downturn
As earlier stated, Hermès main target group is the wealthy individuals who are willing and ready to pay to own unique and high quality products. During the financial meltdown, the wealthy individuals were not significantly affected by economic downturn (Neate, 2013). Their spending power was not affected and which in turn impacted positively on the bottom line of Hermès. The extremely wealthy clients feel satisfied with their purchase since the products of Hermes are very prestigious.
During the meltdown, Hermès ensured that none of its products would be sold at a discounted price (Du, Q. 2009, p, 29). During any financial crisis, there is a high tendencies and is logical for organizations to minimize the prices of their products so as to record improved sales and bottom-line. However, for Hermès it opted to use the less preferred and unpopular strategy (selling its products at a higher price). The reasoning behind this is that it wanted that the value of its products to be retained from the time that they arrive in the stores to the day and time that they are sold out in stores. By selling the products at a discounted price, it would lower the value of the products of the company hence lowering its appeal to the wealthy clients.
The other strategy used during the financial crisis was innovation. During this time, Hermès focused on ensuring that its craftsmen are able to innovate new products and which would make them outstanding. This aspect of innovation ensures that it is able to build/innovate on the present products to create something which is unique (Choi, and Soon-Hwa, 2009, p, 110). This aspect ensured that the products had an appealing effect hence attracting customers to come and buy irrespective of the economic downturn. During the 2008 economic downturn, Hermès ensured that it puts a cap (limited) the number of products it produced or cut down on mass production. Such a move ensured that it had limited inventory (stock) and which would have resulted to its cash to been tied up in inventory (Nguyen, 2014, p, 20). Moreover, it ensured that there was minimal waste hence it ensured maximum utilization of its resources.
Theories/Models on managing luxury brand during downturn
Spending on the brand
when the economy is growing, there is a tendency by the consumers to spend freely. As a result, having an unclear brand position, would not be very risky when compared during a financial downturn. During the growth times, brand weaknesses within the marketplace tends to less obvious since the customers are very forgiving and are not price-conscious (Kapferer, 2011, p,259). However, during tough economic times, the spending habits of the consumers tends to change greatly. During this time, negative news usually fly all over every media channels and which in turn results to the kicking in of consumption fears hence they need additional inspiration to spend.
During tough economic times, consumers usually spend less plus they tend to very selective on what they spend their cash on. They tend to shun those brands which do not offer explicit, meaningful, pertinent and emotional engagement (Wharton, 2008). Conventional wisdom dictates that during tough economic times it’s better to fasten the belt and minimize cost and majority of firms do lower their marketing and branding efforts. However, this is where the opportunity for growth lies. While other firms are lowering their spending budgets and losing the emotional engagement with customers, it pays more in the long-run to spend on the brand (Shukla, 2017). This strategy was effectively used by Hermès and whereby it kept more emphasis on the quality of its brands hence enabling it to perform better during the economic meltdown in 2008.
Spend on relevance of the brand
The brand spend does not necessarily translate to monetary expenditure in every case. It all boils down to creating a buzz around the brand and with the 21st century technology, this efforts might be choreographed. While developing and opening newer communication avenues, firms need to note their limitations and the consumer engagement process. History of this communications is filled with firms overdoing it hence becoming unable in becoming relevant. Within the luxury goods sector, relevance is actually a matter of life and death and hence organizations need to proceed with great caution. However, during economic downturn, it’s the perfect opportunity for luxury brands to build relevance and which shall stick for long-term in the minds of the end consumers (Aït-Sahalia, Parker. & Yogo, 2014, p, 2960).
Avoiding the SALE mentality
The expanding wall-street driven short-term concentration to outperform competitors daily is another shortcoming done by some marketers. There is no one company firm globally which can do this. No one company would be in a position to outperform the market on a daily basis. During recession, short-term focused marketer usually proceed to sales promotion overdrive. This has a direct impact on the erosion of the brand and the consumers to become confused when it comes to what the brand stands for. Instead of concentrating on sales promotion, certain luxury brands like Hermes focuses on engagement (Making their brand relevant) (Shukla, 2017). This strategy in turn leads to cementing the position of ones brand in the minds of the customer. However easier and logical this may might be, many firms are continuously involved in operational thinking hence killing their beloved luxury brands.
During tough economic and erratic consumer buying behavior to start with, luxury firms were pushed to the edge hence forcing them to become creative. As a result, there emerged some game-changing innovations that had huge effect on the luxury goods industry. So as to remain unique and relevant during tough economic times, Certain luxury firms went out of their way to ensure that they develop products which were not only unique but also classy so that they can attract customers (Chauhan, 2013). For instance, Ralph Lauren was lauded as being among the few successful brands during the recession in 2008. In 2010, it opened a 20,000-square-ft outlet in Madison Avenue. The store, built to imitate a mansion, is the brand’s largest ladies store that features home collections and new lines of lingerie and fine jewelry. According to Ralph Lauren, even during economic downturn “customers want to have a piece of luxury” and brands which understand this shall thrive.
Playing on Heritage
Previously, luxury brands did present their iconic lines in creative ways, based on their rich heritage stories (Chauhan, 2013). It was during the 2008 downturn that Hermès launched its 1st men’s store, in a Madison Avenue. It was its first store exclusive for men. Hermès was among the few luxury brands which thrived during the financial crisis. Instead of lowering its prices or follow trends, it opted to concentrate on what it does best: producing expensive but durable classics goods which had outstanding quality and which lasted for a lifetime (Scola, 2015).
Based on success of Hermès and a few brands, the economic crisis did not “kill” the luxury market but has led the customers in becoming very discerning. They have shifted away from bling, loud colors and fat logos to the classics. Instead of purchasing many expensive bags annually, the consumers are now buying just a single bag which is unique, of high quality and timeless and this is where the heritage of a brand plays an essential role. Brands which have understood this and have been putting more emphasis on their history and craftsmanship have experienced growth. Louis Vuitton has been hosting “The Art of Craftsmanship” events where it has been selling their trunks, goods from where the firm originated from (Chauhan, 2013).
Pioneering Digital Media
Luxury brands have embraced social media as the other channel for it to link up with their customers while at the same time retaining their brand image. In 2009, Tory Burch re-launched its web-site and since, social media has been at the center of its global expansion plans. Toryburch.com was started immediately after opening its 1st shop in downtown Manhattan, and presently, the online sales generate increased profits. The concentration was not just on its brand, but targeting people with a particular lifestyle and adding value to them (Dubois, & Duquesne, 2013, p, 39). This was a sure way on connecting and sustaining relationships with its current and potential clients.
Recommendations for Hermès
Despite it having experienced numerous success, Hermes does not have kids and pet section within its product lines and which have the potential of creating million dollars annually for it. Hermes should establish a kid and pet section that focuses on creating and manufacturing these special goods. These would constitute promising projects for Hermes. Wealthy individuals tend to spend a lot of money on their pets. A case in point is “In the 7years that she’s had her diva dog, Louise has spent over £100,000 on all kinds of extravagant treats” (Mirror.co.uk, 2011).
In order for Hermes to become a stronger competitor for Louis Vuitton, it needs to enter in to joint venture with other firms like Gucci firm. Though Hermes has skilled craftsmen and high quality products that have great design, Gucci is a strong luxury brand which has extensive distribution network, and solid financial position. Hermes International may also enter into joint venture with Make-up Art Cosmetics (M.A.C). M.A.C is well recognized for being good at manufacturing cosmetic globally. This joint venture will assist Hermes have new product line which it does not have. High end cosmetics have a huge and potential demand. It shall raise Hermes’s profits without costing them cash in establishing new manufacture and employ additional staffs. Moreover, it shall bring M.A.C from consumer goods sector to luxury sector, hence making the brand to become valuable.
Apart from having better marketing strategy, Hermes needs to have an expansion strategy. China is a potential market which has the possibility of bring high revenue for luxury brands at minimal risks. China is a promising market for all the luxury firms like Hermes (Neate, 2013). Hermes needs to take the risks and enter other markets apart from China. There are many nations whereby Hermes doesn’t have any store like Vietnam, Laos, etc. and whereby many of the rich individuals are ready to pay high prices for their products.
Hermès is an ultra-luxury success story. With limited supply chain network, exclusivity and controlled marketing, the entire firm and its product categories have from time to time posted double-digit growth. This is a reflection of the Hermès brand strength among the wealthy population. Hermes has successfully kept alive and strengthened a brand differentiated through strong history, unique craftsmanship and superior quality. By being regarded to be innovative among all the luxury brands is proof of the firm’s commitment to constantly produce and quality and unique products which have a firm sense of allure and have distinct mark of superior craftsmanship. The 2008 economic crisis did not in any way affect Hermes owing the wide range of strategies that it used to cushion itself against the effects of the financial crisis. Some of the methods used include, not offering discounts, focusing on quality and innovation. The Luxury sector is a highly competitive industry hence the need for luxury firms to become more innovative. For Hermes to continue to prosper, and remain competitive, it needs to enter into joint ventures, expand into other nations and introduce new products line for kids and pets.
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