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- [00:01]
Ben Gilbert
So I don't know if you realize this. Hermes is reporting earnings in, like, two days.
- [00:05]
David Rosenthal
Yes.
- [00:06]
Ben Gilbert
And at first I was like, we should probably not do this episode because their annual report comes out in two days. What if we're not current? And then I realized, this is Hermes. The short term is of no consequence.
- [00:16]
David Rosenthal
Yeah. Also, the Hermes annual reports are the most beautiful annual reports ever created in the history of the financialization of mankind.
- [00:28]
Ben Gilbert
You might think you can't do all of your charts in orange. You need different colors. But you would be wrong.
- [00:34]
David Rosenthal
The illustrations, the themes, you can tell. They care.
- [00:38]
Ben Gilbert
You can tell. All right, let's do it.
- [00:40]
David Rosenthal
Let's do it. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now?
- [00:49]
Ben Gilbert
Is it you? Is it you? Is it you? Sit it down.
- [00:52]
David Rosenthal
Say it straight. Another story on the way.
- [00:56]
Ben Gilbert
Who got the truth? Welcome to season 14, episode two of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal, and we are your hosts. Today we tell the story of a handbag company that won't sell you a handbag. A traditional saddle maker that makes very little of their revenue from saddles. A company that somehow has grown to be worth over $200 billion despite rejecting manufacturing efficiencies and economies of scale. A company so obsessed with craft and a reputation for quality that they have stayed independent while every other luxury brand has merged into conglomerates. That's right, listeners. Today we tell the oldest story we have ever told here on Acquired. Older than Standard Oil or the New York Times, this company dates back to 1837 in Paris, France. The crown jewel of the luxury industry, Hermes.
- [01:55]
David Rosenthal
Ben, do you know what company was also founded in 1837 that we have discussed quite a bit on? Acquired.
- [02:02]
Ben Gilbert
Hmm, No, I do not, David.
- [02:06]
David Rosenthal
That would be the other iconic color luxury company, Tiffany.
- [02:10]
Ben Gilbert
Oh, really?
- [02:11]
David Rosenthal
Also founded in 1837.
- [02:14]
Ben Gilbert
Ah, Chuck T. Well, this episode, listeners, has been probably just under 12 months in the making. LVMH was just after one year ago, and it was in that episode that I feel like I got a real penchant for everything that Hermes stood for. You know, after 187 years, still under family control, they're on their sixth generation of family leadership at the helm. I don't know, David. Everything Hermes does is just so focused and intentional and pure. As much as they sort of get lumped together with brands owned by lvmh, they are in many ways the anti lvmh.
- [02:49]
David Rosenthal
Ooh. Oh, We've got a great discussion of that later in the episode. I used to think that, and I no longer think that, but after our LVMH episode, I mean, you were so inspired by learning about Hermes, you went out and you bought your first luxury object. Right. And it was not an LVMH brand.
- [03:05]
Ben Gilbert
Yes, that is true. My wife and I were on our honeymoon listeners after lvmh. So last summer, and we were in Aix en Provence and we walked by an Hermes store and I thought this would be a great time to go in and get each other something as a honeymoon gift. So my wife got a little twilly scarf and I got an Hermes belt, and it's the only luxury item I own of any luxury brand. Traditional luxury brand. Yeah.
- [03:29]
David Rosenthal
As foreshadowed on our holiday special episode a couple months ago.
- [03:32]
Ben Gilbert
Yep. Well, listeners, if you want to know every time an episode drops, you can sign up@acquired fm. Email, you'll get hints at what the next episode will be and follow up facts from previous episodes. When we learn new information, come discuss this episode with us at Acquired FM Slack. Come check out our second show, ACQ2, where we interview founders, investors and experts, often as follow ups to these episodes. So with that, this show is not investment advice. David and I may have investments in the companies we discuss. And this show is for informational and entertainment purposes only. David, I feel like we're starting before 1837.
- [04:07]
David Rosenthal
Yes, but not too much before 1837.
- [04:10]
Ben Gilbert
All right. We're not going to like the sort of Egyptian invention of the handbag or anything like that.
- [04:16]
David Rosenthal
Boy, let me tell you, I was tempted. I was tempted. Well, if you read the Luxury Strategy, which is a great book that we've referenced many times on Acquired, they start back 50,000 years ago. We start in 1801. Not in Paris, not even in France. You know, as we've been talking about the land of beauty, luxury, enlightenment, where Hermes, of course, was founded and is still based today. And uniquely, hermes still does 85% of their production by hand by mastercrafts people in France, as we will talk a lot about. But instead, we start in the land of hardness and precision of engineering, of exactitude, the future land of the Porsches of the world. That is right.
- [05:02]
Ben Gilbert
Germany, a century before the Porsches and Volkswagens of the world.
- [05:07]
David Rosenthal
Yes. Where Thierry Hermes was born in the town of Crefeld, which is just outside of Dusseldorf, where he's the sixth child of a family of innkeepers.
- [05:18]
Ben Gilbert
So Hermes, is that a German name, a French name?
- [05:22]
David Rosenthal
Hermes is Obviously not a German name. I mean, even I know that Thierry's father was French and his mother was. Was German. And shortly after Thierry is born, he was born in 1801, something pretty major happens in France and then throughout continental Europe that will become very, very important to our story here, and that is that Napoleon comes to power in France. I mean, this is the era we're talking about here.
- [05:50]
Ben Gilbert
Like Napoleon, we finally did it here. On. Acquired your AP European history class has now merged with business history. Recovering Napoleon.
- [05:59]
David Rosenthal
He is critical to what is about to happen here. So in the aftermath of the French Revolution, Napoleon essentially stages a coup, declares himself Emperor first of France, and then he basically begins conquering all of continental Europe, including Germany. Now, this Napoleonic conquest was, at the same time, both the very best thing that could happen to young Thierry. I mean, it leads directly to Hermes, but also the very worst and truly worst. You do. All this conquering, this glory of France that we're going to talk about, becomes important to Hermes. That's the result of wars. So Thierry's entire family, his parents, his mom, his dad, all five of his siblings, they are all killed either directly in the Napoleonic wars or by disease and famine as a result of this. I mean, absolutely terrible. And the result is that Thierry, by the time he's 20 years old, he's an orphan. He is the last Hermes left.
- [06:58]
Ben Gilbert
So, David, 1821, you know, pretty rough time out in the world. Do you know who was born in this year? 1821 and was also an orphan?
- [07:07]
David Rosenthal
Ooh.
- [07:08]
Ben Gilbert
We have talked about them unacquired.
- [07:11]
David Rosenthal
Obviously not Rockefeller, which is where my mind first went, because we talk a lot about his dad.
- [07:16]
Ben Gilbert
Yep. Louis Vuitton himself.
- [07:18]
David Rosenthal
Ah. He will also come up here in a minute.
- [07:21]
Ben Gilbert
20 years younger than Thierry Hermes, but also an orphan.
- [07:25]
David Rosenthal
Wow. I didn't know he was also an orphan.
- [07:27]
Ben Gilbert
Yep.
- [07:28]
David Rosenthal
Wow. It's just crazy. Two orphans, one of whom was German, go on to found the two most important, most French, most luxurious brands and really communicators of status in the modern world. That's wild.
- [07:43]
Ben Gilbert
Yeah. Especially crazy considering they both came from nothing. These people who would create the monikers of the elite, of what would go on to be the symbols of wealth and nobility, came from nothing and were orphans, and at their greatest aspirations were craftspeople. For the elite, they were almost servants.
- [08:04]
David Rosenthal
Yes. So in 1821, Thierry leaves Crefield, leaves Germany. He abandons his original kind of destiny as an innkeeper, and he moves to France. Not to Paris, but to Normandy in the north. And there he becomes an apprentice under a master craftsman, learning the art of equipage. Craftsmanship. Now, equipage is the business of outfitting horse drawn carriages. And who were the customers of horse drawn carriages? Ben? Like you're talking about the nobility. The nobility. You know, horses were extremely important to the world back then. The horse was the car. It was the Ford F150. It was the Toyota Camry. It was also the Rolls Royce that drew the carriage, and only the Rolls Royces were the carriages. So when Thierry moves to Normandy and takes up as an apprentice, he apprentices for 16 years. Years. Wow. And it's not until 1837 that he finally moves to Paris as now a master craftsman and opens up his own shop in Paris on the Rue Bas du rampart in the 9th arrondissement, which that whole street today no longer exists. And there he establishes himself as really quite an exceptional harness maker for horse drawn carriages. Now, it's kind of unclear to me at this point if he's using the famous saddle stitch, which becomes so important to Hermes. And the reason it's unclear to me is because he's not making saddles. Saddles are what other people are making. It's not that the nobility don't ride horses. They do, but they ride horses like the elite today drive a Ferrari. It's not something they do every day.
- [09:56]
Ben Gilbert
Right. Their daily driver is a Bentley, because someone else is driving them and they have a Ferrari for when they occasionally want to drive a Ferrari, they'll climb in a saddle occasionally. But mostly they're in the carriage.
- [10:06]
David Rosenthal
Yeah. So when Thierry arrives in Paris in 1837, he pretty quickly starts becoming known as really the best harness maker and carriage outfitter in Paris, serving the nobility, which is pretty impressive. I mean, here he's this immigrant from Germany, apprenticed in Normandy. He shows up in Paris, and all of a sudden, he's making the best stuff out there.
- [10:29]
Ben Gilbert
Turns out he was just really good.
- [10:30]
David Rosenthal
At the craft and he had exceptionally good timing. We spoke about Napoleon a little bit earlier when Thierry finally comes to Paris. At this point, Napoleon I has been defeated. The Battle of Waterloo, that was 1815. France has now seesawed through, like, a whole bunch of different republics, and the monarchy comes back. And, you know, it's crazy French history stuff. But shortly after Thierry returns, Napoleon's nephew, Napoleon iii, stages another coup and reestablishes the empire in France. And this is super important, Ben, to what you were talking about earlier about, hey, this guy's an orphan. Louis Vuitton was an orphan. How did they become so important. When Napoleon III comes to power in France, he does two things. One, he completely modernizes the city. So if people have heard of the Baron Haussmann who kind of rebuilt Paris, that happens at this time under Napoleon iii. They transform Paris from a medieval city with super tight streets. Like, if you go up to Montmartre, those streets around there, that is old Paris. But what you think of the Eiffel Tower, the museums, the grand boulevards, the Champs, that's happening right at this time. And the Baron Haussmann, he's kind of like Robert Moses was in New York in the mid 20th century, remaking new York, he is given full latitude and direction by Napoleon III to burn Paris to the ground and remake this city as a modern city.
- [12:11]
Ben Gilbert
Fascinating.
- [12:12]
David Rosenthal
And this is super important for Thierry and Hermes for two reasons. One, in the old medieval streets in Paris, not that many people were going up and down them. Not that many people were going to see the nobility in their carriages, in all their finery. Now you've got the Champs, the grand boulevards, everything about the sort of gallantry of Paris that we know today. It's all on display now. So this becomes really important for showing off, for signifying your wealth, your status. The other kind of related thing here that happens with Napoleon and Napoleon III is that status is no longer just about what you were born into in the old system, the nobility, the royalty. It was like, look, you're born noble or you're not, and it's kind of independent of how much money you have or what you do or what influence you have. Under Napoleon, he brought in this modern idea that you could shift your class. I mean, he was essentially a nobody, and he became the emperor of Europe. That'll completely upset the mindset of people.
- [13:17]
Ben Gilbert
Yep.
- [13:18]
David Rosenthal
So all this is happening. This is the best thing that could ever happen to Thierry. He's the best artisan, most exclusive crafter of carriageware, of equipage. The city is being transformed so that this can all be displayed prominently. Social stratifications are becoming more blurry. People can spend money for the first time to buy status. Great for business.
- [13:46]
Ben Gilbert
These are like the disruption waves that enabled him to create a business.
- [13:50]
David Rosenthal
Yes. Before all this, before this era, there's no way that this evolves into Hermes or, honestly, that Louis Vuitton and what he's doing with luggage and with trunks, there's no way that that evolves into Louis Vuitton. So speaking of, both Hermes and Vuitton have one really important client, a key influencer. So to Speak that they both land at this time.
- [14:16]
Ben Gilbert
I remember Louis Vuitton's key client was the Empress Eugenie. Is Hermes the same client?
- [14:22]
David Rosenthal
Yes, the same client. So Napoleon III's wife, the Empress Eugenie, becomes a client of both of these men for her carriages, in the case of Hermes, and for her luggage and for her trunks. And actually, I think also for her packing. Like, I think Louis Vuitton was the royal laytier, I believe, and he packed the trunks. He was the luggage guy. Hermes was the carriage guy, which is.
- [14:48]
Ben Gilbert
So funny because that is still, in some ways, both of their legacy today.
- [14:52]
David Rosenthal
Yes, absolutely, Eugenie. And everything going on at this time makes Louis Vuitton and makes Thierry Hermes. But it's interesting, right? Vuitton and luggage that is inherently of the world that's coming, the modern world, the train that exists at this point in time, Steam engines are a thing, and then the car is about to come, and Louis Vuitton and trunks and luggage, it all translates directly.
- [15:19]
Ben Gilbert
Right. It's sort of built for the upcoming world.
- [15:22]
David Rosenthal
Yes. Not the case with Hermes. And actually, today, I think this is one of the biggest strengths of Hermes. And they still, you know, the equestrian theme, the horse is so much of their brand. They talk about it so much of their products, the saddle stitching, it's calling back to that other era, like that pre modern era where the horse was primary.
- [15:48]
Ben Gilbert
Right. Hermes is deeply rooted in. In French history and Parisian history, and really a key part of how France as a nation has the identity that it has today.
- [16:00]
David Rosenthal
But it would all be irrelevant if the brand didn't translate out of the horse era and into the car era.
- [16:08]
Ben Gilbert
Right.
- [16:09]
David Rosenthal
Which was not Thierry Hermes is doing, nor was it his son's doing. So Thierry dies in 1878, and his son Charles, Emile takes over. Now, he apprenticed coming up in the shop in exactly the same way that Thierry apprenticed. He just apprenticed for his dad. So by the time he takes over, he's been working in the shop as a craftsman for 20 years. And by the way, this sort of family tradition and way of business continues to this day. So Axel Dumas and Pierre Alexis Dumas, who are the two descendants of Hermes, the sixth generation that are running the company today. Axel is the CEO and Pierre Alexei is the artistic director. They apprenticed in the business when they were teenagers for five years after school. They went to the atelier, they learned the saddle stitch, they made bags, they made items with their hands. Now, obviously, they also sort of learned the business from their parents, but they're not learning the business the way that L'Arno children are learning the business at LVMH as executives. They're learning with their hands, as craftspeople, how to make this stuff, which is wild. Excel is the CEO of a $200 billion plus company.
- [17:28]
Ben Gilbert
It's crazy. And to bring it back to the late 1800s, I think the point you're making here is when Charles Emile was apprenticing, there was no other example of what this company could become. So he thought, why don't I carry it on in exactly the same manner, Thierry, that you did? And so there's not this grand ambition to innovate and change with the times. It's, well, how do I learn exactly your craft, exactly the way you do it and then continue that?
- [17:56]
David Rosenthal
Right. The business and the craft are intimately intertwined. They cannot be separated. And this is a playbook theme. I want to pull all the way forward, but is so critical to understand about Hermes and what really, in my mind, differentiates it from lvmh. Lvmh, as we talked about on that episode, has world class, best in the world business executives who partner with world class, best in the world creatives at Hermes. These are not different people. Now, obviously, there is a different CEO and artistic director that are both members of the same family and who are cousins, but in spirit, they're cut from the same cloth, and they apprentice as creative craftspeople, and they collectively. And the family is in charge as much of the creative side of the house as they are of the business side.
- [18:50]
Ben Gilbert
Yeah, makes sense.
- [18:51]
David Rosenthal
So back to Charles Emile in the second generation. He finally adds Saddlery to the business. That's his big expansion. He adds Saddles Banana. Banana. Which, you know, again, like as Paris is modernizing, as you can now buy your way into status for the first time. In Paris, you can be seen writing in addition to characters. And the ideal of what it is to be a noble person or a noble person of status has changed. It's no longer just, oh, I'm a leisurely courtier. It's like, no, I'm Baron Osman. I am doing things for the state, for the country. I am doing big things. It's kind of like American in its way in the Rockefellers, right?
- [19:34]
Ben Gilbert
You're not just famous for being famous. You are famous because you've achieved something, or you're in the act of achieving something, or you hold a high office in which you were elected or appointed to get a specific goal done. You're on the move, you got stuff to do, and you know, you gotta get there.
- [19:48]
David Rosenthal
Exactly. And you need a saddle for that. So Charles Emile, he adds saddles. And in 1880, he moves the workshop in the store to Venkat, rue du Faubourg Saint Honore, 24 rue du Faubourg Saint honore in the 8th arrondissement of Paris. The famous address, the building that is today known as Le Faubourg by everybody in the Hermes universe. And this street in this location is one of the most iconic streets in the world. Buildings in the world, headquarters in the world.
- [20:20]
Ben Gilbert
It was stunning to walk it last summer when I was there. You can feel the presence of Hermes and all the other brands that are there.
- [20:27]
David Rosenthal
Yeah. The Rue du Faubourg Saint Honore is where the French presidential residence is. It's where the British Embassy is. It's where French Vogue is today, probably because Hermes is there and because all of the other luxury flagships are there. So Charles Emile runs the business for 25 years. He adds saddles, he moves the company to the Faubourg, and then in 1902, he retires, and his two sons, Adolphe and Emil, who have apprenticed in the business just like him, just like every generation will do for many generations to come, they take over and they change the name of the company to Hermes Frere Hermes Brothers, because the two brothers are now running the company, and they're.
- [21:11]
Ben Gilbert
Going to do this forever together, and they're going to be thick as thieves. And, you know, they are of one mind on how this company should go.
- [21:18]
David Rosenthal
They've been apprenticed together. They're going to be like Axel and Pierre Alexi today. Well, of the two brothers, I think it is fair to say that Emile, who I believe is the younger brother, is the sort of much more ambitious and much more adventurous one. There's this great story that in the late 1890s, so before his father, Charles Emile retires, the young Emile sets off to conquer Russia for Hermes. He literally, like, gets on a train with a notebook and a suitcase filled with miniature versions of the saddles and the harnesses that Hermes makes, and he just finds his way into the czar of Russia's court and lands him as a customer.
- [21:59]
Ben Gilbert
That is wild.
- [22:00]
David Rosenthal
Unreal. They have to staff up a whole new atelier with, like, 80 craftspeople to fulfill all the orders for the tsar in Russia. Whoa. Yeah. So this is Emile. He's going places. And right as he and Adolphe are taking over, kind of at the end of Charles Emile's tenure, they decide to introduce a new product. Now they're not thinking that this is going to be a big thing at the time, but some of their customers, again, now that they've added saddles, once they get off the horse, they want something to carry the saddle and maybe their riding boots with them while the horse is in the stables at wherever they're going. So they say, great, we can help you with this. And they introduce the Haute au Courois bag, which translates as the high belted bag, to carry saddles and boots for their clients. Now, like I'm saying here, this was intended to be an accessory to the main business of equipage and saddles, the equestrian business. It's not really practical for anything else. I don't know why anybody else would want a big tote bag that could carry your boots.
- [23:06]
Ben Gilbert
What's this bag look like?
- [23:07]
David Rosenthal
Well, this bag looks exactly like the Birkins and the Kelly's today, except a lot bigger.
- [23:11]
Ben Gilbert
Interesting, because you're putting a whole saddle in it, like you're desadling your horse, and then you're putting that in this bag.
- [23:19]
David Rosenthal
Yep. But it has the same trapezoid shape. It has the crossover belt. The Haute courois means the high belted bag. It has the belt. It has the turnstile lock closure for the belt at the top of the bag.
- [23:33]
Ben Gilbert
Fascinating.
- [23:34]
David Rosenthal
So this accessory that we're going to add to the business, this becomes the spiritual heritage to the business today.
- [23:42]
Ben Gilbert
That's crazy. It's like if Apple eventually transitioned to being not the Vision Pro company, but the Vision Pro carrying case company.
- [23:49]
David Rosenthal
Yes, yes, yes. Oh, did you get the carry case, by the way?
- [23:53]
Ben Gilbert
No, I'm not going to spend another $200 on that.
- [23:55]
David Rosenthal
That thing looks like a balloon. It's enormous.
- [23:58]
Ben Gilbert
Yes. And it takes up your whole backpack.
- [24:00]
David Rosenthal
So this bag, this accessory that would become the Kelly and then the Birkin, they introduce it just at the right time. It's 1902, kind of as Charles Emile is retiring. And this idea of this bag that you would put stuff in because you wouldn't bring a bag on a train. You know, if you're of this class, you need a trunk. You need a flat pack trunk that Louis Vuitton is going to make for you. And none of these three men could have seen it at the time, but this accessory to the real business of saddles and horses and harnesses was going to become the perfect transition to move Hermes into the age of the automobile.
- [24:43]
Ben Gilbert
Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes.
- [24:49]
David Rosenthal
As you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business?
- [25:05]
Ben Gilbert
Yep. And as you know from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this.
- [25:17]
David Rosenthal
So what are AI agents? AI agents can think, learn, solve problems and and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control.
- [25:34]
Ben Gilbert
Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it. These agents collaborate, they learn from each other, and they continuously improve handling the busy work across your business so that your teams can actually focus on what truly matters.
- [25:52]
David Rosenthal
Ultimately, ServiceNow and Agentic AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone.
- [26:03]
Ben Gilbert
Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com AI agents now. David, how was Hermes perfectly positioned for the age of the automobile with this new accessory?
- [26:22]
David Rosenthal
So this is wild. I suspect you probably also found this in research, but when I did, my mind melted. So During World War I, in 1916, Emile becomes an officer in the French military and the military sends him to the United States to learn about kind of US industrial and military production. You know, he's sort of a leading industrialist in France at this time, shall we say. And one of the people that he gets sent to meet with is. Do you know about this, Ben?
- [26:56]
Ben Gilbert
No, I have no idea.
- [26:57]
David Rosenthal
I can't believe you didn't find this. No. He meets with Henry Ford.
- [27:03]
Ben Gilbert
No.
- [27:03]
David Rosenthal
Goes to Detroit. He sees the assembly lines, he sees the car, he sees the future, he.
- [27:10]
Ben Gilbert
Sees the assembly lines. And then he had blinders on. He's like, oh, pay no attention to the manufacturing efficiencies they've got going on over there.
- [27:17]
David Rosenthal
This is what's so funny. No, he's like, this is unbelievable. And to the manufacturing efficiencies point, he actually does take some elements of the assembly lines and brings them back to Hermes. It's not like they're anti efficiency, they're pro efficiency, but in the context of being a craft, you know, non mechanized, human, master craftsman, built object. So he actually does take some of the production ideas from Henry Ford. But more importantly, he's looking at this place and he's like, my God, there is a Model T rolling off the assembly line every three minutes. Ford at this point is producing half a million cars per year. Everybody knew about the automobile, but this is a different era. This is kind of the same time as when we talked about our Novo Nordisk episode, about the start of that company, where news didn't reach Europe. This wasn't a global world. And so Emile getting this window, literally seeing the assembly lines in Detroit, he's like, whoa, once this war is over, the world is going to change forever.
- [28:28]
Ben Gilbert
Okay. So Emil both figures out how to open business in Russia and goes to America, meets with Henry Ford, understands the automobile is going to change the world.
- [28:36]
David Rosenthal
Yeah, he's quite the character of this guy. The other thing he finds in America is. I know. You know this one.
- [28:41]
Ben Gilbert
Yeah.
- [28:42]
David Rosenthal
The zipper.
- [28:43]
Ben Gilbert
Yes. Or as it was originally called, the clothes all. Yes. Which really does not have the same ring to it. I'm glad we changed to zipper.
- [28:51]
David Rosenthal
I couldn't believe this. The zipper was a late 1800s, early 1900s invention in America, and it was primarily used for industrial use cases. In this case, it was zippering closed the hood of a car.
- [29:05]
Ben Gilbert
I think like a military car.
- [29:06]
David Rosenthal
Yeah. Where Emile first sees it, it's not at the Ford factory. I think it actually might have been in Canada on the later leg of his journey where he sees it on the car. It was also used for opening and closing boots. And that is how the name zipper came to be. I think it was the B.F. goodrich company.
- [29:22]
Ben Gilbert
Really?
- [29:23]
David Rosenthal
Yeah. I believe they made a brand of boot with this close all function, and they called it the zipper, and that's where the zipper came from. Regardless, enterprising young Emile, he tracks down the inventor of the zipper. Like the holder of the patent in America, he obtains an exclusive license for two years in France. This literally is like the Novo Nordisk episode. Totally brings it back to France and makes the first zippered products. He makes the first zippered jacket ever created anywhere in the world. It is a leather golf jacket for the British Duke of Windsor, the heir to the throne. Just amazing. For years in France, the zipper would be called the Hermes fastener. In France.
- [30:06]
Ben Gilbert
Yes, that's right.
- [30:07]
David Rosenthal
Just wild. I think they made the right decision not to make zippers the business and instead to stay focused on leather. Kids.
- [30:16]
Ben Gilbert
It does show their penchant for innovation. The idea that we can push the envelope forward in functionality in what people would be willing to wear. I mean, this Guy's a duke, and he's wearing a zippered jacket. I'd imagine that drew some eyes at first.
- [30:30]
David Rosenthal
Yeah. And a golf jacket, literally, for use while playing golf. While playing sport. You know, what more modern activity to happen here.
- [30:37]
Ben Gilbert
Yep.
- [30:38]
David Rosenthal
Regardless, though, the big thing for Hermes that he brings back is, oh, my God, the car is coming.
- [30:43]
Ben Gilbert
Okay, so we're still in the third generation of the Hermes family. Two brothers are running it.
- [30:50]
David Rosenthal
What's next when Emile comes back and he's running around making zippered jackets? He's collaborating with car companies. Leads to a rift between the two brothers. Adolphe, the older brother, he's much more conservative. He wants to remain in the horse market. He's kind of depressed about the car coming. He's like, hey, I just want to remain a niche leather worker, and I'm not really cool with everything you're doing here.
- [31:18]
Ben Gilbert
This is literally, like, he wants faster horses. Of the analogy of, like, if you would ask people what they want, they'd say, faster horse. Like, he's stuck in horseland right now.
- [31:27]
David Rosenthal
I don't know if it was that he had his head in the sand or more just like, he didn't want to go build a big company.
- [31:32]
Ben Gilbert
Right. Which I could understand.
- [31:34]
David Rosenthal
Totally. I can totally understand that. Either way, in 1919, Emile buys him out and says, I believe in my ability to lead this company making this transition into the automobile era. And legend has it that he goes to the Craftsman in the atelier above the shop in the Faubourg and says, okay, what are we going to do? What can we make with our hands here in this atelier that will interest our clients today? And I think this is still kind of legend around Hermes of, like, what can we make with our hands that will interest our clients today? And the obvious answer at the time is a version of the haute courois bag. You know, it's bags for these cars. And if you want the most exquisite bags, the most exquisite things to show in your automobiles that you're buying, who better than Hermes? And finely handcrafted leather bags and accessories that you can outfit your car in the same way you could outfit your horse.
- [32:40]
Ben Gilbert
So the business is now Emiles, and the business is now handbags.
- [32:44]
David Rosenthal
And once again, to timing and insight here. Kind of like Thierry in the original case, what the automobile does. And it's not just automobiles. It's also improvements to trains and improvements to ships. The global rich, the global elite, they start traveling a lot more. We're now in the 1920s, the roaring twenties. This is what F. Scott Fitzgerald is writing about the visible symbols of wealth. It's when you're home, it's in your car, and the bags and the accessories you're using with your car. But you're also out traveling a lot more. You're rubbing shoulders with elite all around the world. The American elite are going to France. They're going to Europe, vice versa. People are starting to travel around the world. People are traveling to Asia. People are traveling to the Middle East. People are traveling to South America. Emile's going right along with all these people. And your luggage, your bags, that's what you bring with you. That's what you show.
- [33:43]
Ben Gilbert
Yeah. And importantly, it's not just that you're trying to show a label which is a little bit different than the modern version of luxury. It's that you're trying to have something really nicely crafted. When you show up somewhere, someone should just look at your luggage and go, wow, that is beautiful. Hermes is not yet a recognized brand, so merely slapping Hermes on it won't do the trick. The way to wow the people that you want to wow is through the raw craftsmanship.
- [34:12]
David Rosenthal
The product itself. Yes.
- [34:14]
Ben Gilbert
Yep.
- [34:15]
David Rosenthal
So in 1922, Emile's wife famously complains that the large bag they've been making, the haute courois, the saddle bag, it's too large to fit through car doors. So she asked for a smaller version, and this launches the handbag business in 1925.
- [34:35]
Ben Gilbert
And by the way, by this point, they've put the zipper on a handbag.
- [34:38]
David Rosenthal
Yes, exactly. And speaking of the zipper, in 1925, they had ready to wear clothes like the legacy of the golf jacket here. The legend has it that they added clothes because a longtime client came in and said, I am fed up with seeing my horse better dressed than me. Which, who knows if that's true, but it's a nice story. But they really go into this. In this modern world where the global wealthy, the global elite are traveling, they're seeing each other. What outward signifiers can they supply them? Clothes. 1927, they had jewelry. 1928, they had watches.
- [35:14]
Ben Gilbert
And something interesting that is different than the Hermes you know today, the way that they're adding all of these things, they're finding craftspeople who are experts at particular crafts. Exactly what you're talking about, David. A watchmaker. They're finding a watchmaker, and they're saying, can we work with you on designing something uniquely Hermes? But you're the craftsperson. We're not trying to build this competency in house.
- [35:37]
David Rosenthal
Right. It's not right to say that they're licensing products. You know, it is a collaboration, but they are selling products in their stores that are not made end to end by Hermes employed craftsmen.
- [35:52]
Ben Gilbert
Right. And it's interesting because they're sort of toeing this line between first and foremost being a craftsman themselves and being a manufacturer and being a designer, but also kind of being a retailer where they're just bringing in other branded goods and selling it in their shop.
- [36:10]
David Rosenthal
Yes. And I think all this is being figured out real time, these ideas of retailers versus brands. It was a much fuzzier line then than it was today. So what does Hermes do? What does Emile do? They start opening up stores outside of Paris. And where are they going to go? They're going to go to the travel destinations where their clients are going. So the first store is in the Cote d'azur in the south of France. And then they start opening up more stores around the world. Again, not necessarily in the London's or the Romes or the New Yorks of the world. They're opening them up in the travel destinations.
- [36:51]
Ben Gilbert
Their mindset around additional stores at this point is it's for the same clientele in all the places that they travel.
- [36:58]
David Rosenthal
Yes. And the clientele was primarily French at this point in time.
- [37:03]
Ben Gilbert
Yeah. Or if not exclusively other than the Czar. And yeah.
- [37:06]
David Rosenthal
I suspect though that it was strategic of like our French clients are going to go to these places, they're going to rub shoulders with the Americans, with the British, and then we're going to have a store there so that those Americans, those British elite, they can go purchase our products there too.
- [37:23]
Ben Gilbert
Right. This, by the way, is a different retail strategy than what they have today. Today management sort of insists that the idea is that each store is for the local clientele and we will only expand into an area if we feel that we can serve the local clientele that lives there well. And that's sort of a recognition of the maturation of their business. The rich people are going to go find an Hermes store somewhere. It's easy for them to travel somewhere, buy it on vacation. But if we're going to open new stores, we should open it in places where there is a thriving new upper class who can buy the goods locally there in their city.
- [38:00]
David Rosenthal
Yes. Now I think some element of this certainly still exists. You had a nice time going into the Hermes store in X, right?
- [38:09]
Ben Gilbert
Yes, for sure. But it plays well for me as someone who is on vacation and shopping, to believe that I'm shopping in a store that is, for the locals, it's less fun to be shopping somewhere that is very clearly created for you as a tourist.
- [38:24]
David Rosenthal
Yeah. I think they very brilliantly walk this line. And the products that the shops carry are very different. We'll get into that later in the episode too. But back to this era. So I think we've laid the groundwork of a few critical components of Hermes so far. First, and most importantly, the craftsmanship. These things are handmade by artisans with their hands, and the family and the people who own the company are the chief artisans. That goes all the way back to Thierry. We've talked about the connection to the legacy of French nobility, but not really French nobility. It's sort of like status, but accessible status for the first time in the world and the modernization of the world. We've talked now here about the true modernization of the company and the transition to the automobile era. What we haven't talked about yet and what Hermes at this point certainly is not, is this element of, like, whimsy and art that is really, really critical, I think, to the company.
- [39:28]
Ben Gilbert
Yes. If you've ever been in an Hermes store, you can feel a warmth that doesn't exist in other luxury stores. If you're in a destination with a lot of luxury shops, you'll walk past a lot of bright lights and mirrors and punch you in the face, reds and black and white, and you just feel like there's a lot going on. And then you arrive at Hermes, and it feels warm and it feels soft and it feels welcoming, and it feels whimsical. And there's this almost dreamlike color palette that they use, starting with a base of orange and having this explosive rainbow of fun. But in some ways, it all feels natural and from the earth and just whimsy. I think that you nailed it, David. Whimsical.
- [40:18]
David Rosenthal
And this, I think, is really a very different thread than the original kind of leather craftsmanship. And it is a critical one in the kind of weaving of the Hermes business. And this thread comes from the next generation of the family, specifically Robert Dumas. So Emile had four children, but they were all daughters. And tragically, one died young, but the other three grew up and they got married. And back in this day, women weren't going to take over the business, unfortunately. Right.
- [40:54]
Ben Gilbert
Same story as the New York Times. There was a whole generation of daughters. Well, none of the Ox daughters get the business. And so it goes over to the son in law, the Sulzberger. And now it's the Sulzberger Ox family that owns the Business. In the same way that Hermes is the Hermes Dumas family, the son in law tends to do well in this early 20th century period of passing it down from, unfortunately, father not to daughter, but father to son in law.
- [41:20]
David Rosenthal
And in this case, when you read about the Hermes family fortune today, it's the Dumas family that are obviously the CEO and the artistic director that you hear about visibly. But really, I think all the sons in laws and all of their descendants become active in the business. So there's Robert Dumas, there's Jean Rene Guerin, and there's Francis Puech, and these.
- [41:40]
Ben Gilbert
Are all son in laws, and these.
- [41:42]
David Rosenthal
Are all son in laws. And those are the three family names that you still hear about to this day of the Hermes family. But back to Robert Dumas and the fourth generation. He brings this whimsy and real art into the business.
- [41:54]
Ben Gilbert
And the way Hermes describes it today when you read their annual report is they talk about their trademark humor and imaginative flair. And despite the fact that they really are tied to this old French elite, they really don't take themselves too seriously in all their products, especially the entry level ones. I mean, the Birkin is the Birkin. Yeah, they'll do some special editions here and there, but there's a weight to that product line. But there's an overall playfulness that's exuded from the brand that comes from this era of leadership.
- [42:24]
David Rosenthal
Totally. And this comes from Robert. So one of the first things he does when he joins the business is he redesigns the kind of smaller haute courois bag, the handbag line, into what he calls the sac Adepeche in 1935.
- [42:39]
Ben Gilbert
Really great name. It's got a ring to it. I feel like that's going to go be a viral hit and appear on Sex and the City.
- [42:44]
David Rosenthal
And beautiful, beautiful, elegant bag.
- [42:48]
Ben Gilbert
So seca Depeche. Hold on to that one, listeners.
- [42:52]
David Rosenthal
Yep. A little later in the 1930s, he introduces the Chene d'ancre bracelet, which is another iconic Hermes item in there. Jewelry metier.
- [43:01]
Ben Gilbert
Wait, David, I can't let you get away with that metier. Please enlighten listeners. I know Hermes sprinkles around French words in all their literature, and it just expects Americans to deal with it. If it's italicized, it's French, and you can go look up what it means yourself here on acquired. David, tell us about a metier.
- [43:19]
David Rosenthal
A metier is like someone's work, but in the craftsman sense, a metier is like a trade, it's like a craft profession. And this is What Hermes calls their divisions. I feel gross even just saying the word divisions. There are 16 of them today. And jewelry, of course, is one of the metier. Oh, I feel so much better saying metier.
- [43:42]
Ben Gilbert
I bet. Yeah, there's a levity here in the room now.
- [43:44]
David Rosenthal
So chen danke in French means chain of anchors. You know, anchor chain. And these are anchors, like boat anchors. And the way that this bracelet comes about is Robert is walking along the beach in Normandy one day and he's just inspired by the scene of these boat anchors on this foggy beach. And so he makes a little sketch in his notebook and then he plays with it and then he decides he's going to turn this into a bracelet.
- [44:10]
Ben Gilbert
Love it. And so an important thing to know here is when you're buying Hermes products, they're really not pushing the brand. There is not an iconic recognizable Hermes H or horse and carriage logo or bright color that you're supposed to identify. This is really the origin of quiet luxury where Hermes is handcrafting the highest quality product they can make. A single artisan is the person making the good. And when you receive it, you really are just aware that it's the highest quality thing made by a single person with their blood, sweat, tears, love a piece of them left inside. And it's super different than luxury today because it is just not branded. And Hermes hadn't even really developed the iconography yet that would become Hermes version of slightly louder luxury over the years. If you look at products now, the belts have an hypothetical. You know, they incorporate horse motifs into designs on their ready to wear clothing, but that really wasn't a thing yet in this era. Hermes is on the lighter side of branding their goods today. But it's still, well, they have to.
- [45:24]
David Rosenthal
Adapt to the market.
- [45:26]
Ben Gilbert
The customers want some way to let people know that they're wearing an Hermes item, even if it's lower key than other luxury brands. So Hermes builds that for them.
- [45:35]
David Rosenthal
The family talks about this a lot. The words they use is, this is not a museum. There is this artistic element to what we do, but we are not a museum. We are a business and we have clients and we are here to serve our clients. There is this push pull here.
- [45:53]
Ben Gilbert
Yes. Okay, so what year are we that the bracelet is entering the market?
- [45:57]
David Rosenthal
So that was in kind of the mid-30s. So then in 1937, Robert introduces the other key pillar of Hermes products that is less talked about today relative to the bags and the leather goods, but for many, many decades was the bigger business.
- [46:14]
Ben Gilbert
Oh, yes, I have numbers on this.
- [46:16]
David Rosenthal
So silk scarves, the Hermes classic silk scarves. And this is the embodiment of this art and whimsy that we're talking about. The silks that they use are the finest silks in the world. It takes 300 silk moth cocoons per scarf, as they will readily tell you to produce these things. But the designs on them, the artwork on them are whimsical, like we said. So the first design, the Jeu des omnibus, c'est dam blanche. These sort of white ladies at play, I guess you could translate that, is based on a wood block engraving that Robert does. I mean, this is like what an artist. This guy is like he's about to become CEO of Hermes, but he's making woodblock engravings and then making silk scarves out of them. That's the first design that they put out there. And quickly they become a huge, huge phenomenon with Hermes clients.
- [47:12]
Ben Gilbert
Yeah. And so fast forward all the way to 1988 when Excel Dumas has his very first internship with the company. This is crazy. Silk was 55% of the company's sales. Leather was only 9%. You compare that to today, it is a completely different story. Leather is 43% and silk and textiles is 7%. So there was a run. I mean, this was introduced when David.
- [47:40]
David Rosenthal
The 30s, 1937.
- [47:42]
Ben Gilbert
So 1937 through probably the 1990s, where these silk scarves were the Hermes franchise. And the reason this sort of took off is it almost became part of the French woman's uniform to have an Hermes scarf as a part of your outfit.
- [48:01]
David Rosenthal
Well, it's funny you say the French woman's uniform. Yes, that is entirely true. But the woman who really popularizes them around the globe is a British woman, specifically Queen Elizabeth.
- [48:14]
Ben Gilbert
Oh, I didn't realize that. Really?
- [48:16]
David Rosenthal
Yeah. This is so iconic. Queen Elizabeth, she starts wearing them as headscarves in the 1940s. And I mean, Queen Elizabeth, she's Queen of England for what, like 60, 70 years? And she's wearing these scarves, these, you know, whimsical, playful scarves on her head as the Queen of England.
- [48:34]
Ben Gilbert
Fascinating. So this is a good time to talk about how these silk scarves are made. And I was going to do this later when we talk about their modern day production process, but it turns out that their modern day production process is not that different than it used to be. So here's how Hermes scarves are made. Today. They are first sourcing the finest silk that they can find, which is now from their own owned farms in Brazil. So that's where the silk comes from. Only 20 new designs are created every year and they retire old designs. There's sort of a Disney vault aspect to this.
- [49:12]
David Rosenthal
They'll bring them out of the vault.
- [49:14]
Ben Gilbert
Yes. The pipeline to get a new design into the customer's hands is two years. Now you might be asking yourself, like, come on, why is this taking two years? That's a ridiculous thing. Here is the process. They screen print every single scarf by hand.
- [49:32]
David Rosenthal
Yeah. There's no digital process here. It's not like you're going to customink.com and like ordering up some Hermes scarves.
- [49:37]
Ben Gilbert
Right. Some of the design does seem like it involves computers now. Like if you watch documentaries about the craftsman at Hermes, which there's a couple of good ones we'll link to in the show notes. If you want to just sort of watch Hermes craftspeople at work. They do seem to be translating designs off of a computer, but it's not like they're hitting command P. That's not how this works. Every single color of the scarf is screen printed using its own mask or basically a stencil. So if Your scarf has 20 colors, it has at least 20 masks that they then squeegee the ink over and the precision is perfect.
- [50:16]
David Rosenthal
This is like EUV lithography.
- [50:18]
Ben Gilbert
Yes. I was looking at my wife's sort of twilly scarf, the little wrist or hair tie scarf that we got at Exxon Provence. I mean, I don't know how you do this by hand, and I don't know how you do it by hand 20 times over and over and over for every single layer. If you've ever been to an Hermes store or you own one of these, you just can't believe that this is done by hand without any of the layers being out of alignment. Because if any of them are out of alignment, you ruin the whole thing and you have to start over. And so if that's not enough, the masks are also hand etched by a craftsperson. Their entire job is to know how to translate a design into all the different color layers which they then hand etch. So the pipeline is designer engraver. That's an engraver of each mask, colorist, weaver, printer, and then someone to do the finishing.
- [51:09]
David Rosenthal
All of which are extremely hard to replicate and involve both extreme craftsmanship and extreme taste. The competitive barriers to the Hermes scarf, I think they're way higher than the bags. Honestly. Even though the bags are a bigger.
- [51:24]
Ben Gilbert
Business now and the skills are completely non transferable, this process doesn't really exist. Certainly not at scale at any Other company. Actually, I was talking to my wife about this. She brought up the idea that it's kind of like Disney Imagineers or almost like Pixar employees, where you specialize in this one crazy little piece of the production process that no other company has your same production process. And the attention to detail is so staggering that once you enter the Hermes universe, then you're sort of in that universe for the rest of your career, because that is where your trade is still practiced.
- [51:57]
David Rosenthal
And I think also as a client too, at least in scarves, like, if you entered the Hermes scarf universe, you're not buying any other scarves.
- [52:05]
Ben Gilbert
Totally. And you really like all the lore. Part of what makes Hermes Hermes at this point is their callbacks to their own history. I mean, they have 187 years of history to call upon, and they do so over and over and over again. And they remix and they name things after stores that used to exist at certain addresses. It's a universe.
- [52:27]
David Rosenthal
Yeah. I mean, I remember growing up, my mom is half British, I'm a quarter British, and to the Queen Elizabeth thing, Hermes scarves. My mom's Hermes scarves were and are among her most treasured items.
- [52:39]
Ben Gilbert
Yep.
- [52:40]
David Rosenthal
So you'll note all of this that's happening, Robert, the innovations, these new products, the art, the whimsy, he's doing all this in the 1930s. This is the Great Depression era. This tells you about Hermes and Hermes clients. They are unaffected. They keep buying. And this carries through right to this day. I mean, I don't know that there is a more recession insulated business than Hermes.
- [53:11]
Ben Gilbert
You're exactly right. 12 months now, after we did the LVMH episode, we're finally on the tail end of this sort of pandemic bubble of luxury. And we're seeing a lot of these brands take a hit. Hermes is the most insulated of all the luxury brands, where they have the sort of least cost sensitive clients.
- [53:30]
David Rosenthal
So after this, there's World War II, and famously before the war, Hermes products came in cream colored boxes. Robert was very meticulous about the packaging that his crafted items and his art would come in. And it was cream. It had to be cream. During the war, there's a shortage of packaging materials. They can't get cream. The only color that is available to them in the quantities that they need is orange. That was designed for patisseries, for bakeries.
- [54:02]
Ben Gilbert
Oh, is that what the orange ones were used for?
- [54:05]
David Rosenthal
That's why there was an excess of it, because it was used for bakeries and bakeries Weren't baking as many croissants and pain au chocolat during the war, etc. So there's all this orange packing material. Robert embraces it and the Hermes orange box is born. And this is crazy. I didn't know this till research. Hermes owns this color. You cannot get Hermes orange anywhere else. Pantone does not list it in their colors.
- [54:31]
Ben Gilbert
It's interesting you say Hermes owns this color. So you are correct that Hermes has selected a non pantone color. But what Hermes tries to do is say, well, we own orange. We can't be nailed down by a Pantone specific code. We own orange more broadly. And they've actually gone head to head with the EU and this has gone to court where it's been determined that no, you can't own orange. You can't just own all the oranges.
- [54:59]
David Rosenthal
Amazing.
- [55:00]
Ben Gilbert
And so what they've done is they've actually leaned into this where there is a classic Hermes orange, but it presents differently on each of the leathers. They have 10 different leathers or something like that that they work with. When they dye those leathers, it presents a little bit differently. And so they sort of have this, sure, there's a digital perfect representation of the color of classic orange, but there's this whole spectrum of the way that it shows up on leather. And they've sort of even further kind of winked at all of us by creating five or six other oranges. They have Hermes Feu, which is sort of the fire. They have Hermes Sanguine, which is sort of this red hot orange like lava. Or they have the Hermes Moutard, which is sort of their mustard. And each of these is a little bit of. I think it's to continue to assert that we own the whole spectrum of oranges, but it's definitely to be able to stay current, stay present, encapsulate the theme of a season. Because every year they sort of pick a theme and so they play with their oranges a little bit to evoke the whimsy that they want from this year's theme.
- [56:09]
David Rosenthal
Yeah, there's this sort of like, you know, meta level or like corporate level playfulness to this too, of we own all the oranges.
- [56:16]
Ben Gilbert
Totally. The Hermes oranges are almost like, to continue the Disney analogy. It's almost like the people that go to the park and look for the hidden mickeys. It's a way to even more deeply participate in the Hermes universe.
- [56:26]
David Rosenthal
So a few other things that Robert adds over the years. He adds the men's silks metier, AKA Ties. The legend behind that one is pretty great. Supposedly in Cannes, a number of gentlemen were refused entry to the casino and thus went to the neighboring Hermes shop next door and said, can you take some of your beautiful silk scarves and cut and tailor them into ties for us so that we can enter the casino? I'm sure that's apocryphal, but adds to the legend here.
- [56:57]
Ben Gilbert
And they are these patterns, you know, they're just as intricate as the scarves. There's less storytelling that happens in the tie. The scarfs tend to be something you could frame and put on the wall and look at in 16 different ways and the story behind it. But it's still. I mean, when you look at it, you kind of can't believe that it was hand screen printed.
- [57:16]
David Rosenthal
Totally. After World War II, Robert decides that Hermes needs a logo. So taking Inspiration from the 19th century Painting Le Duc Atelais groom a latente, which means hitched carriage, waiting groom, the famous Hermes logo is born. The logo is the callback to the carriage. It's the nobility. You know, I find it really interesting, especially at that point in time that Robert decided you could imagine like, you know, a galloping horse or something like that would be the appropriate logo.
- [57:48]
Ben Gilbert
No, it's so genius.
- [57:49]
David Rosenthal
No, it's the carriage.
- [57:51]
Ben Gilbert
Yes, it's to intentionally ground the brand in history in something that they were a part of that is only theirs, because nobody else starting today is going to have that as a part of their history. They're leaning into the thing that makes them unique, special, the almost like defensible, durable asset that they have, is that they participated in that era that has.
- [58:12]
David Rosenthal
A nostalgia about it and no longer exists. Yes, horses and the equestrian world still exists. Obviously not what it once was, but it still exists. The carriage world is gone. It's just a dream these days. And that's what Robert is so good at, this dream. The other thing we have to talk about are the window displays. You referenced this a little bit earlier. So he hires first Annie Bomel, and then she's soon joined by the legendary Leila Manchari. Specifically these two women. They come from theater set design just to design the window displays at the Faubourg. At the flagship store on the Rue Faubourg Saint Honore. I mean, there are whole museum exhibits just dedicated to these window displays. And it's not like, again, you walk by xyz, other store, even the most prestigious brands, and it's like the products are there. Here's the products, here's the brand. You're buying. Here's the lv, et cetera. These displays, it's a dream. There are probably some Hermes products in there, but it's like a museum exhibit. It's artwork.
- [59:22]
Ben Gilbert
Yes. And art is exactly the right way to put it. There is no utility to these displays. And these displays, much like any advertising that you see of Hermes today, it's not about the product, it's about how you feel. So I think this is an interesting place to revisit this idea that we talked about on the LVMH episode of Luxury versus Premium, where premium means you pay more and you get more utility out of a given product. I pay for a bigger storage space on my iPhone and I get more utility out of that. I can store more photos. Luxury means you pay more, literally, because it doesn't create more utility. It is either more pleasing to you intrinsically for the feeling, or it's an extrinsic signal where you are signalling to others that you have the means to spend on this item even though it doesn't provide more utility. It's a sort of despite rather than a because. But art, it does fall on this spectrum. Art is like luxury. Taken to its logical extreme, it has actually zero utility. A Birkin bag is a piece of art, but at least it also carries your stuff around. Luxury products are this interesting midpoint between extreme functionality, but also artwork. And so when you buy an Hermes product, you aren't just buying the product, you're buying a piece of art, a piece of their heritage, a feeling that connects you to the maker and the place it was created. You're trying to buy a piece of Hermes heritage and reputation and hoping to adopt it as a part of you, as a part of your identity. And you are seeking, whether it's conscious or not, to let other people know about this too. And you're not necessarily trying to signal it to everyone, but you do want to signal it to the right people who would appreciate it.
- [61:10]
David Rosenthal
There's this genius aspect too, to what Hermes is doing and what Robert's doing with the arts, like these window displays. The luxury strategy book talks a lot about this. When you're selling luxury items, they can't just be art. They need to have some utility to them. Yep, you will never see any of these brands, Hermes included, become art galleries. They're not selling paintings. But it's critical for luxury brands to have a connection to the arts. I think he realized this before anybody. Of like, the windows in our stores are these portals into this world of dream and Art. And you'll come in and you'll buy a scarf that you'll wear, you'll buy a bag that you'll use. Maybe you'll buy a tie, maybe you'll buy a wallet or homewares or furniture or any of the other things over time that they sell and that will have utility. But it's connected to this dream.
- [62:05]
Ben Gilbert
Yes. You're taking a piece of that dream with you, and it's almost a daily reminder of the dream that you're now participating in. The key insight is that by adopting art as a critical piece of the bundle that is your product, it enables you as the seller, to completely switch tracks to disconnect from any evaluation of value.
- [62:33]
David Rosenthal
Right. Or features.
- [62:34]
Ben Gilbert
Exactly. You're out of the feeds and speeds world. You are not being comped against. Well, this other purse is much cheaper and serves the same function. Now we have bundled in the function of the object and an unevaluatable priceless feeling. A priceless feeling. And so now we can sell the goods for whatever we want because it's impossible to know the value of that second component that we've bundled in.
- [63:03]
David Rosenthal
Yeah, totally. So speaking of dreams, we're now in the 1950s, in the post World War II era. The most amazing, unbelievable, fantastical dream of the 1950s happens to Hermes in real life, and that dream is Princess Grace Kelly. So I sort of mentioned a little while back that one of the first things that Robert did when he came into the business was redesign the handbag and christen it the sack a Depeche. Well, it becomes popular, but like, we're talking about leather goods, handbags, you know, important. But that kind of was the previous generation of the business. Now, under Robert, it's these scarves. It's the dream. It's all this stuff. And leather's part of it, but a smaller part. Well, in 1956, Princess Grace Kelly of Monaco. This is a girl from Philadelphia, an American girl who goes on to become a movie star, who then goes on to become Princess Grace of Monaco. I can't imagine a bigger dream for any woman or any person in the 1950s. She is photographed using the Saca Depeche in Life magazine on the COVID of Life magazine. So the legend is that it was on the COVID of Life magazine, but I googled a lot of 1956 covers of life magazine, and I didn't find it on the COVID Oh, interesting.
- [64:39]
Ben Gilbert
So maybe that's been sort of played up over time.
- [64:41]
David Rosenthal
This might have become part of the lore. Regardless, big picture in Life magazine. She is clutching her beloved Saka Depeche to her midsection.
- [64:52]
Ben Gilbert
And it's almost like as she's exiting a building and it almost seems like it's like a paparazzi type photo.
- [64:57]
David Rosenthal
It is, it's a paparazzi photo. And her husband, Prince Rainier of Monaco is holding the door behind her. It's like the most dreamlike thing you could imagine and it's in black and white. And the reason that she is clutching this fairly large bag, unbeknownst to the world at the time, is she's trying to hide her pregnancy from the paparazzi. She's pregnant with her first daughter. And this photo just becomes iconic. Everybody wants to be Grace Kelly. Everybody wants to have this bag. And one of the last things that Robert does right before he retires in 1977 is he officially changes the product name of the Saca de Peche to the Kelly bag. And this is the birth of, I don't even know what to call it. The Kelly and the Birkin are N's of ones, but these leather good products that transcend everything that are like so truly end of one. There's no other way to describe them.
- [65:58]
Ben Gilbert
And there is so much to say about these bags and how they're crafted and the lore around them and the supply and Demand and the Econ101. But before we get to that.
- [66:11]
David Rosenthal
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Ben Gilbert
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David Rosenthal
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Ben Gilbert
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- [67:46]
David Rosenthal
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- [68:08]
Ben Gilbert
Yep. So if you want cutting edge cybersecurity solutions backed by a 24. 7 team of experts who monitor, investigate and respond to threats with unmatched precision, head on over to huntress.com acquired or click the link in the show notes. Our huge thanks to Huntress. Okay, David, so Life magazine, the Kelly bag, it's out. So this thing must sell like hotcakes, right?
- [68:33]
David Rosenthal
Well, yes and no. Certainly this plays right into this whole dream thing that we've been talking about and burnishes Hermes's already incredible brand and image. I mean, my God, Princess Grace Kelly of Monaco is carrying this bag. Not just carrying this bag, but it's her favorite bag, the closest thing to her body. But we're still in the 50s here, so like, yes, it becomes incredibly popular. Yes, I'm pretty sure it becomes Hermes biggest selling bag. But the market isn't quite there yet in the way that it is today with the Birkins and the Kellys. The global rich isn't that big of a population. And yeah, I'm sure they're all buying Kelly's, but Robert probably knows all of these clients personally at this point. We're not anywhere near the scale that we're talking about today.
- [69:29]
Ben Gilbert
And to your point, I keep saying it's launched. It's not really launched, they just rebrand to the Kelly bag. But when the Kelly bag is formally launched, it's really expensive. It's a $900 handbag in the 50s, which today is 10 to $12,000, approximately the price of a Kelly bag today. So it comes out as this thing that is completely ridiculous and inaccessible, price wise. So the people who are buying it are the Grace Kelly's of the world. And there's not really this stratified class below that that's got this huge amount of purchasing power.
- [70:06]
David Rosenthal
Right. The number of people who could spend the equivalent of $12,000 on a bag back then was just much, much, much smaller than it is today.
- [70:15]
Ben Gilbert
Yep, exactly. So no handbags do not immediately become a huge part of the business, or I should say the dominant, whatever it is today. Six or seven times larger than silk. Part of the business right away.
- [70:28]
David Rosenthal
And in fact, actually, sadly, kind of quite the opposite happens. So as we head through the 60s and into the 1970s and the end of Robert's tenure and his generation as the head of Hermes, the company kind of starts to fall on hard times.
- [70:45]
Ben Gilbert
Which is crazy to say, right? I remember this moment in the Porsche episode. You're like, no, come on, Porsche. Skinny down the entire lineup to only making the 911 because they couldn't justify any of the other products. And the whole company was a fricking message. Hermes is not quite in those dire of straits. But I mean, they have the ingredients of Hermes that we know today. They've got the Kelly bag, they've got the orange box, they've adopted the logo.
- [71:07]
David Rosenthal
They've got the scarves.
- [71:08]
Ben Gilbert
They've got the scarves. They have these small workshops where they make everything. But it's not working yet.
- [71:16]
David Rosenthal
And it's particularly not working because like we just talked about, that market was not that big yet. And as we enter the 1970s, something really funny happens. The next generation rejects that dream. This is, you know, you and me, our parents generation, the hippies, the 1970s. This is democratization. Little girls don't want to be Grace Kelly anymore. They want to be like Stevie Nicks or, you know, something like that. And the dream of Hermes that was once so elegant and so desired by so many people but inaccessible is kind of now like, eh, you know, it's certainly still got its audience, but it's not as universal. This is when so many of the other, what we now think of as luxury brands really start to come up. And we talked about this on the LVMH episode, but they're connected to fashion. You know, it's first Dior and then it's Yves Saint Laurent. You know, this is the Mondrian dress from Yves Saint Laurent. This is, you know, the revolution. It's Gucci, it's CHANEL in the 80s when Karl Lagerfeld takes over. And what they're selling is very, very, very different than what Hermes is selling.
- [72:37]
Ben Gilbert
This is an important distinction between Hermes and all the brands you just named. They come from the world of couture and of fashion and of cutting edge, in your face, risky art. And Hermes comes from, I mean, mind you, by this point, they're already 120 years old, 130 years old. They come from the world of leather and horses and durable goods that stand the test of time. And frankly, styles that stand the test of time. It's not how creative and crazy can we be? It's. They talk about it as responsible growth. What's the smallest amount that we can move from our current compass in order to do what our clientele wants while staying true to our roots? It's a rejection of risk and an almost embrace of history. So it's super different than most other luxury brands, which, as you point out, come from fashion.
- [73:33]
David Rosenthal
Right. And those brands are getting born or reborn right there in the 1970s.
- [73:39]
Ben Gilbert
Yes. And, David, this is probably a good time to share who we chatted with in preparation from this episode and his observation about Hermes.
- [73:48]
David Rosenthal
Yes, this was super cool. And, you know, one of the things that for me and for both of us, just kind of blows our mind as acquired grows. We got to talk with Domenico de Soleil, who was CEO of Gucci during the fight with Bernard Arnault that we chronicled. Really? I think that was the best part of our LVMH episode.
- [74:07]
Ben Gilbert
Absolutely. When Domenico Desol and Tom Ford and that team rejected Bernard's takeover and managed to not become a part of lvmh. And obviously then Domenico and Tom Ford left to start Tom Ford after that.
- [74:21]
David Rosenthal
But it was super cool. When we talked to Domenico, he comes from that world. Even with the heritage of Gucci, he and Tom, it was fashion first. And in his perspective, and I think the perspective of many folks that are coming out of this 70s, 80s era of luxury, that's what's interesting. That's what's fresh.
- [74:40]
Ben Gilbert
Risk on, baby.
- [74:41]
David Rosenthal
Risk on. Yeah.
- [74:42]
Ben Gilbert
Let's figure out how to break some glass in what we're doing.
- [74:46]
David Rosenthal
Grace Kelly is not breaking any glass.
- [74:48]
Ben Gilbert
Right. That Domenico helped us understand about Hermes is they have been so protective of their brand and this unbelievable steward. They're so careful at how they've chosen to deploy the brand. They make sure that the mystique is always there. They don't violate the promise. They never cut corners. They have been above board in their brand promise and keeping that promise with customers for over 100 years. And that is a strength and a weakness. It's a strength as long as you learn how to employ it as a strength in the world of fashion. It's butting heads.
- [75:24]
David Rosenthal
Yeah. It's antithetical to fashion.
- [75:27]
Ben Gilbert
Yes, exactly.
- [75:28]
David Rosenthal
So all this culminates towards the end of the 1970s, as Robert is nearing the end of his tenure at Hermes and the end of his life. Sadly, there's A moment. This is like probably 1977 or so where they bring in consultants and the consultants recommend, like, hey, you guys should probably do what Gucci is doing, and you should probably close the atelier above the shop at the Faubourg, and you should probably outsource production and you should probably increase your number of products and your SKUs and have lower prices and have them be more accessible.
- [76:00]
Ben Gilbert
Unbelievable.
- [76:02]
David Rosenthal
That was the accepted wisdom at the time. I don't know if it was McKinsey or, you know, who was saying that.
- [76:07]
Ben Gilbert
Well, today I will tell you that Hermes has a corporate policy of no consultants. And now I know where that came from.
- [76:15]
David Rosenthal
I mean, this is enshrined in the luxury strategy as anti law of marketing number 19, do not hire consultants.
- [76:24]
Ben Gilbert
Wow. So the recommendation was to come in and destroy everything that makes you special and follow the playbook that everyone else is running.
- [76:31]
David Rosenthal
Yeah. I mean, it's working for them and it's not working for Hermes.
- [76:34]
Ben Gilbert
It's crazy.
- [76:35]
David Rosenthal
And this is when the next generation transition happens to Robert's son, Jean Louis Dumas. I kind of can't believe it with this family. Every time they come in at a generational transfer and the company and the brand is under existential threat. Even though we think of Hermes the most unassailable thing in the world right now, but finds itself at a moment where it can be assailed, there's a generational transfer happening. You would think this is like the downward spiral. This is the dropping of the baton. And the next generation always rallies.
- [77:10]
Ben Gilbert
And isn't it amazing? You would think the best person out there to brilliantly come up with both the business strategy and the creat element is probably not your direct descendant.
- [77:24]
David Rosenthal
Right. Probably not your nepotistic family member.
- [77:26]
Ben Gilbert
That's not the best search process to run. And yet it works. There's something about the. I don't think it's like this magical bloodline. I think it is a deep understanding of the tradition of the business, of exactly what type of sort of chutzpah the team has to rally and take on having the political clout to find the right people and empower them to make the change, to have a sixth sense for where you sit in the marketplace versus competitors and what people may want out of your brand next. It's all the intangibles that come from growing up in the business make you able to be the right person to transform it.
- [78:08]
David Rosenthal
I really do think that there is an element too, of the successive generations they apprentice in the atelier. It's like with their hands. I think there is an element of that. And they also apprentice, especially these days on the business side too. Axel talks all the time about dinner table conversations between his uncle Jean Louis, who we're about to talk about now, who is the fifth generation CEO of Hermes, and his mother, who was head of production at the dinner table growing up. You can't not absorb that. I think that's the flip side of nepotism, which makes it such a challenging topic on the one hand, obviously limiting the universe of talent. On the other hand, how do you replicate those dinner table conversations?
- [78:53]
Ben Gilbert
It's funny, I called it a sixth sense. I think the right way to describe it is actually a je ne sais quoi about what you absorb from those.
- [79:01]
David Rosenthal
Totally. Okay, Jean Louis, the fifth generation, the brand, you know, the consultants are saying.
- [79:08]
Ben Gilbert
Hey, go be like Gucci, shut down your shop. Where they still today make Birkin and Kelly bags by hand, one artisan at a time in the most famous address in all of luxury and fashion nutso.
- [79:21]
David Rosenthal
Well, I do have to correct you there. That is not specifically true. It's certainly spiritually true. I believe now the only products that are made in the Faubourg are saddles.
- [79:31]
Ben Gilbert
Oh, really?
- [79:32]
David Rosenthal
I think everything else is made in pentant, which is a 20 minute drive away. It's not like they outsourced production anyway. We'll get to that.
- [79:41]
Ben Gilbert
Great.
- [79:41]
David Rosenthal
Okay, Jean Louis comes in.
- [79:43]
Ben Gilbert
What year is this?
- [79:44]
David Rosenthal
1978.
- [79:45]
Ben Gilbert
Great.
- [79:46]
David Rosenthal
He, like all the generations before and after him, he's come up, he's apprenticed in the business, he knows how to do the saddle stitch. It's in his hands, it's in his soul.
- [79:54]
Ben Gilbert
We've talked too many times without actually talking about the saddle stitch. It's time to actually talk about saddle stitching. So listeners, you might be wondering, why do they keep saying this? What does it mean? Saddle stitching is an amazing technique that Hermes uses for every single bag that they make. It can either. I can't tell if this true or not. It can either only be done by hand or until recently, only be done by hand. But it is a far more effective, high quality and durable form of stitching relative to the typical machine sewn stitching that you're thinking about right now, where the same thread goes through one needle and it goes up, down, up, down, up, down, up, down.
- [80:35]
David Rosenthal
It's also incredibly beautiful. It's got a slight diagonal valence to it as opposed to the normal straight line stitching.
- [80:44]
Ben Gilbert
Yes. So how does it work? So there's something called a horse that goes between your legs, and the horse holds two pieces of leather together. The whole point of the saddle stitch is to sew two pieces of leather together. So you first punch little holes in the leather using likely a pricking iron as your method of doing this. And if you're good, you don't prick all the way through. You just poke a little hole with your pricking iron or awl partway through. So that way you don't poke too big of a hole. You only end up pushing exactly a hole the size of your needle and thread through. And you can always tell if you're looking at something and it's stitched and there's these big freaking holes, and then there's this thin thread that's moving through, and there's space between the thread and the leather. You know what kind of craftsmanship went into that? If it almost looks like the stitch vanishes into the leather and you're like, is there even a hole there? It's hard to even see how this was done. That is a saddle stitch. So you take your pricking iron or your awl, you poke the hole or the partial hole. So there's a lot of muscle memory involved in this. You then pass one needle through, going, call it from the right to the left side, and then you have a.
- [82:01]
David Rosenthal
Second needle on the other end of the thread. So one thread, two needles.
- [82:04]
Ben Gilbert
Yes. That you pass through the other direction. And so what you've done as you pull both of them through is created this incredibly strong sort of interlocking mechanism.
- [82:17]
David Rosenthal
There's tensile force going in both directions.
- [82:20]
Ben Gilbert
Yes. If it gets ripped, you're not at risk of the whole thing pulling out and your saddle or your bag falling apart. You just lose that one stitch, and that one stitch can be repaired. And so the only way for you to unravel something that is saddle stitched together is to individually go through and cut every single stitch.
- [82:42]
David Rosenthal
Yeah. Compare that to most products that you own.
- [82:44]
Ben Gilbert
Yes. This literally provides high utility if you're in an equestrian jumping competition or if your bag needs to hold something that really needs a lot of protection and can't fall through. It's almost like it started with real necessary utility because something life threatening could happen. Now, it's just massively overkill for everything that is saddle stitch. But you appreciate the craft behind it. There are very few people who are in a life or death circumstance that are dependent on their stitch holding true.
- [83:15]
David Rosenthal
I'm going to channel my inner Pierre Alexei here. The current Artistic director of Hermes. I think it still has relevance. If you want your object to be permanent, if you want an object that you own to represent something wholly different and antithetical to, let's call it the amazonification or the Walmartification of items these days, you want it to be made like this.
- [83:45]
Ben Gilbert
Yep. And something that made this really special for hundreds of years, if not still is that it had to be done by hand. So if you want something of this quality, this gets this interesting idea. Is handmade stuff better? Well, not necessarily. And Excel even says this in an interview. He says in 2019, today hand stitching is the highest quality. So machines are a non negotiable. When the quality of a machine stitching gets better than hand stitching, we will do it. We are not a museum. And David, this is where you're getting your we are not a museum quote from. But it really gets to this element of why are handcrafted goods desirable? Well, in this case, it literally creates something higher quality, more durable, certainly more aesthetically pleasing, since when done well, you can't see that hole in between the thread and the leather. It's a pretty special process. And for everyone who's sort of wondering, ok, but what does the rest of creating one of these bags look like? Start to finish a Kelly bag. And we'll talk about Birkin in a little bit. But similar story is made by one craftsman. So one Craftsman starts with 36 unique pieces of high quality leather, as much.
- [84:55]
David Rosenthal
As possible from the same animal and matched exactly.
- [84:59]
Ben Gilbert
Yes, exactly. And so it's not sourced from all these different places all over the world. And one person is responsible for the bottoms and someone else is responsible for the straps. It is one craftsman that takes these 36 cuts and stitches it together. It takes 20 hours and this is over the course of a few weeks to create this. So one person assembling it all, putting the fasteners on it, stitching it, this takes two years to learn how to do before you are allowed to create one for the first time.
- [85:32]
David Rosenthal
Oh, I think it's even more than that. It's two years of training to become a Hermes artisan, period. I don't think you're allowed to touch the Birkins and the Kellys when you start day one on the job. I believe you need at least another three years, if not more before you're allowed to touch the Birkins and the Kellys.
- [85:51]
Ben Gilbert
Fascinating. So this knowledge is passed from generation to generation and Hermes refers to this as the savoir faire or the know how or the expertise about the materials and the exceptional technique that's transmitted from one craftsperson to another.
- [86:08]
David Rosenthal
Ooh, hang on to this. I have a lot more to say when we get to the current generation about this.
- [86:12]
Ben Gilbert
Do you know, David, and I'll stop after this, but I thought this was pretty funny. Have you read the annual report, the 600 page document that they release once a year?
- [86:22]
David Rosenthal
I have to admit, I have not read it cover to cover.
- [86:25]
Ben Gilbert
You did more of the history and I did more of this.
- [86:27]
David Rosenthal
But I've read large sections of it.
- [86:29]
Ben Gilbert
I was reading it. I found myself laughing at how often savoir faire was used in the prose. Every other paragraph, they just sort of throw in at savoir faire 133 times. Savoir faire is referenced in the Hermes registration document.
- [86:45]
David Rosenthal
Partially in their defense, savoir faire literally translates as know how. It's kind of like a proper term in French.
- [86:52]
Ben Gilbert
Yeah, fair. But I think the takeaway is real, that this knowledge is transmitted from one generation to the other in the very same way that it was from father to son all the way back at the founding of the company. And that is how they scale production. And we'll put a pin in that and come back to it later.
- [87:10]
David Rosenthal
Yep. That's the true genius of the current generation, is they have scaled that to 7,000 people.
- [87:16]
Ben Gilbert
It's unbelievable.
- [87:17]
David Rosenthal
Unbelievable. I was going to talk about this towards the end of the Jean Louis era, but I want to say it now because I think it's perfect. I got to talk to a woman named Beatrice Amblard who lives here in San Francisco. This is amazing. She was an artisan at Hermes in Paris. She was hired right at the start of Jean Louise tenure. She worked in the atelier at the Faubourg. When Jean Louis son, Pierre Alexis, current artistic director, came to train after school as a teenager, he sat next to Beatrice, and I got to chat with her about this.
- [87:51]
Ben Gilbert
She runs April in Paris in San Francisco.
- [87:53]
David Rosenthal
So she moved to San Francisco when Hermes opened the San Francisco store here. And I asked her, I was like, oh, you transitioned to the front of the house? And she was like, no, no, no. I was the person for the west coast who repaired everything for North American west coast clients. There was one person in New York and I was in San Francisco, and we came from the Faubourg. And a few of these people go around the world. And one of the things about Hermes and actually Jean Louis, who would say that this like the true essence of luxury, and the true essence of Hermes is everything they make can be repaired. And so if you buy an item from Hermes, no matter what it is, they will repair it.
- [88:28]
Ben Gilbert
Yeah, I think that's true.
- [88:29]
David Rosenthal
Even if it's a hundred years old, you bring it in, they will repair it.
- [88:31]
Ben Gilbert
Yeah, that's true. They have 15, this is flashing forward to today, 15 dedicated repair shops worldwide, and they mend 120,000 pieces a year.
- [88:42]
David Rosenthal
Wow. Amazing.
- [88:43]
Ben Gilbert
Yeah.
- [88:44]
David Rosenthal
So I asked Beatrice, when I was talking to her, what was this like, you know, what was special? And she said, look, you have to understand, when I was training as a young person and decided I wanted to go into this field, Hermes was absolutely the greatest company that anyone could hope to work for. It wasn't even close. There was no comparison what years this was in the late 80s, early 90s. She said, Look, I decided that either I was going to get a job at Hermes or I was going to leave this industry and go do something else. It is in that high of esteem. And I said, oh, well, why? And she said, look, by the time we're at this era, nobody else was left that did this. Everything we talked about in the 1970s, all these other brands, they all went in this complete other direction. The consultants were telling Hermes to go in that direction too. But they're the last one standing that did all of this by hand in the tradition handed down through hundreds of years. If that's important to you, there's no place else. You can't ply your trade doing that anywhere else. I asked her then I was like, okay, well, as for the products and to the clients, to the customers, why does that make a difference? And what she said is what you'll hear the family talk about all the time. She said, look, it's about soul. This product has a soul. Somebody made that thing with their bare hands. That means something. And there's nobody else, certainly at Hermes's scale, that does that. She ended up leaving Hermes and starting her own boutique here in San Francisco, April in Paris. And she actually also runs her own leather school here in San Francisco, too. To train artisans, you can get custom stuff, small boutique stuff. Beatrice is a worldwide master. You can get that from her. But the idea that a $200 billion company at scale would be doing this, there's nobody else.
- [90:41]
Ben Gilbert
Yeah, it's nuts. It's completely insane. And the people who don't work for Hermes, your options are in the dozens. If you go as a customer and you want something like a saddle stitched bag or wallet or something like Hermes would make in that traditional sort of Pre War, early 20th century fashion. There aren't that many other artisans out there. Hermes employs 7,000 of them. I don't know how many other ones there are. 1,000, 2,000. And it's not like Hermes has cornered the market. They're hiring more people and training them as fast as they can. They're trying to preserve this market that otherwise would have entirely been zero. It's a pretty crazy thing that they've managed to scale even to the scale that they're at.
- [91:27]
David Rosenthal
The other thing Beatrice said to bring it back to Jean Louis. He is a legend. He really cared. The idea that he would follow the consultants, it was just so completely anathema to him. He's the artistic director and CEO of the company. She ran into him in the elevator in the Faubourg right after she started. He looks at her and said, you're Beatrice Amblard. Welcome to Hermes. She knew everybody by name. And then when she ended up leaving in 1997 to open her own store, he called her and he was like, genuinely shocked. Nobody ever leaves, like, what are you going to do? And she explained that, well, she wanted to be entrepreneurial, start her own thing. And then shortly after, the San Francisco Chronicle did an article about her. He found the article, read it in France, cut it out, mailed it to her with a note of congratulations, handwritten.
- [92:22]
Ben Gilbert
And it doesn't cost them anything to do that because, I mean, on the one hand you just say they're being a kind person and gave so much to your house for so long.
- [92:30]
David Rosenthal
On the other hand, this is the CEO of Hermes, right?
- [92:32]
Ben Gilbert
And I think it's important to realize these individual craftsmen are entirely non competitive with Hermes. It's a completely different value proposition to the customer. When you're buying Hermes today, you don't start from a place of, you know, I think I want some of the very best sewn leather goods I can find. Let me evaluate the whole landscape of people who could deliver that for me, and then I'll decide which maker to go with either. A, you're doing that and you are a person who knows about a bunch of individual leather craftsmen, which is rare, or B, you actually just want to buy something from Hermes and there's not any evaluation going on. And maybe there is between big luxury brands, but probably not. The value proposition is not, you have a need for a leather good and you can bake off all the competitors. It's you either want something from Hermes or you're a different Type of customer.
- [93:30]
David Rosenthal
Yep. Okay, so Jean Louis story. How did he turn this thing around and save Hermes from the consultants? Well, like we said, he'd apprentice just like every other generation. But unlike any other generation, or I guess, maybe sort of like Emile back in the day going and meeting Henry Ford, he comes to America. And specifically, he came to America to follow his wife, Rena, who became a world famous architect. Rena was interning with I.M. pei in New York.
- [94:02]
Ben Gilbert
Really?
- [94:02]
David Rosenthal
And Rena Dumas would go on to design all the stores that they opened up all around the world and design the atelier in Pantene when they expand production.
- [94:13]
Ben Gilbert
IM Pei, famous from a number of things, including previous acquired episode with Michael Ovitz, designed the CAA building in Los Angeles, designed the Louvre pyramid.
- [94:25]
David Rosenthal
I was going to say, think about the connections here in France and Paris.
- [94:28]
Ben Gilbert
Yeah. Which, by the way, everyone in Paris thought the pyramid was hideously ugly when it first relative to this 1700s building around it. And over time, now it's become this iconic triangle pyramid. Beautiful signature of the city.
- [94:42]
David Rosenthal
Yeah. Jean Louis, when he's in America, works for Bloomingdales. Bloomingdales, My God, of all places.
- [94:50]
Ben Gilbert
Well, there was a heyday of department stores. In fact, if you go way back, do you know how Hermes entered the United States?
- [94:58]
David Rosenthal
In partnership with neiman Marcus.
- [95:00]
Ben Gilbert
Yes. 1930s. Good. Wow. So you did find that.
- [95:04]
David Rosenthal
It's hard to stub me. Yeah, but you do it sometimes.
- [95:08]
Ben Gilbert
Okay, so Bloomingdales.
- [95:10]
David Rosenthal
So from that experience, being in America, being in this much more mainstream audience, he comes to understand what these other brands are doing, what the consultants are suggesting. But he takes that back. And what he says, look, the way forward is we are going to figure out how to make Hermes relevant. We're not going to throw away everything we've done. We're going to keep our tradition, we're going to keep our craftsmanship, we're going to keep our market position. But our clients want to be like these young people, particularly these young women. The moms don't want to be like their moms. They want to be like their daughters.
- [95:51]
Ben Gilbert
And it's a tall order to figure out how to revitalize, rejuvenate, make Hermes relevant for this new era with this new audience with the same products. This is key, right? Keeping the same products and not violating everything that Hermes currently stands for. We talked about this on lvmh, the not yout Mother's Tiffany campaign. It's almost like, how do you not insult your current customer base by adapting for the Next one.
- [96:19]
David Rosenthal
This is such a tight needle to thread, to use a pun here. They need to run the not yout Mother's Tiffany campaign without actually running the not yout Mother's Tiffany campaign.
- [96:29]
Ben Gilbert
Right.
- [96:30]
David Rosenthal
So, well, the first thing in 1979, the first year he takes over, he launches a new ad campaign in Paris with young Parisian women wearing the iconic Hermes scarves. Which, remember, like, that's the main part of the business at this point in time. But it's, you know, all these old people who want to be like Queen Elizabeth wearing the scarves. Young women wearing the scarves, not how you would typically wear a scarf, different parts all over their body. It's the Hermes version of not yout Mother's Tiffany. And most importantly, they're wearing these scarves with jeans. Grace Kelly would never wear jeans. I don't know if she ever did wear jeans, but she sure as hell wouldn't be photographed wearing jeans.
- [97:14]
Ben Gilbert
Fascinating.
- [97:15]
David Rosenthal
These ads are the scarves that Queen Elizabeth is wearing with jeans. And in fun, interesting ways, playful ways to wear the scarves. But they're still the same scarves.
- [97:30]
Ben Gilbert
Fascinating.
- [97:31]
David Rosenthal
And this is like a revolution. I mean, the rest of the family is really upset about it, but he pushes it through. And you can still see echoes of this to this day. Like a big part of Hermes fashion and probably the biggest part of, I think the scarf fashion these days is tying the scarves on your bags, on your accessories, on various parts of your body, you know, not wearing them like your mother wore them.
- [97:56]
Ben Gilbert
And this is how they've adapted for the digital era, too. They've come out with like five or six different apps to try to figure out, like, how do we engage people in the mobile era? And one of the ideas that they had was this app that basically gives you suggestions and all the different ways you could tie a scarf.
- [98:12]
David Rosenthal
Ah, that's super cool.
- [98:14]
Ben Gilbert
Yeah.
- [98:15]
David Rosenthal
But I think this is brilliant because this is allowing Hermes to exist and be relevant alongside fashion without actually getting into fashion themselves. The scarves and then ultimately the bags can be the accessories to your jeans, to your fashion, to your. You know, we're past the era of bell bottoms, but like the spiritual equivalent of bell bottoms here. And they can say something about you, but they're still the same products that they always were.
- [98:48]
Ben Gilbert
And it's pretty interesting. If you can figure out how to coexist alongside cool, fashionable, new, cutting edge things, then you sort of deserve a place in someone's lineup where they say, well, I both am embracing a current trend, but I'm Also respectful of the past. I also found my own way to weave this high class, high status thing into the rest of my image. And I think that especially at their price points, they're serving someone who wants to raise one hand and say I look cool and raise the other hand and say I'm classic. Well, I'm classic and I have the money to spend on things that are very price anchored. Everyone knows what a Kelly bag costs and like it's gone up a little bit. But Hermes has very high price point products that stay approximately that price forever.
- [99:41]
David Rosenthal
Yep. So Jean Louis has a quote about this which is very French. He says, the young customers came to us more than we went to them. People saw again, but with a new eye. The beauty of materials worked by fine hands. They came, we followed. That's the most French way of ever saying this. But this is what we're talking about. He got their client base and often the young people's parents who wanted to be more like the young people here to see with new eyes the same things.
- [100:12]
Ben Gilbert
Yep.
- [100:13]
David Rosenthal
Total genius.
- [100:14]
Ben Gilbert
Yep, for sure. Okay, so that's brilliant.
- [100:17]
David Rosenthal
So that's on the product side and kind of doing this jujitsu to reposition the product center. The other thing that he did, which was huge, was he had the very same realization that Henri Racamier had at Louis Vuitton. And we foreshadowed this earlier. What Raquemier figured out at Louis vuitton in the 1970s was the market. Now the global wealthy, the global elite, the global rich is so much bigger now than it was in the 1950s. The number of people with wealth on the order of Grace Kelly and Prince Rainier of Monaco or, you know, even a few rungs below them. But the number of people who can be in our client base around the world is just so, so, so much larger than it used to be.
- [101:06]
Ben Gilbert
And it's happening in this country by country way, which is perfect for a brand like this. Like they can go to America and then they will observe the rise of Japan and then they'll go to Japan in the 90s and 2000s. Then they'll observe the rising upper middle class of China. So they'll go there in present day. They can really position themselves as sort of the second mover, where they can sort of watch, see when this wealth class exists somewhere and then set up shop and say, hey, France's whole heritage is now available to you to adopt as part of your Persona.
- [101:40]
David Rosenthal
Yeah. And this is super key and I think to this day is a huge part of the defensibility of Hermes and Louis Vuitton, too. No matter where you live in the world and no matter what your cultural background is, when you attain this status, there's still something about this connection to French and European nobility that you cannot buy from a brand from any other country.
- [102:04]
Ben Gilbert
It's super fascinating that French nobility, fashion and heritage is universally revered everywhere. And Italian is too. Like, I would say European generally, but French specifically has an ability to do this in any geography as it develops.
- [102:23]
David Rosenthal
Yep. So all of this stew comes together in 1984 with Jean Louis greatest achievement. And unlike the Kelly bag, which, you know, again, was an accident, like, yes, it was his father, Robert, and incredible genius. And then repositioning and renaming the bag the Kelly Bag, Jean Louis, this is literally whole cloth conceived of by him on a flight from Paris to London in the early 1980s, where he's seated next to the French and British actress.
- [102:56]
Ben Gilbert
Jane Birkin, the it girl of the time.
- [103:00]
David Rosenthal
Now, here's what's really interesting. I bet 95 plus percent of people listening to this right now have no idea who Jane Birkin was.
- [103:10]
Ben Gilbert
Which is so funny, because in interviews with her, as the Birkin bag was blowing up, or at least getting a lot of attention, an interviewer joked that she was going to be more famous for the bag than for her acting career and her modeling and all that. And she sort of laughed and said, wouldn't that be something?
- [103:26]
David Rosenthal
Yeah, right.
- [103:27]
Ben Gilbert
But totally. 95%, if not more of the listeners to this podcast will have no idea who Jane Birkin is before this episode.
- [103:35]
David Rosenthal
But you definitely know the Birkin bag.
- [103:36]
Ben Gilbert
Yep. Or at least you know, of the Birkin bag. I'd bet seven out of 10, maybe eight out of 10 people listening to this couldn't spot it. But if you say a Birkin bag, you sort of know that it's like a unattainably expensive, high status, hard to get handbag.
- [103:52]
David Rosenthal
Well, certainly if you follow the Hermes stock, you know what a Birken bag is, even if you probably couldn't pick it out of a crowd.
- [103:59]
Ben Gilbert
Yes.
- [104:00]
David Rosenthal
But anyway, this is the culmination of everything we've been talking about. Who is Jane Birkin? She was British. She was born in England, but she moved to France and became a French citizen, and she became like a French cultural icon. I mean, again, the tie to France is so important here too. We didn't talk about this with Grace Kelly either. Grace Kelly was an American from Philadelphia, but she became the Princess of Monaco. These two women, these two Personas that are embodied in Hermes. Hermes doesn't do celebrity advertising. I think it's so important that even though neither of them were French, they became so deeply European in what they represented.
- [104:39]
Ben Gilbert
Yeah, that's a great way to put it.
- [104:41]
David Rosenthal
And for Jane Birkin, she was this next generation. She was an actress, both in film and theater. She was a singer. She was incredibly beautiful. She was the it girl, but in a very, very different way than Grace Kelly. She wore jeans, and in particular, she had a trademark accessory fitting with the, you know, 1970s.
- [105:05]
Ben Gilbert
Oh, the basket.
- [105:06]
David Rosenthal
Yep. Counterculture, you know, back to the land type ethos. She carried a wicker basket with her everywhere that she went, which has an.
- [105:16]
Ben Gilbert
Ethos to it, but doesn't lend itself well to overhead bins.
- [105:19]
David Rosenthal
No, it does not. So as the two of them, Jean Louis, CEO and artistic director of Hermes, and Jane Birkin, French cultural icon, are boarding this flight to London. They're seated next to each other, and Jane is struggling to get her fixed handle wicker basket up into the overhead compartment. And at this point, Jane had become a mother and had kids, and she had, you know, kid stuff in her basket.
- [105:47]
Ben Gilbert
She had baby bottles that were, like, spilling out.
- [105:49]
David Rosenthal
Totally. I mean, I carry a lot of kids stuff these days. Like, you need a lot of stuff with the kids.
- [105:54]
Ben Gilbert
By the way, how crazy is it that the Kelly bag was to hide a pregnancy and the Birkin bag was designed to carry baby bottles and baby forward?
- [106:02]
David Rosenthal
Yes. And again, on the one hand, this is sort of esoteric Birkin lore. On the other hand, I think this is super important to Jean Louis. Like, imagine the older generation, Hermes embracing this.
- [106:13]
Ben Gilbert
You know what we should do? We should come out with a $15,000 diaper bag.
- [106:17]
David Rosenthal
Right, right, right. So they sit down, they start talking on the flight, and Jean Louis introduces himself, and it's like, I notice you're strugg wicker basket there, Ms. Perkin.
- [106:28]
Ben Gilbert
And she doesn't know who he is at first. It's the funniest thing.
- [106:30]
David Rosenthal
Right, right, right.
- [106:31]
Ben Gilbert
And she says something like, well, yeah, wouldn't that be great if there was a bigger bag that actually closed? And, you know, But Hermes doesn't make that. Or she made some comment. And he goes, I am Hermes.
- [106:42]
David Rosenthal
Yeah. The legend now, who knows if this is true, is that she said, well, when Hermes makes a diaper bag, you know, I'll. I'll use that one.
- [106:49]
Ben Gilbert
And specifically for her, she sort of fancies herself someone that has a lot of stuff and wants to bring all my stuff with me, so I just need a Big bag and it needs to close easily. Fashion be damned. I just need a huge freaking tote.
- [107:02]
David Rosenthal
Yep. And as they get to talking, they're talking about the Kelly and she's like, look, you know, Kelly's the Kelly, right? But I can't wear it over my shoulder. So Jean Louis starts sketching out designs on the plane and voila, the Birkin is born. Larger than the Kelly, but smaller than the old original Hermes bag. It's a tote bag and it has two handles, unlike the Kelly, which has one handle. And so with two handles, you can put it over your shoulder. You know, it's this sort of, it feels weird to say, more casual version of the Kelly, given that it's, you know, the Birkin bag, but it is, it's the more casual, modern version of the Kelly.
- [107:37]
Ben Gilbert
And the Kelly has cleaner lines and this sort of beautiful, almost mid century trapezoidal shape, whereas the Birkin, everything about it kind of screams function.
- [107:47]
David Rosenthal
So here's what's interesting. They release the product in 1984 and it is not an immediate success. I think part of this is that the Hermes kind of brand transformation, modernization was probably still underway. When you watch interviews with particularly Pierre Alexei, he'll talk about this. He's like, any other company would have given up on this product. But it takes about five years before the Birkin bag becomes the Birkin bag. And the time is right. We're in the 1980s, the go go years. This is the years that are shaping Bernard Arnault here.
- [108:23]
Ben Gilbert
There's tons of American wealth being created. People are looking to be a little bit flashier. Now, granted, Hermes is the least flashy of the luxury labels you could adopt, but people know the brand.
- [108:35]
David Rosenthal
Yeah. I mean, it takes five years for it to become any modicum of success firm is. And then like a lot of these things, this just kind of slow burn starts that grows and grows and grows and grows.
- [108:49]
Ben Gilbert
And there's a real lore around it that it's hard to get. And it's just like with a kid, if you tell them they can't have something, they want it a lot more. And if you tell your very fancy clientele that you would love to be able to get something for them, but there's just not enough and we don't have it today. But, gosh, if you are a great customer of ours and we maintain a relationship with you, let me write down your number. I feel like we may just have something for you soon. Could be a few years, but I'll reach out as soon as we have something, you're an important customer of ours. And if you want to show us you're an even more important customer, please do, by all means. And I'll see what I can do.
- [109:30]
David Rosenthal
Ben, you would make a great Hermes essay.
- [109:33]
Ben Gilbert
I don't think so. I actually had a wonderful Hermes associate that I worked with in the Exxon Provence store. And it was crazy. I mean, we bought basically the most entry level Hermes products that you can buy in one of their stores. I think perfumes are sold in department stores. And makeup, there's some more accessible things. But in terms of the durable goods, started at the bottom, had a delightful time and decided to buy something. And I think we spent an hour and a half and I had the most wonderful service and built a almost friendship with the associate who helped us through the whole process, spending as much time with me as they spent with someone coming in to pick up their Birkin bag. It was a crazy. Probably the best customer service I've ever received in any retail establishment anywhere. So, no, I don't think I would be a good Hermes sales associate relative to where the bar has been set.
- [110:30]
David Rosenthal
It's funny, my experience was different. Of course, I had to go do some research for this episode.
- [110:35]
Ben Gilbert
You drove down to the Palo Alto store, right?
- [110:37]
David Rosenthal
Yes, I went to the Palo Alto store. I had to be down there anyway for some meetings. And the sales associate who ultimately helped me is equally wonderful woman. Had a great experience. Her name is Susan. I'm going back to see her tomorrow as Valentine's Day and Jenny's birthday is coming up. But I walked in the store with the intention of buying what I ultimately did buy, which is Apple Watch Band. I thought that's what that was, an Apple Watch Band. Yep. And, well, we'll get to the Apple partnership in a little bit. But I was passed around between a few different people in the store until ultimately Susan helped me out. And she was great. And I think she actually might be a higher level sa. But when I expressed that I was there to buy an Apple Watch Band.
- [111:22]
Ben Gilbert
Oh, interesting.
- [111:24]
David Rosenthal
Yeah. I don't know if that was just the day in the store or if that was part of the policy.
- [111:28]
Ben Gilbert
I have to imagine it's a little bit different experience in the French countryside.
- [111:32]
David Rosenthal
As compared to the Stanford Shopping Center.
- [111:34]
Ben Gilbert
Yeah, I could see that. But back to the Birkin bag. By 2001, it becomes so widely known that there is a waiting list, a sort of almost secret, shrouded in mystery waiting list to get one of these things that it is the main storyline of a Sex and the City episode. And Samantha figures out that there's a way to jump the. I think they use the number five, five year waitlist.
- [112:02]
David Rosenthal
Well, the scene where she walks in to try and buy it is just iconic where the sales associate is, you know, responding to her like it's $12,000 or whatever. Like, oh, I know there's a waiting list, of course.
- [112:14]
Ben Gilbert
And she name drops one of her clients, her celebrity clients, in order to say it's actually for them to try to move up the wait list. Calamity ensues. They actually figure out that it's for her, not the client. I actually haven't watched the episode, but this is a cultural touchstone for the Birkin. Going from something that is sort of whispered about in handbag circles and well known by the wealthy elite to something that is now a very well known phenomenon, which is good luck ever getting a Birkin bag. And the crazy stories about the most expensive one ever selling for $500,000 on the secondary market and Victoria Beckham having a collection of over 100. And it's crazy. It has become the Patek Philippe Nautilus of handbags. And people look at it almost as.
- [113:03]
David Rosenthal
An investment, a way of summing up. What you're saying is the hard thing about buying a Birkin is not coming.
- [113:10]
Ben Gilbert
Up with the money, which is crazy. It's starting at $12,000 handbag. And what you're saying is that's actually not the constraint.
- [113:17]
David Rosenthal
Yep. But also what you're talking about, with echoes of our Nike episode here, the minute that you are in possession of a Birkin bag, you could immediately sell it for a lot more than what you paid for it.
- [113:29]
Ben Gilbert
And your Hermes SA will not be very happy that you did that. Because the point of buying one is to own one and use one and appreciate the craft and the work and the beauty that went into this product. And Hermes is not trying to sell it to people that are going to flip it. They're trying to sell it to valued customers who will be people who appreciate the Hermes dream for the rest of their life.
- [113:53]
David Rosenthal
Yeah. That would be the last Birkin bag that you ever buy. Every bag, I think maybe even every item.
- [113:59]
Ben Gilbert
Yes.
- [114:00]
David Rosenthal
That Hermes makes has what Hermes calls a blind stamp on it. And this is a series of symbols and numbers.
- [114:07]
Ben Gilbert
There's one on my belt right now.
- [114:09]
David Rosenthal
Yep. There's some on my watch band right now that are stamped into the leather that uniquely identify that item, the year it was made, and the craftsperson who.
- [114:21]
Ben Gilbert
Made it and there are some very cool stories of people who are transitioning from a craftsperson who makes goods to repairs them later in their career and who receive an item back for repair where they were the original creator of that handbag. And that is the coolest, craziest, full circle Hermes moment for any Hermes craftsperson To see this thing that I made, that I really wanted to be durable and stand up in the world, how did it actually perform? And to get it back 10, 20 years later and see it has got to be crazy cool. Yes. So today, everything we're talking about here, the Birkin bag, the kelly bag, these 10 to $100,000 retail handbags, depending on the type of exotic leather and everything, and the scarcity, are referred to as a category of Veblen goods. And so this is essentially the opposite of everything you learned in Econ 101.
- [115:18]
David Rosenthal
As is everything about this company.
- [115:20]
Ben Gilbert
Yes. So normally price is where supply meets demand. So as the price of a good increases, demand for it would go down. A Veblen good is the opposite. As price increases, people actually want it more. So price ends up being a signal that the item is desirable and thus it stimulates demand. Now, interestingly, David, this is exactly what you were talking about before. Birkin bags sell below the market clearing price. Yes, that is another defiance of microeconomics. Normally things should be priced exactly at the intersection of supply meeting demand.
- [115:58]
David Rosenthal
I was just laughing as you were talking about Velbin goods there, and I whipped out my copy of the Luxury strategy and flipped to anti law of marketing number 13, raise your prices as time goes on in order to increase demand.
- [116:12]
Ben Gilbert
So interesting. But one way to look at this is, oh, it's lost revenue. Their prices aren't high enough because they can only make so many of them and they're selling them below the price people are willing to pay. So there's money left on the table. But another way to look at it is that it's an investment in the brand. So there's a very good substack writer 310 value that we'll link to in the show notes, who observed the supply demand mismatch creates scarcity in these two bags. And that scarcity likely creates more demand for the bags, elevates the overall status of Hermes and creates demand for Hermes other products as customers buy Hermes other goods to build a relationship with the company in hopes of being allocated a bag at the below market retail price.
- [116:59]
David Rosenthal
Yes, this is the same dynamic with, I think, a very different set of motivations. As we talked about on the Nike episode, I very firmly believe that Nike could sell many of their shoes for 2, 3, 4, 5 times the price that they do. And they'll show up on Goat or stockx all the time, regularly at higher prices than Nike releases them for. I believe that the reason that they do this is to maintain goodwill with their customer base and maintain Nike's image as a brand that is accessible to everyone. Hermes is doing the opposite. They want this to happen in order to maintain the image of Hermes and specifically the Birkins and the Kellys, as a brand and a product that is not accessible to everyone.
- [117:58]
Ben Gilbert
Yes. And it's not as simple as, well, they just keep raising the prices to make people keep wanting them more. You read that in the Luxury strategy and many luxury brands do that. In fact, Chanel has done it at record amounts the last couple years with the. I think it's called the Chanel Classic Flap Medium or something like that. But that's had this crazy appreciation over the last few years where Chanel is just raising the price. Hermes doesn't do that.
- [118:25]
David Rosenthal
We'll talk about this more later in the episode. But by my very back of the envelope calculations, they are raising their prices, on average, across the entire line, 7% per year for the last 10 years.
- [118:39]
Ben Gilbert
So it's like 5% above 4 or 5% above inflation.
- [118:43]
David Rosenthal
Yeah. Which is more. But not an egregious amount.
- [118:45]
Ben Gilbert
Right. There was a study that found that the Birkin 30, which is one of the sizes in Togo leather, didn't even equal the rate of inflation in the U.S. i'm trying to figure out what the motivation here is, because it's a tremendous restraint. There's no cash grab happening. And maybe it's because what bad things would happen to Hermes if they decided, you know What, Birkins are 20 now, not 12.
- [119:12]
David Rosenthal
Right. They're already viewed as the most expensive handbags in the world. So what harm done to go from 12 to 20?
- [119:21]
Ben Gilbert
Right. And they sell a lot of them. So, like, that actually would be a lot of profit dollars.
- [119:27]
David Rosenthal
Right. And for somebody who's going to spend $12,000 on a handbag, are that many more of those people going to be price sensitive at that swing from 12 to 20? Like, probably not.
- [119:39]
Ben Gilbert
Right. The Wall Street Journal estimated in 2020 that there's about 120,000 of the combined Birkin and Kelly created each year. So 120,000 bags a year. I mean, if you decide that you want to make another 8,000 of pure profit on each bag, that is tempting. And I think it actually says a lot about Hermes obsession with conservatism that they don't meaningfully increase the price like the Kelly is not far above its original 1950s price, inflation adjusted. I think the Birkin bag, the retail price was around $2,000 when it launched in 1984. So call it maybe $6,000 inflation adjusted. So you're looking at maybe twice the price that it launched at on an inflation adjusted basis. So I guess the point I'm making here is I think we should keep in the back of our mind the rest of the episode this question of why doesn't Hermes raise the prices? They're already getting the benefit either way of the sort of trickle down of people participating in the Hermes ecosystem to hopefully get the call one day. So why not make it even more expensive when you do get the call?
- [120:50]
David Rosenthal
Interesting. All right, let's come back to that later in the episode.
- [120:52]
Ben Gilbert
Yeah. Okay. So 1984 Birkin release doesn't sell well for the first five years. Then it becomes this cultural touchstone and gains steam every year after that.
- [121:01]
David Rosenthal
And I was just thinking about that as we were chatting here. This makes sense to me that it wouldn't be a hit right away because it takes time to build the lore and aura around this bag. You can't just drop a new product and have it become like this immediately in this category.
- [121:21]
Ben Gilbert
Correct.
- [121:21]
David Rosenthal
You're never going to have like an iPhone of luxury handbags.
- [121:25]
Ben Gilbert
Correct. It has to be like a Taylor Swift concert in order to instantly. I actually think it's a reasonable comp that like her concert was a extremely scarce brand new product priced at an extreme premium that did sell right away because the product had so much of the brand in it. Like you knew exactly what you were going to get from going to the Taylor concert because you were extremely familiar with the brand. But it's not necessarily well understood that the Birkin equals Hermes in the way that the Eras tour equals Taylor Swift.
- [122:00]
David Rosenthal
Totally. It's also that the product was the Eras tour. The product was not midnights. If it were like, oh, I'm going to go to Taylor's concert and listen to her play all the songs on the new album. Of course, a lot of people would still go, but it was like, no, I'm going to go to Taylor's concert and hear all of Taylor.
- [122:19]
Ben Gilbert
All the amazing Hermes scarves from over the years released out of the Vault.
- [122:24]
David Rosenthal
Yes. The Disney plus of Taylor. All right, all right. A different episode here. Yeah. Okay, back to Jean Louis. So this is how he does it? He does two incredible things to save the company. One, he repositions the brand. I mean, this is just like, I can't believe he pulled this off. He pulls off not yout Mother's Tiffany without saying not yout Mother's Tiffany. And the culmination of that is the Birkin bag and everything that that represents. And then two, the internationalization and discovering and running the same playbook that Raquemier ran at Louis Vuitton. By the end of Jean Louis tenure in 2006, so a couple years after the famous Sex and the City episode, Hermes has gone from, well, less than $100 million. When he took over, the consultants were saying, you know, outsource, shut it down, essentially. By the end of the decade of the 80s, he was just under half a billion dollars in revenue. And then in 2006, he's taken it to $2 billion in annual revenue from nice family business to, like, this is a real, real thing.
- [123:34]
Ben Gilbert
So one more time on those numbers.
- [123:36]
David Rosenthal
So I don't know the exact revenue figure when he took over, but let's call it $50 million in annual revenue. We know it was well less than 100 to 2 billion when he retires in 2006.
- [123:48]
Ben Gilbert
So 40x in 30 years.
- [123:50]
David Rosenthal
Yeah, 40x in under 30 years.
- [123:53]
Ben Gilbert
Wow.
- [123:54]
David Rosenthal
Pretty good. Pretty transformative for the family business. Well, along the way, as the company clearly becomes more and more valuable, remember, he is the family member who's running it. But we're now on the fifth generation of the family. We're starting to bleed into the sixth generation of the family. There are now over 80 family members out there. Eight. Zero. Many of whom are involved in the business, but many of whom aren't. And now this business that they all own is doing $2 billion a year in revenue at very, very high margins. There starts to be some demand for liquidity here.
- [124:38]
Ben Gilbert
Right. Every single one of those family members most valuable asset in their entire net worth is their privately held Hermes stock that nobody can really put a price tag on. But it's just sort of sitting there in everyone's mind of like, it sure would be easier to live my life if I knew that this 90% of my net worth actually worth something that I could access. And an even split that's $25 million a person. I'm pretty sure it's the most valuable thing that any of them owns.
- [125:08]
David Rosenthal
Right. So in 1993, Jean Louis lists Hermes on the Paris Stock Exchange. Collectively, when the dust settles, the family has sold 19% of Hermes to the public, they still own 81%. Now the public float grows a little bit over the years as more family members sell, more generational transfer happens. But you know, more or less still, you know, 70% plus family owned and controlled. It would really take some sort of absolute financial genius to come in and even consider we own over 70% of this business. We're unassailable. Who on earth could possibly make a run at our company?
- [125:54]
Ben Gilbert
It would take a real wolf, I'll tell you.
- [125:59]
David Rosenthal
Which brings us to this has been so fun. I've had so much fun with this episode. All this history. I just revel in the French Connection and everything. This is Hermes's finest moment that we're about to talk about here through it all.
- [126:11]
Ben Gilbert
And it's interesting. It's not their product.
- [126:13]
David Rosenthal
No. Has nothing to do with the product.
- [126:15]
Ben Gilbert
Yeah.
- [126:15]
David Rosenthal
Yes. The fight with Bernard Arnault.
- [126:20]
Ben Gilbert
Yes. We want to thank our longtime friend of the show, Vanta. The leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts so frameworks like SoC2, ISO 27001:GD and HIPAA compliance and Monitoring. Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple.
- [126:44]
David Rosenthal
Yep. Vanta is the perfect example of the quote that we talk about all the time here on acquired Jeff Bezos. His idea that a company should only focus on what actually makes your beer taste better, that is spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product.
- [127:13]
Ben Gilbert
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- [127:39]
David Rosenthal
And perhaps most importantly, your security reviews are now real time instead of static, so you can monitor and share with your customers and partners to give them added confidence.
- [127:48]
Ben Gilbert
So whether you're a startup or a large enterprise and your company is ready to automate compliance and streamline security reviews like Vanta's 7,000 customers around the globe. And go back to making your beer taste better, head on over to vanta.com acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com acquired David Rosenthal. Let us return to Bernard arnault. It's been 12 months.
- [128:19]
David Rosenthal
It's been too long.
- [128:20]
Ben Gilbert
I've been wanting to hear the other side of this story.
- [128:22]
David Rosenthal
I know, I know. Okay, so for anybody who's listened to our LVMH episode, as we talked about earlier, the climax of the story is Bernard's fight with Gucci in that episode. And Gucci is the one that gets away. Bernard isn't able to buy it. Right after the Gucci fight ends in the early 2000s, the same story plays out with Hermes, I think, really in an even more dramatic fashion. So in 2001, right after he lost Gucci, Bernard quietly buys an initial stake in Hermes of 4.9%. Now, I believe that was just under the threshold that they would have to disclose it under French securities regulations. And then here's what they do that the Hermes families couldn't see coming, that only Bernard could engineer. He continues buying for the next 10 years using equity swap derivatives. So it looks like other entities are buying these shares on the open markets, but LVMH have the rights to exercise options to go actually take those shares. Now, this is really hard to remember. I had to triple check these numbers. At this point in time, Hermes's market cap is below 20 billion.
- [129:43]
Ben Gilbert
That's like 8, 9% of what it is today.
- [129:45]
David Rosenthal
And when Bernard first starts buying in the early 2000s, it's below 10 billion. Whoa. I mean, you could say lots of things about Bernard, and genius should be top of your list, but he is one of the best investors of all time. I mean, to identify Hermes at this point in time. And as we will see, he makes a incredible amount of money on these trades. Today, Hermes is a $230 billion market cap company, and he starts buying at.
- [130:13]
Ben Gilbert
Below 10, which is interesting. You say he spotted Hermes. It wasn't hard to spot. The interesting thing is not that he realized it was the crown jewel of luxury. It was that he realized that the crown jewel of luxury could be worth 20 to 30 times as much as it was already worth.
- [130:28]
David Rosenthal
So he starts buying Hermes shares. And Axel, I think, jokes about this in an interview. He's like, look, Bernard isn't buying your shares just because he wants to make an investment or he wants to have some fun? Obviously he wants to own Hermes.
- [130:42]
Ben Gilbert
And by the way, when David and I are referencing these XL interviews, it's one interview. He's made a random appearance here and there, but he has done one long form on stage interview and it is fantastic.
- [130:54]
David Rosenthal
Yes, it's great. We'll link to it in the sources. You should go watch it. So why is Bernard doing this? Obviously, on the one hand, he sees the value here. I mean, for God's sake, Sex and the City episode was just dedicated to the Birkin. There's a lot of value to be unlocked here, shall we say, in owning Hermes. But it's not just that, I hope on our LVMH episode, this is some of the nuance that we painted about Bernard. He's not just a corporate raider, he actually is an operator. And he is one of, if not the best luxury operator out there. So he sees two things in Hermes that maybe aren't as obvious to the rest of the world and that he thinks actually are going to create an opportunity for him. One generational transfer is about to happen. Jean Louis can't live forever. And it's not immediately clear who the next successor is going to be. So Jean Louis son, Pierre Alexis takes over as artistic director. Pierre Alexis went to America for college. He went to Brown University. Interesting. In an interview, I found this. He initially wanted to study computer science at Brown, but he switched to art history. Very fitting. And he comes in and he joins Hermes right after graduation in 1992. So he's being groomed. But Jean Louis wants to separate out the artistic director role and the CEO role.
- [132:24]
Ben Gilbert
Oh, they had been coupled before.
- [132:26]
David Rosenthal
Well, yeah, he held both. So Robert held both. You know, Emile was both, Thierry was certainly both.
- [132:33]
Ben Gilbert
Right. So that really illustrates the point you were making earlier, that the creative and the business sides of the house are one side of the house.
- [132:39]
David Rosenthal
Yes. Until this generation, it was one person. There was no separation at all. So Pierre Alexei is clearly the artistic heir. There's not a clear CEO heir. And in fact, Jean Louis choice Accel, who ultimately does become CEO, he's not in the business yet.
- [133:01]
Ben Gilbert
Right. He did that internship, his sort of five year apprenticeship, but then he left, Right?
- [133:06]
David Rosenthal
Yes. So the story is that Excel really wanted to go work in China and so he goes into investment banking after undergrad. He goes to Sciences Po now. And remember, Jean Louis was his uncle, but his mother, who actually was not a family member, was the managing director for production for Hermes. Axel has this sort of dinner table trading in addition to the apprenticeship craftsman training, but he goes off into the investment banking world. He works first in China and then in New York for BMPE Paribas.
- [133:40]
Ben Gilbert
Wow. So he is an expert in corporate structure and he's an expert on this pretty interesting luxury market in the next 20 years. China.
- [133:51]
David Rosenthal
Yep. And America too.
- [133:53]
Ben Gilbert
Huh.
- [133:54]
David Rosenthal
But he doesn't join the business until 2003 when Jean Louis taps him. And again, on the one hand, as we've talked about, this is a nepotistic business. On the other hand, they're not going to just give him the CEO title right away. He needs to come pay his dues. He starts in the finance department in 2003. And then in 2006 when Jean Louis retires, Axel takes over running the jewelry metier. As CEO of Jewelry, which listeners, you.
- [134:22]
Ben Gilbert
Should know jewelry is not an important part of the Hermes business. It's one of the 16 metiers. They don't even break it out in earnings. It probably rolls up under other Hermes sectors because I don't think it's under watches and I don't think it's under ready to wear accessories. All of other is 12%. So I'm going to guess this thing is like 1 to 3%.
- [134:43]
David Rosenthal
So he does that for two years and then in 2008 he goes and takes over the leather goods and salary business.
- [134:50]
Ben Gilbert
So the big one, which that's 43% of the business and I think at the time it was closer to 50%.
- [134:56]
David Rosenthal
Yes. So Bernard sees, okay, we got a generational transfer opening here. And in fact, when Jean Louis retires in 2006, he promotes his sort of COO right hand person, Patrick Thomas, to be the first non family member CEO running the business side of the house alongside Pierre Alexei on the artistic side.
- [135:19]
Ben Gilbert
And at least in retrospect, they try to make this seem like not a big deal that a non family member took over as CEO. They sort of bill it as well. They needed someone to look after the business in the interim period before the family was sort of ready to have the next heir.
- [135:35]
David Rosenthal
I think there's as much chance as not that that was right, but at a minimum, I think this shows the sort of ignorance, you know, I don't want to say lackadaisicalness of the family here because it's certainly not that, but maybe sort of ignorance or naivete that hey, you're now a public company and there are people like Bernard Arnault out there. You can't just be like, oh yeah, we're going to do public Company CEO transition in this way and take our time you can, but you're opening the door for.
- [136:08]
Ben Gilbert
Right. You're vulnerable.
- [136:09]
David Rosenthal
The Arnaults of the world. So that's one thing that Bernard sees the other. And I really think this is a testament to his vision. Despite all of the strength within Hermes and everything that Jean Louis did, they actually are showing some cracks. And this we had to kind of piece together a little bit. And talking to folks in the industry helped us out here. But look, there's no questioning Hermes financial results and sort of, on the surface, brand value at this point in time, in the 2000s, early 2000s. But there are a few things that are just kind of starting to slip as they scale. And I think actually the best story that illustrates this is one that the family members themselves do not tell, but that you'll hear out there in the lore about Hermes, which is that in, I believe it was in Japan, they had a product, a bag.
- [137:06]
Ben Gilbert
Oh, yeah. This is so interesting, listeners. If you listen to other coverage of Hermes, you will hear this story, and.
- [137:12]
David Rosenthal
You never hear it from the perspective that we're about to tell it. Okay, so here's how the story goes. It's called the late 2000s, early 2010s, and Hermes is selling a canvas beach bag in Japan, and it is flying off the shelves, selling like hotcakes. It's like a equivalent of, call it $150 canvas tote bag, beach bag. And this obviously gets the attention of management and the company that this is happening. And they decide that they are going to, in true Hermes fashion, because it is selling so well, they are going to not only stop selling the product, they're going to take all their supply of it and destroy it. And they come into a board meeting, you know, with all the family members and management. They sort of announced this. And it is met with a standing ovation from the family. This is upholding what Hermes is, which is we don't sell beach bags.
- [138:07]
Ben Gilbert
The family and the board is so aligned that no one even asked a question about this. They just stood and gave applause. And here's how this went on a meta level, listeners. I heard this story. David heard this story, and David texted me at one point, was like, isn't this an odd story? And I was like, what do you mean? And we sort of realized, oh, this is not ever told by any of the family members or company executives anywhere. It's just sort of out there. And the company is not secretive.
- [138:36]
David Rosenthal
They love telling these legendary Hermes stories.
- [138:39]
Ben Gilbert
Yeah. And They've got a 600 page document they release once every year that clearly lays out their entire strategy. They produce documentaries interviewing their artisans, showing videos of their factories. So it rings a little bit odd. It's like, okay, well, why are they not telling this story given how often it's bantied about?
- [138:58]
David Rosenthal
So then you think about it a little bit and you're like, wait a minute, why the f did this happen in the first place?
- [139:07]
Ben Gilbert
Exactly. A canvas beach bag in Japan for $150 and they're making enough of it that it's flying off the shelves. What company is this?
- [139:19]
David Rosenthal
How on earth did this happen? The story here is not a heroic one of we destroyed the supply. This is a tragic one.
- [139:28]
Ben Gilbert
It's almost like when I was sitting there watching Wonder Woman 84 and I was just so appalled at what I was watching, that on this meta level it occurred to me, like, the story here isn't the plot of this movie. The story here is, how do you have such a process failure at Warner Brothers where this thing was let out the door? That is a failure of creative leadership. And that is what you have going on with a $150 canvas tote bag after 175 years of successful Hermes brand stewardship.
- [140:02]
David Rosenthal
Right. And building up the Birkin, the Kelly. I mean, for God's sakes, the scarves sell for like $500.
- [140:08]
Ben Gilbert
Yeah.
- [140:09]
David Rosenthal
So, okay, that I think is the most visceral illustration of this. Two other things that I saw in the research and I think Bernard probably saw here too, towards the end of Jean Louis tenure, he and Hermes started buying and investing in other companies. But why is Hermes doing this?
- [140:29]
Ben Gilbert
Right. This is like the weird stuff going on at Nike when they were buying. You know, Converse was the good example, but Starter, and it was almost like they didn't realize, oh, we should be concentrating our firepower behind our one hero brand. They were trying to create the constellation of weak brands.
- [140:44]
David Rosenthal
The best Hermes could ever hope for by doing this is they're going to be a subscale. They're not even going to be richemont or caring.
- [140:52]
Ben Gilbert
Now, one argument, bootmaker John Lobb and all these other companies that they either bought in whole or in part, it became important for them to own their key supplier relationships.
- [141:03]
David Rosenthal
Yes, those I think were probably strategic acquisitions.
- [141:06]
Ben Gilbert
Yeah. Especially in watches where they actually fairly recently took a 25% position in the company that makes the movements to make sure that they have enough supply coming to them. But that wasn't all of what they were doing. They were also buying other brands. Yeah.
- [141:21]
David Rosenthal
Did you find the biggest disaster? This is kind of in your wheelhouse.
- [141:24]
Ben Gilbert
Ooh, I don't know.
- [141:25]
David Rosenthal
I was wondering if I could stump you with this. They bought, I believe, a 30, 35% stake. They were the largest shareholder in a German company that makes what is really a piece of technology. An old piece of technology, but not something that should be a luxury brand. This is very much in the performance end of the spectrum. They became the largest shareholders in Leica, the camera company. Really? Yeah.
- [141:52]
Ben Gilbert
Huh.
- [141:52]
David Rosenthal
Which, you know, I mean, sort of the motivation's like, oh, you know, they're beautiful and they're like luxurious cameras and they have leather on. And we can put Hermes leather on the Leica cameras.
- [142:02]
Ben Gilbert
Yeah. If they made a Hermes edition Leica camera with a.
- [142:07]
David Rosenthal
They did.
- [142:07]
Ben Gilbert
I should probably look into that, but.
- [142:10]
David Rosenthal
Okay, you're talking about a very narrow target market here. And it's just, you know, it's a technology product. I mean, we'll get into this with Apple in a minute. But it didn't go well, let's put it that way. They ended up divesting the stake.
- [142:23]
Ben Gilbert
It reminds me of when the New York Times did all of this with all the TV stations in the 90s too. It's almost like every company that ever thinks it's a good idea to start buying up other brands is wrong.
- [142:33]
David Rosenthal
Yeah. Unless that is the core strategy of what you are doing. Like lvmh.
- [142:38]
Ben Gilbert
Yes.
- [142:38]
David Rosenthal
Yeah. The third thing that they do, they incubate and create a new luxury brand and company in China called Shangxia. I believe I'm pronouncing that right in 2009 is when they launch it, it literally means up, down or like past, present. And the idea is that the Chinese market is so big and so important to Hermes, they're going to lend the Hermes brand to this new brand that is going to have Hermes principles. But take traditional Chinese craftsmanship, of which there's a long multi thousand year history.
- [143:14]
Ben Gilbert
Yep. I actually like the strategy.
- [143:17]
David Rosenthal
Well, yeah, I mean, it sounds good on paper. Right. But here's the problem, like we were talking about earlier, nothing compares to French culture as an export. And when you are buying luxury, and this is a great experiment to run. Sure. But the reality is that for probably most countries in the world, when you're talking about spending $20,000 on a piece of leather, you want that to be from Hermes and you want that to be from France. And I think this is especially true in China.
- [143:50]
Ben Gilbert
Yeah, that's such a good Point. It's funny, I have a playbook theme called Selling a sense of place to those outside it. The numbers behind this are crazy. Today, 76% of their production is in France and 85% is sold outside of France.
- [144:03]
David Rosenthal
Yeah.
- [144:04]
Ben Gilbert
First of all, 76% of production in France is kind of incredible. The fact that they do this with all these different workshops that are sort of scattered around the country. But, yeah, the incredible French history that is encapsulated by the brand and the French nobility and the French sense of place, it really is just an intangible connection to the culture that is lusted after everywhere in the world. Why on earth would you throw that away when that really is the essence of your core asset right now?
- [144:35]
David Rosenthal
Easy for us to armchair quarterback here. Like, obviously, it didn't work. They end up selling it off, actually, pretty recently to the Agnelli family from Italy, which is the family behind Fiat. Now, look, certainly that one, the Leica thing, it's the combination of all these and the beach bag incident. Bernard sees all this. Here's what he says in the press at the time. I would never diminish the quality of Hermes. Hermes can be an even rarer and greater quality business if they ever wanted to work with us. And I think he's genuine about that.
- [145:09]
Ben Gilbert
Yeah.
- [145:10]
David Rosenthal
The family obviously circles the wagons and like, mounts, they're, you know, like. They're like the rebel alliance here, you know, mounting their defense against the empire.
- [145:18]
Ben Gilbert
Which I think is quite impressive.
- [145:20]
David Rosenthal
Absolutely.
- [145:21]
Ben Gilbert
The fact that they were able to link arms like this and say, in the face of someone trying to make you and all your relatives collectively a multi billionaire in liquid cash, it's kind of incredible to link arms and manage to rebuff it.
- [145:37]
David Rosenthal
Totally. We'll tell the story here, and it's amazing, but I think this is a really important point that I want to land, is I don't think Arnaud was wrong. I think he had a point, and I think the company at the time didn't get it. They certainly do now. So, okay, what's the story? What happens finally in October of 2010? Arnault, he's patient.
- [145:59]
Ben Gilbert
He spent nine years.
- [146:01]
David Rosenthal
Nine plus years. Yeah. That he's just building this stake, being patient. In October 2010, LVMH exercises its options on the equity swaps that it owns and announces that it now controls 14.2% of Hermes shares. And Bernard, at the time, he says, I had to do it because other luxury groups were also talking about making a run at Hermes, and I didn't want this crown jewel of France to be owned, heaven forbid, maybe by a non French organization. Quote here, I could not sit by and allow a competitor or another investor to take a stake in her mess. Oh, he's good. He's so good.
- [146:43]
Ben Gilbert
I love it.
- [146:44]
David Rosenthal
In response to this is the famous, or infamous, if you will, quote from Patrick Thomas, the then CEO of Hermes, which we're not going to say the full thing here on air. You can go Google it. But the response, and this is an official press conference with investor relations people. He says, if you want to seduce a beautiful woman, obviously Hermes being the beautiful woman here, you don't start in the fashion that Bernard is. And he doesn't use those words. This is hilarious. This is amazing. That makes, of course, a huge splash in the French and international press. The drama here is delicious. Karl Lagerfeld is asked his thoughts on what's going on here. And Lagerfeld, of course, he's a legend and he's the longtime creative director of Chanel. He comments publicly. Well, if you don't want to be taken over, don't put your business on.
- [147:35]
Ben Gilbert
The public market, which, hey, game recognized. Game. That's a great point.
- [147:39]
David Rosenthal
He's got a point.
- [147:40]
Ben Gilbert
If you want liquidity, I mean, this is the trade off you make.
- [147:43]
David Rosenthal
Now, of course, Lagerfeld, yes, famously is the creative director of Chanel, but he wasn't exclusively the creative director of Chanel. Who is he also working for at this point in time? He is also, I believe, the menswear creative director for Fendi, which is owned by.
- [147:59]
Ben Gilbert
By lvmh.
- [148:00]
David Rosenthal
Lvmh.
- [148:01]
Ben Gilbert
He's on payroll.
- [148:02]
David Rosenthal
He's on payroll. This continues on for months in the public markets and in the press. By December of 2011, the LVMH stake has grown to 22.6%. Now the family owns 73% of the company at this point. So Bernard now owns almost the entire public float of Hermes.
- [148:28]
Ben Gilbert
There's what, like three and a half percent of Hermes that's publicly floated? He doesn't own.
- [148:32]
David Rosenthal
Yeah, Hermes is like in danger of being delisted from the stock exchange.
- [148:36]
Ben Gilbert
Crazy.
- [148:36]
David Rosenthal
Now, this is what's so brilliant. You might ask, why does this matter? The family owns 73%. Bernard can't do anything. Price is a function of supply and demand. So as Bernard is shrinking the float of this company, the shares that are available for trade on the public markets, well, what happens to the stock?
- [148:57]
Ben Gilbert
Price skyrocket.
- [148:58]
David Rosenthal
It goes through the roof. So now you've got 80 family members and they already thought they were really wealthy and they already wanted liquidity. And now Bernard's coming to them and this is his strategy is just go pick off individual family members one by one, keep increasing his stake and saying, like, yeah, I'll pay you the market price, which is now incredibly inflated for this company. Great. Happy to pay you many hundreds of millions of dollars.
- [149:26]
Ben Gilbert
Crazy.
- [149:27]
David Rosenthal
So what happens? This is why I think this really was the family and the companies finest moment. That temptation, I mean, must have been extreme. And that's just the externally identifiable motivations. I'm sure Bernard and other people at LVMH and everybody else in the industry is doing everything they can to convince family members to sell.
- [149:52]
Ben Gilbert
Right? And all it takes is one weak link, or probably a few weak links because the ownership is so divided into tiny chunks by this point, six generations in, it's pretty peanut buttered around.
- [150:03]
David Rosenthal
But still, I think also just from a psychological perspective, a couple dominoes fall here. And then as a family member, you start looking around and being like, do I want to be the last one? It's kind of like a crowded theater, you know, running for the exits. Right at the time you're thinking about like, holy crap, this is the best.
- [150:21]
Ben Gilbert
It'S ever going to get.
- [150:23]
David Rosenthal
I may never see another opportunity to get liquid at this price, ever. And the minute that other family members start selling, it goes down. Supply and demand, the price goes down.
- [150:32]
Ben Gilbert
Right. I cannot be the last. And it would kind of suck to be the second or the third.
- [150:37]
David Rosenthal
Right? So in 2011, the family comes together, and over 50 of the 80 family members collectively contribute 50.2% of the equity in the company into a new cooperative vehicle that's called H51. As in 51% of Hermes, as in, this vehicle, will have majority control of the company. When they contribute their equity into this vehicle, they contractually agree that that equity will be locked up and cannot be sold for at least 20 years. So they're basically saying to Bernard, no matter what you do, you could pick off anybody else after this for a minimum of 20 years with potential to extend beyond that, you will never, never, never, you or anybody else have control of Hermes.
- [151:32]
Ben Gilbert
So badass, dude, you and I should contribute. We should make an A51. Even though it's completely unnecessary, it just feels right for acquired, you know? Like, I think you and I can each maintain 24 and a half percent stakes, but a 51 really should.
- [151:47]
David Rosenthal
I love it. I love it. Well, hey, you know, we haven't floated our business on the public markets yet, so we're taking Karl Lagerfeld's advice, we don't need to incur the legal fees around doing this. That vehicle was and is still headed by one of the family members, Julie Garon, who was an investment banker at Rothschild. So she leaves and full time becomes head of the defense, I assume alongside xl, who obviously comes from the banking world too.
- [152:16]
Ben Gilbert
It's so interesting. I wonder if you actually can structure articles of incorporation to say, under no circumstances can this entity sell what it owns, because normally what you would do is say it requires a vote of unanimous from the board of directors, blah, blah, blah. But that leaves you vulnerable to the board of directors getting lobbied and convinced. And so I wonder. Exactly. I mean, this is not a public document, so we can't really know, but I wonder how airtight can you really make something and how irreversible?
- [152:48]
David Rosenthal
I don't believe these documents are public, but my understanding from comments that family members in Excel make about them, and spoiler alert, recently they've renewed the term of this for another 10 years. So it's into the mid-2040s.
- [153:03]
Ben Gilbert
They're like, Bernard, you will be dead when this expires. That's exactly what that is.
- [153:08]
David Rosenthal
But I believe it's pretty ironclad that these shares cannot be sold.
- [153:12]
Ben Gilbert
Wow.
- [153:13]
David Rosenthal
So in addition to that, two of the Puesch brothers, Bertrand and Nicholas. Nicholas is the one that there's the gardener drama about right now, which we.
- [153:24]
Ben Gilbert
Should say, listeners, in case you don't know, there's a lot of stories floating around in the press right now that Nicholas Puesh is going to give half of his stake in Hermes, which represents something like a little under 3%, to his gardener or his ex gardener, who's now 51. Nobody knows his name.
- [153:44]
David Rosenthal
Nicholas does not have children or heirs or other heirs.
- [153:48]
Ben Gilbert
Right. So there's a press story right now that just shy of 3% of Hermes could be given to the family gardener.
- [153:54]
David Rosenthal
Anyway, the two Puesch brothers, they do not contribute their shares to age 51, but they give age 51 a right of first refusal on their shares. So they could sell their shares, but at whatever price they agree to, the rest of the family has a roer on purchasing them.
- [154:12]
Ben Gilbert
Oh, interesting.
- [154:13]
David Rosenthal
So that's another probably 10 to 15% of Hermes right there.
- [154:18]
Ben Gilbert
Whoa. Okay. That's significant. I wonder how this gardener thing's gonna play out.
- [154:22]
David Rosenthal
Yeah, right. And those shares would be, I believe, subject to that roer, assuming that that has stayed in place. Anyway. This is really just an incredible coordination. Yes, it's a Family. They're all family. But there's 80 people here.
- [154:37]
Ben Gilbert
The fact that they actually rebuffed this offer and that Bernard sold down his stake is crazy.
- [154:43]
David Rosenthal
Well, let's get into what happens with Bernard's steak, because famously, as Domenico de Soleil said in the press at the end of the Gucci affair, even when he loses, he still wins, and Bernard still wins here. So this effectively ends the takeover bid when age 51 is put in place. But meanwhile, there are all sorts of lawsuits going on, particularly around how LVMH amassed this stake in secret with the equity swaps.
- [155:12]
Ben Gilbert
It was basically illegal, right?
- [155:14]
David Rosenthal
Well, in 2014, the French court rules that this was illegal. LVMH has to pay a fine, I believe, like a 10, $15 million fine for having done this.
- [155:24]
Ben Gilbert
Pennies.
- [155:24]
David Rosenthal
Yeah, right. As we'll see, it's truly pennies. And they also mandate that LVMH needs to distribute out that Hermes stake to its own shareholders. LVMH can no longer hold the stake. Well, who's the largest shareholder in lvmh? It's Group Arnault, which is Bernard Arnault's family office. So they get 8% of Hermes personally into his family office entity, which this is the brilliance of Bernard. They take that value, which is. Call it on the order of $5 billion, and remember when they started buying, the whole company was trading at a market cap below $10 billion.
- [156:09]
Ben Gilbert
So massively appreciated stock. They basically created value out of nowhere here. This billions of dollars landing in Bernard's personal bank account. He has created that money out of nowhere.
- [156:19]
David Rosenthal
He has unlocked shareholder value for sure, even in the absence of a change of control transaction. So back when Bernard was engineering his takeover of lvmh, one of the financial instruments that he used to do it was he IPO'd a 25% stake in Deor. He already owned Dior that he had gotten out of bankruptcy from Busek.
- [156:45]
Ben Gilbert
That's right. He had this Russian doll structure where he owned a slim majority of an entity that owned a slim majority of an entity that owned a slim majority. And so he was able to generate a bunch of liquid cash from all the minority shares that he sold off. But he still got to control Dior LVMH Group R. Because he was technically the majority owner of each of them.
- [157:10]
David Rosenthal
Yes, but he and LVMH didn't own this 25% minority stake in Dior. He takes the Hermes shares and does a share swap. So swaps that value directly with the 25% of Dior. That he doesn't own, to bring that first into Group Arnault, his family office. And then he trades that into lvmh. So lvmh, now finally, as a result of this, is able to take 100% control of Dior. And in exchange for Group Arnault trading this asset into Dior, Bernard's ownership of lvmh goes from 36% up to 46%. So he gets an extra 10% of LVMH. And here's the most incredible aspect of this. Not a single dollar in tax is paid on all of this. Oh, my God. Because it's all share swaps, basically, Bernard just gets 10% more of his own company as a result of this, which.
- [158:11]
Ben Gilbert
Would then go on to appreciate, call.
- [158:13]
David Rosenthal
It 4 or 500% over the next five, six years.
- [158:17]
Ben Gilbert
Five X'd since 2017.
- [158:19]
David Rosenthal
Yeah. Wow.
- [158:21]
Ben Gilbert
Even when he loses, he wins.
- [158:24]
David Rosenthal
Unbelievable. Now, this is a situation where everybody wins. I don't think there are any losers here. And Hermes families absolutely are not losers. And you could even say they sort of have the last laugh here because, yes, Bernard gets to benefit from an extra 4 to 5x appreciation in LVMH's market cap here from, let's call it the real beginning of when LVMH publicly announces their stake in Hermes. So 2010, Hermes's market cap is up 16x.
- [159:00]
Ben Gilbert
It's crazy. And the reason why no one's a loser here and everyone's a winner is because Hermes truly is the crown jewel. It is such an unassailable, exceptional business. The last 12 months, it did 14 billion in revenue, 5.7 billion in operating income. They have a 71% gross margin and a 44% operating margin. It's a software business that doesn't need any R and D tech.
- [159:27]
David Rosenthal
Companies go like, I don't know what Hermes color to call it, but some color with envy over this. But there is one more chapter of the story that we have to tell because that wouldn't have just happened. It wasn't just the Bernard affair in and of itself that led to this 16x market cap increase. He was right. Like I was saying earlier, there were, I think, some real problems in the business. And that is the story of the sixth generation of Pierre, Alexei and Excel, who I think have certainly fixed those problems, but have really led Hermes, the business and the company into a whole new era.
- [160:06]
Ben Gilbert
Yes, that is absolutely right. There is a quote that I want to start with for the XL Dumas era, which is possibly the best articulation that I've ever heard of business strategy anywhere. And he did it in the interview that we were talking about. So he says every decision that we make has got some reverse effect, which I think is like a French translation for trade off. So every decision we make has got some trade off. There's something I really like about strategy and Michael Porter. Strategy is accepting that you are doing something better than the other and the other is doing something better than you. You have to pick your fight. I'm always a little bit disappointed when I see someone on my team say that we do everything at the same time. Great. That doesn't happen in real life. You have to pick your fight. And Hermes picks their fights better than anyone.
- [160:54]
David Rosenthal
And what they've done over the last 10 years since the Bernard fight, is that they have figured out how to scale hand crafted artisanal production.
- [161:12]
Ben Gilbert
Yes.
- [161:13]
David Rosenthal
On the surface, those are completely like oxymoronic terms. Those are completely diametrically opposed.
- [161:20]
Ben Gilbert
This is a dead art in the world. And Hermes manages to crank out hundreds of thousands of products that otherwise would only be created by individual makers with no infrastructure and no brand. And it'd be really hard to discover them. And frankly, they would all just go out of business. Most of them go out of business anyway.
- [161:39]
David Rosenthal
Totally. What was the stat that you said a little while ago that there are 120,000 Perkins and Kelly's produced every year?
- [161:47]
Ben Gilbert
Yep, exactly.
- [161:48]
David Rosenthal
Yeah. If they were still making these things on the third floor at the Faubourg. No way. No way. And this was kind of the problem in what the consultants were saying at the start of Jean Louis tenure of like, hey, you need to outsource production, you need to scale production, you need to make this more accessible.
- [162:05]
Ben Gilbert
Right. You have a global brand now. Like, you need to figure out how to serve the demand for your brand.
- [162:10]
David Rosenthal
Yep. So the Patrick Thomas quote that I want to start with is so great. The luxury industry is built on a paradox. The more desirable a brand becomes, the more it sells. But the more it sells, the less desirable it becomes. We've been talking about this whole episode, but then it continues. I believe Hermes's vision provides a solution to this dilemma. And this is what the current generation has found the solution. So today, I think we referenced this earlier in the episode. Hermes employs 7,000 mastercrafts, people, artisans. Most of the story that we've been telling thus far, you know, until 1992, all of the craftspeople in the company more or less were working in the Faubourg. In this one relatively small building on the Rue Faubourg du Saint Honore in Paris. In 1992, they moved production to Pantin in the suburbs of Paris. That building is amazing, but only houses about 250, 300 craftspeople. And actually still to this day, Axel talks about this a lot. Any one of their production sites does not have more than 250 to 300 craftspeople.
- [163:26]
Ben Gilbert
Yes. They believe that every single person should know each other by name. And they think that 250 to 300 is the natural limit on that. And Excel even says if you have more than 300, it is not a workshop, it's a factory.
- [163:39]
David Rosenthal
Yeah. And they are not in the business of factories. At the same time, he and the company have stated as an explicit goal that they will ramp up production capacity by 7% every year. Well, as the company gets larger and larger today, that means adding 500 artisans every year.
- [164:00]
Ben Gilbert
Crazy. And when XL started at the company, all the way back in the 80s, there were 250 craftsmen, period. And they hired two per year. Two craftsmen per year in the late 80s.
- [164:11]
David Rosenthal
Right. Now, here's the issue, though. How on earth are you going to do this? Like you were saying, this is a dead art.
- [164:16]
Ben Gilbert
Nobody else does this little maker with a workshop in San Francisco or a workshop in Paris. But how are you even going to find them, Right?
- [164:25]
David Rosenthal
And those people, you know, the Beatrice's here in San Francisco, they're entrepreneurs. They're not going to go back to joining Hermes because they all came from Hermes in the first place. How are you going to hire 500 a year? It's not like they can go hire from their competitors. They're not doing this right.
- [164:39]
Ben Gilbert
Their competitors have all outsourced production and embrace assembly lines.
- [164:42]
David Rosenthal
So they do the only thing that you can do. They build the pipeline of training master craftspeople and artisans entirely themselves. They build schools, they build training centers. They go to parts of France that are in rural areas that have high unemployment. They go to those areas and they open trade schools. And they say, we're going to train you. They have 100% graduation rates. They're like, we're not going to give up on you. We're going to make sure you learn this trade, that you graduate. You may not come work for Hermes when you graduate, but we're going to give you this skill, and then we're going to offer you a job as a master craftsman.
- [165:24]
Ben Gilbert
It's crazy.
- [165:25]
David Rosenthal
It's unbelievable. So back in the, you know, even through the Jean Louis era, the fifth generation Beatrice was the anomaly as a woman. These were all like old men that were doing this stuff.
- [165:38]
Ben Gilbert
Yep.
- [165:39]
David Rosenthal
Today, the average age of the Hermes artisan workforce is 30 years old and 80% are women.
- [165:47]
Ben Gilbert
It's wild.
- [165:48]
David Rosenthal
It's a wholesale transformation. And they are training them. They actually just opened in 2021 their first official French governmentally sanctioned degree granting program, the Ecole Hermes de Savoir Faire. This is the savoir faire that pops up in the annual report, you know, a hundred whatever times.
- [166:09]
Ben Gilbert
Let's name a school after it too.
- [166:10]
David Rosenthal
Yeah, yeah, yeah. They're like getting into like government policy here. They are preserving and growing this art form in France.
- [166:19]
Ben Gilbert
Yeah. They're not France's largest export because they have a very constrained way that they can create the products, but they may be France's finest export. So it behooves the French government to try to figure out how to make this last another hundred years.
- [166:33]
David Rosenthal
Yep. So Today there are 31 Hermes ateliers, artisan manufacturing facilities all throughout the country, each with no more than 250, 300 people in it.
- [166:46]
Ben Gilbert
Right. It's the cloud computing idea of scaling horizontally.
- [166:49]
David Rosenthal
Totally. This is aws. This is the point I'm getting to.
- [166:52]
Ben Gilbert
Right. They're building data centers.
- [166:54]
David Rosenthal
They were Amazon and they added aws, and they are adding two to four of those every year.
- [167:01]
Ben Gilbert
So. Funny you had that thought too.
- [167:03]
David Rosenthal
Totally.
- [167:03]
Ben Gilbert
And it's all people. I mean, it's all sticking to the thing that got them here, which is every product, or at least every leather goods product, every handbag made end to end by one artisan trained in the traditional early 20th century way.
- [167:19]
David Rosenthal
So this is an insane idea that leather goods, which is 43% of the business. Hermes did what, 11.6 billion euros in revenue last year. They're on track to probably do call it 14 billion in euros. Yep.
- [167:35]
Ben Gilbert
Last 12 months is 14 billion. Yeah.
- [167:38]
David Rosenthal
That 6 billion of that is going to be handcrafted items where one artisan makes one item at a time and they're sold around the world like 6 billion euros worth of that every year, growing at 15, 20% a year. Yeah. Wild.
- [167:56]
Ben Gilbert
This is a really important thing to understand the company. They firmly believe that only 250 to 300 craftsmen can work in a building. So that's one, two. It takes two plus years for someone to learn the craft and apprentice. And three, that every one of these things must be created by one individual by hand. And if you believe all those three things for sure, then it forces a very specific constraint on your business, and you must work backward from that. You can only train so fast, you can only produce so fast, which then of course means that it affects your products and it affects the availability and it affects the price, which of course means that it affects the customer set. So there's a way to view Hermes, which is they want the very highest end customer with zero price sensitivity, and they do whatever they need to serve that master. But I think there's another very real way to look at it, which is how the company describes themselves. That starts with the constraints of the craft. And when you hold true to that ethos at its most extreme, you end up with the company's brand and posture that you have today as the only logical end point. They can only hire 3, 4, or 500 craftsmen a year. They can only do this other stuff. Good luck getting a Birkin bag. I mean, it's just one of these things where you can say they're artificially constraining. Supply all you want.
- [169:13]
David Rosenthal
As long as they do things this way, this is the max throughput.
- [169:18]
Ben Gilbert
And so they would have to change something. They would have to say, hey, there's some new fancy saddle stitching machine that it turns out makes just as high a quality product and every craftsman is twice as effect effective, or something like that. But until they fold on one of these constraints that they've decided are stakes in the ground, the result is the scarcity. That's not the goal, that's the result.
- [169:41]
David Rosenthal
The Amazon comparison is so apt here. Hermes has this incredible, unassailable flywheel, but it operates in the exact opposite way of an Amazon flywheel. It's not about maximizing the cycles. It's slowing, it's minimizing. It's a intentionally rate, limited flywheel, and it all works together.
- [170:01]
Ben Gilbert
At the end of the day, it is probably true that neither one is the starting place and neither one is the ending place. And the two things that I'm referring to here are the method of craftsmanship and the price and scarcity. They just work harmoniously together. One is not driving the other. It is that they both want the brand posture that they have and they want the constraints that they have. And so it works together perfectly. But a cynical person could be like, well, yeah, all that handcrafted mumbo jumbo only exists because that's how you justify the brand pricing and availability that they've put in place. But I think it all works in concert.
- [170:39]
David Rosenthal
Totally. I mean, like we've told the whole episode, and I'm thinking back to what Beatrice Told me when I asked her why, if a master craftsperson made this thing by hand, it has a soul. And if a machine made it in an assembly line, it does not, Right?
- [170:54]
Ben Gilbert
Maybe. But sure, in an assembly line with crappy ingredients, blah blah, blah. Sure. But can craftsmen use better tools? Yes. And will Hermes continue to embrace tools that make craftsmen more efficient at some point? Did they use sharper knives than were previously available in the past? They totally did. And so will they use things that make the needle go a little faster? Maybe.
- [171:18]
David Rosenthal
Totally. Let's take a step back here. We got to consider the exact opposite case study of this, which is 100% happening to great success, which in a lot of ways is the same thing that the consultants told Jean Louis back in the day. Look at the rest of the industry. Louis Vuitton, which as we talked about, has the same calibre of heritage and history as Hermes.
- [171:38]
Ben Gilbert
Yes, it could have Hermes gravity if it wanted to, but instead you can buy a checkerboard cotton sweatshirt with 120 lvs on it.
- [171:48]
David Rosenthal
Right. They are having the same level of success, the same margins. It's working like a charm.
- [171:55]
Ben Gilbert
But it's less durable.
- [171:57]
David Rosenthal
Well, I think that's sort of the question. Is it less durable or is it just these are different markets or different strategies. Now here's the crux of it that we've also been teasing on. The episode that I think now's the time to come back to this thing that I'm wearing on my wrist.
- [172:14]
Ben Gilbert
The Apple Watch partnership out of left field. Very surprising. Very odd for the brand to do this.
- [172:20]
David Rosenthal
I have a lot of complicated feelings about the thing on my wrist, including primarily that I love it. Okay, here's the story. 2015, Apple launches the Apple Watch. Supposedly the story goes that Jony I've and the watch I think was really Johnny's kind of like pep project. As his last hurrah before leaving Apple, he had all these quotes at the time of the Swiss watch industry better watch out, we're coming for them, et cetera, et cetera.
- [172:46]
Ben Gilbert
Which was true. I mean, different market, but it's by far the best selling watch in the world.
- [172:51]
David Rosenthal
Yes. But has far from been the death knell of the Swiss watch industry.
- [172:56]
Ben Gilbert
Right? Yeah. The Swiss watch industry has done just fine since the Apple watch came out on the high end.
- [173:01]
David Rosenthal
Yes. Marc Newson was consulting for Apple specifically on the watch. And Johnny asked Mark to introduce him to Pure Alexia and XL and to Hermes. Apple was looking for a luxury fashion brand. Remember there was the Apple Watch edition In the beginning, that was like the gold Apple watch and all that.
- [173:23]
Ben Gilbert
Oh, man. $10,000 for something that was going to be obsolete in a year. It's crazy.
- [173:27]
David Rosenthal
Yeah, that clearly didn't work.
- [173:29]
Ben Gilbert
But it's beautiful.
- [173:30]
David Rosenthal
Yeah, totally beautiful. But they needed a luxury brand. They needed a brand that was not deeply in bed with the traditional Swiss watch industry, which some of these luxury groups are.
- [173:42]
Ben Gilbert
Oh, it's funny, I hadn't actually made that connection, that that's why it's Hermes and not.
- [173:46]
David Rosenthal
Well, I think there's two reasons. That's one reason. The other reason is they needed a brand that was going to appeal to pretty much everybody.
- [173:54]
Ben Gilbert
Yeah.
- [173:55]
David Rosenthal
For everything we've talked about with Louis Vuitton and how successful that's been, it's polarizing.
- [174:01]
Ben Gilbert
Totally. And Apple also needed to go to the very top of whatever they were going to grab. Like, that's the thing about Hermes is.
- [174:07]
David Rosenthal
Whatever they make, nobody is ever going to say that Hermes makes crap.
- [174:11]
Ben Gilbert
Right. They make the most fully realized version of whatever they're making. If they have an idea, they want to release the best possible, most extreme, exquisite version of that thing. And that's very Apple. I mean, Apple has to make compromises for the scale that they're at. But if Apple had partnered with someone that was more opinionated, let's say they were better in some ways but worse than others, it kind of doesn't play for Apple's brand. They need to partner with someone unassailable.
- [174:42]
David Rosenthal
Accel and Pierre Alexei talk about this all the time. When they're asked about, oh, xyz, flashy celebrity is carrying a Birken bag, blah, blah, blah. They say, look, we don't judge. We never judge. Here at Hermes, our clients are our clients, whether it's Grace Kelly or Kim Kardashian. And that's what Apple needed. So Axel has a great quote on this. He says, we had an incredible talk with Jonathan. I've. And there was a lot of mutual admiration and common values from that. We said, wouldn't it be nice to have something combining our craftsmanship, our vision? It was about trying to make a contemporary, elegant object. It was not a master plan of global domination. Okay, this thing on my wrist is exactly what Axel is saying. There it is, a contemporary, elegant object that is beautiful leather. And the reason I bought it is for my life and modern life. This thing is on my wrist 23 hours a day. I sleep with it 100%.
- [175:41]
Ben Gilbert
I love the Hermes Slim to Hermes watch. I looked at that thing. I don't know five times during research, lusting after it, and ultimately closed the browser tab being like, I wear an Apple watch all day, every day. There's just no world where it actually makes sense for me to own a different watch.
- [175:58]
David Rosenthal
Right? I mean, even more than my phone, this thing is part of me. When I was looking to do research for this episode and buy a bit of the Hermes dream, I couldn't imagine anything more appropriate to be closer to me than literally, it's on my wrist 23 hours a day, right. At the same time, I find it absolutely terrifying from the perspective of what it means for Hermes and the Hermes future. Not because I think that Apple and technology is going to take over the world, but I think there's some serious problems with this product along the lines of the issues that Bernard identified in the company when he was making his run. Let's start with the price. I bought the deployment buckle version of the strap because I thought it looked amazing. It is the most expensive version of the band that Hermes sells as such. And it cost $540, which is expensive.
- [176:52]
Ben Gilbert
For an Apple watch band. But it's sort of like in the ballpark of Apple accessories. Or it's at least maybe twice as much as normal Apple accessories.
- [177:01]
David Rosenthal
This is among the cheapest leather products that Hermes sells as a comparison. If you want to go buy a hermes luggage tag, $640. Let's move out of leather goods for a second. If you want to go buy an hermes sweatshirt, over $2,000. If you want to buy an Hermes piece of furniture, and they make incredibly beautiful furniture, $40,000 minimum. $540 for this thing. It's not priced right for an Hermes product. It's too low.
- [177:34]
Ben Gilbert
It's somehow bridging the gap between an Apple product and an Hermes product.
- [177:38]
David Rosenthal
Yes. And maybe that's because it's also sold in Apple stores, et cetera, et cetera. But related to that, you start to think about that, like, wait, why is the price so low? Nowhere on the exquisite orange packaging and box that this thing came in, nowhere on it, nor on the product page on the website does it say that it was handmade.
- [177:59]
Ben Gilbert
So Hermes belts, and I believe they're Apple watches. And there are other things are machine sewn.
- [178:06]
David Rosenthal
And this to me is like, wow, you know, would I have spent $2,000 on a handmade Apple watch Hermes band? Maybe, maybe not. Like, I don't know. Whether I would have is irrelevant. Hermes should be selling $2,000 hand made.
- [178:25]
Ben Gilbert
Apple watch bands, even if people aren't Buying them. That's sort of the question. I agree with you. Because what I think this does is it defies how I think of Hermes, which is whatever they're going to do, they're going to do it at that logical extreme. They're not going to compromise. They're not going to figure out how to address a lower market. They're going to sell the same expensive scarf that they sold their grandma to you, but they're going to have a different way to advertise it. And this is weird.
- [178:53]
David Rosenthal
It's weird.
- [178:54]
Ben Gilbert
It's a compromise. I think the same thing about their belts, by the way. I think the same thing about anything that is machine sewn so it can be mass produced and have availability in every store. Like, it feels like they don't promise that everything they make is hand sewn, but it feels like a mild violation of the brand promise.
- [179:13]
David Rosenthal
Right? Yeah. So I don't know. On the one hand, I love it. I don't want any other Apple watch strap. It is an Hermes product. It's beautiful. On the other hand, yeah, it feels like a profanity.
- [179:25]
Ben Gilbert
You're right, it does feel like a profanity. I mean, Apple is the most valuable brand in the world, but the most common brand in the world. And for Hermes to associate with such a common brand feels odd.
- [179:39]
David Rosenthal
Yeah.
- [179:40]
Ben Gilbert
Apple is the definition of mass market at this point.
- [179:43]
David Rosenthal
Well, I think that is certainly part of it. The thing that is really just kind of head scratching to me about it is why do they not sell these things for four times as much and make them by hand?
- [179:54]
Ben Gilbert
Yeah.
- [179:55]
David Rosenthal
What are they getting out of selling a machine made strap for $540?
- [180:01]
Ben Gilbert
Maybe you're now an Hermes customer and over the next 50 years you're on a journey with them.
- [180:06]
David Rosenthal
I think that's true. I mean, I'm going back tomorrow.
- [180:09]
Ben Gilbert
What are you getting tomorrow?
- [180:11]
David Rosenthal
I don't want to spoil Jenny's birthday, Valentine's surprise. I'm actually getting two things, but we'll talk about this on a future episode.
- [180:18]
Ben Gilbert
Okay, sounds good. The cliffhanger.
- [180:20]
David Rosenthal
Cliffhanger. So just to put some numbers and finish out the story, by 2018, revenue has grown from, call it three and a half, 4 billion euros when XL took over in 2013. By 2018, that's 6 billion euros. 2019, it's 7 billion. It dips a bit during 2020 with the pandemic, but then 9 billion in 2021 last year, 11.6. And like we said, on track for, call it 14 billion euros in 2020. Three, this is an absolutely resounding success. As we've said, what Axel and Pierre, Alexei and this generation of the family has done, like all the generations before them, has been nothing short of amazing.
- [181:04]
Ben Gilbert
Remarkable.
- [181:05]
David Rosenthal
Starting with the defense against Bernard. Incredible. I don't want to fully judge or leave a negative mark on the company solely because of the Apple Watch thing, but I just got to say we've seen a few times here in these generations that the seeds of the next challenge are sown in the current generation. And I wonder if this is it here.
- [181:25]
Ben Gilbert
Hermes has always thrived by figuring out how to be above it all and it be counter positioned to the rest of luxury. It's an open question, I think, of whether the Apple partnership helps that or hurts that.
- [181:37]
David Rosenthal
Yeah.
- [181:37]
Ben Gilbert
Okay, a few more stats on the business today before we move into analysis. That sounds good to you, David? Great, great. Well, I thought one fascinating thing was Excel saying that with the 4.3 billion in net income that they do, they always split it roughly the same way. One third to the dividend, one third gets reinvested in capex and one third in cash. And what's pretty interesting is they have a reasonably low reinvestment rate, they're dividending out a lot of cash and they're holding onto a lot of cash, 2/3 of it. And so what's obvious there in the numbers that we've talked about in a more subjective way is they have a limited ability to actually reinvest in the business. It's much like Costco. They're constrained by factors other than capital. You give them more money, they can't do anything with it, which I just find fascinating. They can only train the craftspeople so fast. And frankly, at some point they'll saturate the market too. If they're going to address the whole world, they're going to have to change what they sell. And the Apple Watch may be the first little version of that. They grew what, 20, 25% last year. They can't keep growing at 25% without changing what Hermes stands for. And so even if they could train these craftspeople as fast as possible, they have another governor, which is scarcity, product, image, price. At some point, they'll bump up against the walls of that and no additional craftspeople and no additional money can help them grow anymore.
- [183:06]
David Rosenthal
That's such a good point. And that's the counterpoint to my impassioned concern a minute ago. Okay, great, David, everything you were just saying, that translates to Hermes as a museum. And Hermes is Not a museum.
- [183:20]
Ben Gilbert
Right.
- [183:21]
David Rosenthal
And it has to meet its clients where they are. And like I said, I wear this thing 23 hours a day. I couldn't imagine buying any other product from them.
- [183:27]
Ben Gilbert
And I'm sure there are some members of the family that want to walk around with their nose in the air and be a museum and say, hermes is pure, and I want to go my whole life and then die with Hermes remaining pure. And there's other members of the family that are like, can we serve customers and grow this business? My God. And that Apple watch represents the second faction.
- [183:45]
David Rosenthal
Yep, totally.
- [183:46]
Ben Gilbert
Next, their cash position. They've got $10 billion in cash, and that is after materially increasing the dividend for the first time in a decade. They've recently just started dividending out more cash, which, again, is emblematic of the same idea of money is not our constraint, which is pretty new for the business. That's a decade or two old problem that never existed over the first 170 years. And so that's an interesting thing to know about a business is it was always run under the constraint of even if we see growth opportunities, we don't have enough cash to pursue all of them. Now they actually do. And so it's interesting to see how management sort of responds in this opportunity for abundance that they have and figures out how to treat certain elements of the business as a scarce resource, even though they don't have to.
- [184:31]
David Rosenthal
Yep. Now, certainly there is an element to the dividend that is part of making the family shareholding lock up. An easier pill to swallow.
- [184:41]
Ben Gilbert
Yes. Quite palatable. The segments of the business, leather goods and salary is 43%. That's the big guy. We didn't talk about this much on the episode, but ready to wear and accessories is 27%. That's a big chunk. That's the second largest chunk of the business is clothing, effectively. And I sort of have an open question of whether they should be in clothing. Isn't it kind of antithetical? I mean, certainly it's odd to see them in the fashion world and they do these Runway shows and they do couture, but it feels weird. It somehow feels antithetical in some way.
- [185:13]
David Rosenthal
Yeah. They're not a fashion brand, and yet they participate in it.
- [185:18]
Ben Gilbert
Yep. Next largest segment after that is silk and textiles. So remarkable how small the scarf business has become of their overall mix, given that it used to be, what, close to half the business after that is perfume and beauty at 4% and watches at 4%. And then there's a couple Categories of others, which I think it's really interesting to look at perfume and beauty as another glimpse of what's to come. They make $100 bottles of perfume and they sell them at department stores.
- [185:47]
David Rosenthal
Yep. And they launched beauty in 2020 with lipstick.
- [185:51]
Ben Gilbert
Yep. Which I think is very China focused. It's very interesting to me that they are trying to appeal especially to a younger demographic with a lot of their recent perfumes and selling in department stores. Again, it feels antithetical to Hermes as this sort of pure brand. But on the other hand, it's a continuation of the Apple Watch strategy even further.
- [186:13]
David Rosenthal
Yep. There's one more elephant in the room to me that we haven't addressed via the story, which is that the business is a global business for sure. But really today, this business is an Asia business.
- [186:30]
Ben Gilbert
Yeah. So here's some stats. In 2006, France was already down to 19% of sales. I mean, it started at 100% of sales. So that's why I say down to 19%. 2006. This is a while ago or almost 20 years ago. At that point in time, Japan represented 27% of sales. So there's all this talk about China and luxury today. Japan was that in the early 2000s. So crazy, right? Japan was one and a half times France in terms of sales for Hermes. Well, today France is down to just 9% of sales. So let's flash back to 2006 again. So we talked about Japan being at 27% of sales. Asia Pacific, outside of Japan was only 17%.
- [187:15]
David Rosenthal
Oh, wow.
- [187:16]
Ben Gilbert
Japan was almost one and a half times as large as rest of Asia. Well, today rest of Asia is 48%. Half of Hermes business is Asia, excluding Japan, aka China. Exactly. That's crazy. And I think Russia accounted for a decent amount of that.
- [187:36]
David Rosenthal
Hmm, interesting. The Japan story, actually, I think is still significant. Japan today is what, like 10% of revenue? Yeah.
- [187:44]
Ben Gilbert
Japan's larger than France. It's 9% in France, 10% in Japan.
- [187:49]
David Rosenthal
Right. So I actually looked into that. I was like, huh? Yeah. The rest of Asia, you know, again, aka China, is 48% of the business. But on a per capita basis, Japan buys twice as much Hermes as China.
- [188:02]
Ben Gilbert
That's interesting.
- [188:03]
David Rosenthal
Still, Japan is, I believe, around a tenth of the size of China and is 10% of Hermes sales versus 48% for rest of Asia.
- [188:14]
Ben Gilbert
Huh.
- [188:14]
David Rosenthal
For a small country, kind of like France, it's still very, very significant for the business.
- [188:18]
Ben Gilbert
Yeah. I will say that. You listen to management commentary. Hermes is very excited about China's middle class and they have done a really good job skewing younger there. 80% of clients in China are below 40.
- [188:32]
David Rosenthal
Wow. And again, this is a huge, unique success for Hermes. China has been big for the whole luxury industry over the last decade plus. But the past few years, particularly the last two years, China has been real tough for the luxury industry. And yet Hermes is still growing there.
- [188:55]
Ben Gilbert
Yep. Employee count. So they have 21,000 total employees. 7,000 are artisans. 62% of employees work in France. So they really have stayed French. They've not outsourced. They have 54 production sites in France, or what they call workshops, and they manufacture 76% of the objects that they sell in their stores in their own exclusive workshops. So they do still have these partnerships with other companies that they own part of or just have a partnership with or a distribution deal with. Usually what it means is it's sold as an Hermes product, but it's made by another manufacturer. And over the years, they've done this with shoes and umbrellas and leather jackets and raincoats and silverware and gloves. They've had all these independent craftsmen that they sort of contracted with who have these really small shops, really small operations, don't have the brand reach that Hermes does. But they make Hermes products that are actually made by those people. So it's interesting. I think they are sort of decreasing that when I give the number that at this point, 76% of objects are made in its own exclusive workshops. But it is more correct than not to think about Hermes as they control everything from design to production to brand to retail today.
- [190:12]
David Rosenthal
Yep. And I think a lot of those, like, there's a silversmith and a tableware manufacturer that they own large stakes into. So it's like a related party.
- [190:22]
Ben Gilbert
Yep, exactly. They have over 300 stores in 45 countries. David, as I mentioned earlier, in 2020, the Wall Street Journal estimated that about 120,000 Birkin and Kelly bags were made in that year. That's about 25 to 30% of total revenue coming from just those two bags, which, again, you can't buy and also you can't even see.
- [190:47]
David Rosenthal
Yeah, they're not on display in the stores.
- [190:50]
Ben Gilbert
I went to a few Hermes stores over the last year. A, because I love the brand. B, because I was thinking we might do this episode at some point. I saw zero Birkenaur Kelly bags even on display. This is the thing that they generate all their buzz about and make 30% of their revenue from. And you can't see it in a store.
- [191:07]
David Rosenthal
Yep.
- [191:08]
Ben Gilbert
Crazy.
- [191:09]
David Rosenthal
Totally Crazy.
- [191:10]
Ben Gilbert
I mean, if you just do some Napkin math, at 25 hours per bag, that's 1,500 craftsmen just making Birkins and Kelly's all day long.
- [191:18]
David Rosenthal
Sounds about right.
- [191:19]
Ben Gilbert
They have 16 metiers, and one in particular that I want to talk about is Petite H. This is one of my favorite Hermes things, period. So it started in 2010. It's a very interesting idea for other leather brands. You typically see them trying to use the second best leather cut in some of their bags, but Hermes, they'll never do that. There's no bag that's ever produced with any imperfections or any part of the leather that they think is any lesser than the best. So what do they do with all that leftover material? Well, for years they were just storing it. And this is everything from the leathers to the felts to the silks, all this extra material where they were just like, there's a tiny little bit that's usable, but not enough to actually make another bag to our standards. So into the closet it goes. And in 2010, they launch Petite H. And what they basically do is they collaborate with other artists for tiny little goods that can be cut from the scraps that are super whimsical, super fun. Think luggage tags that are cute little animals, but it's just enough of a shape to know that it's a bull or a bear or a cat. And you look at it and you're like, oh, that's really clever. And what they call it is creation in reverse. You start designing with the materials, not the end product in mind. And it's kind of the opposite of everything else that Hermes has ever done, which is think about what's the perfect good we can create to solve this problem for a customer. This was like, now we've got a bunch of scraps. What's fun stuff we can do? And that is that whimsy coming through.
- [192:54]
David Rosenthal
Yes.
- [192:55]
Ben Gilbert
One thing that I want to say about the luxury bubble cooling is that earlier I sort of chalked it up to, well, Hermes has the most exclusive brand posture, so they have the least price sensitive customers. So they're going to feel the pullback less than everyone else. And that is true, but there are other parts of it, too. Hermes obsession with responsible growth, limiting production and slower price appreciation also plays into the desirability and the durability of their goods. If they were out there cranking the prices of Birkin bags, you might think less of them.
- [193:32]
David Rosenthal
Yeah.
- [193:33]
Ben Gilbert
If they were out there trying to produce more of them to meet demand, you'd certainly think less of them if they were outsourcing production in any way. So it's how they conduct business that has caused them to sort of be in a better position than the rest of the luxury industry right now in this pullback.
- [193:49]
David Rosenthal
Yeah. I'm glad you reminded me to bring this up when we were talking earlier about the question of the secondary market and why are they leaving pricing power.
- [193:57]
Ben Gilbert
On the table or essentially there's consumer surplus in economic terms.
- [194:01]
David Rosenthal
Right. And I said, I think they increase prices across the product range by about 7% per year. So where I got that from is if you look at the compounded annual revenue growth rate of Hermes for the last 10 years, the sixth generation era, it's 15% revenue's grown 15% compounded annually since Excel took over in 2013. They've increased production 7% per year. That's their stated goal. So if you say, like, okay, of the 15% revenue growth, take out the 7% production growth, that leaves 7 to 8% of that's gotta be attributable to price increases.
- [194:39]
Ben Gilbert
Huh?
- [194:40]
David Rosenthal
Which I think this is the answer. Now, is it the right strategy? Probably it is the right strategy. If you're thinking about, hey, this is a generational business. We're on the sixth generation. We want to ensure it's around for the 12th generation. Yes. We're leaving consumer surplus on the table here because we don't want to be seen as that brand that, you know is like $100,000 handbags, even though they are $100,000 handbags.
- [195:04]
Ben Gilbert
Right, yeah. There's a fine line.
- [195:06]
David Rosenthal
There's a gaucheness to it.
- [195:08]
Ben Gilbert
Right, Exactly. They need to have a price that's high enough to signal this is something really, really special. And we are more unique than every other luxury brand who's trying to make similar products and have similar positioning. But also, it's not so expensive that it's gauche. And I think the latter part, it's not actually about the dollar amount, it's about the price difference. Because if it's three times as much as it was a decade ago, it's harder to trust the intrinsic value of the good if it's fluctuating all over the place.
- [195:40]
David Rosenthal
There probably is an element of like a, I want to say, almost defense that they can fall back upon of. Well, yes, we sell these things for $12,000, $20,000, whatever, but the moment you take possession, you can turn around and sell it for more.
- [195:54]
Ben Gilbert
Oh, this is an intentional strategy over at Rolex, they increase prices a certain amount per year and they want to show a track record of that so that if you buy one, you can rest assured that it's going to increase in value over time and that it's a good investment. Because counterintuitively, by increasing the price more than the rate of inflation every year, or especially more than the rate of 5 to 7% stock market return, it spurs people to buy that otherwise wouldn't have bought because they feel more safe making the purchase.
- [196:25]
David Rosenthal
This concept landed for me during our Porsche episode working with Doug Demiro. There's a class of almost every car that you would ever buy. The old adage is true that the day you drive it off the lot, it's worth 20% less than it was the day when you bought it. For I don't know what the right word is. Luxury cars, collectors cars, rare cars, et cetera. The opposite is true. These are investment vehicles. If you buy a Carrera gt, you're going to spend a million dollars for it. But you can also be confident that you're not going to lose money on that purchase.
- [197:04]
Ben Gilbert
Right.
- [197:05]
David Rosenthal
It's an investment.
- [197:06]
Ben Gilbert
Right. Then there's a business unit that we didn't talk about yet called Hermes Horizons.
- [197:11]
David Rosenthal
Yes. Which is not a official metier, Right?
- [197:14]
Ben Gilbert
It is not a metier. They break it out under other products. They have four categories of other products. There's Internet of Things, which is Apple Watch. There's tanneries and Precious leathers. There's Metal Parts, which is a J3L subsidiary that I think literally makes the clasps and stuff like that.
- [197:30]
David Rosenthal
My deployment buckle.
- [197:31]
Ben Gilbert
Yes. And then there's Hermes Horizons.
- [197:33]
David Rosenthal
This is so great.
- [197:34]
Ben Gilbert
Hermes Horizons is perfectly named. What it basically says is if you.
- [197:39]
David Rosenthal
Have a private jet and you want it outfitted with Hermes seats.
- [197:43]
Ben Gilbert
Hey, we don't make seats.
- [197:44]
David Rosenthal
We've got the division for you.
- [197:46]
Ben Gilbert
We will make you seats.
- [197:47]
David Rosenthal
Yes. There's an amazing quote from an article, probably 10, 15 years old. The person who is running this division said something like, we get a lot of clients who come in here and they want a big H on whatever it is they want us to make. And we have to have a discussion with those clients that if that's what you want, we are not the place for you.
- [198:13]
Ben Gilbert
Yes.
- [198:14]
David Rosenthal
So great. Maybe one day be Hermes Horizons customers.
- [198:19]
Ben Gilbert
Maybe. We'll see.
- [198:20]
David Rosenthal
All right, well, let's transition officially to analysis and start with power, as we always do. Hamilton Helmer's seven powers and listeners.
- [198:29]
Ben Gilbert
This is the question of what enables a given business to achieve persistent differential returns or to be more profitable than their closest competitor on a sustainable basis. And the seven that Hamilton has identified are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And the question we asked David on the LVMH episode was for luxury brands, is there anything else other than branding power? Because the definition of branding power is if I present you two identical objects and one of them is branded and one of them is unbranded, it is literally quantified as the premium that you are willing to pay me for the brand. Now, in Hermes case, it may not actually be branded, but you might still know it as Hermes and be willing to pay more for it.
- [199:19]
David Rosenthal
Yeah, if you know, you know.
- [199:21]
Ben Gilbert
Yes. Again, we're drawing a lot of attention to quiet luxury here. Hermes is not as quiet luxury as they once were. So I think it's safe to say it would have an H or a horse or woven H into the fabric or something like that if presented to you here. But obviously there's a tremendous amount of branding power.
- [199:40]
David Rosenthal
Now on the LVMH episode we talked a lot about and I think this truly was maybe the most brilliant thing that Bernard Arnault did was he realized when nobody else did that there were scale economies in luxury to a group of luxury brands. There's the opposite of scale economies to an individual luxury brand. But at the group level there is power and specifically scale economies power that does not exist at the brand level. Clearly none of that is happening here.
- [200:13]
Ben Gilbert
Yep. Okay. I have two cases to make for non brand powers that come into play.
- [200:18]
David Rosenthal
Oh, okay, great.
- [200:19]
Ben Gilbert
Cornered resource.
- [200:21]
David Rosenthal
Yes. Agree.
- [200:22]
Ben Gilbert
They literally have all the craftsmen.
- [200:24]
David Rosenthal
Agree.
- [200:24]
Ben Gilbert
Except for the ones that are opening their own independent shop. And those ones don't have brand power. An Hermes craftsman can make a wallet. An independent craftsman can make a wallet. You're going to pay a lot more for the Hermes one. In fact, you're never even going to be aware that the independent craftsman exists. If someone else wanted to go compete with Hermes, it'd be hard because they don't have the brand, they don't have the history. But also you literally can't find any more craftsmen, so you'd have to train them yourselves.
- [200:46]
David Rosenthal
Well, and I think even the other luxury brands out there, most of them probably do have some craftsmen, some stuff that's done by hand, some components of some products done by hand. But nobody does what Hermes does. And Hermes does all the craftsmen. So cornered resource for sure.
- [201:00]
Ben Gilbert
Yep. The other one that is a little bit squishier are they counter position to other luxury brands by basically Saying, hey, we don't have to serve as many customers as you, so we actually can handcraft each item individually. Louis Vuitton has no ability to switch gears and say, ooh, it's important to compete on the vector of handcrafted.
- [201:22]
David Rosenthal
Right. There are a lot of T shirts out there.
- [201:24]
Ben Gilbert
Right. They have to serve too many customers. But Hermes doesn't.
- [201:28]
David Rosenthal
Right.
- [201:29]
Ben Gilbert
It's kind of flimsy counter positioning.
- [201:32]
David Rosenthal
No, I like that. Actually, it's rare to have counter positioning at scale. As Hamilton would put it, counter positioning is usually a takeoff phase. Power.
- [201:41]
Ben Gilbert
Yep.
- [201:42]
David Rosenthal
I think there's an element of that you could dissect how much of that particular element is actually part of the Hermes brand versus counter positioning in and of itself. But I buy it. I think at the end of the day, though, I mean, we spent however long this episode will be when it ships, recounting the myth of the brand here. Like, brand is the power.
- [202:01]
Ben Gilbert
Yep. Brand is the power.
- [202:03]
David Rosenthal
Yes.
- [202:04]
Ben Gilbert
Okay, Playbook. I called David earlier this week and I said, we have a problem. There's this really good part of the LVMH episode and we're going to need to repeat it point for point on the Hermes episode. And that is why handbags are just the best freaking product to sell ever as a business. David planted the seed with me. Perhaps. It's actually going to be a pretty different point once we really tell the whole story. And David, you are right. So the point that was made on the LVMH episode are handbags are the best product ever because they're super easy to sell versus clothing. They don't require you trying anything on or sizing. You look at it. If you like it, you buy it. Done much better than a fashion product. They're easier to create and produce than perfumes, which is another common luxury category. The profit margin is astounding. For most luxury brands, the profit is between 10 and 12 times. The cost to make them at Louis Vuitton is something like 13 times. So there's this ease of creation, there's high volume. According to annual consumer surveys that Coach does, the average American woman purchased two new handbags in 2000. And by 2004, that number was more than four. So it's this high volume product. And at Louis Vuitton's immense 4 Floor Global store in Tokyo, 40% of all sales are made in the first room, which sells only monogrammed handbags, wallets, and other leather goods. Basically, none of these are true. For Hermes. The business is not high volume or not nearly as High volume as they could be. In fact, they don't even show you handbags in their stores. So certainly not in that first room.
- [203:41]
David Rosenthal
It's amazing. At least in the Palo Alto Hermes, which is one I've most recently been in. You walk in and you would think this is a homeware's company. Yes, there's a lot of tableware and there's a lot of furniture and there's clothing. There's ready to wear and there's clothing and there's some leather goods, there's scarves. But you would really think, wow, I'm in the most expensive IKEA ever.
- [204:07]
Ben Gilbert
It's such a funny way to describe it in terms of trying on the handbags. When you do get your moment in the sun and you have your 90 minute appointment and your glass of champagne and you have the opportunity to buy one of the two or three Birkin bags that they have in store, you can't say no.
- [204:23]
David Rosenthal
You have already accepted.
- [204:24]
Ben Gilbert
Right. And it doesn't have the benefit of saving square footage the way that I mentioned. Oh, you don't need to try on handbags. There's nothing to impede your velocity. Hermes is impeding your velocity. And they're taking up square footage with these private rooms for you to go and spend time in. So they don't take advantage of that benefit either. I mean, the only thing that it has in common are these goods are sold at a phenomenal margin, just like Louis Vuitton. But I sort of came around to this idea that actually we're not making any of the same points at all. They managed to sell the same exact product category, totally different, and they've constructed an entirely different business model around the same products.
- [205:03]
David Rosenthal
Yes, I think that's really the story here. Yes. There are other brands. There's Chanel, there's Gucci, there's Sicily. I don't want to say that those luxury brands and those handbag brands are not incredible. They are. But there's Hermes and there's Louis Vuitton and they're both connected all the way back to Empress Eugenie and France and the nobility and all of that. And it's so interesting that they have such different strategies and they are the two pinnacles.
- [205:31]
Ben Gilbert
Right. This is a good moment to bring up this idea that Hermes likes to espouse that they have no marketing department.
- [205:41]
David Rosenthal
Yes. This is a whimsical element of Hermes that I kind of love.
- [205:44]
Ben Gilbert
Yes. So they make the point that everyone at the company is responsible for marketing, which is wonderful. What a great comment. But there's some truth to it. There's obviously a lot of PR and events and stuff that they do, but it's worth looking at some of the numbers. They spend 23% of their revenue on sales and marketing costs, but just a small fraction of that is actually on marketing or what they call communication. It's just four and a half percent of their revenue. And if you compare that to lvmh, which spends over one third of their revenue on sales and marketing combined. So that's 23% for sales and marketing at Hermes compared to 33% at LVMH. I mean, that's a huge difference. When you compare apples to apples just on marketing. LVMH says they spend 12% of total sales on advertising and promotion. Hermes spends 4.5% on communication. I think that is actually apples to apples.
- [206:40]
David Rosenthal
Yeah, that's the media spend of Hermes, I believe.
- [206:44]
Ben Gilbert
It's still not right, though. Oh, it's all marketing, that 4.5% versus 12%. But remember you pointed out to me earlier before recording, two thirds of Hermes communication is actually events. So if you look at the remaining third, it might be as low as one and a half percent of their sales are actually spent on media buys for marketing compared to LVMH's 12%.
- [207:09]
David Rosenthal
Yeah, this is really cool. I saw a very large, splashy media buy from Hermes very recently and I was shocked when I saw it because I didn't expect it. But then, now doing all the research, understanding the strategy, it makes total sense to me. It was at the ballet here in San Francisco at sfb, at the program for mere mortals, which was just as I talked about on the Novo Nordisk episode. We went to see it opening night. Just incredible. Incredible piece. Allegory for Pandora's box and AI and ballet in the modern world here in San Francisco. The back of the program was a full page Hermes ad. And I was like, whoa, I think I texted you a picture. I was like, hermes is buying full page marketing ads. But no, no, no. This is in the program at the ballet. This is not on the back of Vogue. There's a difference, right?
- [208:00]
Ben Gilbert
This is in some ways event spend.
- [208:02]
David Rosenthal
Yes, it's much closer to that.
- [208:04]
Ben Gilbert
They also go really hard when they're going to spend money. They don't blanket the world. They decide these concentrated ways that they want to do something really unique and special. And that's how they spend their media buys.
- [208:15]
David Rosenthal
Also their event spend, you might say. Like, wait, how did they spend twice as much on events as they do on media. You haven't read about Hermes events. Yeah, even just the pure marketing events like a store launch or product launch, they'll spend a million dollars on a party.
- [208:29]
Ben Gilbert
Right. Another place that they save a lot of money is that they don't do celebrity endorsements, unlike virtually every other luxury brand. And this gets back to control, control, control. Hermes is the master of its own image. And in these other companies, celebrities do dumb stuff all the time and it reflects on the company. You have to change your spokesperson. I mean, you look at Kanye, you have to just decide to stick with them and tough it out. Nike has done this a number of times to sort of say, like, we think we're going to come out the other side and we think they're going to get through this Hermes. No, we control our own image. No one else reflects on us. And who needs celebrity endorsers when you make your products so desirable and so expensive that the celebrities will just buy them anyway and they want to be seen in it? So there are celebrities running around who get paid to endorse other brands who will pay full price to wear Hermes out and about.
- [209:28]
David Rosenthal
It's part of the status is getting the ability to buy one, getting the appointment with your essay, spending the money. That's part of the status.
- [209:36]
Ben Gilbert
Not only is it revenue generating and cost saving, but it's also more powerful than a paid endorsement because it's authentic. It is what the celebrity is choosing to do with their dollars.
- [209:46]
David Rosenthal
Yeah, I'm pretty sure that Grace Kelly bought her Saca Depeche.
- [209:49]
Ben Gilbert
Unbelievable. At the end of the day, the Hermes brand really has a tremendous amount of word of mouth from people who are big fans of it. And the brand is built through the lore around the products and they just don't need to do that much media because they have a community. They have slowly, organically built this at this point. Large number of people around the world that aspire to buy Hermes and honestly they just don't need to do that much marketing.
- [210:22]
David Rosenthal
This is going to sound absurd on the surface, but I think it's true. That audience is incredibly diverse. That audience is lots of customers in the Middle east. That audience is 40 plus percent China. That audience is still French people with the preface de in their names. That is old nobility. That audience is the wealthiest people in America. That audience is Cardi B and Megan Thee Stallion.
- [210:52]
Ben Gilbert
As we talked about earlier, somehow there's something about the French heritage that everyone else is willing to, status wise, look up to and want to participate in.
- [211:02]
David Rosenthal
Yep. I don't Think we want to go down this rabbit hole, but there is a whole TikTok and Instagram culture of Hermes sales associate appointments and Birkin appointments and reveals and all that. And it's huge. There are millions and millions of people that watch this.
- [211:17]
Ben Gilbert
Yep. Okay. One thing that we did not talk about is how they merchandise the stores. And this is another thing that sets Hermes apart from other brands. They have a pull model versus a push model for all you software engineers out there. Basically, they embrace this idea that every store is for the local clientele and that store managers know their clients the best. So therefore, store managers should get to pick what is in each store. And headquarters does not dictate what every store stocks, which is super different than every other brand. You open retail stores in order to just get your product out. That's the point is distribution. Whatever salespeople we hire to work at those stores, they're going to sell the same iPhones and iPads that we have everywhere else at every other store that is not Hermes. So at Podium every year, which is this event that they have every six months where they show off all the new references. Here's all the new designs for all the new products. Each store manager gets a budget, and they have the freedom to buy basically stock and get allocations of whatever they want at their store. Under the constraint that you can't ask for 120,000 Birkin bags at your one store.
- [212:27]
David Rosenthal
I believe there's also regulation that every store needs to carry at least one item from each metier.
- [212:33]
Ben Gilbert
Oh, that's cool. I didn't realize that. I like that, but yeah.
- [212:36]
David Rosenthal
This operates like a retail buying event. It's bizarre, but awesome.
- [212:41]
Ben Gilbert
Even though they're wholly owned, they get the benefit of not being wholly owned.
- [212:45]
David Rosenthal
Right. The market signals.
- [212:47]
Ben Gilbert
The cool thing about a retailer that's decoupled from the manufacturer is that the retailer can kind of stock whatever cool stuff they want. As long as the metiers are all producing a diverse set of references, then you actually do get this diversity of different things that are stocked at that store for that region. So it leads to this cool thing that no two stores are identical. It's kind of fun to see what this Hermes shop has versus that Hermes shop. Whenever you travel, there's like a Costco.
- [213:15]
David Rosenthal
Treasure hunt element to it.
- [213:17]
Ben Gilbert
Yes, exactly. I will tell you, I was in the Exxon Provence store and someone came in and said, I want to buy this particular item. And the store manager said, well, we don't have it. And they have a policy against anyone sort of calling ahead to know what's where. And he was asking, well, can you call the other store that I think was in Marseille or something like that and see if they have it there? And she said, no, we don't do that. You can go there and you can find out. And I think this person was trying to like buy something and flip it. And so they were sort of onto that. He was also trying to take pictures of things in the store and they said, you can't do that, sir. Like you can't take photos of what we have in stock. Because they don't want people standing up websites to say, tip, go buy this here. Because you can flip it online for that much. But I love it. They have pretty tight controls around that.
- [214:03]
David Rosenthal
I love it. Luxury strategy. Anti love marketing number six. Dominate the client.
- [214:08]
Ben Gilbert
Dominate the client. Yep. Their e commerce strategy is just pretty funny. It's not like you can go online and buy a Birkin bag, but there's not even a product detail page with a sold out button. There's just this educational page about what Birkin bags are all about and how neat the designs are and what the category is.
- [214:26]
David Rosenthal
But there's no buy button.
- [214:28]
Ben Gilbert
It's also for a different audience. Interestingly, 70% of buyers online for all the stuff that you can buy online were new to Hermes. So that's a great strategy for them. For E commerce you say, look, the special things are the special things. But for people who we want to come experience the brand for the first time, great, we've got a website for you. And I think you can sort of tell that internally they're torn since that's not the full Hermes experience. Like you don't get the experiential part of being in the store, but they also do a lot of volume through it and it's a way to reach a new audience and it's kind of an expectation at this point.
- [215:03]
David Rosenthal
This is a really uniquely Hermes thing and is related to their airport strategy too.
- [215:10]
Ben Gilbert
Oh yeah.
- [215:11]
David Rosenthal
And I experienced this too when I went to Palo Alto. I just walked into the store. I was pretty intimidated. As a first time buyer and you don't have an essay, a sales associate relationship, it can feel very intimidating, especially knowing what I know about the company and the brand. The weight of history. Walking into this store, it's not like walking into an ikea. This is very intentional. The e commerce strategy and then the airport strategy is, hey, nobody feels intimidated in an airport. Obviously you don't have to have an appointment to walk into the airport. Hermes Store. It's a way to get first time buyers into the fold, establish the relationship with them, get them more comfortable in this buying experience. Which is wholly unique to Hermes.
- [215:55]
Ben Gilbert
Yep. In some ways it seems wholly un Hermes, but in other ways, kind of like the Apple watch thing that they do, or the perfume, they are looking for ways to be more approachable.
- [216:06]
David Rosenthal
Right.
- [216:07]
Ben Gilbert
Another one worth mentioning is employee turnover. So the employees, especially the craftsmen, basically stay forever. As we've been saying, there's really no other game in town. And if Vermeers wasn't there, these people probably wouldn't have been trained to be craftsmen in the first place. So what does that look like? Numerically, there is 6% annual turnover and only 4.5% leave of their own desire. 4.5% of their entire workforce every year leaves of their own desire.
- [216:36]
David Rosenthal
So that translates to a longer than 20 year average tenure. This is like Costco level employment retention.
- [216:44]
Ben Gilbert
It's funny you say that. So Costco is 7% a year, but Costco cheats a little bit. And that the stat is after the first year, whereas Hermes attrition of 6% includes the first year.
- [216:57]
David Rosenthal
Wow.
- [216:58]
Ben Gilbert
Yeah. So just compare this with all industries in the US that's a 3.4% monthly turnover. So in the United States, across all industries. And thanks to Jeremy diamond and the Slack for pointing this out, one third of the entire workforce churns on average every year. So when you're trying to figure out, geez, is 6% good? 6% is unbelievable because the benchmark is 33%.
- [217:24]
David Rosenthal
Especially in the context of think about the two areas that are the bulk of Hermes employees. It's craftspeople and sales associates, which if.
- [217:35]
Ben Gilbert
You are to use different language, is manufacturing and retail, which are super high churn categories.
- [217:41]
David Rosenthal
Right. That's the point I'm making.
- [217:42]
Ben Gilbert
I mean, even software developers churn at 15 to 20% per year. And that's just the voluntary numbers. This is much better than software engineers who get paid hundreds of thousands of dollars to have a very cushy job. So finally, let's go real apples to apples. Let's compare this to LVMH. Well, LVMH's total turnover in 2022 was 24% versus Hermes 6%. So Hermes may be obsessed with this whole savoir faire and transmission of craft in their annual report, but it is totally real. I mean, the entire thing works because of the knowledge and craft of their people.
- [218:19]
David Rosenthal
I mean, they have incredible YouTube videos and documentaries they put out like you referenced. And you Go see these people. And you really get the feel like factories. They're not factories. These ateliers are something truly unique.
- [218:34]
Ben Gilbert
Yeah. And they're only getting more obsessed with control. I mean, controlling everything end to end. Hermes used to have 56% of retail locations that were company owned. This is back in 2003. So 20 years ago, little over half were company owned. That's now 74%. So they're getting rid of what they refer to as the concessionaires, which are essentially franchise stores, and closing them in favor of the wholly owned businesses. So this is, again, they're just trying to figure out how do we control more of our production of our everything. Soup to nuts. They describe this strategy as having three pillars, and this is like three pillars for their entire business. This is like V strategy at the top of the annual report creation, craftsmanship and an exclusive distribution network. And that's probably the way to sum up Hermes. All right, so to close Playbook, I just have one more, which is really this idea of what is the job to be done by Hermes? And I had this great conversation with Derek Guy, who's sort of colloquially known on Twitter as the menswear guy. Dye workwear is his handle. And he has some amazing threads. They're very worth reading about if you're interested in ironing pants or why suits don't fit the way they used to. But he pointed out this really interesting thing to me, which is the value propositions of Hermes are essentially a bundle. And that bundle is exclusivity, service, craftsmanship, shopping experience and a great brand. And you basically can't get that bundle anywhere else that doesn't have competitors.
- [220:13]
David Rosenthal
Yeah, you can get individual elements of that bundle elsewhere.
- [220:17]
Ben Gilbert
Absolutely.
- [220:18]
David Rosenthal
But by nature, given what this is and the luxury industry, you can't assemble this experience, the Hermes experience, out of separate components.
- [220:30]
Ben Gilbert
And it used to exist in sort of a Pre War, early 20th century era. You could. But Hermes was the only one that sort of chose to keep doing things the old way and scale. And everyone else kind of went out of business or changed their methodology to scale. So, for example, Louis Vuitton has the branding, they have exclusivity, but the craftsmanship isn't there. They don't make things in that early 20th century way. Supreme can offer you exclusivity and brand, but again, there's no real craftsmanship there. And then you've got all these individual artisans, a craftsperson and a. A little workshop somewhere in Paris making the highest quality, you know, Hermes quality things. But there's no brand would you buy that? Would you pay even half the price for that? I think a lot of people who are buying Hermes are buying it because Hermes and they want the brand.
- [221:17]
David Rosenthal
Right.
- [221:18]
Ben Gilbert
And you know, there's other things that are missing from that too. There's no shopping experience. Service is unknown because you don't know how long that maker is going to be around. You know for a fact that 50 years from now you can get your Hermes things serviced. So there's some great makers like Chester Mox or April in Paris or I heard great things about Mila Gito. These are like exceptional craftsmen hand making items in the same way. But it's a different bundle of value propositions.
- [221:45]
David Rosenthal
Yeah. Completely different product.
- [221:48]
Ben Gilbert
To me. What sums up the analysis is that the magic of what Hermes has done is managed to scale the old way with the complete bundle.
- [221:57]
David Rosenthal
Yep, totally agree. Nothing more to add.
- [222:01]
Ben Gilbert
Thanks, Charlie.
- [222:02]
David Rosenthal
All right, should we do value creation, value capture and then we've got a new way to wrap up episodes here.
- [222:09]
Ben Gilbert
Yes. Well, this section was originally Created by us 5 years ago or something to basically assess of the value created in the world, how much does the company actually capture of it. So canonically, Craigslist creates a ton of value, Wikipedia creates a ton of value, captures very little of it. But you look at, on the other hand, Google, they create a lot of value. You can find stuff on the Internet, they're pretty damn good at capturing it. They've built a huge business on that. So there I think is a reasonable indictment to make that many of you will want to make on all of luxury and say it's just excess. They don't actually create value in the world and then they capture a tremendous amount of value because they just have a brand that allows people to social signal and all luxury is excess. And that's a reasonable viewpoint. However, I think there's an interesting way to look at Hermes in particular, which is if what you desire is the highest quality craft, they offer at an extreme price a guarantee to be able to get that super high quality craft. And that's different than every other luxury brand that is no longer about craftsmanship but is kind of about hype and logos brands.
- [223:25]
David Rosenthal
Yeah, let's bring up brand and fashion.
- [223:27]
Ben Gilbert
Yes. So I would say Hermes has figured out that there actually is a pretty big niche for craftsmanship or at least people who desire the brand of craftsmanship and they're exceptional at value capture around that.
- [223:42]
David Rosenthal
Well, it's interesting, yes. But the secondary market is this very direct. If you're talking Purely about economic value creation, value capture. Very direct data point that, like, no, they are leaving a lot of surplus on the table for their consumers.
- [223:57]
Ben Gilbert
Yep. Another element to value creation, value capture is what they're doing good for the world, period, regardless of what they're able to capture. Anybody who's doing things with exotic leathers, you may have a problem with farmed crocodiles in mass quantities in order to create the Himalaya print Birkin bags.
- [224:18]
David Rosenthal
There's actually a brief period where Jane Birkin boycotted Hermes bags and asked him to take her name off of them.
- [224:24]
Ben Gilbert
Do you know how that got solved? Like, why is she cool with it now?
- [224:27]
David Rosenthal
I could be wrong, but I believe this is when Hermes took the crocodile farming in house and improved a lot of the animal welfare standards.
- [224:34]
Ben Gilbert
So for everyone who's like, you know, it's absolutely cruel to do this to crocodiles to make handbags, Hermes doesn't really have, like, a counterpoint. They don't have, like a. Well, they lived good lives. That's not a part of their defense. Their defense is purely around sustainable farming, which is, hey, these are endangered species in many scenarios with these exotic leathers. And so what we do is, for the ones that we farm, we also release a bunch into the wild to try to replenish the population. Even though we're not actually taking away from the population in the wild because we're not hunting them. We are trying to sort of almost in an eye for an eye way, say, look, we're creating a bunch of crocodiles. And so we're releasing a bunch of them into nature also. And I don't know, it sits medium with me.
- [225:20]
David Rosenthal
Yeah, it's not a great response.
- [225:23]
Ben Gilbert
Right. Similarly, you see piles and piles and piles of cowhides for the leather production. And the response is, well, look, these were beef cows. And so we're basically doing a good thing by making sure that we use the whole animal, since we were going to use it anyway for sustenance somewhere else in humanity.
- [225:43]
David Rosenthal
To me, that is a better argument than we farmed the crocodiles for the skins. It's funny, actually. Doing the Novo Nordisk episode gave me a new perspective on this with animal products. And obviously, insulin doesn't come from animals anymore. It's genetically engineered. But a lot of pigs and cows went into producing insulin for many, many, many decades. That's a new perspective to look at things, because people would have died otherwise.
- [226:06]
Ben Gilbert
Yep.
- [226:07]
David Rosenthal
Now, is that what's happening here with Hermes? Absolutely not.
- [226:10]
Ben Gilbert
Right. I mean, other brands, Chanel, Karl Lagerfeld, Mulberry. A bunch of them are banning exotic leathers in their products. So I think Hermes has played around with mushroom leather. But do I think Hermes is going to go all vegan anytime soon? Absolutely not. It's just not happening. The last thing that you can definitely be mad about if you are into animal welfare is the fact that Hermes care so deeply about their brand that they burn imperfect products so they never see the light of day. That's a bummer. I understand Hermes position of not wanting these bags to get out there and have their brand on it. And, you know, people realize, like, oh, some Birkin bags look kind of crappy, but if you're destroying product that could otherwise have utility, especially when it's made from animals, bummer.
- [226:54]
David Rosenthal
Agreed.
- [226:55]
Ben Gilbert
So they spend a lot of time in their annual report talking about how much more they're getting efficient in their manufacturing processes, how the rates of this are going down. They don't specifically call out burning bags, but how they're able to use more and more of the raw material and have everything that goes in the top of the funnel get used in products all the way at the bottom of the funnel. So the company's taken a lot of heat for it over the years, and it's something that they spend a lot of time working on.
- [227:18]
David Rosenthal
Yep.
- [227:19]
Ben Gilbert
All right, David, I think that brings us to the question, which is, what is your big takeaway from this episode? What is something it's like a big idea you're obsessed with. After spending all this time with Hermes.
- [227:34]
David Rosenthal
We'Ve kind of been struggling for a while with how do we end these episodes, these books that we write now.
- [227:40]
Ben Gilbert
Right. We're not going to grade them the way that we used to grade.
- [227:42]
David Rosenthal
Right. That doesn't make sense. That was always kind of hokey anyway. And we've done bear case and bull case. And again, are we going to do that better than an equity research analyst? I don't know.
- [227:53]
Ben Gilbert
Well, and importantly, Bear case, Bull case has to take into account what are people's current expectations. So you have to dissect the stock price.
- [228:01]
David Rosenthal
Right. Which isn't really the point of acquired.
- [228:03]
Ben Gilbert
Right. And we figure by the time you get to this point of the episode, you kind of already have a bear case and a bull case in your head. It's not like we're going to sit here and paint. Well, if people keep being excited about.
- [228:14]
David Rosenthal
Luxury goods, here's an incredible new insight that'll change your perspective on the stock. Like, no.
- [228:18]
Ben Gilbert
Right.
- [228:19]
David Rosenthal
So, you know, we've been casting about for honestly, a while here of like, how do we land the plane on these episodes? And so what we're trying here for the first time and let us know what you think, if you like it in a very Hermes like way. We dedicate really a month plus of our life to each of these episodes. Like, this is all we're doing for certainly the last four weeks, every day we've been getting up, we've been studying this company, we've been writing. You know, it's sort of insane.
- [228:46]
Ben Gilbert
It's craft. We joke, but it's craft.
- [228:48]
David Rosenthal
And really, like you said, Ben, this episode started a year ago when we did the LVMH episode. And it's been percolating and percolating and percolating. And the last four weeks, it's been every waking moment for us. And so I think a fun way to try to end the episode is when we wake up in the middle of the night and Hermes is on our mind. What are the aspects of Hermes and why? And it ends up being personal for us. Like, what resonates for us from having told this story and done this work and what resonates for acquired, honestly. And for me. We've touched on this a little bit throughout the episode, kind of with the whimsy and the dream element of Hermes. But there's something also to this company that I think is deeply interconnected with the fact that it's on the sixth generation of the family. You ask yourself, how is that possible? How six generations later is this company stronger than ever? And the family members are more committed than ever to running it? And I think it's because they have fun. And again, this comes through in the whimsy. This comes through in the annual reports. This comes through when you watch the interviews with Excel and Pierre Alexei, and when you read the articles and hear people talk like Beatrice about Jean Louis, they are really having fun doing what they're doing. It's an amazing culture and it's kind of hard to have in a environment where you are also, I think, the 47th largest market cap company in the world. I think about other companies, like, it's about winning, right? You think about a professional sports team or like, I think my mind goes to like, the New England Patriots, you know, or like, honestly, it goes to like, Benchmark and Sequoia, like the best venture capital firms out there. These are organizations that are 100% dedicated to winning. And it's not that Hermes isn't dedicated to winning, but they're kind of even more so dedicated to having fun and enjoying themselves.
- [230:49]
Ben Gilbert
Yeah, there's a fun and there's staying true to their identity and both of those things are more important than winning some numerical game.
- [230:57]
David Rosenthal
Right. So for me, that's the splinter in my mind over the last set of months with Hermes is honestly, it's what acquired is for me and for us. Hermes could go out tomorrow and they could follow the consultants, they could borrow a page from the LVMH playbook, and they could vastly increase their sales and profitability overnight. And if they were solely focused on winning, that might be what they do. But they are never going to do that.
- [231:25]
Ben Gilbert
But if they do that, it's still only a short term right thing to do.
- [231:28]
David Rosenthal
Right. So I think it's kind of tied into this short term, long term perspective thing. The reason I say it's fun is the family wants to keep doing this. And so if it weren't fun, they would probably maximize value and they would hit the short term bid and they would sell to Bernard, but they don't.
- [231:43]
Ben Gilbert
Yep. I love that. The splinter in my mind is that you can sell what on the face of it, seems like the same type of products as someone else, but build two entirely different businesses. And Louis Vuitton and Hermes, on the face of it, do the same thing. And as soon as you start digging in, you realize that these companies could not be more different. And all of the puzzle pieces that fit together to create Hermes is an entirely different puzzle than the pieces that fit together to create Louis Vuitton. It's a great reminder that just because you are in the same product category as someone else, you don't have to build a similar business and you might not even be competing with them. There's a large number of people for whom Louis Vuitton and Hermes are not actually in a consideration set together ever. And I think that's fascinating.
- [232:38]
David Rosenthal
Right? These are mutually exclusive brands for a lot of people.
- [232:41]
Ben Gilbert
Yeah.
- [232:42]
David Rosenthal
Certainly not all, but a lot of people. I was thinking about that too, a little bit. In the context of oftentimes in a market, the best way to compete with your best competitor is to do the exact opposite of them, you know, is not to compete with them or at.
- [232:56]
Ben Gilbert
Least be open to a. We don't have to do anything alike. Open to that idea.
- [233:00]
David Rosenthal
Right. This is Android and iOS.
- [233:03]
Ben Gilbert
Right?
- [233:04]
David Rosenthal
Well, all right. That's our landing of the Hermes plane. Let us know what you think. I just love doing this one. This was one of the most enjoyable experiences for me. I mean, all of our episodes are. But like I just really loved this one.
- [233:17]
Ben Gilbert
Well, sometimes we get to learn about an industry that's interesting to know things about, like healthcare or something we're a fan of, like the NFL episode, but sometimes we do an episode like Hermes, and it really teaches us how to run our own business. Again, acquired is not luxury, but we do create a product that has real scarcity, both on the listener front, because we only have an episode a month, and on the sponsor front, because we only have three sponsors a season. There is so much to learn studying the purity of Hermes when you run a business that's predicated on scarcity.
- [233:48]
David Rosenthal
Yes.
- [233:49]
Ben Gilbert
So this one was extra indulgent for you and I.
- [233:52]
David Rosenthal
Yes, yes, totally. Okay, Carmes, let's do it. What you got?
- [233:57]
Ben Gilbert
I have three.
- [233:59]
David Rosenthal
Ooh, fun.
- [234:00]
Ben Gilbert
And none of them are a Vision Pro, even though the Vision Pro is sitting next to me on my desk. And the reason is not because I can't recommend it, but because this is acquired and we can't possibly do anything that's too current. I need more time to evaluate the Hermes podcast.
- [234:14]
David Rosenthal
Indeed.
- [234:15]
Ben Gilbert
Okay, first one. The Anker prime charger. I'll give you the model number because Anker products are impossible to figure out. What's what? This is the A2343 model. It is a 100 watt charger that has two USB C ports and one USB A port. And it is tiny. It's lightweight, it's dense. You'll pick it up and be like, oh, my God, this is really heavy. But it's lightweight compared to large bricks. And here's the important thing. In those diagonal airline charging seats, you can plug it in and it doesn't fall out. And so it's 100 watts. You can super fast charge phone, laptop, whatever. There's two ports, two USB C ports and one USB A. And it works on airlines. So it's the only thing that I travel with now. And it's the new gallium nitride GaN charging technology, which I think is totally game changing.
- [235:09]
David Rosenthal
Nice. I've got a 60 watt Ankor that, you know, kind of same concept and. Yeah, totally. Only thing I travel with.
- [235:15]
Ben Gilbert
Is it Gallium Nitride.
- [235:17]
David Rosenthal
No, no, no. It's a few years old.
- [235:18]
Ben Gilbert
Okay. Yeah, I don't understand why nobody's talking about it. Because it feels like it completely revolutionized chargers. It makes everything 50% the size, even though it has super high power delivery.
- [235:27]
David Rosenthal
I might need to upgrade my travel setup. Maybe I need an Hermes leather case for it.
- [235:31]
Ben Gilbert
Might need to do it. All right, we'll link it in the show notes. Two more are apps or websites or web services. I don't know what you're supposed to call them these days. The first one is an app called Matter, which I have replaced for years. I used Instapaper and it was great, but it just hasn't been touched in forever. And Matter is Instapaper, but better. It is also an amazing way to listen to things that you save in a very realistic voice. So longtime listeners know I don't absorb stuff very well by reading. I absorb it really well by listening. And so much of the research.
- [236:07]
David Rosenthal
So you're talking about text to speech, not like saving podcast episodes.
- [236:10]
Ben Gilbert
Correct. You can save podcast episodes, but you can forward an email newsletter and have that read it to you. You can use the bookmarklet on a website, have it read it to you. So it sort of bundles in text to speech and podcasts and email newsletters and read it later. Type services into one app. I mean, I did half the research for this. By taking long things to read, including PDFs, it has an ability to parse PDFs now and listening while running. Or my son was asleep in a carrier and I'm walking around the house or I'm in a dark room somewhere. I'm on the treadmill in the garage. So I really like Matter. The team behind it is awesome. They actually were kind enough to reach out and have David and I collaborate with them on a couple of guest blog posts for their Words that Matter series of some of our favorite readings and writings of all time. The team was great, which was my entree into it, but the product has exceeded expectations.
- [237:00]
David Rosenthal
Okay. I haven't actually tried the app yet. I love those guys. Now I got to try the app.
- [237:03]
Ben Gilbert
That's awesome. My third one is another thing that dramatically has helped my research, which is Perplexity. AI.
- [237:10]
David Rosenthal
Oh yeah.
- [237:12]
Ben Gilbert
If I could stop using Google, I would, because Perplexity is better for everything that I used to Google, period.
- [237:20]
David Rosenthal
Oh wow. Okay. All right. We got to have perplexity on ACQ2 or something like, all right, more to come on this.
- [237:25]
Ben Gilbert
It's all the good things about ChatGPT and all the good things about Google and none of the bad things of either. It's reliable, it links to sources, it has good ui. I trust it because I've fact checked it so many times and it just keeps being right. It makes it easy to fact check. Accessing information is one of these things that if it's 97% good, it's bad. So it Needs to be always good.
- [237:48]
David Rosenthal
Honestly, this is why I don't use ChatGPT for acquired work. I feel like we need to be 100% all the time.
- [237:53]
Ben Gilbert
Here's the best use case for perplexity. The other day I couldn't find something on Google and I went over to Perplexity and I asked it the question and it said, the answer to this is unknown on the Internet. And I was like, that is amazing. You just gave me confidence.
- [238:08]
David Rosenthal
Oh, getting that answer. Otherwise you're going to spend half an hour on Google trying to find it.
- [238:12]
Ben Gilbert
Yes.
- [238:13]
David Rosenthal
Oh, that's amazing.
- [238:14]
Ben Gilbert
Yeah. So it was both time saving and confidence inducing.
- [238:17]
David Rosenthal
I love it. Okay. I've heard from so many people about Perplexity, I got to give it a go. And next episode, research.
- [238:24]
Ben Gilbert
It's phenomenal.
- [238:25]
David Rosenthal
I'm so disappointed in myself. But also, it's just the reality of my life right now. I've become like the middle of the bell curve technology adopter. I used to be the bleeding edge early adopter. It's just, man, getting old is hard. Joanna Stern had a great quote about this the Wall Street Journal, when she was interviewed by Ben Thompson recently. She said, man, I wish I had the access that I have now. When I was younger, I would be on stop. I'd be pulling all nighters. I'd be using it to its full degree. And I don't have the energy now. Like, I got kids. And I'm like, man, I feel that.
- [238:57]
Ben Gilbert
That's the paradox. You often do your best work when you get older, even though you have less time because you're wiser, your information's.
- [239:05]
David Rosenthal
Better, your access, everything.
- [239:07]
Ben Gilbert
Yeah, you've gotten better at your craft, and you can never have both, but you live your life anyway. You'll make it through.
- [239:14]
David Rosenthal
What's the Dune quote? Life is not a problem to solve, but a reality to experience.
- [239:19]
Ben Gilbert
Ooh, Yeah, I think that is it.
- [239:20]
David Rosenthal
There you go. Okay. My car. Val, we are recording this. By the time the episode comes out, the super bowl will have been played and won by somebody. But, man, I am fired up. Go Niners. San Francisco 49ers. Brock Purdy. Hell, yeah. I'm channeling my inner JTO Sullivan and QB School YouTube channel here. I'm so excited. Brock's story is amazing. So I was trying to think, okay, I can't have like, the Niners in the super bowl be my carve out.
- [239:49]
Ben Gilbert
Especially if this airs after they lose. Are we leaving it in?
- [239:52]
David Rosenthal
Right. Especially if they lose. Right? Like, but what I can have as My carve out and is perfect for Acquired. Years ago, I read Bill Walsh's book. Bill Walsh was the legendary coach of the 49ers during the Joe Montana, Steve Young era. He invented the west coast offense, and he wrote this book called the Score Takes Care of Itself. And it's so good. It's just like a great leadership book. But, you know, the title says it all. It's related to Hermes. It's related to Acquired. It's, you know, the splinter in the mind. Everything we've been talking about, it includes some ideas like scripting. This is now so commonplace in the NFL and football everywhere, but everybody scripts out your first set of, you know, 5, 10, 20 plays, et cetera. Bill Walsh invented that. And like, we do the same thing on Acquired. We have scripts. Like, I have a script, you know, you have a script, and obviously the episode doesn't follow the script any more than an NFL game.
- [240:44]
Ben Gilbert
But you need a way to start that's predictable or at least something you've thought through.
- [240:49]
David Rosenthal
Right? Obviously, Bill Walsh didn't invent that idea writ large, but he invented it for the NFL. There's also some really good stuff in there about when to persist with doing something different and continue to do it versus stop doing it. And, like, what are the right reasons to do it. Like, especially in the early days when it's working or not working, Like, I'm thinking about, you know, launching the Birkin and all that. Anyway, it's a great book. Bill Walsh was a legendary figure and. Yeah, man. Go Niners. Hell yeah.
- [241:17]
Ben Gilbert
There you go. Wishing you the best of luck. And listeners, you know what already happened?
- [241:22]
David Rosenthal
Well, either way, I'm celebrating because either the Niners won or we're going to see a lot of Taylor Swift and Travis Kelce.
- [241:29]
Ben Gilbert
So I'm thrilled I tweeted this that Taylor plus the NFL is literally the perfect bundle because they've both fully saturated their markets, that Taylor is America's musical cultural icon of this moment. There's no one who could be a Taylor super fan that's not already a Taylor super fan. And the NFL similarly has had close to 100 year history, and it is the fullest realization of itself already. The NFL is America's sport, and so they've already got all the super fans they're going to get. And so by bundling together. This is so awful.
- [242:03]
David Rosenthal
Oh, no. This is the ultimate collab.
- [242:06]
Ben Gilbert
Yes, they can address each other's sort of casual fans who wouldn't have tuned in specifically for one or the other.
- [242:13]
David Rosenthal
Taylor is 100%. I'm not saying she's dating Travis because of this, but Taylor is one of the smartest CEOs in the world, writ large, period, bar none. And like, of course she is thinking about this.
- [242:24]
Ben Gilbert
Yep. What's the phrase that Shashir Miroto used? The marginal churn contribution. There are people who will not turn off the super bowl who otherwise would have because there might be another Taylor viewing.
- [242:36]
David Rosenthal
Jenny has negative interest in football, but she's telling me about like what Taylor is wearing, you know, whether she's going to be able to make it back from Japan from the Super Bowl.
- [242:47]
Ben Gilbert
We'll see. All right, listeners, we have a bunch of thank yous. Huge thank you to Domenico Desol, the former CEO of Gucci and the co founder of Tom Ford. With Tom Ford. Domenico, your conversation was just invaluable in preparing for this episode. And obviously, yes, a legend. Adam Pritzker, good friend of the show, is the co founder of assembled brands and the company Kate, which is in the fashion luxury space. And Adam is super kind and a huge contributor to this episode, just like he was to lvmh, to Derek Guy, who is dyeworkwear on Twitter for teaching me about saddle stitching and what makes Hermes special and a bunch of the other brands that we mentioned that do boutique leather goods. And for putting April in Paris on my radar, that was very helpful. Reginald Jerome Deman or rj, which is sort of a funny pen name. He wrote a book called Swan Souvenirs of Paris Elegance. He's obsessed, for lack of a better phrase, with Parisian luxury and the history of it. And so it was really educational to talk with him about this and fact check a lot of my Hermes history. And finally, there is a lot written about the company. I do think the best way to understand Hermes is just to go right to the source. Their 586 page annual report, they just lay out the whole strategy. So if you're curious about the company, that's an amazing place to look.
- [244:12]
David Rosenthal
It's funny, we did not talk to anyone at the company. We usually never do when we're making an episode.
- [244:17]
Ben Gilbert
Just kind of awkward.
- [244:18]
David Rosenthal
Yeah, we usually talk to them afterwards, but not during. In this case, we didn't need to. It's right there. They wrote down everything.
- [244:23]
Ben Gilbert
Yep. And David, I know you had a couple cool conversations.
- [244:26]
David Rosenthal
Yeah. Well, speaking of April in Paris, Beatrice Amblade here in San Francisco, it was so fun to talk to an actual former Hermes artisan. There's personal stories of Jean Louis and the family. They really gave me a sense of just how special the family is, they are, the company is, and the work that they do. And then I also have to thank Lauren Sherman. Lauren is, I think, pretty much, bar none, the very best business of fashion and business of luxury reporter out there. She was at the business of fashion for a long time. She's now at Puck. She's Puck's fashion correspondent. She launched the fashion vertical for Puck. Lauren is awesome. I chatted with her for a long time. She gave me a lot of great perspective on Hermes within the industry. Really. There are a few journalists out there. I'm thinking of Brad Stone and Emily Chang at Bloomberg and Kara Swisher, obviously. But they're incredible journalists and they really, really understand the business and the industry that they're covering. And Lauren is one of those. And it was super great to get to chat with her.
- [245:34]
Ben Gilbert
Yep. Well, you can sign up for notifications on when new episodes drop at Acquired FM email. You can also get little tidbits at what next episode will be and play the guessing game with the rest of the community at Acquired FM Slack. We'll also be including listener corrections in Acquired FM email. Subscribe to ACQ2 and any podcast player. We've got some great ones coming. And after you finish this episode, come get some of that sweet Acquired merch that everyone is talking about at Acquired FM store.
- [246:07]
David Rosenthal
Acquired Hermes Collab coming soon.
- [246:09]
Ben Gilbert
One day. We'll see you next time.
- [246:11]
David Rosenthal
We'll see you next time. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now, huh?