Company analyses Fashion & Management
Ashley Moella, Mandy Verdoorn, Agata StefanoviÄ? and Sophie Slangen M2D
01-02 03 04 05 06 07 09-10 10-11 12-13 14-15 16-17 18-19 20-21 22 24-25 26-29 30-33 34-35 36-37 38-39 40-41
Executive summar y Introduction research Introduction research subject Methodology Conclusion 5 por ter’s Introduction internal research Shared values Structure Style Staff Strategy Skills Systems Introduction external research Megatrends Industr y research Market research 5 por ter’s Swot Tows strategies Sources
TA B L E O F C O N T E N T
EXECUTIVE S U M M A RY INTERNAL The McKinsey 7’s model is used to give a clear view on the internal environment of Hermès. Hermès has had the same shared values since 1837, which are; responsibility, authenticity and time to work well together. Hermès’ brand philosophy is “We don’t have a policy of image; we have a policy of product”. These values and philosophy stand in connection to the rich history and use of tradition at Hermes and together they create a solid base for the business model. Hermès uses a strategy based on creativity, maintaining control over know-how, original communication and an exclusive distribution network. By using these pillars Hermes aims to reach their strategy of long-term growth. Hermès its USP’s are: the use of creativity, savoir faire, high quality, being an independent family business and the use of patience in a positive and competitive manner. Hermès consists of an agile and vertical supply chain. The atmosphere in the company is cooperative in which the employees work efficiently. Hermès takes care of its employees by offering them training and improving the work environment. The production of Hermes items solely happens in France and by hand, this slows down the production process but is in line with the patience USP.By owning 70% of their suppliers Hermes can guarantee the quality of their products without being scared for higher margins. The net promoter score of Hermes is 11 and 2 points higher than the luxury average. This score measures the customers willingness to not only return for another purchase, but also to recommend it to their family, friends or colleagues.
EXTERNAL By using the PESTEL analysis we discovered that the current global health crisis situation has a big impact on a political and economic part of this model. The government instability and the worldwide lockdown during a pandemic is causing shipping delays and puts the production on hold. Consumers are restricted to go outside, and a lot of not vital shops are being closed. This results in more online purchases and more secondhand purchases since consumers are experiencing economic instability as well. The lucrative secondhand business in limited edition or scarce items and the fact that consumers are more aware of the high impact of fashion and more often choose for a secondhand item is a threat for Hermès. Nevertheless, the growing amount of luxury middle class population and tourism in France is promising a more positive effect on the luxury fashion market.
I N D U S T RY I N S I G H T S The revenue of the industry of the luxury leather goods looks positive and is still expected to grow annually. This also makes it look positive for hermes. Asia and especially China is a strong growing market with many consumers. Europe turns out to be the largest market. This is because of the popular destination for tourists that buy these products and the many manufacturers of luxury products that are based in the continent. Factors that could influence the luxury leather market in the future are for example: the digital revolution, new generations and the uncertainty of the outcome of Brexit, so they should be watched. The US’ recent adoption of protectionist policies, the implementation of fiscal policies, tighter monetary policy and restrictive trade policy have resulted in slower consumer spending, higher consumer prices, and disrupted global supply chains. The uncertainty of the outcome of Brexit (the UK’s strategy to leave the European Union), will undoubtedly have an effect on the Eurozone and beyond. Other factors impacting the future of the global luxury market include the digital revolution and the impact of technology and the influence of different generations on the development of the luxury market. (Arienti, P, 2017)
S T R AT E G I C O P T I O N S To create the optimal strategic options, the TOWS matrix method is used. By combining the SWOT, different strategies were created. The overall advice for Hermes is to work with these strategic options, to make their brand and product stronger in the future and to come up with a strong strategic position eventually. Most of the strategic options stand in connection to each other or can be combined to target multiple problems or advantages at the same time.
St renght s
INTER N A L FA CTO R S VS
S 1Strong brand name. S 2 Big global presence with 310 exclusive stores.
EXTERN A L FA CTO R S
Weaknesses W1The low capacity of their production lines. W2 The lack of online presence and digital engagement with consumers. W3 The reliance on (exotic) animal skins of their handbags.
O p p o rt u n itie s
S -O St rat egi es
W- O st rat egi es
O 1 The shift of economic powers to Asia. O 2 Digital revolution shift to online and use of AI, VR.
S 2-O1 Hermes should take advantage of its presence in Asia to roll out even more stores and launch an for the asian market suiting website. To gain a bigger market share.
W1- O 1 Expanding production overseas to keep up with demand from new market. W2- O 2 The brand has to use the digital revolution, roll out a more strategic social media strategy and to update the website functions.
T h re a th s
S -O St rat egi es
W- T St rat egi es
S 1- T 1 Hermes should use it’s strong brand name and rich heritage to stand out against the luxury conglomerate owned brands. Being a independent family business gives them internally more power to stay true to their heritage and differentiates them.
W3- T1 Hermes has to lessen or stop the use of exotic animal skins to stay connected with their client and to stay ethical.
T 1 High competition in the luxury segment.
INTRODUCTION
RESEARCH
This report is made to give Hermes advice on their business and strategic options to create a solid strategic position. The other main goal was to answer the research question: “What are the most important strategic options for Hermes? We were able to answer the research question by diving into the internal and external environment of the business. In this report a full 180 degrees’ view is created and given, with this complete view on all the elements that influence a business we were able to answer the research question.
RESEARCH SUBJECT
Hermès is a luxury brand placed in the high segment, and is known for its high quality craftmanship and exclusivity. The company will always make sure the products they produce will have a long-life product. ‘The company is driven by its permanent entrepreneurial spirit and consistently high standards, (Hermès International, 2018) Hermès Paris is an artisan, seller for almost 200 years now. All the products are based on saddlery makers extended to the theme of transportation and travel. Hermès was founded in 1837 by a family-owned French house that employs over 14,000 people all over the world. The company only has fifteen artisanal métiers employed, whose collections are presented in over 310 stores all over the world. Of all these stores 41% is located in the Euro-one, 24% in Japan and 15% in the United States for main markets. 78% of Hermès its turn-over is generated through Hermès fully owned shops.The company will always make sure the products they produce will have a long-life product.
METHODOLOGY
In this report an internal and external company analysis of Hermès Paris is given with the use of the McKinsey 7’s model, 4P’s of marketing, PESTEL and Porter’s 5 Forces models and SWOT/TOWS methods. While working on 4P’s of marketing we researched the key factors (product, price, place, and promotion) that are involved in the marketing of Hermès’s service. The PESTEL tool was used to analyse and monitor the macro-environmental factors that may have a profound impact on Hermès Paris performance. We used this method in collaboration with other analytical business tools such as the SWOT analysis and Porter’s Five Forces to give a clear understanding of a situation and related internal and external factors that have an impact on the company. Porter’s Five Forces model helped us to analyse a company’s competitive environment like the number and power of a company’s competitive rivals, potential new market entrants, suppliers, customers, and substitute products influence a company’s profitability. Nevertheless we used SWOT analysis that stands for Strengths, Weaknesses, Opportunities, and Threats to assess Hermès’s current position before we decide on suggesting a new strategy or advice. The previously mentioned methods were used in order to get the deep insight of the company’s strategic position and give Hermès Paris valuable business advice for the improvement in the future performance.
While doing research on every aspect of this brand, qualitative but mostly the quantitative research methods were used, as it requires carefully chosen reliable sources which were accessible online as well as offline. In order to collect the most relevant data the focus was given on the date range. The greatest part of sources researched and presented in the report are published not longer than in 2018. Not only the theoretical part of the research was done but also main Hermès stores were visited in Amsterdam and London cities. After our efforts put into talking to the employees and trying to find out more about the brand from the first source, the impression was that Hermès Paris staff is insensitive and really secretive, which we also perceived as an important point for the further research. The biggest limitation we have faced was the one-sided information we had to work with during the internal part research, as we were very dependent on the annual reports of Hermès itself because of the need to collect the most relevant and reliable information. As we have noticed further, Hermès is a quite secretive brand in the sense of giving an insight of their company from the internal part online and while trying to interview the employees as well. It is fair to mention that the information we were gathering from different online sources often needed to be fact-checked, as most of it was not from Hermès directly.
CONCLUSION PORTER’S 5
Porter’s 5 Forces analysis showed the two most important external forces that have a biggest impact on Hermès Paris company: Industry rivalry - there are many strong players in the luxury leather market and through years these brands have developed a strong brand name and a strong position in the luxury market and since fashion industry is very competitive, an overtake by one of the luxury conglomerates is always a risk, since they are more powerful and have access over more capital than Hermès itself by being a family owned business. Threat of substitutes - the second hand market is a threat of substitutes, because buying an Hermès handbag costs a lot of effort and time. The rise of the second hand market creates the option to buy the same items for an even higher price but without the effort and time spent. Especially when these days consumer behaviour is changing in the way that conveniency and fastness are key. Although the product differentiation in the luxury industry is high. Customers cannot find other brands that produce the exact same product.
INTRODUCTION INTERNAL RESEARCH
In this report an internal analysis is created with the use of the 7’s model from McKinsey. By using this model, a complete overview of the strengths, weaknesses and gaps in the company can be given and used to give the company advice on what to improve. By doing this research we gained the ‘S of strength and the ‘W of weakness in the SWOT matrix. We start our research with the ‘S of shared values, this ‘S is the core of the 7’s model of McKinsey and can be seen as the heart and base of the company. To get to and understand the other S’s we have to know our base, as the other S’s are not related in hierarchy; they are put in randomised order in the report.
INTERNAL SHARED VA L U E S Hermès has had the same shared values since 1837, which are; responsibility, authenticity and time to work well, together. Responsibility stands for handmade leather products which are the work of just one person, who masters all the necessary steps for the fabrication of the object and is responsible for the final quality. This also extends to the materials used, which must be of indisputable origin and the most beautiful quality.
Hermès’ brand philosophy is “We don’t have a policy of image, we have a policy of product”.
High quality craftmanship and exclusivity.
Authenticity stands for Hermès’ focus on finding the most beautiful pieces of raw material. The way they look at quality, is reflected in all the work they put in the products. Linings are given the same amount of attention as the exteriors. ‘Time to work well, together’ stands for all the employees who embrace the qualities of each and everyone in this company. (annual report Hermès 2018)
Strengths:
Weaknesses:
- Strong brand name
- limited use of automatization in their production process
- Vertical supply chain - Maintaining the quality of their product by keeping craftsmanship as an important usp - Being an independent family business - Big global presence with 320 exclusive stores.
- The low capacity of their production lines - the reliance on (exotic ) animal skins for their handbags - The limited online presence and digital engagement with the consumer.
entrepreneurial spirit and consistently high standards.
A N A LY S E S STRUCTURE
How is the company/team divided? In Hermès we found seven different departments, which are all divided into smaller groups. These departments are very well trained and share their knowledge with each other, which comes with a cooperative atmosphere in the company in which all the employees can do their job effectively.
Strengths:
Weaknesses:
- Strong brand name
- limited use of automatization in their production process
- Vertical supply chain - Maintaining the quality of their product by keeping craftsmanship as an important usp
- The low capacity of their production lines - the reliance on (exotic ) animal skins for their handbags
- Being an independent family business - Big global presence with 320 exclusive stores.
Executive Chairman Axel Dumas
- The limited online presence and digital engagement with the consumer.
Executive Chairman Emile Hermès SARL Executive Vice President Sales and Distribution
A different manager for every team in this department
Executive Vice President Communication
A different manager for every team in this department
Artistic Executive Vice President
A different manager for every team in this department
Executive Vice President Compliance and Organisation Development
A different manager for every team in this department
Executive Vice President Leather goods-Saddlery
A different manager for every team in this department
Executive Vice President in charge of Métiers and Data & IT systems Executive Vice President Finance Executive Vice President Manufacturing Division & Equity Investments
A different manager for every team in this department A different manager for every team in this department A different manager for every team in this department
INTERNAL STYLE Hermès has a symbolic view of management. Hermès makes its employees feel empowered, included and supported by offering courses to keep the knowledge up to date and to keep innovating. The atmosphere of the company feels safe and there is plenty of room for improvement (P.Robbins, sd) Hermès has a Functional Organizational Structure which makes the company accomplish its continuity and high quality. (Hermès International, 2018)
Strengths:
Weaknesses:
- Strong brand name
- limited use of automatization in their production process
- Vertical supply chain - Maintaining the quality of their product by keeping craftsmanship as an important usp - Being an independent family business - Big global presence with 320 exclusive stores.
- The low capacity of their production lines - the reliance on (exotic ) animal skins for their handbags - The limited online presence and digital engagement with the consumer.
(Own work, 2020)
A N A LY S E S S TA F F Hiring Hermès’ new employees and artisans are carefully selected and will always have to follow the three-day-in-house training session called “Inside the Orange Box”. The goal of this training is to make all employees at Hermès feel close, identify with and involved in the company’s culture, values and philosophy. Hermès has a mandatory 2-year training for a new craftsman or woman before he or she will be able to start working on any leather products in the Hermès portfolio. This 2-year mandatory training slows down the production time, but the company’s philosophy has always been to maintain being scarce and exclusive. The company’s leather goods division only hires 200 craftsmen per year. Work environment Hermès takes care of its employees by improving machines and reducing noise pollution at workstations. They also offer monthly communication campaigns and on-site safety trainings. The company wants its employees to have freedom of expression by organizing social dialogue at group level. (Hermès International, 2018)
Nevertheless our own perception on Hermès staff after visiting the physical stores in Amsterdam and London was that the employees of the company might easily be seen as quite insensitive and extremely secretive about giving the better insight on the company to the customers or researchers. Another thing to notice which we experienced while visiting the stores is that Hermès Paris employees care about the visitors status a lot and the customer might feel pre-judged based on his appearance, and this as well unfortunately affects their quality of service.
Strengths:
Weaknesses:
- Strong brand name
- limited use of automatization in their production process
- Vertical supply chain - Maintaining the quality of their product by keeping craftsmanship as an important usp - Being an independent family business - Big global presence with 320 exclusive stores.
- The low capacity of their production lines - the reliance on (exotic ) animal skins for their handbags - The limited online presence and digital engagement with the consumer.
INTERNAL S T R AT E G Y
Original communication
The strategy of Hermes is one of long term growth (Hermes, 2018), this means gaining a bigger market share, more revenue and customers in a multi year time frame. To get to this goal they use a long-term development strategy based on creativity, maintaining control over know-how, original communication and an exclusive distribution network (Hermes, 2018 ).
Hermes advertisements vary from 3D drawings to podcasts with the Hermes customer. Hermes also does not make use of celebrity marketing, this because of the fact that their products mostly are being bought by the rich which often are celebrity’s them self. Hermes instead wants to offer rich and surprising experiences often in line with the theme of that year. The Instagram page and campaigns of Hermes often do not contain products but are there to set a vibe and create a fantasy (MartinRoll , 2018).
Creativity Every year Hermes comes up with a new theme for that year and uses it as an inspiration for their entire collection and brand. These themes are not specifically used for making limited editions but for the brand to stay playful and innovative. Maintaining control over know-how (savoir faire) Hermes keeps perfecting the skills and expertise of their artisans by offering a range of training and professional qualification programs. These programs are delivered within the in-house academy and through a range of partnerships with training structures (Hermes, 2018). By maintaining the control over know-how the Hermes customer is assured of a product made by the best artisans and of great quality.
A N A LY S E S
But on a critical note, this differentiating way of online communication is not always profitable. When we compare the amount of Instagram followers of Hermes , Louis Vuitton and Chanel, Hermes Is laying behind with almost 1/4 of the amount of followers the other brands have. This is a very big difference and can mean that their digital engagement with the customer is insufficient, Hermes also ranked at the 11th spot of most popular online brands while Louis Vuitton and Chanel ranked 2nd and 3rd (Beauloye, 2020).
Exclusive distribution network The quality of their network continues with the opening of six new stores in 2019 located in: New York, China and Poland. Also there will be priority given to the renovation and expansion of twenty stores around the world (Hermes, 2018 ). Also in 2019 Hermes will continue with implementing the new digital platform in Asia to gain more influence on this very important and big market (Hermes, 2018 ).
As can be seen in the charts, Hermes scores very low on the online presence and digital engagement with only 3,93% of share of search interest and dropped 7 spots on the online ranking in comparison to 2019.
Strengths:
Weaknesses:
- Strong brand name
- limited use of automatization in their production process
- Vertical supply chain - Maintaining the quality of their product by keeping craftsmanship as an important usp - Being an independent family business - Big global presence with 320 exclusive stores.
- The low capacity of their production lines - the reliance on (exotic ) animal skins for their handbags - The limited online presence and digital engagement with the consumer.
INTERNAL SKILLS The skills of a company stand in relation to the competitive strategy and the USP’s of a company. The USP’s of Hermes are in connection with their rich history, the USP’s consist of : the use of creativity, savoir faire, high quality, being an independent family business and the use of patience in a positive and competitive manner. That’s what helped them to gain a strong brand name. The brand name of Hermes Resembles its USP’s and customers expect the high quality, craftsmanship and luxury feel from every product. This brand name is so strong that customers are okay with waiting for sometimes more than a year to buy the expensive bag of their dreams. By using patience in a competitive manner, Hermes has used the principle of supply and demand in a very profitable manner. There is no other brand that has bags that are so hard to get your hands on those of Hermes. This created an aura of exclusivity and a cult status around Hermes. Also by being an independent family business and not owned by a conglomerate the creative vision, history and skills have been secured for years. All these elements together makes the brand stand out against other brands and gives them a very strong position in the market. Hermes has a net promoter score of 11, which is two points higher than the luxury average (9). The net promoter score measures the customers willingness to not only return for another purchase, but also to recommend it to their family, friends or colleagues (customer.guru, 2020). From this fact we can conclude that all the hard work Hermes has put in their development strategy and maintaining the USP’s is working, and customers are coming back to them and even recommend them.
‘“The luxury industry is built on a paradox: the more desirable the brand becomes, the more it sells but the more it sells, the less desirable it becomes” (Patrick Thomas, former CEO).”
Strengths:
Weaknesses:
- Strong brand name
- limited use of automatization in their production process
- Vertical supply chain - Maintaining the quality of their product by keeping craftsmanship as an important usp - Being an independent family business - Big global presence with 320 exclusive stores.
- The low capacity of their production lines - the reliance on (exotic ) animal skins for their handbags - The limited online presence and digital engagement with the consumer.
A N A LY S E S SYSTEMS Agile supply chain Hermes has an agile supply chain, this means that higher margins are possible because price is not a prime customer driver and that they can use postponement (which is a very important part of Hermes it’s USP’s , stated by skills) (Kooijman, 2020). The use of an agile supply chain is also very suitable for Hermes because it needs excellent processes that are mostly created by humans and the partners and suppliers need to be very flexible. Hermes matches these requirements because of the fact that almost their whole production process is done by human hands and with suppliers owned by the brand. By owning mostly of their suppliers and partners (sister companies) Hermes contains a vertical supply chain and can dispose of the best quality materials in the industry. This is very important for Hermes since the brand is highly dependent on exotic- and non-exotic animal skins for their leather goods. Supply chain: Planning:
Sourcing:
Production:
Transportation:
Returns:
Strengths:
Weaknesses:
- Strong brand name
- limited use of automatization in their production process
- Vertical supply chain - Maintaining the quality of their product by keeping craftsmanship as an important usp - Being an independent family business - Big global presence with 320 exclusive stores.
- The low capacity of their production lines - the reliance on (exotic ) animal skins for their handbags - The limited online presence and digital engagement with the consumer.
INTRODUCTION EXTERNAL RESEARCH
External sources are obtained outside the company and can provide company, customer, competitor, trends and industry and market data. For this research we dived into the most important megatrends as well as both market and industry of the luxury goods segment. This research is needed to discover both opportunities and threats for the company in order to get to the final tows for the company.
M E G AT R E N D S 1. SHIFTING ECONOMIC POWER
Why research megatrends?
Population growth worldwide is increasing. This is one of the main reasons for the shift in economic power. The influence of this rising power in certain places is bringing many changes, especially for business, society and the way we invest.
Trends are an emerging pattern of change, likely to impact how we live and work. Megatrends are large, social, economic, political, environmental or technological changes that can influence a wide range of activities, processes and perceptions. (Fisk, P, 2019) Megatrends are forces that are driving changes in global markets. this makes them important for our company research. The megatrends we looked into are: shifting economic powers & Increasing connectedness and decreasing privacy. We chose these because they turned out to be the most important for the future of hermes.
China will be the new global superpower According to (Fisk, P, 2019) Only 15 years ago, China’s economy was one tenth the size of the US economy. If it continues to grow as predicted, it will be bigger than the US economy by the late 2020s. As a result, China expects to have 200 cities with a population of over one million people by 2025. To tackle overcrowding in Beijing, China is building a new city (Xiongan New Area) from scratch 100km southwest of the capital. Initially it will be double the size of Manhattan and is expected to become twice the size of New York and Singapore.and Singapore.
In 1950, life expectancy in China was 40 years. By 2050, this will have risen to 80 years. Global demographics will change In 2016, Asia’s population was estimated at 4.4 billion, having quadrupled in size during the 20th century. It is now forecast to grow to over 5 billion people by 2050. Asia benefits from a wealth of resources, and has an ecological variety which makes it well-placed to support this growth. (Fisk, P, 2019) Looking at this, we can expect that there will be huge economic growth in asia.
The global population continues to grow
Conclusion
1976
4,136,542
2016
7,432,109
2015
9,725,148
Due to population growth, the inequality in wages and the improving economy in Asia, we can assume that Asia is gonna be the most important market worldwide. Because this mainly applies to the emerging markets, this will apply the most in the US, China, Russia and India.
2. INCREASING CONECTEDNESS AND DECREASING P R I VA C Y Because everything is online nowadays, the consumers of the future are also increasingly connected. The online world is for almost every consumer available. This trend is changing the way people live, work and are connected to each other.
78% in China say they are ‘constantly’ looking at screens these days’
Mobile leads the way The advent of mobile internet is one of the greatest innovations for connecting with consumers. Because of this the world is within reach for them. Consumers can have instant access and find the answers to almost all questions at any time of the day. The rapid increase in connections via Internet connectivity has provided convenience, speed and instant access throughout life.
Connectivity is the new normal As of 2017, 45% of the global population uses the internet. Euromonitor projects that 76% will have access to the internet by 2030. (Euromonitor research, 2017) Connected consumers use a variety of devices to connect to the internet, in order to experience and interact with digital content, with “experience” being one of the most important words relating to the needs of a connected consumer. This has altered all aspects of life including shopping, education, entertainment, research, accessing services as well as socialising and is disrupting and arguably improving upon many traditional structures for doing these things.
Global use of the internet
45% 2017
83%
of global internet users say acces to the web should be a ‘basic human right’ Conclusion
76% 2030
The world is slowly gaining access to the internet. For businesses, this means faster and easier opportunities to connect with consumers. You see the interest of consumers in this online world increasing because it is easy, fast and becoming more and more accessible.
I N D U S T RY RESEARCH
Q U A N T I TAT I V E How does the industry look like in terms of revenues/ margins?
Luxury leather goods The Luxury leather goods segment includes exclusive handbags, suitcases and briefcases, as well as small leather goods such as wallets. The top five companies in this category are LVMH (with brands such as Louis Vuitton, Rimowa, Moynat and Loewe), Kering (Gucci, Saint Laurent, Bottega-Veneta and others), Coach, Michael Kors, Hermès and Tumi. Research shows that the demand for attractive leather products and luxury international brands is increasing because it gives the consumer a certain value of status. Leather goods are one of the fastest growing segments of the personal luxury goods market, and is expected to grow above the market average by 2023. (Arienti, P, 2017)
Top 5 luxury goods companies by sales, FY2017 sales ranking
name of company
country of origin
luxury goods sales
1.
Moet Hennessy Louis Vuitton SE
France
€27,995m
2.
The estee lauder Companies Inc.
US
€13,683m
3.
Compagnie Financiere Richemont SA
Switzerland
€12,819m
4.
Kering SA
France
€12,168m
5.
Luxottica Group SpA
Italy
€10,322m
top 10
€118,909m
top 100
€246,664m
economic concentration
48.2%
Overall luxury goods sales In FY2017, the minimum sales threshold for a company to enter the Top 10 list rose to US$7.35 billion. All companies reported growing year-onyear sales, and almost all companies had compound annual growth during FY2015-2017. All of the nine Top 10 companies reporting net profits were profitable, with five out of the top six companies reporting double-digit net profit margins. Six companies in the Top 10 improved their profit margins year-on-year, with Kering reporting the biggest gain, up 5.0 percentage points. (Arienti, P, 2017)
Global economic outlook on luxury leather goods The segment Luxury Leather Goods accounted for 14% of the Luxury Goods revenue in 2018. (grand view research, 2019) Revenue in the Luxury Leather Goods segment amounts to US$41,013m in 2020 and the market is expected to grow annually by 3.9% (CAGR 2020-2023). In global comparison, most revenue is generated in China (US$7,337m in 2020). In relation to total population figures, per person revenues of US$5.51 are generated in 2020.
Impact factors Despite the recent slowdown of economic growth, the luxury goods market looks positive. The US’ recent adoption of protectionist policies, the implementation of fiscal policies, tighter monetary policy and restrictive trade policy have resulted in slower consumer spending, higher consumer prices, and disrupted global supply chains. The uncertainty of the outcome of Brexit (the UK’s strategy to leave the European Union), will undoubtedly have an effect on the Eurozone and beyond. Other factors impacting the future of the global luxury market include the digital revolution and the impact of technology and the influence of different generations on the development of the luxury market. (Arienti, P, 2017)
Regional insights Europe turned out to be the largest market in 2018. In Europe, the U.K had the largest market share, followed by Germany, Italy and France. Some of the dominant luxury brands such as Gucci, Versace and Louis Vuitton have their factories in Europe. Europe is also one of the most attractive tourist destinations, it always attracts millions of travelers from all over the world. Many affluent men and women like to buy expensive leather shoes or handbags during their visit, which increases the market share of luxury products. (grand view research, 2019) Asia Pacific in particular has experienced significant growth in recent years as a result of an increasing buying pattern of luxury goods by consumers. India, China and Japan are some of the leading markets in Asia-Pacific. They are responsible for stimulating market growth in this region. China is one of the largest markets for luxury leather products. According to a survey, many Chinese people who travel abroad save on hotel and food costs and spend their money on luxury products. Moreover, the luxury consumers of China are younger than the world average, thereby making it one of the largest markets for luxury leather products in the world.(grand view research, 2019) Perfromance by country France was the best-performing country, achieving 18.7 percent composite sales growth in luxury goods in FY2017, and also contributed the largest share to the total sales of Top 100 luxury goods companies. Italy was at the bottom of the luxury goods sales growth this time, although it has the highest number of companies in the Top 100. (Arienti, P, 2017)
Performance by country, FY2017
Luxury leather goods market Share Insights The manufacturers of these luxury products are mainly concentrated in Europe and North America. Due to increasing ban on animal slaughtering, the supply of raw materials is very limited, leading to an increase in the input cost and reduction in profit margin of various companies. With a relatively observant competition, new product launches is key in order to retain the interest of consumers. As a result, the key players continue to introduce various new products at the end of the review period. For example, the brand Hidesign has launched two products called Champagne and Caviar, which are made from ostrich leather and deer leather in a respectful way. (grand view research, 2019) Conclusion The revenue of the industry of the luxury leather goods looks positive and is still expected to grow annually. This also makes it look positive for hermes. Asia and especially China is a strong growing market with many consumers. Europe turnt out to be the largest market.This is because of the popular destination for tourists that buy these products and the many manufacturers of luxury products that are based in the continent. Factors that could influence the luxury leather market in the future are for example: the digital revolution, new generations and the uncertainty of the outcome of Brexit, so they should be watched. Also the supply of raw materials is very limited and sustainability is becoming more and more important so improved products are key in order to retain successful in the market.
Q U A L I TAT I V E
I N D U S T RY RESEARCH
How does the industry look like in terms of competitive rivalry ?
For the qualitative industry research we dived into the competative rivalry within the luxury industry. the 2019 top three of the most valuable luxury brands made by interbrand consisted of LV on the 1st place, Chanel on the second and Hermes in 3rd place. Other luxury brands that made the top ten list are : Gucci, Cartier, Dior, Tiffanny, Burberry and Prada. (Davis, D, 2019) While Louis Vuitton was ranked the most valuable luxury brand, Gucci was noted as the fastest growing luxury brand in the world. (Sherman, L, 2018) The ranking revealed that for the second consecutive year, luxury and retail comprise the fastest growing sector, even better than technology.
The top 3 luxury brands world wide by brand valuation and growth in 2019:
1.
2.
3.
Louis Vuitton has a €32.223 billion brand valuation, with 14% growth. Making in the most valuable luxury brand and the 17th most valuable brand in the world. Chanel has a €22.134 billion valuation, with 11% growth. Making it the 2nd most valuable luxury brand and the 22nd most valuable brand in the world.
Hermes has a €17.92 billion brand valuation, with 9% growth. Making it the 3rd most valuable luxury brand and the 28th most valuable brand in the world.
Power of the luxury goods conglomerate A very important part of the luxury industry are the luxury goods conglomerates. A conglomerate is a group of different business entities that operate under a single parent company (entities within a conglomerate often span a variety of industries). (Dun & Bradstreet, 2018) There are Six luxury goods conglomerates that have control over the top forty luxury brands within the fashion industry. The top 3 of the most powerfull luxury goods conglomerates consist of: on the first place LVHM, Second place the Kering group and third Richemont SA. While most of these corporations own businesses outside of fashion, their primary focus is over the fashion brands they hold. While some brands like Hermes and Chanel are stil private and family owned, the majority of the most well known and influential brands are owned by these conglomerates. While the debate is still up about the fact of these conglomerates are good for the industry, one thing is sure, these conglomerates have a lot of power and influence in the industry. (Arienti, P, 2019)
The LVHM group is the biggest luxury conglomerate around the world and owns approximately 70 brands.
The top 3 luxury goods conglomerates:
1. Owns: Louis Vuitton, Dior, Celine, Fendi, Loewe, Bulgari, Kenzo etc.
2. Owns: Gucci, Botega Veneta, YSL, Balenciaga, Alexander Mqueen.
3. Owns: Gartier, Chloe, A Alia, Net- a- Porter.
While the capital and influence are great attributes, there is also a downside to these conglomerates. The amount of influence that these conglomerates have within the fashion industry is monopolizing. Since they own a majority of the most world-renowned fashion brands, they have a great amount of control of the entire fashion industry. Moreover, since the conglomerates fully own the brands, they have final say over everything that relates to each brand which shows total control over the brand and everything that it produces. Conglomerates have full control over who becomes the creative director at a brand that they own, which means they pick someone who has artistic control over the brand and what the brand puts out to the consumer. Conglomerates do not only have executive control but also indirect artistic control over the brands as well. In some ways, conglomerates take away from the artistic integrity of the brands at the end of the day. For private owned businesses like Chanel and Hermes an overtake by one of these powerfull conglomerates is always a threat, since they have excess to a lot of capital and influence. (CKD, 2019)
The 2nd hand market The second hand market is a very fast growing market especially when focused on second hand luxury bags and leather items. This because they are an aspirational product for first-time buyers, easy to buy online, and yet relatively scarce in the traditional offline retail channel. Most firsthand luxury goods companies have a vested interest in this category because leather goods are typically their primary focus, and in many cases account for the bulk of their sales. But the second hand market isn’t always focussed on the first time luxury item buyer. Nowadays the second hand market is also used to resell highly priced limited edition items for an ever higher price then the original selling price.
Q U A N T I TAT I V E
MARKET RESEARCH
How does the market look like in terms of consumption figures?
Opinions on the economic climate over the next twelve months were never this negative. Consumers are substantially more negative about the economic situation than they were in the previous month. The component indicator Economic climate has deteriorated from -8 in March to -31 in April. Never before have consumers been as negative about the economic climate in the next twelve months as in April. The previous low was in November 2011, during the eurozone crisis. As for the economic climate over the past twelve months, consumer sentiment in April is almost as positive as in March. (CBS, 2020)
Historic drop in consumers willingness to buy Consumers’ willingness to buy has also plummeted. This component indicator stands at -17, down from 2 in March, the single largest decline in history. Consumer opinions about their financial situation in the next twelve months have fallen drastically. Consumers also find this a much more unfavourable time to make large purchases than in March. The deterioration of these two components of consumer’s willingness to buy is unparalleled. However, consumers’ opinions on their financial situation over the past twelve months have improved. (CBS, 2020)
Majority of consumers expect unemployment to rise The question whether or not someone has a job plays an important role in their willingness to buy. Consumers’ unemployment expectations have deteriorated significantly in April. This deterioration was also the largest ever recorded. Approximately 85 percent of the respondents expect unemployment to rise in the twelve months to come, whereas 8 percent anticipate a drop. The balance of positive and negative answers stands at -78.The all-time low was -88 in March 1993. (CBS, 2020)
Q U A L I TAT I V E
MARKET RESEARCH
What does the market look like in terms of changing buying behaviour? The research on a qualitative market shows 4 different consumer trends in 2020.
Social media Time spent with mobile devices continues to rise. Smartphone-based retail sales increased by close to 40% this year, and this trend will only continue in the months to follow. Also The in-store customer experience will continue to shift so retailers will have to give customers an actually good reason to shop offline. Personalization will continue to be big in 2021 as well. And a personalized, cohesive brand experience requires an omni channel marketing strategy. The consumers are most interested in personalized content related to products that interest them, products based on their previous purchases or searches, updates on availability or price, and retargeting related to the exact product they’re looking for. So talking about the luxury goods segment to maximize return on marketing spend, fashion players need to horn their social media strategy. (Genchur, 2020) (Amed, 2020)
Time spent on mobile devices continues to rise, also smartphone - based sales increased by up to 40% this year. This trend is likely to continue, thus retails have to give the consumer an good in store experience to keep them shopping offline. Personalisation will also continue to be very important in 2021, and its important for brands to use a personalised omni channel marketing strategy to give the customer a personalised, cohesive brand experience. The consumer is most interested in personalised content related to products that interest them, products based on their previous purchases or searches, updates on availability or price, and retargeting related to the exact product they’re looking for. For the luxury segment it would be profitable to invest in a omni channel marketing strategy to maximise return on marketing spend.
Convenience
Sustainability
More digital and cashierless checkout technology implemented in stores. Along these same lines, we’ll also see brick-and-mortar stores embrace digital technologies that make it faster and easier for consumers to shop offline. More consumers will be leveraging (Buy Online, Pickup In-Store), when you’re competing with online retailers, convenience counts. (Deshpande, 2020)(Amed, 2020)
Consumers are becoming more active participants in the creation of a more sustainable economy and increasingly aware of the broad sustainability challenge facing the world. Over the next 10 years, more consumers will have incorporated sustainable behaviour into their lives, whether that means routinely recycling or looking for sustainable products and opting for organic products and cruelty-free brands. (Genchur, 2020)(Amed, 2020)
The 2020 Consumer Retail Technology Survey shows that 72% of consumers ranked technology that speeds up the checkout process as their most valuable retail technology. All in all convenience and immediacy are key, and companies must reduce friction in the customer journey via in-store experience and localised assortments.
In response companies have to act up to this new consumer behaviour, many of them are going green, zero waste of change their their value proposition in a bid to attract environmentally-conscious consumers. Fashion businesses need to swap platitudes and promotional noise for action on sustainability measures such as energy consumption, pollution, and the use of animal products, because the awareness of the customer is getting bigger.
Fashion businesses need to swap platitudes and promotional noise for action on sustainability measures such as energy consumption, pollution, and the use of animal products, because the awareness of the customer is getting bigger.
OVERALL H E R M E S PA R I S
INTERNAL
EXTERNAL
Hermes has strong traditional brand values that form the brand. They achieve this through high quality craftmanship, entrepreneurial spirit throughout the company and consistently high standards. Hermès has a Functional Organizational Structure which makes the company accomplish its continuity. they also use a long-term development strategy, this means gaining a bigger market share, more revenue and customers in a multi year time frame. Hermes contains a vertical supply chain so they can maintain excellent processes to dispose of the best quality materials in the industry. Hermes makes exquisite use of the USPs to keep the strong brand name and to ensure that the brand has its exclusive status. All these different elements together gives the brand a very strong position in the luxury goods market.
Driving forces like shifting economic powers and increasing connectedness and decreasing privacy can have an impact on the strategies of hermes. Threw interest of consumers in the online world opportunities to connect faster and easier to consumers are increasing. Also the economic shifts that are showing can assume that important markets are moving. Therefore there are expansion possibilities which Hermes should explore to gain a lager market share. the influence of the market and industry developments on the market segment can be seen in the change of consumer behaviour. Consumers more often base their buying decisions and consumption on the values and beliefs of a company. Hermes has to have a pro active role in sustainability and create all round shopping experiences by for example using an omni channel. The rise of the second hand market is also very important. Consumers are more aware of the high impact of fashion and leather goods and are now more often choosing for a second hand item. But sustainabilty is not always the reason why consumers tend to shop at the second hand market. There is a lucrative second hand business in limited edition or scarce items that are being sold for a higher price then the original selling price. This stands in relation to the principle of supply and demand, which isnt profitable for hermes, and drives customers away form them. The now ongoing covid-19 virus also has a big impact on Hermes. Consumers are restricted to go outside and a lot of not vital shops are being closed. This results in more online purchases and more second hand purchases since consumers are experiencing economic instability. So hermes has to have a pro-active role and make their online shopping experience outstanding.
CONCLUSION
PORTER’S 5 FORCES
H E R M E S PA R I S This is a framework for analyzing a company’s competitive environment. The number and power of a company’s competitive rivals, potential new market entrants, suppliers, customers, and substitute products influence a company’s profitability
THREAT OF NEW ENTRANTS low
BUYERS POWER low
for new entrants to enter this market a lot of capital is rquired to match these strong brands with a lot of history and a strong brand name.
Hermes customer is one with a high income, and care a lot about the brand values and strong brand name, so the quality is a priority and buyers in this case are less price sensitive.
INDUSTRY RIVALRY high There are many strong players in the luxury leather market, like the LVHM group for example who also have developed a strong brand name and a strong position in the luxury market. Also an overtake by one of the luxury conglomerates is always a risk.
THREAT OF SUBSTITUTION moderate the rise of the second hand market creates the option to buy the same items for an even higher price but without the effort and time spent.
SUPPLIERS POWER low a lot of luxury brands own their own suppliers which gives them a strong position and helps them maintain a consistent quality of their products.
Conclusion Porter’s 5 Forces analysis showed the two most important external forces that have a biggest impact on Hermès Paris company: Industry rivalry - there are many strong players in the luxury leather market and through years these brands have developed a strong brand name and a strong position in the luxury market and since fashion industry is very competitive, an overtake by one of the luxury conglomerates is always a risk, since they are more powerful and have access over more capital than Hermès itself by being a family owned business. Threat of substitutes - the second hand market is a threat of substitutes, because buying an Hermès handbag costs a lot of effort and time. The rise of the second hand market creates the option to buy the same items for an even higher price but without the effort and time spent. Especially when these days consumer behaviour is changing in the way that conveniency and fastness are key. Although the product differentiation in the luxury industry is high. Customers cannot find other brands that produce the exact same product.
PESTEL
P
E
POLITICS
ECONOMICS
France government instability (Due to Corona Virus created chaos France government is forced to make unpredictable decisions) (Brookings, 2019) Lowering taxes in France (France unveils billions in tax cuts to reset pro-business in their 2020 budget plan) (Bisserbe, 2019)) Worldwide shipping delays due to COVID-19 (Shippings and import possibilities are hugely affected (delayed/ cancelled) duo to current pandemic situation) (downdetector, 2020) Production on hold because of the pandemic (Shutting down factories worldwide as countries are going on lockdown) (Fashionnetwork, 2020)
Prediction of the economic crisis due to pandemic (Huge amount of unemployment and bankrupting businesses all around the world because of the Corona Virus) (Fashionnetwork, 2020) Factories shut down (what causes a serious slow down of production) (Fashionnetwork, 2020) Economic instability (always a big threat for a company, for example: current Corona Virus situation) (Brookings, 2019) Growing luxury tourism in France (The growth luxury travel market is attributed to the increase in disposable income and growth in the middle class population in countries such as China, Hong Kong, India, and Malaysia (Kadam, 2019))
S SOCIAL Population growth in France (The population growth rate in France is 0,2% making it one of the most populated countries in Europe) (The world data bank, 2020) Positive career attitudes (Growing attention on education and focus on a well paid job)(OECD, 2020) Changing consumer behaviour (The consumer is spending more money on experience over materials, rising consciousness in terms of sustainability) (Genchur, 2020) Growing amount of millionaires in the world (A further 2,124 people joined the ranks of the super-rich last year, taking the total number of ultra-high net worth individuals with personal fortunes of more than $30m to 265,490. Wealth-X predicts the ranks of the global financial elite will significantly grow by 2023) (Neate, 2019)
H E R M E S PA R I S
T
E
TECHNOLOGICAL
E N V I R O N M E N TA L
Innovation as a driving force behind investments (Innovation index in France in 2019 is almost 18 points higher than the world’s average) (The Global Economy, 2020) Growing attention on the digital economy (France is increasing the digital uptake to 100% of companies, including small organisations and startups) (Telecom Lille , 2019 )
Usage of exotic animal skin (With the growing attention on a sustainable future and changing consumer behaviour most of the luxury fashion brands are currently stopping to sell items made of exotic animals skins) (PETA, 2017) The influence of climate change (climate change impact on business model and supply chain. Example: if the supply chain is not flexible it can lead to bottlenecks if shipments from one part of the world are delayed because of sudden climate shift) (Buis, 2020) (Wang, 2020)
L LEGAL Takeover attempt by market leaders (For private owned companies, a takeover by a luxury conglomerate is always a risk since they have access to more capital and a bigger market share) Growing counterfeit and second hand market (Trade in fake goods is now 3.3% of world trade and rising, yet the most affected industry is fashion. Counterfeit and second hand markets are providing consumers with the easier accessible products price wise or convenience wise) (OECD, 2019) (CPP-LUXURY, 2020)
SWOT H E R M E S PA R I S
STRENGTHS:
WEAKNESSES:
1. Strong brand name Over the last 183 years Hermes has positioned itself as one of the powerhouses in luxury leather goods.(Chaboud, 2017)
1. Limited use of automation in their production The production process of Hermes is highly dependent on humans, This can be a problem when for example being in a health crisis.
2. Vertical supply chain Hermes owns up to 70% of its supply chain, and has a high control over it. The vertical supply chain makes it possible to avoid overdependence on saddlery and leather goods. (Chaboud, 2017) 3. Maintaining the quality of their products by keeping craftsmanship as a USP The brand’s commitment to craft is precisely what enables their continued prosperity, 182 years after their founding. (MartinRoll ,2018) 4. Independent family business Being an independent family business differentiates them from the majority of luxury conglomerate owned brands.. (MartinRoll , 2018) 5. Big global presence with 310 exclusive stores Hermes only sells its products in their own stores and webshop which are situated across the globe. (Hermès, 2020)
2. The low capacity of their production lines The low capacity of their production lines can be a problem when expanding overseas. The scarcity is part of their business model. But can be a problem when launching to new markets. 3. The reliance on (exotic) animal skins of their handbags The consumer’s opinion concerning exotic animal skins is changing, the cruelty concerning the animal farms are generating negative news around Hermes. 4. The lack of online presence and digital engagement with consumer The social media of Hermes is not performing like other brands and for the consumer it’s hard to get in touch with the brand ( reviews, customer care).(Beauloye, 2020)
OPPORTUNITIES: 1. The shift of economic powers Due to population growth and an improving economy the shift of economic powers is moving towards Asia.(Fisk, P, 2019) 2. Digital revolution - shift to online and use of AI, VR to optimise shopping experiences The online world is becoming more important for retailers and an omni channel experience is required. (Genchur, 2020)
THREATS: 1. Changing consumer behaviour Consumers are becoming more interested in experience over materials, also the production, resources and positioning of the brand is getting more attention. (Deshpande,2020) 2. High competition in the luxury segment The luxury market always have been one of high competition, overtakements by a conglomerate is always a risk.
3. Growth of the upper class The main target group of Hermes is the rich and the famous, the growth of this group indirectly means that the market for Hermes is also growing. (Neate, 2019)
3. The growing second hand market The second hand market is blooming, consumers can get their hands easier on a second hand Birkin than a brand new one and are willing to pay more. (CPP-LUXURY, 2020)
4. Growing amount of luxury tourism The luxury tourism is very important for hermes since their items are mainly sold through brick and mortar stores. (Kadam, 2019)
4. Economic instability Economic instability is always a big threat for the companies, although there is a lot of factors that can cause it. For example the most current one is pandemic, but it also maybe the inflation, economic growth/ recession, asset bubbles etc. (Brookings, 2019)
SWOT
EXT E R NAL
INT E R NAL
H E R M E S PA R I S
POSITIV E
NE G AT I V E
S tren g h ts
Weaknesses
- Strong brand name - Vertical supply chain - Maintaining the quality of their products by keeping craftsmanship as a USP - independent family business - Big global presence with 310 exclusive stores
- Limited use of automation in their production - The low capacity of their production lines - The reliance on (exotic) animal skins of their handbags - The lack of online presence and digital engagement with consumer
Op p o rtu n itie s
Threat s
- The shift of economic powers - Digital revolution - shift to online and use of AI, VR to optimise shopping experiences - Growth of the upper class - Growing amount of luxury tourism
- Changing consumer behaviour. - High competition in the luxury segment - The growing second hand market - Economic instability
Conclusion This SWOT analysis is made by using all the important information of the internal and external Environment. The strength and weaknesses are created from inside the business, the opportunities and threats form the external environment. With this SWOT analysis we got a 180 degrees’ view of the company, which we are going to use for the Tows analysis to create the strategic options.
TOWS S T R AT E G I E S
H E R M E S PA R I S
To create the best strategic options for Hermes we have used the Tows matrix. By combining the SWOT, different strategies were created. The strategies all have a different function, from growth to defence.
St renght s
I N TER N A L FACTO R S VS
S 1Strong brand name. S 2 Big global presence with 310 exclusive stores.
EXTERN A L FACTO R S
Weaknesses W1The low capacity of their production lines. W2 The lack of online presence and digital engagement with consumers. W3 The reliance on (exotic) animal skins of their handbags.
O p p o rt u n itie s
S - O St rat egi es
W- O st rat egi es
O 1 The shift of economic powers to Asia. O 2 Digital revolution shift to online and use of AI, VR.
S 2-O1 Hermes should take advantage of its presence in Asia to roll out even more stores and launch an for the asian market suiting website. To gain a bigger market share.
W1- O 1 Expanding production overseas to keep up with demand from new market. W2- O 2 The brand has to use the digital revolution, roll out a more strategic social media strategy and to update the website functions.
T h rea th s
S - O St rat egi es
W- T St rat egi es
S 1- T 1 Hermes should use it’s strong brand name and rich heritage to stand out against the luxury conglomerate owned brands. Being a independent family business gives them internally more power to stay true to their heritage and differentiates them.
W3- T1 Hermes has to lessen or stop the use of exotic animal skins to stay connected with their client and to stay ethical.
T1 High competition in the luxury segment.
Conclusion The advice for Hermes is to work with these strategic options, to make their brand and product stronger in the future and to come up with a strong strategic position eventually and stay ahead of its competitors. Many of these options can be combined or are connected to each other and thus will work well together when rolled out at the same time. When looking at the developments concerning the mega trends and pestle analysis it’s very important for Hermes to be one of the first big players in Asia and dominate that market online and offline before other brands.
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