Hermès AI transcript and summary - episode of podcast Acquired

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Episode: Hermès

Author: Ben Gilbert and David Rosenthal
Duration: 04:06:32

Episode Shownotes

In luxury, there’s Hermès… and there’s everyone else. Stewarded by one French family over six generations, Hermès sells the absolute pinnacle of the French luxury dream. Loyal clients will wait years simply for the opportunity to buy one of the company’s flagship Birkin or Kelly bags. Unlike every other luxury

brand, Hermès:Doesn’t increase supply to meet demand (hence the waitlists)Doesn’t loudly brand their products (IYKYK)Doesn’t do celebrity endorsements (stars buy their bags just like everyone else)Doesn’t even have a marketing department! (they barely advertise at all)And yet everyone knows who they are and what they represent. But, despite all their iconoclasm, this is not a company that’s stood still for six generations. Unbeknownst to most, Hermès has completely reinvented itself at least three times in its 187-year history. Including most recently (and most dramatically) by the family’s current leaders, who responded to LVMH and Bernard Arnault’s 2010 takeover attempt by pursuing a radical strategy — scaling hand craftsmanship. And in the process they turned the company from a sleepy, ~$10B family enterprise into a $200B market cap European giant. Tune in for one incredible story!Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Links:See our episode page for visuals!The saddle stitch (video)Inside the Saddlery at the FaubourgHermès 2022 Annual ReportAxel Dumas InterviewAll episode sourcesCarve Outs:Anker GaN Prime 100W chargerMatterPerplexityThe Score Takes Care of Itself‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Summary

In this episode of 'Acquired,' hosts Ben Gilbert and David Rosenthal explore the remarkable history of Hermès, a luxury brand founded in 1837 and still family-run. They discuss Hermès' unique positioning in the luxury market, characterized by artisanal craftsmanship, strict supply limits, and avoidance of traditional marketing strategies. Following a takeover attempt by LVMH in 2010, the brand underwent a transformative strategy that increased its market value from $10 billion to around $200 billion. The episode highlights how Hermès balances its heritage with modern demands while maintaining an exclusive and esteemed reputation in luxury goods.

Go to PodExtra AI's episode page (Hermès) to play and view complete AI-processed content: summary, mindmap, topics, takeaways, transcript, keywords and highlights.

Full Transcript

00:00:00 Speaker_00
So I don't know if you realize this, Hermes is reporting earnings in like two days. 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?

00:00:12 Speaker_00
And then I realized, this is Hermes. The short term is of no consequence.

00:00:18 Speaker_01
Also, the Hermes annual reports are the most beautiful annual reports ever created in the history of the financialization of mankind.

00:00:28 Speaker_00
You might think you can't do all of your charts in orange, you need different colors, but you would be wrong.

00:00:33 Speaker_01
The illustrations, the themes, you can tell they care. You can tell. All right, let's do it. Let's do it.

00:00:40 Speaker_02
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now?

00:00:57 Speaker_00
Welcome to Season 14, Episode 2 of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

00:01:05 Speaker_01
I'm David Resenthal.

00:01:07 Speaker_00
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.

00:01:18 Speaker_00
A company that somehow has grown to be worth over $200 billion despite rejecting manufacturing efficiencies and economies of scale.

00:01:27 Speaker_00
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,

00:01:39 Speaker_00
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, Hermès.

00:01:54 Speaker_01
Ben, do you know what company was also founded in 1837 that we have discussed quite a bit on Acquired? No, I do not, David. That would be the other iconic color luxury company, Tiffany.

00:02:10 Speaker_00
Oh, really?

00:02:11 Speaker_01
Also founded in 1837.

00:02:12 Speaker_00
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.

00:02:29 Speaker_00
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.

00:02:43 Speaker_00
As much as they sort of get lumped together with brands owned by LVMH, they are in many ways the anti-LVMH.

00:02:49 Speaker_01
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.

00:02:59 Speaker_01
You went out and you bought your first luxury object, right? And it was not an LVMH brand.

00:03:05 Speaker_00
Yes, that is true. My wife and I were on our honeymoon listeners after LVMH, so last summer.

00:03:10 Speaker_00
And we were in Exxon, Provence, and we walked by an Hermes store and I thought that 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.

00:03:22 Speaker_00
And it's the only luxury item I own of any luxury brand, traditional luxury brand.

00:03:28 Speaker_01
Yeah. As foreshadowed on our holiday special episode a couple months ago.

00:03:32 Speaker_00
Well, listeners, if you want to know every time an episode drops, you can sign up at acquired.fm slash email. You'll get hints at what the next episode will be and follow-up facts from previous episodes when we learn new information.

00:03:44 Speaker_00
Come discuss this episode with us at acquired.fm slash 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.

00:03:57 Speaker_00
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.

00:04:07 Speaker_01
Yes, but not too much before 1837.

00:04:10 Speaker_00
We're not going to like the Egyptian invention of the handbag or anything like that. Boy, let me tell you, I was tempted. I was tempted.

00:04:19 Speaker_01
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.

00:04:32 Speaker_01
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.

00:04:40 Speaker_01
And uniquely, Hermes still does 85% of their production by hand by master crafts people in France, as we will talk a lot about.

00:04:50 Speaker_01
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, Germany. A century before the Porsches and Volkswagens of the world. Yes.

00:05:07 Speaker_01
Where Thierry Hermes was born in the town of Krefeld, which is just outside of Dusseldorf, where he's the sixth child of a family of innkeepers. So Hermes, is that a German name? A French name? Hermes is obviously not a German name.

00:05:24 Speaker_01
I mean, even I know that. Thierry's father was French and his mother was German.

00:05:31 Speaker_01
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.

00:05:48 Speaker_01
I mean, this is the era we're talking about here, like Napoleon.

00:05:51 Speaker_00
We finally did it here on Acquired. Your AP European history class has now merged with business history. We're covering Napoleon.

00:05:59 Speaker_01
He is critical to what is about to happen here.

00:06:02 Speaker_01
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.

00:06:14 Speaker_01
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.

00:06:29 Speaker_01
You know, 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,

00:06:38 Speaker_01
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.

00:06:50 Speaker_01
And the result is that Thierry, by the time he's 20 years old, he's an orphan. He is the last Hermes left.

00:06:57 Speaker_00
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? Oh, we have talked about them on Acquired.

00:07:10 Speaker_01
Obviously not Rockefeller, which is where my mind first went, because we talk a lot about his dad. Yep.

00:07:16 Speaker_00
Louis Vuitton himself. Ah, he will also come up here in a minute. 20 years younger than Thierry Hermes, but also an orphan.

00:07:25 Speaker_01
Wow. I didn't know he was also an orphan. Yep. 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.

00:07:43 Speaker_00
Yeah, especially crazy considering they both came from nothing.

00:07:47 Speaker_00
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.

00:08:04 Speaker_01
Yes. So in 1821, Thierry leaves Cretfield, 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.

00:08:19 Speaker_01
and there he becomes an apprentice under a master craftsman learning the art of équipage craftsmanship. Now, équipage is the business of outfitting horse-drawn carriages and

00:08:34 Speaker_01
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 F-150. It was the Toyota Camry.

00:08:50 Speaker_01
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. Wow.

00:09:05 Speaker_01
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 Basse du Rampart in the 9th arrondissement, which that whole street today no longer exists.

00:09:22 Speaker_01
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.

00:09:39 Speaker_01
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.

00:09:53 Speaker_01
It's not something they do every day.

00:09:56 Speaker_00
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.

00:10:05 Speaker_01
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.

00:10:20 Speaker_01
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. Turns out he was just really good at the craft. And he had exceptionally good timing.

00:10:35 Speaker_01
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.

00:10:47 Speaker_01
France has now seesawed through a whole bunch of different republics, and the monarchy comes back, and it's crazy French history stuff.

00:10:56 Speaker_01
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.

00:11:13 Speaker_01
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.

00:11:25 Speaker_01
So if people have heard of the Baron Haussmann, who kind of rebuilt Paris, that happens at this time. under Napoleon III.

00:11:33 Speaker_01
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.

00:11:42 Speaker_01
But when you think of the Eiffel Tower, the museums, the Grand Boulevards, the Champs-Élysées, 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.

00:11:59 Speaker_01
He is given full latitude and direction by Napoleon III to burn Paris to the ground and remake this city as a modern city. fascinating. And this is super important for Thierry and Hermès for two reasons.

00:12:15 Speaker_01
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 and all their finery.

00:12:27 Speaker_01
Now you've got the Champs-Élysées, the Grand Boulevard, 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.

00:12:43 Speaker_01
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.

00:12:59 Speaker_01
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.

00:13:13 Speaker_01
That'll completely upset the mindset of people. 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 carriage wear, of équipage.

00:13:31 Speaker_01
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.

00:13:44 Speaker_00
Great for business. These are like the disruption waves that enabled him to create a business. Yes.

00:13:51 Speaker_01
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.

00:14:02 Speaker_01
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.

00:14:16 Speaker_00
I remember Louis Vuitton's key client was the Empress Eugenie. Is Hermes the same client?

00:14:21 Speaker_01
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.

00:14:39 Speaker_01
I think Louis Vuitton was the royal laitier, I believe, and he packed the trunks. He was the luggage guy. Hermes was the carriage guy.

00:14:47 Speaker_00
Which is so funny because that is still, in some ways, both of their legacy today.

00:14:52 Speaker_01
Yes, absolutely. Eugenie and everything going on at this time makes Louis Vuitton and makes Thierry Hermès. But it's interesting, right? Vuitton and luggage, that is inherently of the world that's coming, the modern world.

00:15:09 Speaker_01
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.

00:15:19 Speaker_00
Right, it's sort of built for the upcoming world.

00:15:22 Speaker_01
Yes. Not the case with Hermès. And actually, today, I think this is one of the biggest strengths of Hermès, and they still, you know, the equestrian theme, the horse, is so much of their brand.

00:15:36 Speaker_01
They talk about it so much in their products, the saddle stitching. It's calling back to that other era, like that pre-modern era where the horse was primary.

00:15:47 Speaker_00
Right. Hermès is deeply rooted in French history, in Parisian history, and really a key part of how France as a nation has the identity that it has today.

00:16:00 Speaker_01
But it would all be irrelevant if the brand didn't translate out of the horse era and into the car era. Right. which was not Thierry Hermes' doing, nor was it his son's doing. So Thierry dies in 1878, and his son, Charles Émile, takes over.

00:16:20 Speaker_01
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.

00:16:37 Speaker_01
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 Hermès, the sixth generation that are running the company today.

00:16:53 Speaker_01
Axel is the CEO and Pierre-Alexis is the artistic director. They apprenticed in the business.

00:16:59 Speaker_01
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.

00:17:09 Speaker_01
Now, obviously, they also sort of learned the business from their parents, but they're not learning the business the way that the Arnaud children are learning the business at LVMH as executives.

00:17:19 Speaker_01
They're learning with their hands as craftspeople how to make this stuff. Which is wild.

00:17:24 Speaker_00
Accel is the CEO of a $200 billion plus company. It's crazy. And to bring it back to the late 1800s, I think the point you're making here is when Charles Emil was apprenticing, there was no other example of what this company could become.

00:17:40 Speaker_00
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.

00:17:50 Speaker_00
It's, well, how do I learn exactly your craft, exactly the way you do it, and then continue that?

00:17:56 Speaker_01
Right. The business and the craft are intimately intertwined. They cannot be separated.

00:18:02 Speaker_01
And this is a playbook theme I want to pull all the way forward, but it's so critical to understand about Hermes and what really, in my mind, differentiates it from LVMH.

00:18:12 Speaker_01
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.

00:18:28 Speaker_01
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.

00:18:42 Speaker_01
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. Yeah, makes sense. So, back to Charles Emil and the second generation. he finally adds saddlery to the business.

00:18:57 Speaker_01
That's his big expansion, he adds saddles. Which, you know, again, as Paris is modernizing, as you can now buy your way into status, for the first time in Paris, you can be seen riding in addition to characters. And

00:19:14 Speaker_01
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 Osmond. I am doing things for the state, for the country. I'm doing big things.

00:19:30 Speaker_01
It's kind of like American in its way in the Rockefellers, right?

00:19:34 Speaker_00
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.

00:19:45 Speaker_00
You got stuff to do and you know, you got to get there Exactly.

00:19:48 Speaker_01
And you need a saddle for that. So Charles Émile, he adds saddles. And in 1880, he moves the workshop in the store to Vincat rue du Faubourg Saint-Honoré. 24 rue du Faubourg Saint-Honoré in the 8th arrondissement of Paris. The famous address.

00:20:06 Speaker_01
The building that is today known as Le Faubourg by everybody in the Hermès 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.

00:20:19 Speaker_00
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.

00:20:27 Speaker_01
Yeah, the Rue du Faubourg Saint-Honoré is where the French presidential residence is, it's where the British embassy is, it's where French Vogue is today, probably because Hermès is there and because all of the other luxury flagships are there.

00:20:41 Speaker_01
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.

00:20:53 Speaker_01
And his two sons, Adolf 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.

00:21:11 Speaker_00
And they're 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.

00:21:18 Speaker_01
They've been apprenticed together. They're going to be like Axel and Pierre-Alexis today.

00:21:22 Speaker_01
Well, of the two brothers, I think it is fair to say that Emil, who I believe is the younger brother, is the sort of much more ambitious and much more adventurous one.

00:21:32 Speaker_01
There's this great story that in the late 1890s, so before his father, Charles Emil, retires, the young Emil sets off to conquer Russia for Hermes.

00:21:43 Speaker_01
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 Tsar of Russia's court and lands him as a customer. That is wild.

00:22:00 Speaker_01
Unreal. They have to staff up a whole new atelier with, like, 80 craftspeople to fulfill all the orders for the Tsar in Russia.

00:22:06 Speaker_03
Whoa.

00:22:08 Speaker_01
Yeah. So this is Emil. He's going places. And right as he and Adolf are taking over, kind of at the end of Charles Emil's tenure, they decide to introduce a new product.

00:22:19 Speaker_01
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

00:22:33 Speaker_01
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 aqua bag, which translates as the high belted bag to carry saddles and boots for their clients.

00:22:50 Speaker_01
Now, like I'm saying here, this was intended to be an accessory to the main business of équipage and saddles, the equestrian business. It's not really practical for anything else.

00:23:01 Speaker_01
I don't know why anybody else would want a big tote bag that could carry your boots. What's this bag look like? Well, this bag looks exactly like the Birkins and the Kellys today, except a lot bigger.

00:23:11 Speaker_00
Interesting. Because you're putting a whole saddle in it, like you're de-saddling your horse, and then you're putting that in this bag.

00:23:18 Speaker_01
Yep, but it has the same trapezoid shape. It has the crossover belt, the otakurwa, that means the high belted bag. It has the belt. It has the turnstile lock closure for the belt at the top of the bag. Fascinating.

00:23:33 Speaker_01
So this accessory that we're going to add to the business, this becomes the spiritual heritage to the business today.

00:23:41 Speaker_00
That's crazy. It's like if Apple eventually transitioned to being not the Vision Pro company, but the Vision Pro carrying case company.

00:23:49 Speaker_03
Yes, yes, yes.

00:23:50 Speaker_00
Oh, did you get the carry case, by the way? No, I'm not going to spend another $200 on that. That thing looks like a balloon. It's enormous. Yes, and it takes up your whole backpack.

00:24:00 Speaker_01
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 Emil is retiring.

00:24:15 Speaker_01
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.

00:24:26 Speaker_01
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.

00:24:42 Speaker_00
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00:24:48 Speaker_01
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00:25:04 Speaker_00
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00:26:03 Speaker_00
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 slash ai-agents. Now David, how was Hermes perfectly positioned for the age of the automobile with this new accessory?

00:26:22 Speaker_01
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,

00:26:34 Speaker_01
Emil 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.

00:26:49 Speaker_01
And one of the people that he gets sent to meet with is, do you know about this, Ben? No, I have no idea. I can't believe you didn't find this. No. He meets with Henry Ford.

00:27:02 Speaker_00
No.

00:27:03 Speaker_01
He goes to Detroit. He sees the assembly lines. He sees the car. He sees the future.

00:27:09 Speaker_00
He sees the assembly lines and then he like had blinders on. He's like, oh, pay no attention to the manufacturing efficiencies they've got going on over there.

00:27:17 Speaker_01
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.

00:27:29 Speaker_01
It's not like they're anti-efficiency, they're pro-efficiency, but in the context of being a craft, non-mechanized human master craftsman built object. So he actually does take some of the production ideas from Henry Ford, but more importantly,

00:27:47 Speaker_01
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 arrow.

00:28:04 Speaker_01
This is kind of the same time as when we talked about our Novo Nordisk episode about the start of that company where like news didn't reach Europe. This wasn't a global world. And so.

00:28:16 Speaker_01
Emil getting this window, like literally seeing the assembly lines in Detroit, he's like, whoa, once this war is over, the world is going to change forever.

00:28:27 Speaker_00
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.

00:28:35 Speaker_01
Yeah, he's quite the character, this guy. The other thing he finds in America is, I know you know this one.

00:28:41 Speaker_00
Yeah.

00:28:41 Speaker_01
The zipper.

00:28:42 Speaker_00
Yes.

00:28:44 Speaker_01
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 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 zipper enclosed the hood of a car i think like a military car yeah where emil first sees it it's not at the ford factory i think it actually might have been in canada on this

00:29:11 Speaker_01
a 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 BF Goodrich company.

00:29:22 Speaker_00
Really?

00:29:23 Speaker_01
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.

00:29:31 Speaker_01
Regardless, enterprising young Emil, 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.

00:29:45 Speaker_01
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.

00:30:00 Speaker_01
For years in France, the zipper would be called the Hermes fastener in France.

00:30:05 Speaker_00
Yes, that's right.

00:30:07 Speaker_01
Just a while. I think they made the right decision not to make zippers the business and instead to stay focused on leather goods.

00:30:15 Speaker_00
It does show their penchant for innovation. The idea that we can push the envelope forward in functionality and 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.

00:30:30 Speaker_01
Yeah. And a golf jacket literally for use while playing golf, while playing sport. You know, what more modern activity to happen here? Yep. Regardless though, the big thing for Hermes that he brings back is, oh my God, the car is coming.

00:30:43 Speaker_00
Okay. So we're still in the third generation of the Hermes family. Two brothers are running it. What's next?

00:30:51 Speaker_01
When Emil comes back and he's running around making zippered jackets, he's collaborating with car companies, leads to a rift between the two brothers. Adolf, the older brother, he's much more conservative. He wants to remain in the horse market.

00:31:08 Speaker_01
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.

00:31:18 Speaker_00
This is literally like he wants faster horses of the analogy of like if you would ask people what they want they'd say a faster horse like he's stuck in horse land.

00:31:25 Speaker_01
Right. Now 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. Right.

00:31:32 Speaker_00
Which I could understand.

00:31:33 Speaker_01
Totally. I could totally understand that. Either way, in 1919, Emil buys him out and says, I believe in my ability to lead this company, making this transition into the automobile era.

00:31:45 Speaker_01
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?

00:32:04 Speaker_01
And I think this is still kind of legend around Hermès 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 Accroire bag, you know, it's bags for these cars.

00:32:21 Speaker_01
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.

00:32:40 Speaker_01
So the business is now a meals and the business is now handbags.

00:32:44 Speaker_01
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.

00:33:04 Speaker_01
You know, we're now in the 1920s, the roaring 20s. 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.

00:33:17 Speaker_01
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.

00:33:31 Speaker_01
People are traveling to the Middle East. People are traveling to South America and meals going right along with all these people and your luggage, your bags. That's what you bring with you. That's what you show.

00:33:43 Speaker_00
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.

00:33:54 Speaker_00
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.

00:34:07 Speaker_00
The way to wow the people that you want to wow is through the raw craftsmanship.

00:34:12 Speaker_01
The product itself, yes. So in 1922, Emile's wife famously complains that the large bag they've been making, the haute courtois, the saddlebag, it's too large to fit through car doors. So she asked for a smaller version.

00:34:30 Speaker_01
And this launches the handbag business in 1925. And by the way, by this point, they've put the zipper on a handbag. Yes, exactly. And speaking of the zipper in 1925, they add ready to wear clothes, like the legacy of the golf jacket here.

00:34:45 Speaker_01
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, you know, who knows if that's true, but it's a nice story. But they really go into this.

00:34:59 Speaker_01
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.

00:35:13 Speaker_00
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.

00:35:27 Speaker_00
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.

00:35:37 Speaker_01
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.

00:35:52 Speaker_00
Right.

00:35:52 Speaker_00
And it's interesting because they're sort of towing 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.

00:36:10 Speaker_01
Yes, and I think all this is being figured out real-time. These ideas of retailers vs brands, it was a much fuzzier line then than it is today. So what does Hermes do, what does Emile do? They start opening up stores outside of Paris

00:36:30 Speaker_01
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 Côte d'Azur in the south of France. And then they start opening up more stores around the world.

00:36:42 Speaker_01
You know, again, not necessarily in like the Londons or the Rome's or the New York's of the world.

00:36:48 Speaker_00
They're opening them up in the travel destinations. Their mindset around additional stores at this point is it's for the same clientele in all the places that they travel. Yes. And the clientele was primarily French at this point in time. Yeah.

00:37:03 Speaker_00
Or if not exclusively, other than the Tsar and yeah.

00:37:06 Speaker_01
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

00:37:21 Speaker_01
purchase our products there too. Right.

00:37:23 Speaker_00
This, by the way, is a different retail strategy than what they have today.

00:37:26 Speaker_00
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.

00:37:40 Speaker_00
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.

00:37:50 Speaker_00
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.

00:38:00 Speaker_01
Yes. Now, I think some element of this certainly still exists. You had a nice time going into the Hermes store in X, right?

00:38:08 Speaker_00
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.

00:38:23 Speaker_01
Yeah, I think they very brilliantly walk this line. And the products that the shops carry are very different. And we'll get into that later in the episode too. But back to this era.

00:38:34 Speaker_01
So, I think we've laid the groundwork of a few critical components of Hermès so far. First and most importantly, the craftsmanship.

00:38:44 Speaker_01
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.

00:38:54 Speaker_01
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.

00:39:07 Speaker_01
We've talked now here about the true modernization of the company and the transition to the automobile era.

00:39:14 Speaker_01
What we haven't talked about yet, and what Hermes at this point certainly is not, is this element of whimsy and art that is really, really critical, I think, to the company.

00:39:28 Speaker_00
Yes. If you've ever been in an Hermes store, you can feel a warmth that doesn't exist in other luxury stores.

00:39:37 Speaker_00
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

00:40:02 Speaker_00
dream-like 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.

00:40:18 Speaker_01
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.

00:40:31 Speaker_01
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.

00:40:48 Speaker_01
And back in this day, women weren't going to take over the business, unfortunately.

00:40:53 Speaker_00
Same story as the New York Times. There was a whole generation of daughters.

00:40:56 Speaker_00
Well, none of the Ox daughters get the business, and so it goes over to the son-in-law of 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.

00:41:09 Speaker_00
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.

00:41:19 Speaker_01
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.

00:41:29 Speaker_01
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-René Guérin, and there's Francis Pouet. And these are all son-in-laws. And these are all son-in-laws.

00:41:43 Speaker_01
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.

00:41:54 Speaker_00
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,

00:42:05 Speaker_00
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.

00:42:16 Speaker_00
But there's an overall playfulness that's exuded from the brand that comes from this era of leadership.

00:42:23 Speaker_01
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 Otakowa bag, the handbag line, into what he calls the Sac a Depeche in 1935.

00:42:38 Speaker_00
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.

00:42:46 Speaker_01
Beautiful, beautiful, elegant bag.

00:42:48 Speaker_00
So Sac a Depeche. Hold on to that one, listeners.

00:42:51 Speaker_01
Yep. A little later in the 1930s, he introduces the Chandoncre bracelet, which is another iconic Hermes item in there. Jewelry métier.

00:43:01 Speaker_00
Wait, David, I can't let you get away with that. Métier. Please enlighten listeners. I know Hermes sprinkles around French words in all their literature, and it just expects Americans to deal with it.

00:43:12 Speaker_00
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 métier.

00:43:19 Speaker_01
A métier is like someone's work, but in the craftsman sense. A métier 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.

00:43:37 Speaker_01
And jewelry, of course, is one of the métiers. Oh, I feel so much better saying métier.

00:43:41 Speaker_00
I bet. Yeah. There's a levity here in the room now.

00:43:44 Speaker_01
So chain d'encre in French means chain of anchors, you know, anchor chain. And these are anchors like boat anchors.

00:43:50 Speaker_01
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.

00:44:03 Speaker_01
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.

00:44:10 Speaker_00
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.

00:44:30 Speaker_00
This is really the origin of quiet luxury, where Hermes is handcrafting the highest quality product they can make a single

00:44:39 Speaker_00
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.

00:44:53 Speaker_00
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 Hermès' version of, you know, slightly louder luxury.

00:45:07 Speaker_00
Over the years, if you sort of look at products now, the belts have an H. 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.

00:45:18 Speaker_00
Hermès is on the lighter side of branding their goods today, but it's still— Well, they have to adapt to the market. 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.

00:45:33 Speaker_00
So Hermes builds that for them.

00:45:35 Speaker_01
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.

00:45:50 Speaker_01
There is this push-pull here. Yes.

00:45:53 Speaker_00
Okay, so what year are we that the bracelet is entering the market?

00:45:57 Speaker_01
So that was in kind of the mid-30s. So then in 1937, Robert introduces the other key pillar of Hermès products that is less talked about today relative to the bags and the leather goods, but for many, many decades was the bigger business.

00:46:14 Speaker_00
Oh yes, I have numbers on this.

00:46:16 Speaker_01
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.

00:46:28 Speaker_01
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.

00:46:42 Speaker_01
So the first design, the Jeux des Omnibus et Dames Blanches, the sort of white ladies at play, I guess you could translate that, is based on a woodblock engraving that Robert does.

00:46:53 Speaker_01
I mean, this is like what an artist this guy is, like he's about to become CEO of Hermès, but he's making woodblock engravings and then making silk scarves out of them.

00:47:04 Speaker_01
That's the first design that they put out there and quickly they become a huge, huge phenomenon with Hermes clients.

00:47:11 Speaker_00
Yeah. And so fast forward all the way to 1988 when Axel 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.

00:47:32 Speaker_00
Leather is 43% and silk and textiles is 7%. So there was a run. I mean, this was introduced when, David, the thirties? So 1937 through probably the 1990s, where the silk scarves were the Hermes franchise.

00:47:50 Speaker_00
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.

00:48:01 Speaker_01
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.

00:48:14 Speaker_00
Oh, I didn't realize that, really.

00:48:16 Speaker_01
Yeah, this is so iconic, Queen Elizabeth. She starts wearing them as headscarves in the 1940s. And, you know, I mean, Queen Elizabeth, she's Queen of England for what, like 60, 70 years?

00:48:26 Speaker_01
And she's wearing these scarves, these, you know, whimsical, playful scarves on her head as the Queen of England.

00:48:34 Speaker_00
fascinating. So this is a good time to talk about how these silk scarves are made.

00:48:39 Speaker_00
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 is how Hermes scarves are made today.

00:48:52 Speaker_00
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.

00:49:09 Speaker_00
There's sort of a Disney vault aspect to this. They'll bring them out of the vault. 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?

00:49:24 Speaker_00
That's a ridiculous thing. Here is the process. They screen print every single scarf by hand.

00:49:31 Speaker_01
Yeah, there's no digital process here. It's not like you're going to customink.com and like ordering up some romantic scarves.

00:49:37 Speaker_00
Right. Some of the design does seem like it involves computers now.

00:49:41 Speaker_00
Like if you watch documentaries about the craftsmen 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.

00:49:54 Speaker_00
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.

00:50:05 Speaker_00
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.

00:50:15 Speaker_01
This is like EUV lithography.

00:50:17 Speaker_00
Yes, I was looking at my wife's sort of twilly scarf, the little wrist or hair tie scarf that we got in Aix-en-Provence.

00:50:24 Speaker_00
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.

00:50:32 Speaker_00
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.

00:50:40 Speaker_00
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.

00:50:50 Speaker_00
Their entire job is to know how to translate a design into all the different color layers, which they then hand etch.

00:50:57 Speaker_00
So the pipeline is designer, engraver, that's an engraver of each mask, colorist, weaver, printer, and then someone to do the finishing.

00:51:09 Speaker_01
all of which are like extremely hard to replicate and involve both extreme craftsmanship and extreme taste.

00:51:17 Speaker_01
The competitive barriers to the Hermes scarf, I think they're way higher than the bags, honestly, even though the bags are bigger business now.

00:51:24 Speaker_00
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.

00:51:33 Speaker_00
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.

00:51:45 Speaker_00
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.

00:51:57 Speaker_01
And I think also, you know, as a client too, at least in scarves, like if you entered the Hermes scarf universe, you're not buying any other scarves.

00:52:05 Speaker_00
Totally. And you really like all of 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.

00:52:19 Speaker_00
And they remix and they name things after stores that used to exist at certain addresses. It's a universe.

00:52:26 Speaker_01
Yeah. I mean, I remember growing up and my mom is half British. I'm a quarter British and, you know, to the Queen Elizabeth thing, Hermes scarves, you know, my mom's Hermes scarves were and are among her most treasured items.

00:52:39 Speaker_00
Yep.

00:52:39 Speaker_01
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.

00:53:00 Speaker_01
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.

00:53:11 Speaker_00
You're exactly right. Twelve 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.

00:53:22 Speaker_00
Hermes is the most insulated of all the luxury brands, where they have the sort of least cost-sensitive clients.

00:53:30 Speaker_01
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.

00:53:48 Speaker_01
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.

00:54:02 Speaker_00
Oh, is that what the orange ones were used for?

00:54:04 Speaker_01
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, et cetera. So there's all this orange packing material.

00:54:14 Speaker_01
Robert embraces it, and the Hermes orange box is born. And this is crazy. I didn't know this until research. Hermes owns this color. You cannot get Hermes orange anywhere else. Pantone does not list it in their colors.

00:54:30 Speaker_00
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.

00:54:49 Speaker_00
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.

00:54:58 Speaker_01
Amazing.

00:54:59 Speaker_00
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. You know, they have 10 different leathers or something like that that they work with.

00:55:14 Speaker_00
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.

00:55:29 Speaker_00
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.

00:55:45 Speaker_00
Or they have the Hermes Moutard, which is sort of their mustard.

00:55:48 Speaker_00
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.

00:56:05 Speaker_00
to evoke the whimsy that they want from this year's theme.

00:56:08 Speaker_01
Yeah, there's this sort of like, you know, meta level or like corporate level playfulness to this too.

00:56:14 Speaker_00
We own all the oranges. 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.

00:56:26 Speaker_01
So, a few other things that Robert adds over the years. He adds the men's silks métiers, aka ties. The legend behind that one is pretty great.

00:56:36 Speaker_01
Supposedly in Cannes, a number of gentlemen were refused entry to the casino and thus went to the neighboring Hermès shop, you know, 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?

00:56:54 Speaker_01
I'm sure that's apocryphal, but adds to the legend here.

00:56:57 Speaker_00
And they are these patterns, you know, they're just as intricate as the scarves. There's less storytelling that happens in the tie.

00:57:03 Speaker_00
The scarves 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.

00:57:16 Speaker_01
Totally. After World War II, Robert decides that Hermès needs a logo, so taking inspiration from the 19th century painting Le Duc Atelier Groume à la Tente, which means Hitched Carriage Waiting Groom, the famous Hermès logo is born.

00:57:33 Speaker_01
The logo is the callback to the carriage. It's the nobility.

00:57:37 Speaker_01
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.

00:57:48 Speaker_00
No, it's so genius.

00:57:49 Speaker_01
No, it's the carriage.

00:57:50 Speaker_00
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.

00:58:03 Speaker_00
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 a nostalgia about it.

00:58:13 Speaker_01
And no longer exists. Yes. Horses in the equestrian world still exists. It's 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.

00:58:30 Speaker_01
The other thing we have to talk about are the window displays. You referenced this a little bit earlier. So he hires first Annie Baumel, and then she's soon joined by the legendary Leila Manjari.

00:58:42 Speaker_01
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-Honoré.

00:58:54 Speaker_01
I mean, there are whole museum exhibits just dedicated to these window displays.

00:59:00 Speaker_01
And it's not like, you know, again, you walk by XYZ other store, even the most prestigious brands, and it's like the products are there, you know, here's the products, here's the brand you're buying, here's the LV, et cetera.

00:59:14 Speaker_01
These displays, it's a dream. There are probably some Hermes products in there, but it's like a museum exhibit. It's artwork.

00:59:22 Speaker_00
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.

00:59:37 Speaker_00
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.

00:59:51 Speaker_00
I pay for a bigger storage space on my iPhone and I get, you know, more utility out of that. I can store more photos. Luxury means you pay more literally because it doesn't create more utility.

01:00:03 Speaker_00
It is either more pleasing to you intrinsically for the feeling or it's an extrinsic signal where you are signaling to others that you have the means to spend on this item even though it doesn't provide more utility.

01:00:16 Speaker_00
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.

01:00:33 Speaker_00
Luxury products are this interesting midpoint between extreme functionality, but also artwork.

01:00:41 Speaker_00
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

01:00:52 Speaker_00
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.

01:01:03 Speaker_00
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.

01:01:10 Speaker_01
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.

01:01:25 Speaker_01
They need to have some utility to them. 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.

01:01:39 Speaker_01
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.

01:01:54 Speaker_01
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.

01:02:04 Speaker_00
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,

01:02:22 Speaker_00
It enables you as the seller to completely switch tracks, to disconnect from any evaluation of value. Right. Or features. Exactly. You're out of the feeds and speeds world.

01:02:36 Speaker_00
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

01:02:49 Speaker_00
an unevaluable 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.

01:03:02 Speaker_01
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 the 1950s happens to Hermes in real life. And that dream is Princess Grace Kelly.

01:03:28 Speaker_01
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 Sac a Depeche. Well,

01:03:40 Speaker_01
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 the scarves, it's the dream, it's all this stuff.

01:03:52 Speaker_01
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.

01:04:13 Speaker_01
I can't imagine a bigger dream for any woman or any person in the 1950s. She is photographed using the Sacre de Peche in Life magazine on the cover of Life magazine.

01:04:28 Speaker_01
So the legend is that it was on the cover of Life Magazine, but I googled a lot of 1956 covers of Life Magazine, and I didn't find it on the cover.

01:04:38 Speaker_00
Oh, interesting.

01:04:39 Speaker_01
So maybe that's been sort of played up over time. This might have become part of the lore. Regardless, big picture in Life Magazine, she is clutching her beloved Saka Depeche to her midsection.

01:04:52 Speaker_00
And it's almost like as she's exiting a building and it's it almost seems like it's like a paparazzi type photo.

01:04:57 Speaker_01
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.

01:05:07 Speaker_01
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.

01:05:23 Speaker_01
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 Sack of Depeche to the Kelly bag.

01:05:42 Speaker_01
And this is the birth of, I don't even know what to call it. The Kelly and the Birkin are ends 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.

01:05:57 Speaker_00
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 econ 101. But before we get to that,

01:06:11 Speaker_01
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01:08:22 Speaker_00
Our huge thanks to Huntress. Okay David, so Life Magazine, the Kelly bag, it's out, so this thing must sell like hotcakes, right? Well, yes and no.

01:08:36 Speaker_01
Certainly this plays right into this whole dream thing that we've been talking about. and burnishes Hermes' already incredible brand and image.

01:08:47 Speaker_01
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.

01:09:04 Speaker_01
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.

01:09:19 Speaker_01
And like, yeah, I'm sure they're all buying Kellys, 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.

01:09:29 Speaker_00
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.

01:09:39 Speaker_00
It's a $900 handbag in the 50s, which today is $10,000 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.

01:09:56 Speaker_00
So the people who are buying it are the Grace Kellys of the world, and there's not really this stratified class below that that's got this huge amount of purchasing power.

01:10:06 Speaker_01
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. Yep, exactly.

01:10:16 Speaker_00
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.

01:10:28 Speaker_01
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.

01:10:45 Speaker_00
Which is crazy to say, right? I remember this moment in the Porsche episode. You're like, no, come on.

01:10:50 Speaker_00
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 freaking mess.

01:10:57 Speaker_00
Hermes is not quite in those dire of straits, but I mean, they have the ingredients of Hermes that we knew today. They've got the Kelly bag. They've got the orange box. They've adopted the logo. They've got the scarves. They've got the scarves.

01:11:09 Speaker_00
They have these small workshops where they make everything, but it's not working yet.

01:11:16 Speaker_01
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.

01:11:34 Speaker_01
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.

01:11:50 Speaker_01
and the dream of Hermes that was once so elegant and so desired by so many people but inaccessible is kind of now like You know, it's certainly still got its audience, but it's not as universal.

01:12:07 Speaker_01
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.

01:12:20 Speaker_01
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.

01:12:37 Speaker_00
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.

01:12:52 Speaker_00
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.

01:13:09 Speaker_00
It's not how creative and crazy can we be. 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?

01:13:24 Speaker_00
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.

01:13:33 Speaker_01
Right. And those brands are getting born or reborn right there in the 1970s.

01:13:39 Speaker_00
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.

01:13:47 Speaker_01
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 is acquired gross. We got to talk with Domenico Di Sole who was CEO of Gucci during the fight with Bernard Arnault that we chronicled

01:14:04 Speaker_00
Really, I think that was the best part of our LVMH episode. Absolutely. When Domenico Desole and Tom Ford and that team rejected Bernard's takeover and managed to not become a part of LVMH.

01:14:16 Speaker_00
And obviously then Domenico and Tom Ford left to start Tom Ford after that.

01:14:21 Speaker_01
But it was super cool. When we talked to Domenico, he comes from that world, even, you know, with the heritage of Gucci. He and Tom, it was fashion first.

01:14:29 Speaker_01
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.

01:14:40 Speaker_00
Risk on baby. Risk on. Yeah. Let's figure out how to break some glass in what we're doing.

01:14:46 Speaker_01
Grace Kelly is not breaking any glass.

01:14:48 Speaker_00
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.

01:15:04 Speaker_00
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.

01:15:18 Speaker_00
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. Yeah, it's antithetical to fashion. Yes, exactly.

01:15:28 Speaker_01
So all this culminates towards the end of the 1970s as Robert is nearing the end of his tenure at Hermès and the end of his life. Sadly, there's a moment, this is like probably 1977 or so,

01:15:41 Speaker_01
where they bring in consultants and the consultants recommend like, hey, you guys should probably do what Gucci is doing.

01:15:49 Speaker_01
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.

01:16:00 Speaker_01
Unbelievable. That was the accepted wisdom at the time. I don't know if it was McKinsey or, you know, who was saying that.

01:16:07 Speaker_00
Well, today I will tell you that Hermes has a corporate policy of no consultants. And now I know where that came from.

01:16:14 Speaker_01
I mean, this is enshrined in the luxury strategy is anti law of marketing. Number 19, do not hire consultants.

01:16:24 Speaker_00
Wow. So the recommendation was to come in and destroy everything that makes you special and follow the playbook that everyone else is running.

01:16:30 Speaker_01
Yeah. I mean, it's working for them and it's not working for Hermes. It's crazy. 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.

01:16:45 Speaker_01
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, you know, the most unassailable thing in the world right now, but finds itself in a moment where it can be assailed.

01:17:01 Speaker_01
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.

01:17:10 Speaker_00
And isn't it amazing? You would think the best person out there to brilliantly come up with both the business strategy and the creative element is probably not your direct descendant. Right. Probably not your nepotistic family member.

01:17:26 Speaker_00
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.

01:17:35 Speaker_00
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,

01:17:55 Speaker_00
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.

01:18:07 Speaker_01
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.

01:18:23 Speaker_01
You know, 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 Hermès, and his mother, who was head of production at the dinner table growing up.

01:18:38 Speaker_01
You can't not absorb that. I think that's the flip side of nepotism, right? 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?

01:18:53 Speaker_00
You know, 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 sort of absorb from those.

01:19:01 Speaker_01
Totally. Okay. Jean-Louis, the fifth generation, the brand, you know, the consultants are saying, Hey, go be like Gucci.

01:19:09 Speaker_00
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.

01:19:21 Speaker_01
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.

01:19:31 Speaker_00
Oh, really?

01:19:31 Speaker_01
I think everything else is made in Pentat, which is a 20 minute drive away. It's not like the outsourced production. Anyway, we'll get to that. Great. Okay. Jean-Louis comes in. What year is this? Great.

01:19:46 Speaker_01
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.

01:19:54 Speaker_00
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?

01:20:03 Speaker_00
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 is true or not, it can either only be done by hand, or until recently only be done by hand, but

01:20:20 Speaker_00
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.

01:20:35 Speaker_01
It's also incredibly beautiful. It's got a slight diagonal valence to it as opposed to the normal straight line stitching.

01:20:43 Speaker_00
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.

01:20:57 Speaker_00
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 all part way through.

01:21:15 Speaker_00
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.

01:21:23 Speaker_00
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.

01:21:32 Speaker_00
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.

01:21:45 Speaker_00
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.

01:21:59 Speaker_00
And then you have a second needle on the other end of the thread. So one thread, two needles. Yes. That you pass through the other direction. And so what you've done as you pull both of them through.

01:22:11 Speaker_00
is created this incredibly strong sort of interlocking mechanism. There's tensile force going in both directions. Yes. If it gets ripped, you're not at risk of the whole thing pulling out and your saddle or your bag falling apart.

01:22:28 Speaker_00
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. Yeah.

01:22:41 Speaker_00
Compare that to most products that you own. 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.

01:22:56 Speaker_00
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.

01:23:09 Speaker_00
There are very few people who are in a life or death circumstance that are dependent on their stitch holding true.

01:23:20 Speaker_01
I think it still has relevance if you want your object to be permanent.

01:23:27 Speaker_01
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.

01:23:44 Speaker_00
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.

01:24:00 Speaker_00
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.

01:24:12 Speaker_00
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?

01:24:20 Speaker_00
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.

01:24:33 Speaker_00
And for everyone who's sort of wondering, okay, but what is 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.

01:24:48 Speaker_00
So one craftsman starts with 36 unique pieces of high quality leather. As much as possible from the same animal and matched exactly. Yes, exactly.

01:25:00 Speaker_00
And so it's not sourced from all these different places all over the world and one person's 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.

01:25:13 Speaker_00
It takes 20 hours and this is over the course of a few weeks to create this. 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.

01:25:32 Speaker_01
Oh, I think it's even more than that. It's two years of training to become an 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.

01:25:43 Speaker_01
I believe you need at least another three years, if not more, before you're allowed to touch the Birkins and the Kellys. Fascinating.

01:25:51 Speaker_00
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.

01:26:08 Speaker_01
Ooh, hang on to this. I have a lot more to say when we get to the current generation about this.

01:26:12 Speaker_00
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? I have to admit, I have not read it cover to cover.

01:26:25 Speaker_00
You did more of the history and I did more of this. But I've read large sections of it. 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 a savoir-faire.

01:26:39 Speaker_00
133 times savoir-faire is referenced in the Hermès registration document.

01:26:44 Speaker_01
Partially in their defense, savoir-faire literally translates as know-how. It's kind of like a proper term in French.

01:26:52 Speaker_00
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.

01:27:04 Speaker_00
And that is how they scale production. And we'll put a pin in that and come back to it later.

01:27:10 Speaker_01
Yeah, that's the true genius of the current generation is they have scaled that to 7,000 people. It's unbelievable. Unbelievable.

01:27:18 Speaker_01
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.

01:27:29 Speaker_01
She was an artisan at Hermès in Paris. She was hired right at the start of Jean-Louis' tenure. She worked in the atelier at the Faubourg.

01:27:41 Speaker_01
When Jean-Louis' son, Pierre-Alexis Kern, artistic director, came to train after school as a teenager, he sat next to Beatrice. And I got to chat with her about this.

01:27:50 Speaker_00
She runs April in Paris in San Francisco.

01:27:52 Speaker_01
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.

01:28:00 Speaker_01
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, you know, a few of these people go around the world.

01:28:14 Speaker_01
And one of the things about Hermes and actually Jean-Louis. or say this, like the true essence of luxury and the true essence of Hermes is everything they make can be repaired.

01:28:23 Speaker_01
And so if you buy an item from Hermes, no matter what it is, they will repair it.

01:28:27 Speaker_00
Yeah, I think that's true.

01:28:28 Speaker_01
Even if it's 100 years old, you bring it in, they will repair it.

01:28:31 Speaker_00
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. Wow. Amazing.

01:28:43 Speaker_01
Yeah. So I asked Beatrice when I was talking to her, what was this like? You know, what was special?

01:28:48 Speaker_01
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.

01:29:05 Speaker_01
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 a steam. And I said, oh, well, why?

01:29:18 Speaker_01
And she said, look, by the time we're at this era, nobody else was left that did this. Yeah, right. Everything we talked about in the 1970s, all these other brands, they all went in this complete other direction.

01:29:31 Speaker_01
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.

01:29:46 Speaker_01
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?

01:29:59 Speaker_01
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' scale,

01:30:16 Speaker_01
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.

01:30:25 Speaker_01
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, like there's nobody else.

01:30:40 Speaker_00
Yeah, it's nuts. It's completely insane. And the people who don't work for Hermes, your options are in the dozens.

01:30:48 Speaker_00
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.

01:31:05 Speaker_00
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.

01:31:16 Speaker_00
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.

01:31:26 Speaker_01
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.

01:31:42 Speaker_01
She ran into him in the elevator in the Faubourg right after she started. He looked at her and said, You're Beatrice Amblard. Welcome to Hermes." You know, she knew everybody by name.

01:31:52 Speaker_01
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?"

01:32:05 Speaker_01
And she explained that, well, she wanted to be entrepreneurial, start her own thing.

01:32:10 Speaker_01
And then shortly after the San Francisco Chronicle did an article about her, he found the article, read it in France, cut it out, and mailed it to her with a note of congratulations handwritten.

01:32:21 Speaker_00
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. On the other hand, this is the CEO of Hermes. Right.

01:32:32 Speaker_00
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.

01:32:43 Speaker_00
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.

01:32:55 Speaker_00
Let me evaluate the whole landscape of people who could deliver that for me, and then I'll decide which maker to go with.

01:33:03 Speaker_00
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.

01:33:17 Speaker_00
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.

01:33:30 Speaker_01
Yep. Okay. So Jean-Louis story, how did he turn this thing around and save Hermes from the consultants?

01:33:39 Speaker_01
Well, like we said, he'd apprenticed just like every other generation, but unlike any other generation, or I guess maybe sort of like Emil back in the day, going and meeting Henry Ford,

01:33:49 Speaker_01
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. Really?

01:34:02 Speaker_01
And Rena Dumas would go on to design all the stores that they opened up all around the world. Oh. And design the Atelier in Pantene when they expand production.

01:34:13 Speaker_00
I.M. 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.

01:34:24 Speaker_01
I was going to say, think about the connections here in France and Paris.

01:34:28 Speaker_00
Yeah. Which, by the way, everyone in Paris thought the pyramid was hideously ugly when at first, relative to this 1700s building around it. And over time, now it's become this like iconic triangle pyramid, beautiful signature of the city.

01:34:42 Speaker_01
Yeah. Jean-Louis, when he's in America, he works for Bloomingdale's. Bloomingdale's? My God, of all places.

01:34:50 Speaker_00
Well, there was a heyday of department stores. In fact, if you go way back, do you know how Hermes entered the United States? In partnership with Neiman Marcus. Yes. 1930s. Good. Wow. So you did find that. It's hard to stop me, but you do it sometimes. Okay.

01:35:08 Speaker_00
So Bloomingdale's.

01:35:09 Speaker_01
So from that experience, you know, being in America, being in this much more mainstream, you know, audience, he comes to understand what these other brands are doing, you know, what the consultants are suggesting. But he takes that back.

01:35:28 Speaker_01
And what he says, like, look, the way forward is we're 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.

01:35:38 Speaker_01
We're going to keep our market position. But our clients want to be like these young people, particularly these young women. You know, the moms don't want to be like their moms. They want to be like their daughters.

01:35:51 Speaker_00
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.

01:36:02 Speaker_00
Keeping the same products and not violating everything that Hermes currently stands for. We talked about this on LVMH, the Not Your Mother's Tiffany campaign.

01:36:13 Speaker_00
It's almost like, how do you not insult your current customer base by adapting for the next one?

01:36:19 Speaker_01
this is such a tight needle to thread to use a pun here. They need to run the Not Your Mother's Tiffany campaign without actually running the Not Your Mother's Tiffany campaign.

01:36:30 Speaker_01
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, that's the main part of the business at this point in time.

01:36:48 Speaker_01
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.

01:37:00 Speaker_01
It's the Hermes version of Not Your Mother's Tiffany. And most importantly, they're wearing these scarves with jeans. Grace Kelly would never wear jeans.

01:37:10 Speaker_01
I don't know if she ever did wear jeans, but she sure as hell wouldn't be photographed wearing jeans.

01:37:14 Speaker_00
Fascinating.

01:37:15 Speaker_01
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. Fascinating. And this is like a revolution.

01:37:32 Speaker_01
I mean, the rest of the family is really upset about it, but he pushes it through, you know, and you can still see echoes of this to this day, like a big part of Hermes fashion.

01:37:42 Speaker_01
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.

01:37:55 Speaker_00
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?

01:38:05 Speaker_00
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.

01:38:12 Speaker_01
Ah, that's super cool. Yeah. 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

01:38:36 Speaker_01
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.

01:38:48 Speaker_00
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,

01:39:02 Speaker_00
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.

01:39:16 Speaker_00
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.

01:39:26 Speaker_00
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.

01:39:33 Speaker_00
And like it's gone up a little bit, but Hermes has very high price point products that stay approximately that price forever.

01:39:40 Speaker_01
Yeah, 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.

01:39:57 Speaker_01
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. Total genius.

01:40:14 Speaker_01
Yep, for sure. Okay, so that's brilliant. So that's on the product side and kind of doing this jujitsu to reposition the products in Hermès.

01:40:23 Speaker_01
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 Racamier figured out at Louis Vuitton in the 1970s was

01:40:39 Speaker_01
The market now, the global wealthy, the global elite, the global rich is so much bigger now than it was in the 1950s.

01:40:50 Speaker_01
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.

01:41:06 Speaker_00
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.

01:41:17 Speaker_00
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

01:41:32 Speaker_00
set up shop and say, hey, France's whole heritage is now available to you to adopt as part of your persona.

01:41:40 Speaker_01
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.

01:41:48 Speaker_01
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.

01:42:04 Speaker_00
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.

01:42:23 Speaker_01
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

01:42:37 Speaker_01
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.

01:42:51 Speaker_01
the early 1980s, where he's seated next to the French and British actress Jane Birkin. The it girl of the time. 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.

01:43:09 Speaker_00
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.

01:43:23 Speaker_00
And she sort of laughed and said, wouldn't that be something? Yeah, right. But totally 95%, if not more of the listeners to this podcast will have no idea who Jane Birkin is before this episode.

01:43:34 Speaker_01
But you definitely know the Birkin bag.

01:43:36 Speaker_00
Yep. Or at least you know of the Birkin bag. I'd bet 7 out of 10, maybe 8 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.

01:43:52 Speaker_01
Well, certainly if you follow the Hermes stock, you know what a Birkin Bank is, even if you probably couldn't pick it out of a crowd. Yes. But anyway, this is the culmination of everything we've been talking about. Who is Jane Birkin?

01:44:05 Speaker_01
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. And we didn't talk about this with Grace Kelly either.

01:44:17 Speaker_01
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, like Hermes doesn't do celebrity advertising.

01:44:30 Speaker_01
I think it's so important that even though neither of them were French, they became so deeply European in what they represented.

01:44:38 Speaker_00
Yeah, that's a great way to put it.

01:44:40 Speaker_01
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.

01:44:58 Speaker_01
And in particular, she had a trademark accessory fitting with the, you know, 1970s. Oh, the basket. Yep. Counterculture, you know, back to the land type ethos. She carried a wicker basket with her everywhere that she went.

01:45:14 Speaker_00
Which has an ethos to it, but doesn't lend itself well to overhead bins.

01:45:19 Speaker_01
No, it does not. So as the two of them, Jean-Louis, CEO and Artistic Director of Hermès, and Jane Birkin, French cultural icon, are boarding this flight to London.

01:45:30 Speaker_01
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, kids stuff in her basket.

01:45:46 Speaker_01
She had baby bottles that were like spilling out. Totally. I mean, I carry a lot of kids stuff these days. Like you need a lot of stuff with the kids.

01:45:53 Speaker_00
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.

01:46:01 Speaker_01
Yes. And I get it. 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.

01:46:13 Speaker_00
You know what we should do? We should come out with a $15,000 diaper bag. Right, right, right.

01:46:19 Speaker_01
So they sit down, they start talking on the flight, and Jean-Louis introduces himself, and it's like, I notice you're struggling with your wicker basket there, Miss Perkin.

01:46:27 Speaker_00
And she doesn't know who he is at first. It's the funniest thing. Right, right, right. 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.

01:46:38 Speaker_00
Or she made some comment, and he goes, I am Hermes.

01:46:41 Speaker_01
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 use that one.

01:46:48 Speaker_00
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.

01:47:01 Speaker_01
Yeah. 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.

01:47:16 Speaker_01
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.

01:47:27 Speaker_01
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.

01:47:37 Speaker_00
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.

01:47:47 Speaker_01
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.

01:48:04 Speaker_01
When you watch interviews with particular Pierre Alexi, 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 Birkenbeg becomes the Birkenbeg. And like, the time is right.

01:48:17 Speaker_01
We're in the 1980s, the go-go years. You know, this is the years that are shaping Bernard Arnault here.

01:48:23 Speaker_00
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. Yeah.

01:48:35 Speaker_01
I mean, it takes five years for it to become any modicum of success for Hermes. And then, like a lot of these things, this just kind of slow burn starts that grows and grows and grows and grows.

01:48:49 Speaker_00
And there's a real lure 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.

01:48:59 Speaker_00
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.

01:49:08 Speaker_00
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.

01:49:21 Speaker_00
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.

01:49:30 Speaker_01
Ben, you would make a great Hermes essay.

01:49:33 Speaker_00
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.

01:49:48 Speaker_00
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, you know, had a delightful time and decided to buy something.

01:50:00 Speaker_00
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.

01:50:16 Speaker_00
It was a crazy, probably that 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.

01:50:29 Speaker_01
It's funny, you know, my experience was different. Of course I had to go do some research for this episode.

01:50:35 Speaker_00
You drove down to the Palo Alto store, right?

01:50:37 Speaker_01
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.

01:50:49 Speaker_01
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.

01:51:00 Speaker_00
Apple watch band. I thought that's what that was.

01:51:01 Speaker_01
An Apple watch band. Yup. 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.

01:51:15 Speaker_01
And I think she actually might be a higher level essay, but when I expressed that I was there to buy a, an Apple watch band.

01:51:22 Speaker_00
Oh, interesting.

01:51:23 Speaker_01
Yeah, I don't know if that was just the day in the store or if that was part of the policy.

01:51:28 Speaker_00
I have to imagine it's a little bit different experience in the French countryside as compared to... The Stanford Shopping Center. Yeah, I could see that. But back to the Birkenbag, by 2001,

01:51:39 Speaker_00
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.

01:51:54 Speaker_00
And Samantha figures out that there's a way to jump the, I think they use the number five, five-year wait list.

01:52:02 Speaker_01
Well, the scene where she walks in to try and buy it is just iconic, where the sales associate is responding to her like, it's $12,000 or whatever. Like, oh, I know. There's a waiting list. Of course.

01:52:13 Speaker_00
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, you know, calamity ensues. They actually figure out that it's for her, not the client.

01:52:26 Speaker_00
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 phenomena, which is

01:52:42 Speaker_00
good luck ever getting a Birkin bag. And, you know, 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 a hundred. And, you know, it's crazy.

01:52:57 Speaker_00
You know, it has become the Patek Philippe Nautilus of handbags and people look at it almost as a investment.

01:53:04 Speaker_01
A way of summing up what you're saying is the hard thing about buying a Birkin is not coming up with the money.

01:53:10 Speaker_00
And which is crazy, right? It's starting at $12,000 handbag. And what you're saying is that's actually not the constraint.

01:53:17 Speaker_01
Yeah. But also what you're talking about, you know, 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.

01:53:29 Speaker_00
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.

01:53:41 Speaker_00
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.

01:53:52 Speaker_01
Yeah, that would be the last Birkin bag that you ever buy. Every bag, I think maybe even every item that Hermes makes has what Hermes calls a blind stamp on it. And this is a series of symbols and numbers. There's one on my belt right now.

01:54:09 Speaker_01
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 made it.

01:54:21 Speaker_00
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.

01:54:39 Speaker_00
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?

01:54:50 Speaker_00
And to get it back 10, 20 years later and see it has got to be crazy cool. Yes.

01:54:55 Speaker_00
So today, everything we're talking about here, the Birkin bag, the Kelly bag, these $10,000 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.

01:55:12 Speaker_00
And so this is essentially the opposite of everything you learned in Econ 101.

01:55:17 Speaker_01
as is everything about this company.

01:55:20 Speaker_00
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.

01:55:34 Speaker_00
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. Birkenbags sell below the market clearing price. Yes.

01:55:49 Speaker_00
That is another defiance of microeconomics. Normally things should be priced exactly at the intersection of supply meeting demand.

01:55:58 Speaker_01
I was just laughing as you were talking about developing 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.

01:56:12 Speaker_00
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.

01:56:26 Speaker_00
But another way to look at it is that it's an investment in the brand. So there's a very good Substack writer, 310value, that we'll link to in the show notes, who observed

01:56:36 Speaker_00
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.

01:56:59 Speaker_01
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 two, three, four, five times the price that they do.

01:57:19 Speaker_01
And they'll show up on GOAT or StockX all the time regularly at higher prices than Nike releases them for.

01:57:27 Speaker_01
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

01:57:47 Speaker_01
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.

01:57:57 Speaker_00
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.

01:58:10 Speaker_00
In fact, Chanel has done it in record amounts the last couple of years with the, I think it's called the Chanel classic flap medium or something like that.

01:58:18 Speaker_00
But that's had this crazy appreciation over the last few years where Chanel is just raising the price. Hermes doesn't do that.

01:58:25 Speaker_01
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.

01:58:39 Speaker_00
So it's like 5% above, 4 or 5% above inflation.

01:58:43 Speaker_01
Yeah.

01:58:43 Speaker_00
Which is more, but not an egregious amount. 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 US.

01:58:54 Speaker_00
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? Perkins are 20 now, not 12.

01:59:12 Speaker_01
Right. They're already viewed as the most expensive handbags in the world. So what harm done to go from 12 to 20? Right.

01:59:22 Speaker_00
And they sell a lot of them. So like that actually would be a lot of profit dollars.

01:59:26 Speaker_01
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.

01:59:39 Speaker_00
Right. The Wall Street Journal estimated in 2020 that there's about 120,000 of the combined Birkin and Kelly created each year.

01:59:49 Speaker_00
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'

02:00:01 Speaker_00
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 Birkenbag, the retail price was around $2,000 when it launched in 1984, so call it

02:00:20 Speaker_00
maybe $6,000 inflation-adjusted. So you're looking at maybe twice the price that it launched out on an inflation-adjusted basis.

02:00:28 Speaker_00
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?

02:00:37 Speaker_00
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?

02:00:49 Speaker_01
Interesting. All right. Let's come back to that later in the episode.

02:00:52 Speaker_00
Yeah. Okay. So 1984 Birkin release doesn't sell well for the first five years. Then it becomes this cultural touchstone and gain steam every year after that.

02:01:01 Speaker_01
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. Yes. And aura around this bag.

02:01:14 Speaker_01
You can't just drop a new product and have it become like this. immediately in this category.

02:01:20 Speaker_00
Correct.

02:01:21 Speaker_01
You're never going to have like an iPhone of luxury handbags.

02:01:25 Speaker_00
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

02:01:38 Speaker_00
brand-new product, priced at an extreme premium, that did sell right away because the product had so much of the brand in it.

02:01:47 Speaker_00
Like, you knew exactly what you were going to get from going to the Taylor concert because you were extremely familiar with the brand.

02:01:52 Speaker_00
But it's not necessarily well understood that the Birkin equals Hermès in the way that the Heiress Tour equals Taylor Swift.

02:01:59 Speaker_01
Totally. It's also that the product was the Heiress Tour. The product was not Midnight's. 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.

02:02:13 Speaker_01
But it was like, no, I'm going to go to Taylor's concert and hear all of Taylor.

02:02:19 Speaker_00
All the amazing Hermes scarves from over the years released out of the vault.

02:02:23 Speaker_01
Yes. The Disney plus of Taylor. All right. All right. Different episode here. 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.

02:02:41 Speaker_01
I mean, this is just like, I can't believe he pulled this off. He pulls off not your mother's Tiffany without saying not your mother's Tiffany. And the culmination of that is the Birkenbeg and everything that that represents.

02:02:53 Speaker_01
And then two, the internationalization and discovering and running the same playbook that Rakhamyeh ran at Louis Vuitton. By the end of Jean-Louis' tenure in 2006, so a couple of years after the famous Sex and the City episode.

02:03:08 Speaker_01
Hermes has gone from well less than a hundred million dollars. When he took over the consultants were saying, you know, outsource, shut it down. Essentially by the end of the decade of the eighties, he was just under half a billion dollars in revenue.

02:03:22 Speaker_01
And then in 2006, he's taken it to $2 billion in annual revenue from, you know, nice family business to like, this is a real, real thing. So one more time on those numbers.

02:03:36 Speaker_01
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 a hundred to 2 billion when he retires in 2006. So 40 X in 30 years. Yeah. 40 X in under 30 years. Wow. Pretty good.

02:03:55 Speaker_01
Pretty transformative for the family business. Well, along the way, as the company clearly becomes more and more valuable, you know, remember he is the family member who's running it, but we're now on the fifth generation of the family.

02:04:13 Speaker_01
We're starting to bleed into the sixth generation of the family. They're now over 80 family members out there, eight zero. many of whom are involved in the business, but many of whom aren't.

02:04:25 Speaker_01
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.

02:04:38 Speaker_00
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.

02:04:50 Speaker_00
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.

02:05:05 Speaker_00
I'm pretty sure it's the most valuable thing that any of them owns.

02:05:08 Speaker_01
Right. So in 1993, Jean-Louis lists Hermès on the Paris Stock Exchange. Collectively, when the dust settles, the family has sold 19% of Hermès to the public. They still own 81%.

02:05:24 Speaker_01
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.

02:05:38 Speaker_01
It would really take some sort of absolute financial genius to like come in and even consider, you know, we owned over 70% of this business. We're unassailable. Who on earth could possibly make a run at our company?

02:05:54 Speaker_00
It would take a real wolf, I'll tell you.

02:05:59 Speaker_01
Which brings us to, you know, 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 Hermès' finest moment that we're about to talk about here. Through it all.

02:06:11 Speaker_01
And it's interesting, it's not their product.

02:06:13 Speaker_00
No. Has nothing to do with the product. Yeah.

02:06:15 Speaker_01
Yes. The fight with Bernard Arnault.

02:06:19 Speaker_00
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02:06:27 Speaker_00
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02:06:44 Speaker_01
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02:08:03 Speaker_00
And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. David Rosenthal, let us return to Bernard Arnault. It's been 12 months. It's been too long.

02:08:20 Speaker_00
I've been wanting to hear the other side of this story.

02:08:22 Speaker_01
I know, I know. OK, 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.

02:08:39 Speaker_01
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%.

02:09:00 Speaker_01
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.

02:09:13 Speaker_01
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,

02:09:33 Speaker_01
This is really hard to remember. I had to triple check these numbers. At this point in time, Hermes' market cap is below $20 billion.

02:09:42 Speaker_00
That's like 8-9% of what it is today.

02:09:45 Speaker_01
And when Bernard first starts buying in the early 2000s, it's below $10 billion. But 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.

02:09:59 Speaker_01
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 below 10.

02:10:13 Speaker_00
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.

02:10:21 Speaker_00
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.

02:10:27 Speaker_01
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. Like, obviously he wants to own Hermes.

02:10:42 Speaker_00
And by the way, when David and I are referencing these Excel 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.

02:10:53 Speaker_01
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 sakes, the Sex and the City episode was just dedicated to the Birkin.

02:11:08 Speaker_01
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.

02:11:24 Speaker_01
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 gonna create an opportunity for him.

02:11:43 Speaker_01
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's son, Pierre Alexi, takes over as artistic director.

02:11:58 Speaker_01
Pierre Alexi 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.

02:12:12 Speaker_01
And he comes in and he joins Hermes right after graduation in 1992. So he's being grim, but Jean-Louis wants to separate out the artistic director role and the CEO role.

02:12:24 Speaker_00
Oh, they had been coupled before? Well, yeah, he held both.

02:12:27 Speaker_01
So Robert held both, you know, Emile was both, Thierry was certainly both.

02:12:32 Speaker_00
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.

02:12:38 Speaker_01
Yes. Until this generation, it was one person. There was no separation at all. So Pierre Alexi is clearly the artistic heir. There's not a clear CEO heir. And in fact, Jean-Louis' choice, Axel, who ultimately does become CEO, he's not in the business yet.

02:13:01 Speaker_00
He did that internship, his sort of five-year apprenticeship, but then he left, right?

02:13:05 Speaker_01
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. And remember, Jean-Louis was his uncle, but his mother, who actually was not a family member,

02:13:20 Speaker_01
was the managing director for production for Hermes. Axel has this sort of, you know, dinner table trading in addition to the apprenticeship craftsman trading, but he goes off into the investment banking world.

02:13:35 Speaker_01
He works first in China and then in New York for Bampe Peribas.

02:13:40 Speaker_00
Wow. So he is an expert in corporate structure. Yep. And he's an expert on this pretty interesting luxury market in the next 20 years, China.

02:13:50 Speaker_01
Yup.

02:13:51 Speaker_00
And America too.

02:13:53 Speaker_01
Huh? 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 an epitastic business. On the other hand, they're not going to just give him the CEO title right away.

02:14:07 Speaker_01
He needs to come pay his dues. He starts in the finance department in 2003. And then in 2006, when Jean-Louis retires, XL takes over running the jewelry Metier as CEO of jewelry.

02:14:20 Speaker_00
which listeners you should know, jewelry is not an important part of the Hermes business. It's one of the 16 métiers. They don't even break it out in earnings.

02:14:28 Speaker_00
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 one to three percent.

02:14:42 Speaker_01
So he does that for two years and then in 2008 He goes and takes over the leather goods and salary business.

02:14:49 Speaker_00
So the big one, which that's 43% of the business. And I think at the time it was closer to 50%.

02:14:55 Speaker_01
Yes. So Bernard sees, okay, we've got a generational transfer opening here.

02:15:02 Speaker_01
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 Alexi on the artistic side.

02:15:18 Speaker_00
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

02:15:28 Speaker_00
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.

02:15:35 Speaker_01
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.

02:15:50 Speaker_01
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.

02:16:05 Speaker_01
You can, but you're opening the door for 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.

02:16:17 Speaker_01
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.

02:16:32 Speaker_01
But look, there's no questioning Hermes's financial results and sort of on the surface brand value at this point in time in the 2000s, early 2010s. but there are a few things that are just kind of starting to slip as they scale.

02:16:48 Speaker_01
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.

02:17:06 Speaker_00
Oh yeah, this is so interesting, listeners. If you listen to other coverage of Hermes, you will hear this story.

02:17:11 Speaker_01
And you never hear it from the perspective that we're about to tell it. OK, 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.

02:17:28 Speaker_01
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.

02:17:40 Speaker_01
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.

02:17:52 Speaker_01
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.

02:18:06 Speaker_00
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.

02:18:18 Speaker_00
I heard this story, David heard this story, and David texted me at one point and was like, isn't this an odd story? And I was like, what do you mean?

02:18:26 Speaker_00
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. They love telling these legendary Hermes stories.

02:18:38 Speaker_00
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.

02:18:52 Speaker_00
It's like, okay, well, why are they not telling this story, given how often it's bantied about?

02:18:58 Speaker_01
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? Exactly.

02:19:07 Speaker_00
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? How on earth did this happen?

02:19:22 Speaker_01
The story here is not a heroic one of we destroyed the supply.

02:19:26 Speaker_00
This is a tragic one. 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.

02:19:41 Speaker_00
The story here is how do you have such a process failure at Warner Brothers where this thing was let out the door.

02:19:49 Speaker_00
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.

02:20:02 Speaker_01
Right. And building up the Burke and the Kelly. I mean, for God's sakes, the scarves sell for like $500. Yeah. So, okay, that I think is the most visceral illustration of this.

02:20:13 Speaker_01
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.

02:20:27 Speaker_00
But why is Hermes doing this? Right.

02:20:29 Speaker_00
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.

02:20:41 Speaker_00
They were trying to create the constellation of weak brands.

02:20:44 Speaker_01
The best Hermes could ever hope for by doing this is they're going to be a subscale, like, they're not even going to be Richemont or Kering.

02:20:52 Speaker_00
Now, one argument, you know, 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.

02:21:03 Speaker_01
Yes, those I think were probably strategic acquisitions.

02:21:06 Speaker_00
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.

02:21:18 Speaker_00
They were also buying other brands.

02:21:20 Speaker_01
Yeah. Did you find the biggest disaster? This is kind of in your wheelhouse. Ooh, I don't know. I was wondering if I could stump you with this. They bought, I believe a 30, 35% stake.

02:21:31 Speaker_01
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.

02:21:47 Speaker_01
They became the largest shareholders in Leica, the camera company. Really? Yeah. Huh.

02:21:52 Speaker_01
Which, you know, I mean, sort of the motivation is like, oh, you know, they're beautiful and they're like luxurious cameras and they have leather on them and we can put Hermes leather on the Leica cameras.

02:22:01 Speaker_00
Yeah, if they made a Hermes edition Leica camera with a... They did. I should probably look into that.

02:22:09 Speaker_01
But 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.

02:22:22 Speaker_00
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.

02:22:33 Speaker_01
Yeah. Unless that is the core strategy of what you are doing, like LVMH. Yes. 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.

02:22:51 Speaker_01
In 2009 is when they launch it. It literally means up down or like past present.

02:22:58 Speaker_01
And the idea is that, you know, 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.

02:23:14 Speaker_00
Yep. I actually like the strategy.

02:23:16 Speaker_01
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're buying luxury. And this is a great experiment to run, sure.

02:23:32 Speaker_01
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.

02:23:49 Speaker_00
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.

02:24:04 Speaker_00
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.

02:24:11 Speaker_00
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.

02:24:28 Speaker_00
Why on earth would you throw that away when that really is the essence of your core asset?

02:24:33 Speaker_01
right now easy for us to armchair quarterback here like obviously it didn't work they end up selling it off actually pretty recently to the uh agnelli family from italy which is the family behind fiat now look certainly that one the laika 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

02:24:58 Speaker_01
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.

02:25:09 Speaker_03
Yeah.

02:25:09 Speaker_01
The family obviously circles the wagons and, like, mounts their, you know, like, they're like the rebel alliance here, you know, mounting their defense against the empire.

02:25:18 Speaker_00
Which I think is quite impressive. Absolutely. 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.

02:25:33 Speaker_00
It's kind of incredible to link arms and manage to rebuff it. Totally.

02:25:37 Speaker_01
We'll tell the story here and it's amazing. But I think this is like 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.

02:25:49 Speaker_03
Hmm.

02:25:50 Speaker_01
They certainly do now. So, okay, what's the story? What happens? Finally, in October of 2010, Arno is patient. He spent nine years? Nine plus years. Yeah. That he's just building this stake, being patient,

02:26:05 Speaker_01
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

02:26:22 Speaker_01
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.

02:26:34 Speaker_01
A quote here, I could not sit by and allow a competitor or another investor to take a stake in Hermes. Oh, he's good. He's so good. I love it.

02:26:44 Speaker_01
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.

02:26:54 Speaker_01
You can go Google it, but the response, and this is an official press conference, you know, with investor relations people. He says, if you want to seduce a beautiful woman, obviously Hermes being the beautiful woman here,

02:27:07 Speaker_01
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.

02:27:21 Speaker_01
Karl Lagerfeld is asked his thoughts on what's going on here. And Lagerfeld, of course, he's a legend. He's the longtime creative director of Chanel.

02:27:30 Speaker_01
He comments publicly, well, if you don't want to be taken over, don't put your business on the public market.

02:27:35 Speaker_00
which, hey, game recognized game, that's a great point. He's got a point. If you want liquidity, I mean, this is the trade-off you make.

02:27:43 Speaker_01
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?

02:27:53 Speaker_01
He is also, I believe, the menswear creative director for Fendi, which is owned by?

02:27:59 Speaker_00
By LVMH.

02:28:00 Speaker_01
LVMH. He's on payroll. 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.

02:28:21 Speaker_01
So Bernard now owns almost the entire public float of Hermes.

02:28:28 Speaker_00
There's what, like three and a half percent of Hermes that's publicly floated he doesn't own?

02:28:32 Speaker_01
Yeah. Hermes is like in danger of being delisted from the stock exchange. Crazy. Now, this is what's so brilliant. You might ask, why does this matter? The family owns 73 percent. Bernard can't do anything. price is a function of supply and demand.

02:28:46 Speaker_01
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 price? Skyrocket. It goes through the roof.

02:29:00 Speaker_01
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.

02:29:11 Speaker_01
They 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.

02:29:26 Speaker_01
Crazy. So what happens? You know, this is why I think this really was the family and the company's finest moment. That temptation, I mean, must have been extreme. And that's just the externally identifiable motivations.

02:29:43 Speaker_01
You know, 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.

02:29:52 Speaker_00
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. You know, six generations in, it's pretty peanut buttered around.

02:30:03 Speaker_01
But still, I think also just from a psychological perspective, a couple of dominoes fall here. And then as a family member, you start looking around and being like, do I want to be the last one?

02:30:13 Speaker_01
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 it's ever going to get. I may never see another opportunity to get liquid at this price ever.

02:30:27 Speaker_01
And the minute that other family members start selling. It goes down. Supply and demand. The price goes down.

02:30:32 Speaker_00
Right. I cannot be the last and it would kind of suck to be the second or the third. Right.

02:30:38 Speaker_01
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.

02:30:59 Speaker_01
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.

02:31:16 Speaker_01
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.

02:31:31 Speaker_01
So badass.

02:31:32 Speaker_00
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 A51 really should.

02:31:47 Speaker_01
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.

02:31:59 Speaker_01
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.

02:32:15 Speaker_00
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.

02:32:27 Speaker_00
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.

02:32:38 Speaker_00
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?

02:32:48 Speaker_01
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.

02:33:03 Speaker_00
They're like, Bernard, you will be dead when this expires. That's exactly what that is.

02:33:08 Speaker_01
But I believe it's pretty ironclad that these shares cannot be sold. Wow. So, in addition to that, two of the Puesh brothers, Bertrand and Nicholas. Nicholas is the one that there's the Gardner drama about right now.

02:33:24 Speaker_00
Which we 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 Gardner, or like his ex-Gardner, who's now like

02:33:42 Speaker_00
51. Nobody knows his name. Nicholas does not have children or heirs or other heirs. Right. So there's a press story right now that just shy of 3% of Hermes could be given to the family gardener.

02:33:54 Speaker_01
Anyway. The two Puest brothers, they do not contribute their shares to H51, but they give H51 a right of first refusal on their shares.

02:34:06 Speaker_01
So they could sell their shares, but at whatever price they agree to, the rest of the family has a roofer on purchasing them. Oh, interesting. So that's another probably 10 to 15% of Hermes right there.

02:34:18 Speaker_00
Whoa, okay, that's significant. I wonder how this Gardner thing is going to play out.

02:34:22 Speaker_01
Yeah, right? And those shares would be, I believe, subject to that roofer, 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.

02:34:37 Speaker_00
The fact that they actually rebuffed this offer and that Bernard sold down his stake is crazy.

02:34:43 Speaker_01
Well, let's get into what happens with Bernard's stake. Because famously, as Domenico Di Sole said in the press at the end of the Gucci affair, even when he loses, he still wins. And Bernard still wins here.

02:34:57 Speaker_01
So this effectively ends the takeover bid when H51 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. It was basically illegal, right?

02:35:13 Speaker_01
Well, in 2014, the French court rules that this was illegal. LVMH has to pay a fine, I believe like a 10, 15 million dollar fine for having done this. Pennies. Yeah, right. As we'll see, it's truly pennies.

02:35:27 Speaker_01
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 Arnaud, which is Bernard Arnaud's family office.

02:35:44 Speaker_01
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.

02:36:00 Speaker_01
And remember, when they started buying, the whole company was trading at a market cap below $10 billion.

02:36:08 Speaker_00
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.

02:36:18 Speaker_01
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 Dior.

02:36:40 Speaker_01
He already owned Dior that he had gotten out of bankruptcy from Boussec. That's right.

02:36:46 Speaker_00
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.

02:36:55 Speaker_00
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 RRNO, because he was technically the majority owner of each of them.

02:37:09 Speaker_01
Yes. But He and LVMH didn't own this 25% minority stake in Dior. He takes the Hermes shares and does a share swap.

02:37:21 Speaker_01
So swaps that value directly with the 25% of Dior that he doesn't own to bring that first into Group Arnaud, 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.

02:37:42 Speaker_01
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.

02:38:03 Speaker_01
Oh my God. Because it's all share swaps. Basically, Bernard just gets 10% more of his own company as a result of this.

02:38:10 Speaker_00
Which would then go on to appreciate.

02:38:12 Speaker_01
Call it four or 500% over the next five, six years.

02:38:16 Speaker_00
5X since 2017? Yeah. Wow. Even when he loses, he wins.

02:38:24 Speaker_01
Unbelievable. Now, this is a situation where everybody wins. I don't think there are any losers here and the Hermes families absolutely are not losers.

02:38:34 Speaker_01
And you could even say they sort of have the last laugh here because yes, Bernard gets to benefit from, you know, an extra four to five X appreciation in LVMH's market cap here.

02:38:48 Speaker_01
from let's call it the real beginning of when LVMH publicly announces their stake in Hermes. So 2010, Hermes' market cap is up 16x.

02:38:59 Speaker_00
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.

02:39:12 Speaker_00
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&D.

02:39:26 Speaker_01
Tech companies go like, I don't know what Hermes color to call it, but some color with envy over this. There is one more chapter of the story that we have to tell because that wouldn't have just happened.

02:39:37 Speaker_01
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.

02:39:49 Speaker_01
And that is the story of the sixth generation of Pierre Alexi and XL, who I think have certainly fixed those problems, but have really led Hermes, the business and the company into a whole new era.

02:40:06 Speaker_00
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.

02:40:20 Speaker_00
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.

02:40:30 Speaker_00
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.

02:40:49 Speaker_00
You have to pick your fight and Hermes picks their fights better than anyone and

02:40:55 Speaker_01
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. Yes. On the surface, those are completely like oxymoronic terms. Those are completely diametrically opposed.

02:41:19 Speaker_00
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.

02:41:35 Speaker_00
And frankly, they would all just go out of business. Most of them go out of business anyway.

02:41:39 Speaker_01
Totally. What was the stat that you said a little while ago that there are 120,000 Perkins and Kellys produced every year? Yep, exactly. Yeah. If they were still making these things on the third floor at the faux bourg, no way, no way.

02:41:55 Speaker_01
And this was kind of the problem and 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.

02:42:04 Speaker_00
Right. You have a global brand now, like you need to figure out how to serve the demand for your brand.

02:42:10 Speaker_01
Yup. 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.

02:42:26 Speaker_01
We've been talking about this whole episode, but then he continues. I believe Hermes's vision provides a solution to this dilemma. And this is what the current generation has found, the solution.

02:42:38 Speaker_01
So today, I think we referenced this earlier in the episode, Hermes employs 7,000 master crafts people, artisans,

02:42:50 Speaker_01
Most of the story that we've been telling thus far, 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 de Saint-Honoré in Paris.

02:43:07 Speaker_01
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.

02:43:21 Speaker_01
Any one of their production sites does not have more than 250 to 300 craftspeople.

02:43:26 Speaker_00
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 Axel even says, if you have more than 300, it is not a workshop. It's a factory.

02:43:38 Speaker_01
Yep. 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.

02:43:53 Speaker_01
Well, as the company gets larger and larger today, that means adding 500 artisans every year.

02:43:59 Speaker_00
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. Right. Now, here's the issue, though. How on earth are you going to do this?

02:44:14 Speaker_00
Like you were saying, this is a dead art. Nobody else does this. Little maker with a workshop in San Francisco or a workshop in Paris. But like, how are you even going to find them?

02:44:25 Speaker_01
Right. 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?

02:44:35 Speaker_01
It's not like they can go higher from their competitors. They're not doing this.

02:44:38 Speaker_00
Right. Their competitors have all outsourced production and embrace assembly lines.

02:44:42 Speaker_01
So they do the only thing that you can do. They build the pipeline of training master crafts people and artisans entirely themselves.

02:44:54 Speaker_01
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.

02:45:08 Speaker_01
They have a hundred percent 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.

02:45:20 Speaker_01
And then we're going to offer you a job as a master craftsman. It's crazy. 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.

02:45:35 Speaker_01
These were all like old men that were doing this stuff.

02:45:38 Speaker_00
Yep.

02:45:38 Speaker_01
Today, the average age of the Hermes artisan workforce is 30 years old and 80% are women. It's wild. It's a wholesale transformation. and they are training them.

02:45:52 Speaker_01
They actually just opened in 2021 their first official French governmentally sanctioned degree-granting program, the École Hermèse de Savoir-Faire. This is the Savoir-Faire that pops up in the annual report, you know, a hundred whatever times.

02:46:08 Speaker_01
Let's name a school after it too. Yeah, yeah, yeah. They're like getting into like government policy here. They are preserving and growing this art form in France.

02:46:19 Speaker_00
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.

02:46:27 Speaker_00
So it behooves the French government to try to figure out how to make this last another hundred years.

02:46:32 Speaker_01
Yep. So today there are 31 Hermes ateliers, you know, artisan manufacturing facilities all throughout the country, each with no more than, you know, 250, 300 people in it.

02:46:46 Speaker_00
Right. It's the cloud competing idea of scaling horizontally. Totally. This is AWS. This is the point I'm getting to. Right.

02:46:52 Speaker_01
They're building data centers. They were Amazon and they added AWS and they are adding two to four of those every year.

02:47:00 Speaker_00
It's so funny. You had that thought too. Totally. 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.

02:47:14 Speaker_01
Yep.

02:47:15 Speaker_00
Trained in the traditional early 20th century way.

02:47:18 Speaker_01
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.

02:47:35 Speaker_00
Yep. Last 12 months is 14 billion.

02:47:38 Speaker_01
Yeah. 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.

02:47:55 Speaker_00
Yeah, wild. 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.

02:48:11 Speaker_00
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.

02:48:25 Speaker_00
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.

02:48:37 Speaker_00
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.

02:48:46 Speaker_00
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.

02:48:52 Speaker_00
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 endpoint. They can only hire three, four, or 500 craftsmen a year. They can only do this other stuff.

02:49:07 Speaker_00
Good luck getting a Birkenbag. I mean, it's just one of these things where you can say they're artificially constraining supply all you want,

02:49:13 Speaker_01
As long as they do things this way, this is the max throughput.

02:49:17 Speaker_00
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 us just as high a quality product.

02:49:25 Speaker_00
And every craftsman gets, you know, twice as 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.

02:49:40 Speaker_01
You know, 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.

02:49:56 Speaker_01
It's a intentionally rate limited flywheel and it all works together.

02:50:00 Speaker_00
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.

02:50:13 Speaker_00
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.

02:50:25 Speaker_00
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.

02:50:38 Speaker_01
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.

02:50:54 Speaker_00
Right. 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?

02:51:09 Speaker_00
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.

02:51:18 Speaker_01
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.

02:51:31 Speaker_01
Look at the rest of the industry. Louis Vuitton, which as we talked about, has the same caliber of heritage and history as Hermès. Yes.

02:51:38 Speaker_00
It could have Hermes' Gravity if it wanted to, but instead you can buy a checkerboard cotton sweatshirt with 120 LVs on it.

02:51:48 Speaker_01
Right. They are having the same level of success, the same margins. It's working like a charm. But it's less durable. Well, I think that's sort of the question. Is it less durable or is it just these are different markets or different strategies?

02:52:06 Speaker_01
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, the Apple Watch partnership.

02:52:16 Speaker_00
Out of left field, very surprising, very odd for the brand to do this.

02:52:20 Speaker_01
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.

02:52:31 Speaker_01
Supposedly, the story goes that Johnny Ive, and the watch I think was really Johnny's kind of like pet project as his last hurrah before leaving Apple.

02:52:40 Speaker_01
He had all these quotes at the time of the Swiss watch industry, better watch out, we're coming for them, you know, et cetera, et cetera. Which was true.

02:52:48 Speaker_00
I mean, different market, but it's by far the best-selling watch in the world.

02:52:51 Speaker_01
Yes, but it's far from been the death knell of the Swiss watch industry.

02:52:55 Speaker_00
Right. Yeah. The Swiss watch industry has done just fine since the Apple watch came out on the high end.

02:53:01 Speaker_01
Yes. Mark Newson was consulting for Apple specifically on the watch and Johnny asked Mark to introduce him to Pierre Alexia and XL and to Hermes. Apple was looking for a luxury fashion brand.

02:53:17 Speaker_01
Remember there was the Apple Watch edition in the beginning that was like the gold Apple Watch and all that.

02:53:22 Speaker_00
Oh, man. $10,000 for something that was going to be obsolete in a year. It's crazy.

02:53:27 Speaker_01
Yeah. That clearly didn't work. But it's beautiful. 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.

02:53:42 Speaker_00
Oh, it's funny. I hadn't actually made that connection that that's why it's Hermes and not... Well, I think there's two reasons.

02:53:47 Speaker_01
That's one reason. The other reason is they needed a brand that was going to appeal to pretty much everybody.

02:53:54 Speaker_03
Yeah.

02:53:54 Speaker_01
For everything we've talked about with Louis Vuitton and how successful that's been, it's polarizing.

02:54:01 Speaker_00
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 whatever they make... Nobody is ever going to say that Hermes makes crap. Right.

02:54:11 Speaker_00
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.

02:54:25 Speaker_00
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.

02:54:39 Speaker_00
They need to partner with someone unassailable.

02:54:42 Speaker_01
Axel and Pierre-Alexi talk about this all the time when they're asked about, oh, XYZ flashy celebrity, you know, is carrying a Birkenbeck, blah, blah, blah. They say like, look, we don't judge. We never judge here at Hermes.

02:54:53 Speaker_01
Our clients are our clients, whether it's Grace Kelly or, you know, Kim Kardashian. Yeah. And that's what Apple needed. So, Axel has a great quote on this.

02:55:02 Speaker_01
He says, we had an incredible talk with Jonathan Ive, 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?

02:55:14 Speaker_01
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.

02:55:30 Speaker_01
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.

02:55:39 Speaker_00
A hundred percent. I love the Hermes slim to Hermes watch. I like 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.

02:55:52 Speaker_00
There's just no world where like it actually makes sense for me to own a different watch.

02:55:57 Speaker_01
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.

02:56:06 Speaker_01
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.

02:56:21 Speaker_01
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.

02:56:35 Speaker_01
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.

02:56:50 Speaker_00
which is expensive 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.

02:57:00 Speaker_01
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.

02:57:18 Speaker_01
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.

02:57:33 Speaker_00
It's too low. It's somehow bridging the gap between an Apple product and an Hermes product.

02:57:38 Speaker_01
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?

02:57:47 Speaker_01
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.

02:57:59 Speaker_00
So Hermes's belts, and I believe they're Apple watches, and there are other things, are machine sewn.

02:58:06 Speaker_01
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 handmade Apple watch bands.

02:58:26 Speaker_00
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.

02:58:38 Speaker_00
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.

02:58:50 Speaker_00
And this is weird. It's weird. 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.

02:59:04 Speaker_00
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.

02:59:12 Speaker_01
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.

02:59:25 Speaker_00
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. Yeah.

02:59:40 Speaker_00
Apple is the definition of mass market at this point.

02:59:42 Speaker_01
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?

02:59:54 Speaker_03
Yeah.

02:59:54 Speaker_01
What are they getting out of selling a machine-made strap for $540?

03:00:00 Speaker_00
Maybe you're now an Hermes customer, and over the next 50 years, you're on a journey with them.

03:00:06 Speaker_01
I think that's true. I mean, I'm going back tomorrow.

03:00:08 Speaker_00
What are you getting tomorrow?

03:00:11 Speaker_01
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.

03:00:18 Speaker_00
Okay. Sounds good.

03:00:19 Speaker_01
The cliffhanger cliffhanger. So just to put some numbers and finish out the story by 2018 revenue has grown from call it three and a half, four billion euros when XL took over in 2013. By 2018, that's six billion euros. 2019, it's seven billion.

03:00:39 Speaker_01
It dips a bit during 2020 with the pandemic, but then nine billion in 2021. Last year, 11.6. And like we said, on track for call it 14 billion euros in 2023. This is an absolutely resounding success.

03:00:55 Speaker_01
As we've said, what Axel and Pierre-Alexi and this generation of the family has done, like all the generations before them, has been nothing short of amazing.

03:01:04 Speaker_00
Remarkable.

03:01:04 Speaker_01
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.

03:01:13 Speaker_01
But I just got to say, we've seen with 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.

03:01:24 Speaker_00
Hermes has always thrived by figuring out how to be above it all and it be counterposition to the rest of luxury. It's an open question, I think, of whether the Apple partnership helps that or hurts that.

03:01:36 Speaker_01
Yeah.

03:01:37 Speaker_00
OK, a few more stats on the business today before we move into analysis. Does that sound good to you, David? Great. Great.

03:01:44 Speaker_00
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.

03:01:59 Speaker_00
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 on to a lot of cash, two-thirds of it.

03:02:09 Speaker_00
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.

03:02:23 Speaker_00
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,

03:02:35 Speaker_00
they're gonna 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.

03:02:48 Speaker_00
And so, even if they could train these craftspeople as fast as possible, they have another governor, which is scarcity, product image, price,

03:02:58 Speaker_00
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.

03:03:06 Speaker_01
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 is a museum and Hermes is not a museum. Right.

03:03:20 Speaker_01
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.

03:03:27 Speaker_00
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.

03:03:37 Speaker_00
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.

03:03:44 Speaker_01
Yup. Totally.

03:03:46 Speaker_00
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.

03:03:54 Speaker_00
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.

03:04:08 Speaker_00
And so that's kind of 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.

03:04:18 Speaker_00
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.

03:04:31 Speaker_01
Yeah. Now, certainly there is an element to, to the dividend that is part of making the family shareholding lock up an easier pill to swallow.

03:04:40 Speaker_00
Yes. Quite palatable. The segments of the business, leather goods and sattlery 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.

03:04:53 Speaker_00
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?

03:05:02 Speaker_00
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.

03:05:13 Speaker_01
Yeah. They're not a fashion brand and yet they participate in it.

03:05:17 Speaker_00
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%.

03:05:34 Speaker_00
And then there's a couple of 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 a hundred dollar bottles of perfume and they sell them at department stores.

03:05:46 Speaker_01
Yup. And they launched beauty in 2020 with lipstick.

03:05:51 Speaker_00
Yup. 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.

03:06:03 Speaker_00
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. Yup.

03:06:14 Speaker_01
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.

03:06:29 Speaker_00
Yeah. So here's some stats. In 2006, France was already down to 19% of sales. I mean, it started at a hundred percent of sales. So that's why I say down to 19%. 2006, this is a while ago, or almost 20 years ago.

03:06:43 Speaker_00
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.

03:07:00 Speaker_00
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%. Oh, wow. Japan was almost one and a half times as large as rest of Asia.

03:07:20 Speaker_00
Well, today, rest of Asia is 48%. half of Hermes' business is Asia excluding Japan. A.K.A. China. Exactly. That's crazy. And I think Russia accounted for a decent amount of that.

03:07:36 Speaker_01
Hmm. Interesting. The Japan story actually I think is still significant. Japan today is what, like 10% of revenue?

03:07:44 Speaker_00
Yeah. Japan's larger than France. It's 9% in France, 10% in Japan.

03:07:49 Speaker_01
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. That's interesting.

03:08:03 Speaker_01
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. Huh. For a small country, kind of like France, it's still very, very significant for the business.

03:08:18 Speaker_00
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. Wow.

03:08:33 Speaker_01
And, you know, 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,

03:08:47 Speaker_01
China has been real tough for the luxury industry and yet Hermes is still growing there.

03:08:54 Speaker_00
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.

03:09:07 Speaker_00
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.

03:09:17 Speaker_00
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.

03:09:31 Speaker_00
And over the years, they've done this with shoes and umbrellas and leather jackets and raincoats and silverware and gloves.

03:09:38 Speaker_00
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.

03:09:50 Speaker_00
So it's interesting, I think they're sort of decreasing that when I give the number that at this point 76% of objects are made in its own exclusive workshops.

03:10:00 Speaker_00
But it is more correct than not to think about Hermes as they control everything from design to production to brand to retail today.

03:10:11 Speaker_01
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. Yep.

03:10:22 Speaker_00
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.

03:10:37 Speaker_00
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.

03:10:46 Speaker_01
Yeah, they're not on display in the stores.

03:10:49 Speaker_00
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 Birkin or Kelly bags, even on display.

03:11:00 Speaker_00
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.

03:11:07 Speaker_01
Yep.

03:11:07 Speaker_00
Crazy.

03:11:08 Speaker_01
Totally crazy.

03:11:09 Speaker_00
I mean, if you just do some napkin math at 25 hours per bag, that's 1500 craftsmen just making Birkins and Kellys all day long. Sounds about right.

03:11:19 Speaker_00
They have 16 métiers, and one in particular that I want to talk about is Petit H. This is one of my favorite Hermès things, period. So it started in 2010. It's a very interesting idea.

03:11:32 Speaker_00
For other leather brands, you typically see them trying to use the second best leather cut in some of their bags. But at Hermes, they'll never do that.

03:11:44 Speaker_00
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.

03:11:56 Speaker_00
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.

03:12:07 Speaker_00
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.

03:12:20 Speaker_00
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.

03:12:34 Speaker_00
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.

03:12:47 Speaker_00
This was like, no, we've got a bunch of scraps. What's fun stuff we can do? And that is that whimsy coming through.

03:12:54 Speaker_01
Yes.

03:12:55 Speaker_00
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.

03:13:11 Speaker_00
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.

03:13:26 Speaker_00
If they were out there cranking the prices of Birkin bags, you might think less of them. 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 anyway.

03:13:39 Speaker_00
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.

03:13:48 Speaker_01
Yet, 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 on the table.

03:13:57 Speaker_00
Essentially, there's consumer surplus in economic terms.

03:14:01 Speaker_01
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

03:14:11 Speaker_01
compounded annual revenue growth rate of Hermes for the last 10 years, you know, 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.

03:14:28 Speaker_01
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 got to be attributable to price increases, huh? Which I think this is the answer now.

03:14:43 Speaker_01
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.

03:14:53 Speaker_01
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. Right.

03:15:05 Speaker_00
Yeah, there's a fine line. There's a gauche-ness to it. Right, exactly.

03:15:08 Speaker_00
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.

03:15:22 Speaker_00
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.

03:15:31 Speaker_00
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.

03:15:39 Speaker_01
There probably is an element of like, 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.

03:15:53 Speaker_00
Oh, this is an intentional strategy over at Rolex.

03:15:56 Speaker_00
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.

03:16:08 Speaker_00
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,

03:16:18 Speaker_00
It spurs people to buy that otherwise wouldn't have bought because they feel more safe making the purchase.

03:16:25 Speaker_01
This concept landed for me during our Porsche episode working with Doug DiMiro. There's a class of almost every car that you would ever buy.

03:16:34 Speaker_01
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, collector's cars, rare cars, et cetera, the opposite is true.

03:16:50 Speaker_01
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.

03:17:04 Speaker_00
Right. It's an investment. Right. Then there's a business unit that we didn't talk about yet called Hermes Horizons. Yes, which is not a official Metier, right? It is not a Metier. They break it out under other products.

03:17:16 Speaker_00
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.

03:17:29 Speaker_01
My deployment buckle.

03:17:30 Speaker_00
Yes. And then there's Hermes Horizons.

03:17:33 Speaker_01
This is so great.

03:17:34 Speaker_00
Hermes Horizons is perfectly named.

03:17:37 Speaker_01
What it basically says is... If you have a private jet and you want it outfitted with Hermes seats.

03:17:43 Speaker_00
And we don't make seats.

03:17:44 Speaker_01
We've got the division for you.

03:17:45 Speaker_00
We will make you seats. Yes.

03:17:49 Speaker_01
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.

03:18:05 Speaker_01
And we have to have a discussion with those clients, that if that's what you want, we are not the place for you. Yes. So great. Maybe one day be a Hermes Horizons customers. Maybe. We'll see.

03:18:20 Speaker_01
All right, well, let's transition officially to analysis and start with power, as we always do. Hamilton Helmer's seven powers.

03:18:28 Speaker_00
And listeners, 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?

03:18:39 Speaker_00
And the seven that Hamilton has identified are counter-positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource.

03:18:51 Speaker_00
And the question we asked David on the LVMH episode was, for luxury brands, is there anything else other than branding power?

03:18:59 Speaker_00
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.

03:19:12 Speaker_00
Now in Hermes' case, it may not actually be branded, but you might still know it is Hermes and be willing to pay more for it.

03:19:19 Speaker_01
Yeah. If you know, you know.

03:19:21 Speaker_00
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 a woven H into the fabric or something like that if presented to you here.

03:19:36 Speaker_00
But obviously, there's a tremendous amount of branding power.

03:19:39 Speaker_01
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.

03:19:57 Speaker_01
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.

03:20:13 Speaker_00
Yep. Okay, I have two cases to make for non-brand powers that come into play. Oh, okay, great. Cornered resource.

03:20:20 Speaker_01
Yes, agree.

03:20:21 Speaker_00
They literally have all the craftsmen.

03:20:23 Speaker_01
Agree.

03:20:24 Speaker_00
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.

03:20:33 Speaker_00
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.

03:20:40 Speaker_00
They don't have the history, but also you literally can't find any more craftsmen. So you'd have to train them yourselves.

03:20:45 Speaker_01
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.

03:20:58 Speaker_01
So cornered resource for sure.

03:21:00 Speaker_00
Yep. The other one that is a little bit squishier, are they counter positioned 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.

03:21:15 Speaker_00
Louis Vuitton has no ability to switch gears and say, Ooh, it's important to compete on the vector of handcrafted.

03:21:22 Speaker_01
Right. There are a lot of t-shirts out there.

03:21:23 Speaker_00
Right. They have to serve too many customers, but Hermes doesn't. Right. It's kind of flimsy counter positioning.

03:21:32 Speaker_01
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. Yep. I think there's an element of that.

03:21:44 Speaker_01
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.

03:21:53 Speaker_01
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.

03:22:01 Speaker_00
Yep, brand is the power. Yes. 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 gonna need to repeat it point for point on the Hermes episode.

03:22:16 Speaker_00
And that is why handbags are just the best freaking product to sell ever as a business. And 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.

03:22:32 Speaker_00
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.

03:22:45 Speaker_00
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.

03:22:59 Speaker_00
At Louis Vuitton, it's 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

03:23:11 Speaker_00
In 2000 and by 2004, that number was more than four. So it's this high volume product.

03:23:17 Speaker_00
And at Louis Vuitton's immense four-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 Hermès.

03:23:32 Speaker_00
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.

03:23:41 Speaker_01
It's amazing. You know, at least in the Palo Alto Hermes, which is what I've most recently been in, you walk in and you would think this is a homewares company.

03:23:50 Speaker_00
Yes.

03:23:51 Speaker_01
There's a lot of tableware, and there's a lot of furniture.

03:23:54 Speaker_00
And there's clothing. There's ready-to-wear.

03:23:56 Speaker_01
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.

03:24:06 Speaker_00
It's such a funny way to describe it.

03:24:09 Speaker_00
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.

03:24:21 Speaker_00
You can't say no. You have already accepted. Right. And it doesn't have the benefit of saving square footage the way that, you know, I mentioned, oh, you don't need to try on handbags. There's nothing to impede your velocity.

03:24:33 Speaker_00
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.

03:24:44 Speaker_00
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.

03:24:54 Speaker_00
They've managed to sell the same exact product category totally different, and they've constructed an entirely different business model around the same products.

03:25:03 Speaker_01
Yes. I think that's really the story here. Yes, there are other brands. There's Chanel, there's Gucci, there's Sicilia. I don't want to say that those luxury brands and those handbag brands are not incredible. They are. But.

03:25:16 Speaker_01
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.

03:25:31 Speaker_00
Right. This is a good moment to bring up this idea that Hermes likes to espouse, that they have no marketing department.

03:25:40 Speaker_01
Yes, this is a whimsical element of Hermes that I kind of love.

03:25:44 Speaker_00
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.

03:25:53 Speaker_00
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.

03:26:05 Speaker_00
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.

03:26:13 Speaker_00
And if you compare that to LVMH, which spends over one third of their revenue on sales and marketing combined, so that's 23 percent for sales and marketing at Hermes compared to 33 percent at LVMH. I mean, that's a huge difference.

03:26:25 Speaker_00
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.

03:26:40 Speaker_01
Yeah, that's the media spend of Hermes, I believe.

03:26:44 Speaker_00
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.

03:26:58 Speaker_00
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%.

03:27:08 Speaker_01
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.

03:27:26 Speaker_01
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, you know, allegory for Pandora's box and AI and ballet in the modern world here in San Francisco.

03:27:44 Speaker_01
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.

03:27:58 Speaker_01
There's a difference.

03:27:59 Speaker_00
Right. This is, in some ways, event spend.

03:28:01 Speaker_01
Yes.

03:28:02 Speaker_00
It's much closer to that. 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.

03:28:15 Speaker_01
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.

03:28:23 Speaker_00
Yeah.

03:28:23 Speaker_01
Even just the pure marketing events, like a store launch or product launch, they'll spend a million dollars on a party.

03:28:29 Speaker_00
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.

03:28:45 Speaker_00
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 him and tough it out.

03:28:58 Speaker_00
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.

03:29:09 Speaker_00
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.

03:29:20 Speaker_00
So there are celebrities running around who get paid to endorse other brands who will pay full price to wear Hermes out and about.

03:29:28 Speaker_01
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.

03:29:35 Speaker_00
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.

03:29:46 Speaker_01
Yeah. I'm pretty sure that Grace Kelly bought her sack of Depeche.

03:29:49 Speaker_00
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.

03:30:03 Speaker_00
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.

03:30:18 Speaker_00
And honestly, they just don't need to do that much marketing.

03:30:22 Speaker_01
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.

03:30:37 Speaker_01
That audience is still French people with the preface de in their names, i.e. old nobility. That audience is the wealthiest people in America. That audience is Cardi B and Megan Thee Stallion.

03:30:51 Speaker_00
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.

03:31:01 Speaker_01
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 like, you know, it's huge.

03:31:15 Speaker_01
There are millions and millions of people that watch this.

03:31:17 Speaker_00
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.

03:31:32 Speaker_00
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.

03:31:45 Speaker_00
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.

03:31:57 Speaker_00
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.

03:32:05 Speaker_00
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.

03:32:13 Speaker_00
Each store manager gets a budget, and they have the freedom to buy, quote unquote 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.

03:32:27 Speaker_01
I believe there's also a regulation that every store needs to carry at least one item from each metier.

03:32:33 Speaker_00
Oh, that's cool. I didn't realize that. I like that.

03:32:35 Speaker_01
But yeah, this operates like a retail buying event. It's bizarre, but awesome.

03:32:40 Speaker_00
Even though they're wholly owned, they get the benefit of not being wholly owned, you know?

03:32:45 Speaker_01
Right, the market signals.

03:32:46 Speaker_00
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.

03:32:55 Speaker_00
You know, 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.

03:33:06 Speaker_00
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.

03:33:14 Speaker_01
There's like a Costco treasure hunt element to it.

03:33:16 Speaker_00
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.

03:33:27 Speaker_00
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 Marseilles or something like that and see if they have it there?

03:33:39 Speaker_00
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 on to that.

03:33:48 Speaker_00
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.

03:33:58 Speaker_00
Cause you can flip it online for that much, but I love it. They have pretty tight controls around that.

03:34:03 Speaker_01
I love it. Luxury strategy, anti-love marketing. Number six, dominate the client, dominate the client.

03:34:09 Speaker_00
Yup. 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 like a sold out button.

03:34:19 Speaker_00
There's just this educational page about what Birkin bags are all about and how neat the designs are and what the category is.

03:34:26 Speaker_01
But there's no buy button.

03:34:27 Speaker_00
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 that you say, look, the special things are the special things.

03:34:41 Speaker_00
But for people who we want to come experience the brand for the first time, great, we've got a website for you.

03:34:47 Speaker_00
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.

03:35:03 Speaker_01
This is a really uniquely Hermes thing and is related to their airport strategy too. Oh yeah. And I experienced this too. When I went to Palo Alto, I just walked into the store. I was pretty intimidated.

03:35:17 Speaker_01
As a first-time buyer and you don't have an SA, a sales associate relationship, It can feel very intimidating, like especially knowing what I know about the company and the brand, you know, the weight of history, like walking into this store.

03:35:31 Speaker_01
It's not like walking into an IKEA. You know, this is very intentional. The e-commerce strategy and then the airport strategy is, hey, nobody feels intimidated in an airport.

03:35:39 Speaker_01
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.

03:35:51 Speaker_01
in this buying experience, which is wholly unique to Hermes.

03:35:55 Speaker_00
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.

03:36:05 Speaker_01
Right.

03:36:06 Speaker_00
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.

03:36:17 Speaker_00
And if Hermes 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.

03:36:27 Speaker_00
4.5% of their entire workforce every year leaves of their own desire.

03:36:36 Speaker_01
So that translates to a longer than 20-year average tenure. This is like Costco-level employment retention.

03:36:43 Speaker_00
It's funny you say that. So Costco is 7% a year, but Costco cheats a little bit in that the stat is after the first year, whereas Hermes' attrition of 6% includes the first year.

03:36:56 Speaker_03
Wow.

03:36:57 Speaker_00
Yeah. So just compare this with all industries in the U S that's a 3.4% monthly turnover.

03:37:05 Speaker_00
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 Jesus, 6% good, 6% is unbelievable.

03:37:21 Speaker_00
Cause the benchmark is 33%.

03:37:23 Speaker_01
Especially in the context of, think about the two areas that are the bulk of Hermès' employees. It's craftspeople and sales associates.

03:37:34 Speaker_00
Which, if you are to use different language, is manufacturing and retail, which are super high churn categories.

03:37:40 Speaker_01
Right. That's the point I'm making.

03:37:42 Speaker_00
I mean, even software developers churn at 15 to 20 percent 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.

03:37:54 Speaker_00
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%.

03:38:06 Speaker_00
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.

03:38:19 Speaker_01
I mean, they have incredible YouTube videos and documentaries. They put out like you referenced and you go see these people and like you really get to feel like factories. You know, they're not factories. These ateliers are something truly unique.

03:38:33 Speaker_00
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. A little over half were company owned.

03:38:48 Speaker_00
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.

03:38:58 Speaker_00
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.

03:39:10 Speaker_00
This is like the 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.

03:39:24 Speaker_00
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. He's sort of colloquially known on Twitter as the menswear guy.

03:39:39 Speaker_00
dye work wear as 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.

03:39:49 Speaker_00
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.

03:40:05 Speaker_00
And you basically can't get that bundle anywhere else. That doesn't have competitors.

03:40:13 Speaker_01
You can get individual elements of that bundle elsewhere.

03:40:17 Speaker_00
Absolutely.

03:40:18 Speaker_01
But by nature, given what this is in the luxury industry, you can't assemble this experience, the Hermes experience, out of separate components.

03:40:30 Speaker_00
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.

03:40:41 Speaker_00
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.

03:40:54 Speaker_00
Supreme can offer you exclusivity and brand, but again, there's no real craftsmanship there.

03:40:58 Speaker_00
And then you've got all these individual artisans, you know, a craftsperson and a little workshop somewhere in Paris making the highest quality, you know, Hermes quality things, but there's no brand. Would you buy that?

03:41:10 Speaker_00
Would you pay even half the price for that? I think a lot of people who are buying Hermes are buying it because they're Hermes and they want the brand. Right. And, you know, there's other things that are missing from that, too.

03:41:19 Speaker_00
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 thing serviced.

03:41:29 Speaker_00
So there's some great makers like Chester Mox or April in Paris, where I heard great things about Milagito. These are like exceptional craftsmen, hand-making items in the same way, but it's a different bundle of value propositions.

03:41:45 Speaker_01
Yeah, completely different product.

03:41:47 Speaker_00
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.

03:41:57 Speaker_01
Yeah, totally agree. Nothing more to add.

03:42:00 Speaker_00
Thanks, Charlie.

03:42:02 Speaker_01
All right, should we do value creation, value capture, and then we've got a new way to wrap up episodes here?

03:42:08 Speaker_00
Yes. Well, this section was originally created by us five 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.

03:42:23 Speaker_00
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.

03:42:35 Speaker_00
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.

03:42:54 Speaker_00
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,

03:43:09 Speaker_00
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. Yeah.

03:43:25 Speaker_00
It's about brand and fashion. 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.

03:43:41 Speaker_01
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.

03:43:57 Speaker_01
Yep.

03:43:58 Speaker_00
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.

03:44:10 Speaker_00
Farmed crocodiles in mass quantities in order to create the Himalaya print Birkin bags.

03:44:17 Speaker_01
There was actually a brief period where Jane Birkin boycotted Hermes bags and asked them to take her name off of them.

03:44:23 Speaker_00
Do you know how that got solved? Why is she cool with it now?

03:44:26 Speaker_01
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.

03:44:34 Speaker_00
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.

03:44:46 Speaker_00
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

03:44:55 Speaker_00
for the ones that we farm, we also release a bunch into the wild to try to replenish the population.

03:45:02 Speaker_00
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 like 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.

03:45:16 Speaker_00
And I don't know, it sits medium with me.

03:45:19 Speaker_01
Yeah. It's not a great response.

03:45:22 Speaker_00
Right. Similarly, you see piles and piles and piles of cow hides for the leather production. And the response is, well, look, these were beef cows.

03:45:32 Speaker_00
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.

03:45:42 Speaker_01
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.

03:45:55 Speaker_01
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.

03:46:06 Speaker_00
Yep.

03:46:06 Speaker_01
Yeah. Is that what's happening here with Hermes? Absolutely not.

03:46:09 Speaker_00
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?

03:46:23 Speaker_00
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 cares so deeply about their brand that they burn imperfect products so they never see the light of day.

03:46:37 Speaker_00
That's a bummer. I understand Hermes's position of not wanting these bags to get out there and have their brand on it.

03:46:44 Speaker_00
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.

03:46:54 Speaker_01
Agreed.

03:46:55 Speaker_00
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.

03:47:03 Speaker_00
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 kind of get used in products all the way at the bottom of the funnel.

03:47:12 Speaker_00
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.

03:47:18 Speaker_01
Yup.

03:47:19 Speaker_00
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.

03:47:34 Speaker_01
We've kind of been struggling for a while with how do we end these episodes? These like books that we write now. Right.

03:47:40 Speaker_00
We're not going to grade them the way that we used to grade.

03:47:42 Speaker_01
Right. That doesn't make sense. That was always kind of hokey anyway. And we've done bear case and bull case. And like, again, are we going to do that better than an equity research analyst? Like, I don't know.

03:47:53 Speaker_00
Well, and importantly, bear case, bull case has to take into account what are people's current expectations. So you sort of have to dissect the stock price.

03:48:01 Speaker_01
Right. Which isn't really the point of acquired.

03:48:03 Speaker_00
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 luxury goods.

03:48:14 Speaker_01
Here's an incredible new insight that'll change your perspective on the stock. Like, no. Right. So, you know, we've been casting about for honestly a while here of like, how do we land the plane on these episodes?

03:48:24 Speaker_01
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.

03:48:36 Speaker_01
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.

03:48:45 Speaker_00
It's craft. We joke, but it's craft.

03:48:47 Speaker_01
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.

03:48:58 Speaker_01
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.

03:49:11 Speaker_01
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.

03:49:27 Speaker_01
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?

03:49:41 Speaker_01
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.

03:49:53 Speaker_01
And again, this comes through in the whimsy, this comes through in the annual reports, this comes through when you watch the interviews with XL and Pierre Alexie, 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.

03:50:12 Speaker_01
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?

03:50:26 Speaker_01
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.

03:50:35 Speaker_01
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, like, having fun and enjoying themselves.

03:50:49 Speaker_00
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.

03:50:57 Speaker_01
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.

03:51:11 Speaker_01
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.

03:51:24 Speaker_00
But if they do that, it's still only a short term right thing to do.

03:51:28 Speaker_01
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.

03:51:36 Speaker_01
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.

03:51:42 Speaker_00
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.

03:52:00 Speaker_00
And as soon as you start digging in, you realize that these companies could not be more different.

03:52:06 Speaker_00
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.

03:52:15 Speaker_00
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.

03:52:28 Speaker_00
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.

03:52:37 Speaker_01
Right. These are mutually exclusive brands for a lot of people.

03:52:41 Speaker_00
Yeah.

03:52:42 Speaker_01
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.

03:52:55 Speaker_00
Or at least be open to a, we don't have to do anything alike, open to that idea.

03:53:00 Speaker_01
Right. This is Android and iOS.

03:53:03 Speaker_00
Right.

03:53:04 Speaker_01
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.

03:53:17 Speaker_00
Well, sometimes we get to learn about an industry. That's interesting to know things about like healthcare or something.

03:53:23 Speaker_00
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.

03:53:31 Speaker_00
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.

03:53:42 Speaker_00
There is so much to learn studying the purity of Hermes when you run a business that's predicated on scarcity. Yes. So this one was extra indulgent for you and I. Yes, yes, total.

03:53:54 Speaker_01
Okay, let's do it. What you got?

03:53:57 Speaker_00
I have three. Oh, fun. 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.

03:54:09 Speaker_00
I need more time to evaluate.

03:54:13 Speaker_01
There is a podcast indeed.

03:54:15 Speaker_00
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.

03:54:34 Speaker_00
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.

03:54:43 Speaker_00
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.

03:55:00 Speaker_00
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.

03:55:08 Speaker_01
Nice. I've got a, um, 60 watt Anker that, you know, kind of same concept and yeah, totally. Only thing I travel with. Is it gallium nitride? No, no, no. I was a few years old.

03:55:17 Speaker_00
Okay. Yeah. I don't understand why nobody's talking about it. Cause it feels like it completely revolutionized chargers. It makes everything 50% the size, even though it has super high power delivery.

03:55:27 Speaker_01
I might need to upgrade my travel setup. Maybe I need an Hermes leather case for it.

03:55:31 Speaker_00
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 we're supposed to call them these days. The first one is an app called Matter, which I have replaced.

03:55:43 Speaker_00
For years, I used things to paper, 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.

03:56:00 Speaker_00
So longtime listeners know I don't absorb stuff very well by reading. I absorb it really well by listening.

03:56:06 Speaker_01
And so much of the research you're talking about text to speech, not like saving podcast episodes.

03:56:09 Speaker_00
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.

03:56:20 Speaker_00
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.

03:56:31 Speaker_00
It has an ability to parse PDFs now and like listening while running or my son was asleep in a carrier and I'm like 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.

03:56:43 Speaker_00
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.

03:56:55 Speaker_00
The team was great, which was my entree into it, but the product has exceeded expectations.

03:56:59 Speaker_01
Okay. I haven't actually tried the app yet. I love those guys. Now I got to try the app.

03:57:03 Speaker_00
It's awesome. My third one is another thing that dramatically has helped my research, which is perplexity AI. If I could stop using Google, I would, because perplexity is better for everything that I use to Google. Period.

03:57:20 Speaker_01
Oh, wow. Okay. All right. We got to have perplexity on ACQ two or something like more to come on this.

03:57:25 Speaker_00
It's all the good things about chat GPT 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.

03:57:39 Speaker_00
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.

03:57:47 Speaker_01
Honestly, this is why I don't use chat TPT for acquired work. I feel like we need to be 100% all the time.

03:57:52 Speaker_00
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.

03:58:06 Speaker_00
You just gave me confidence.

03:58:08 Speaker_01
Oh, getting that answer. Otherwise you're going to spend half an hour on Google trying to find it.

03:58:12 Speaker_00
Yes.

03:58:13 Speaker_01
Oh, that's amazing.

03:58:14 Speaker_00
Yeah. So it was both time-saving and confidence inducing.

03:58:17 Speaker_01
I love it. Okay. I've heard from so many people about perplexity. I got to give it a go and next episode research. It's phenomenal. I'm so disappointed in myself, but also it's just the reality of my life right now.

03:58:28 Speaker_01
I've become like the, you know, middle of the bell curve technology adopter. I used to be the bleeding edge, you know, early adopter. It was just. Man, getting old is hard.

03:58:39 Speaker_01
Joanna Stern had a great quote about this, the Wall Street Journal, when she was interviewed by Ben Thompson recently. She said like, man, I wish I had the access that I have now when I was younger.

03:58:49 Speaker_01
I would be on stop, 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.

03:58:57 Speaker_00
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 better.

03:59:05 Speaker_01
Your access, everything.

03:59:06 Speaker_00
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.

03:59:14 Speaker_01
What's the Dune quote? Life is not a problem to solve, but a reality to experience. Ooh, yeah, I think that is it. There you go. OK, my carve out. We are recording this.

03:59:23 Speaker_01
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 J.T. O'Sullivan and QB School YouTube channel here.

03:59:42 Speaker_01
I'm so excited. Brock's story is amazing. So I was trying to think, okay, I can't have the Niners and the Super Bowl be my carve-out.

03:59:49 Speaker_00
Especially if this airs after they lose. Are we leaving it in? Right. Especially if they lose, right?

03:59:54 Speaker_01
But what I can have as my carve-out, and it's 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.

04:00:10 Speaker_01
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.

04:00:19 Speaker_01
It's, you know, the splinter in the mind, everything we've been talking about. It includes some ideas like scripting.

04:00:25 Speaker_01
This is now so commonplace in the NFL and football everywhere, but everybody scripts out your first set of, you know, five, 10, 20 plays, et cetera. Bill Walsh invented that. And like, we do the same thing on acquired.

04:00:38 Speaker_01
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.

04:00:44 Speaker_00
But you need a way to start that's predictable or at least something you've thought through.

04:00:49 Speaker_01
Right. Obviously, Bill Walz 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?

04:01:04 Speaker_01
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.

04:01:13 Speaker_01
Bill Walsh was a legendary figure and yeah, go Niners. Hell yeah. There you go. Wishing you the best of luck and listeners, you know, already happened.

04:01:22 Speaker_01
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. So I'm thrilled.

04:01:30 Speaker_00
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

04:01:43 Speaker_00
who could be a Taylor Superfan that's not already a Taylor Superfan. And the NFL, similarly, has had close to a hundred year history, and it is the fullest realization of itself already.

04:01:55 Speaker_00
The NFL is America's sport, and so they've already got all the Superfans they're gonna get. And so by bundling together, this is so awful. No, this is the ultimate collab.

04:02:06 Speaker_00
Yes, they can address each other as sort of casual fans who wouldn't have tuned in specifically for one or the other,

04:02:12 Speaker_01
Taylor is a hundred percent thing. 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.

04:02:23 Speaker_00
Yep. What's the phrase that Shishir Morota 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.

04:02:36 Speaker_01
Jenny has negative interest in football, but she's telling me about, like, what Taylor is wearing, you know, whether she's gonna be able to make it back from Japan from the Super Bowl. We'll see.

04:02:47 Speaker_00
All right, listeners, we have a bunch of thank yous. Huge thank you to Domenico Desole, 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.

04:03:03 Speaker_00
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 and luxury space. And Adam is

04:03:14 Speaker_00
super kind and a huge contributor to this episode just like he was to LVMH.

04:03:19 Speaker_00
To Derek Guy who is at Dye Workwear 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.

04:03:34 Speaker_00
That was very helpful. Reginald Jerome Deman, or RJ, which is sort of a funny pen name, he wrote a book called Swan Songs, Souvenirs of Paris Elegance. He's obsessed, for lack of a better phrase, with Parisian luxury and the history of it.

04:03:51 Speaker_00
And so it was really educational to talk with him about this and fact check a lot of my Hermès history. And finally, there is a lot written about the company. I do think the best way to understand Dermez is just to go right to the source.

04:04:04 Speaker_00
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.

04:04:11 Speaker_01
It's funny. You know, we did not talk to anyone at the company. We'd usually never do when we're making an episode.

04:04:16 Speaker_00
It's just kind of awkward.

04:04:18 Speaker_01
Yeah. We usually talk to them afterwards, but not during.

04:04:20 Speaker_00
In this case, we didn't need to. It's right there. They wrote down everything. Yep. And David, I know you had a couple of cool conversations.

04:04:26 Speaker_01
Yeah, well, speaking of April in Paris, Beatrice Amblard here in San Francisco was so fun to talk to an actual former Hermès artisan. There's personal stories of Jean-Louis and the family. They really gave me a sense of

04:04:40 Speaker_01
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.

04:04:57 Speaker_01
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.

04:05:09 Speaker_01
She gave me a lot of great perspective on Hermes within the industry. Really, there are a few journalists out there. You know, I'm thinking of like Brad Stone and Emily Chang at Bloomberg and Kara Swisher, obviously, but they're incredible journalists.

04:05:25 Speaker_01
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.

04:05:34 Speaker_00
Yep. Well, you can sign up for notifications on when new episodes drop at acquired.fm slash 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 slash slack.

04:05:49 Speaker_00
We'll also be including listener corrections in acquired.fm slash email. Subscribe to ACQ2 and any podcast player. We've got some great ones coming.

04:05:59 Speaker_00
And after you finish this episode, come get some of that sweet Acquired merch that everyone is talking about at acquired.fm slash store.

04:06:06 Speaker_01
Acquired Hermes collab coming soon.

04:06:09 Speaker_00
One day.

04:06:10 Speaker_01
We'll see you next time. We'll see you next time.