EUR 850.00 For Business Accounts Only

Morningstar | Hermes' Brand Strength Supports Long-Term Pricing Power

We believe wide-moat Hermes has carved out a unique niche in the luxury goods industry, which will provide it with continuing superior returns on capital. Hermes’ iconic leather bag styles (part of the EUR 3 billion leather goods segment) are in limited supply, supporting the brand’s exclusivity perception and providing the company with demand visibility and significant pricing power. Hermes Birkin and Kelly bags are sold in secondary markets and auctions for higher than the initial purchase prices--an impressive feat for soft luxury goods. The remainder of Hermes’ product portfolio has a wide moat and includes small leather goods, scarves, jewellery items, saddles, and dining sets. These goods cater to aspirational consumers and high-net-worth individuals and also serve as gifts, providing Hermes with recurring demand and protecting it from cyclical demand fluctuations. Hermes is distinctive among competition thanks to its vertically integrated supply chain, from leather tanning to leather goods stitching to controlled distribution through owned and operated (and concessioned) stores. This allows the company to maintain the necessary quality control (and the perception of it among consumers) and certain price positioning (no discounting).Over the years, Hermes has been carefully managed, but as it expands, maintaining the exclusivity perception and strong top-line growth may become more challenging. We expect Hermes to expand through sustainable pricing power, widening the product range, and minor store count additions. Demand should be driven by the increasing number of high-net-worth and middle-class individuals globally, as well as growth in their incomes. China is still expected to remain the biggest growth driver in the longer term, as consumption is supported by higher wages through a shrinking labour pool and new fortunes are made in such industries as technology and other value-added sectors.