In a crowded, competitive world where time is an ever-scarcer resource, people desire filters that can help them quickly identify high-value collaborators. By creating belief networks that connect their brands to certain characteristics, luxury goods companies provide consumers with valuable filtering tools. Hermès has created one of the most robust luxury goods belief networks ever. Through savvy marketing, impressive craftsmanship, and a storied heritage, Hermès has cultivated a brand that many consumers believe stands for the epitome of wealth, culture, and status. The strength of this brand is evidenced by both its size and scope. The Hermès brand is globally recognized and, in fact, is almost akin to a global luxury language. The brand is so strong that the company has successfully attached it to a variety of disparate product areas, everything from leather goods to fashion and fashion accessories to perfumes to watches, each of which is a large and rapidly growing revenue generator for the company. Moreover, the company has a storied heritage connected to celebrities, royalty, and centers of culture going back to its founding in Paris in 1837. This heritage aspect is particularly important since new brands can’t go back in time and create a heritage, putting them at a huge disadvantage versus incumbents such as Hermès. As a result of its strength as a people filter, we believe Hermès is likely to grow both its volume and pricing over time, particularly as billions more people are added to the global middle class and the value of their belief network likely grows even stronger. In fact, we believe its pricing outlook is among the most favorable in our whole portfolio. Even if an artisan from an Hermès workshop handcrafted an identical bag, it would sell at a fraction of the price because it would not be part of Hermès’ global belief network. Furthermore, because the Hermès brand serves as a signal of wealth, culture, and status, and this signal is only reliable if it is costly to send, Hermès has to raise its prices as wealth increases in order to maintain the brand’s value proposition. For example, whereas most handbags have become cheaper over time after adjusting for inflation, Hermès’ Birkin bag pricing has grown faster than inflation.
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