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Season 14, Episode 2

ACQ2 Episode

February 19, 2024
February 19, 2024

The Complete History & Strategy of Hermès

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!


Many thanks to our fantastic Season 14 partners:

Links (and Visuals!):

Carve Outs:

More Acquired:

Follow-Ups and Corrections:

  • You cannot and should not actually wear a Birkin over your shoulder, as described in the episode. (How gauche of us!) It’s a tote, and should be carried by hand or in the crook of your arm. Thank you to our more cultured listeners for pointing this out. :)
  • The H51 bylaws are actually available publicly! (In French, naturally.) Big thank you to listener Nicholas Cullen for sending our way. A few highlights from him:
    • Article 11 says only descendants of Emile Hermès and his wife Julie Hollande can be shareholders.
    • Article 7.2.2 says shareholders can ask the company to buy their B shares from them starting in January 2041.
    • Article 19.3.4(iii) states that any transfer of Hermès International shares to any person requires a 3/4 majority shareholders’ vote, except in the case where an H51 shareholder exercises its right under article 7.2 to ask the company to buy its B shares for a mix of cash and Hermès International shares following the end of the lock-in period.
  • Not a correction, but Hermès is officially Acquired’s biggest season episode of all-time. We’ve been blown away by the response and how it’s expanded the audience to so many new people (welcome!). Making it was truly one of the greatest joys we’ve had in the past decade of Acquired, and we’re so glad you all are enjoying it too!

Note: references to Fortune in ServiceNow sponsor sections are from Fortune ©2023. Used under license.


We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
February 19, 2024

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
February 19, 2024


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
February 19, 2024

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
February 19, 2024

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
February 19, 2024

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
February 19, 2024

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
February 19, 2024

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
February 19, 2024

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
February 19, 2024

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: I don't know if you realize this. Hermes is reporting earnings in two days.

David: Yes.

Ben: At first I was like, we should probably not do this episode because their annual report comes out in two days. What if we're not current? And then I realized this is Hermes. The short term is of no consequence.

David: Yeah. Also, the Hermes annual reports are the most beautiful annual reports ever created in the history of the financialization of mankind.

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

David: The illustrations, the themes, you can tell they care.

Ben: You can tell. All right, let's do it.

David: Let's do it.

Ben:  Welcome to season 14, episode 2 of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: We are your hosts. Today, we tell the story of a handbag company that won't sell you a handbag, a traditional saddle maker that makes very little of their revenue from saddles, a company that somehow has grown to be worth over 200 billion despite rejecting manufacturing efficiencies and economies of scale, a company so obsessed with craft and a reputation for quality that they have stayed independent while every other luxury brand has merged into conglomerates.

That's right, listeners. Today, we tell the oldest story we have ever told here on Acquired, older than Standard Oil or the New York Times. This company dates back to 1837 in Paris, France. The crown jewel of the luxury industry, Hermès.

David: Ben, do you know what company was also founded in 1837 that we have discussed quite a bit on Acquired?

Ben: No, I do not, David.

David: That would be the other iconic color luxury company, Tiffany.

Ben: Really?

David: Also founded in 1837.

Ben: Chuck T. 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. After 187 years, still under family control, they're on their sixth generation of family leadership at the helm. David, everything Hermes does is just so focused, intentional, and pure. As much as they get lumped together with brands owned by LVMH, they are in many ways the anti LVMH.

David: 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, you were so inspired by learning about Hermes. You went out and you bought your first luxury object. It was not an LVMH brand.

Ben: Yes, that is true. My wife and I were on our honeymoon, listeners, after LVMH, so last summer. We were in Aix-en-Provence, and we walked by an Hermès store. I thought that this would be a great time to go in and get each other something as a honeymoon gift. My wife got a little twilly scarf, and I got an Hermès belt. It's the only luxury item I own of any traditional luxury brand.

David: Yeah, as foreshadowed on our holiday special episode a couple months ago.

Ben: Listeners, if you want to know every time an episode drops, you can sign up at acquired.fm/email. You'll get hints at what the next episode will be and follow up facts from previous episodes when we learn new information. Come discuss this episode with us at acquired.fm/slack. Come check out our second show, ACQ2, where we interview founders, investors, and experts, often as follow ups to these episodes. Before we dive in, we want to briefly share that our presenting sponsor this season is JP Morgan, specifically their incredible payments business.

David: Yeah. We really uncovered the breadth of JP Morgan Payments as we went deep into industry research for our Visa episode last year. Just like how we say every company has a story, every company's story is powered by payments. JP Morgan Payments turns out to be a part of so many of our Acquired companies' journeys.

Ben: With that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David, I feel like we're starting before 1837.

David: Yes, but not too much before 1837.

Ben: All right, we're not going to the Egyptian invention of the handbag or anything like that.

David: Boy, let me tell you, I was tempted. 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. As we've been talking about, the land of beauty, luxury, enlightenment, where Hermes, of course, was founded and is still based today.

Uniquely, Hermes still does 85% of their production by hand, by Mastercraft's people in France, as we will talk a lot about. But instead, we start in the land of hardness and precision of engineering, of exactitude, the future land of the Porsches of the world. That is right, Germany.

Ben: A century before the Porsches and Volkswagens of the world.

David: Yes, 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.

Ben: Hermes, is that a German name? A French name?

David: Hermes is obviously not a German name, even I know that. Thierry's father was French and his mother was German. 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. This is the era we're talking about here. Napoleon.

Ben: We finally did it here on Acquired, your AP European history class has now merged with business history We're covering Napoleon.

David: He is critical to what is about to happen here. 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. This Napoleonic conquest was, at the same time, both the very best thing that could happen to young Thierry, It leads directly to Hermes.

Also, the very worst and truly worst, all this conquering, this glory of France that we're going to talk about becomes important to Hermes, that's the result of wars. Thierry's entire family, his parents, his mom, his dad, all five of his siblings, are all killed either directly in the Napoleonic wars or by disease and famine as a result of this. Absolutely terrible. The result is that Thierry, by the time he's 20 years old, he's an orphan. He is the last Hermes left.

Ben: David, 1821, pretty rough time out in the world. Do you know who was born in this year, 1821, and was also an orphan? We have talked about them on Acquired.

David: Obviously not Rockefeller, which is where my mind first went, because we talk a lot about his dad.

Ben: Yup. Louis Vuitton himself.

David: He will also come up here in a minute.

Ben: Twenty years younger than Thierry Hermes, but also an orphan.

David: Wow, I didn't know he was also an orphan.

Ben: Yup.

David: 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.

Ben: Yeah, especially crazy considering they both came from nothing. These people who would create the monikers of the elite of what would go on to be the symbols of wealth and nobility, came from nothing, were orphans, and at their greatest aspirations were craftspeople for the elite. They were almost servants.

David: Yes. In 1821, Thierry leaves Krefeld, leaves Germany. He abandons his original destiny as an innkeeper. He moves to France, not to Paris, but to Normandy in the north. There, he becomes an apprentice under a master craftsman learning the art of equipage craftsmanship. Equipage is the business of outfitting horse drawn carriages. Who were the customers of horse drawn carriages? Ben, like you're talking about.

Ben: The nobility.

David: The nobility. Horses were extremely important to the world back then. The horse was the car. It was the Ford F150, it was the Toyota Camry. It was also the Rolls Royce that drew the carriage, and only the Rolls Royces were the carriages.

When Thierry moves to Normandy and takes up as an apprentice, he apprentices for 16 years. 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-Rempart in the 9th arrondissement, which that whole street today no longer exists.There, he establishes himself as really quite an exceptional harness maker for horse drawn carriages.

It's unclear to me at this point if he's using the famous saddle stitch, which becomes so important to Hermes. The reason it's unclear to me is because he's not making saddles. Saddles are what other people are making. It's not that the nobility don't ride horses. They do, but they ride horses like the elite today drive a Ferrari. It's not something they do every day.

Ben: Right. Their daily driver is a Bentley because someone else is driving them. 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.

David: Yeah. 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. Here, he's this immigrant from Germany, apprenticed in Normandy. He shows up in Paris. All of a sudden, he's making the best stuff out there.

Ben: It turns out he was just really good at the craft.

David: He had exceptionally good timing. We spoke about Napoleon a little bit earlier. When Thierry finally comes to Paris, at this point, Napoleon I has been defeated in the Battle of Waterloo. That was 1850, and France has now seesawed through a whole bunch of different republics, and the monarchy comes back. It's crazy French history stuff.

Shortly after Thierry returns, Napoleon's nephew, Napoleon III stages another coup and reestablishes the Empire in France. This is super important, Ben, to what you were talking about earlier about this guy's an orphan. Louis Vuitton was an orphan. How did they become so important?

When Napoleon III comes to power in France, he does two things. (1) He completely modernizes the city. If people have heard of the Baron Haussmann who rebuilt Paris, that happens at this time under Napoleon III. They transformed Paris from a medieval city with super tight streets. If you go up to Montmartre, those streets around there, that is old Paris. But when you think of the Eiffel Tower, the museums, the grand boulevards, the Champs-Élysées, that's happening right at this time.

The Baron Haussmann, he's like Robert Moses was in New York in the mid 20th century remaking New York. He is given full latitude and direction by Napoleon III to burn Paris to the ground and remake this city as a modern city.

Ben: Fascinating.

David: This is super important for Thierry and Hermes for two reasons. (1) 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. Now you've got the Champs-Élysées, the Grand Boulevard, everything about the gallantry of Paris that we know today, is all on display now. This becomes really important for showing off for signifying your wealth, your status.

The other 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 you're born noble or you're not. It's independent of how much money you have, what you do, or what influence you have. Under Napoleon, he brought in this modern idea that you could shift your class. He was essentially a nobody, and he became the emperor of Europe. That'll completely upset the mindset of people.

All this is happening, this is the best thing that could ever happen to Thierry. He's the best artisan, most exclusive crafter of carriageway of equipage. The city is being transformed so that this can all be displayed prominently. Social stratifications are becoming more blurry. People can spend money for the first time to buy status. Great for business.

Ben: These are the disruption waves that enabled him to create a business.

David: Yes. Before all this, before this era, there's no way that this evolves into Hermes. Honestly, Louis Vuitton and what he's doing with luggage and with trunks, there's no way that that evolves into Louis Vuitton. Speaking of, both Hermes and Vuitton have one really important client, a key influencer, so to speak, that they both land at this time.

Ben: I remember Louis Vuitton's key client was the Empress Eugenie. Is Hermes the same client?

David: Yes, the same client. 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. Actually, I think also for her packing. I think Louis Vuitton was the royal laities, I believe, and he packed the trunks. He was the luggage guy, Hermes was the carriage guy.

Ben: Which is so funny because that is still, in some ways, both of their legacy today.

David: Yes, absolutely. Eugenie and everything going on at this time makes Louis Vuitton and makes Thierry Hermes. It's interesting. Vuitton and luggage, that is inherently of the world that's coming, the modern world. The train exists at this point in time, steam engines are a thing, and then the car is about to come, and Louis Vuitton, trunks, and luggage, all translates directly.

Ben: Right, it's built for the upcoming world.

David: Yes. Not the case with Hermès. Actually today, I think this is one of the biggest strengths of Hermes and they still. The equestrian theme, the horse is so much of their brand. They talk about it so much of their products, the saddle stitching. It's calling back to that other era, that pre modern era where the horse was primary.

Ben: Right. Hermes 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.

David: But it would all be irrelevant if the brand didn't translate out of the horse era and into the car era, which was not Thierry Hermes' doing, nor was it his son's doing. Thierry dies in 1878. His son, Charles-Emile, takes over. He apprenticed coming up in the shop in exactly the same way that Thierry apprenticed. He just apprenticed for his dad. By the time he takes over, he's been working in the shop as a craftsman for 20 years.

By the way, this family tradition and way of business continues to this day. Axel Dumas and Pierre-Alexis Dumas, who are the two descendants of Hermes, the sixth generation that are running the company today, Axel is the CEO and Pierre-Alexis is the artistic director, apprenticed in the business. When they were teenagers for five years after school, they went to the atelier, they learned the saddle stitch, they made bags, they made items with their hands.

Obviously, they also learned the business from their parents, but they're not learning the business the way that the Arnault children are learning the business at LVMH as executives. They're learning with their hands as craftspeople how to make this stuff, which is wild. Axel is the CEO of a $200 billion plus company.

Ben: It's crazy. To bring it back to the late 1800s, I think the point you're making here is, when Charles-Emile was apprenticing, there was no other example of what this company could become. He thought, why don't I carry it on in exactly the same manner, Thierry, that you did? There's not this grand ambition to innovate and change with the times, it's well how do I learn exactly your craft exactly the way you do it and then continue that?

David: Right. The business and the craft are intimately intertwined, they cannot be separated. 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. 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. 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, they apprentice as creative craftspeople, and they collectively and the family, is in charge as much of the creative side of the house as they are of the business side.

Ben: Yeah, makes sense.

David: Back to Charles-Emile and the second generation, he finally adds saddlery to the business. That's his big expansion, he adds saddles. Again, as Paris is modernizing as you can now buy your way into status, for the first time in Paris, you couldn't be seen riding in addition to carriages.

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 Haussmann. I am doing things for the state, for the country. It's like America in its way and the Rockefellers.

Ben: Right. You're not just famous for being famous, you are famous because you've achieved something, you're in the act of achieving something, or you hold a high office in which you were elected or appointed to get a specific goal done. You're on the move. You got stuff to do, and you got to get there.

David: Exactly, and you need a saddle for that. Charles-Émile adds saddles. In 1880, he moves the workshop in the store to 24 rue du Faubourg Saint-Honoré in the 8th arrondissement of Paris.

Ben: The famous address.

David: The building that is today known as Le Faubourg by everybody in the Hermes universe. This street and this location is one of the most iconic streets in the world, buildings in the world, headquarters in the world.

Ben: 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.

David: 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.

Charles Emile runs the business for 25 years. He adds saddles, he moves the company to the Faubourg. In 1902, he retires. His two sons, Adolphe and Emile, who have apprenticed in the business just like him, just like every generation will do for many generations to come, take over. They change the name of the company to Hermes Freres, Hermes Brothers, because the two brothers are now running the company.

Ben: And they're going to do this forever together, and they're going to be thick as thieves. They are of one mind on how this company should go.

David: They've been apprenticed together, going to be like Axel and Pierre-Alexis today. Of the two brothers, I think it is fair to say that Emile, who I believe is the younger brother, is the much more ambitious and much more adventurous one.

There's this great story that in the late 1890s, before his father Charles-Emile retires, the young Emile sets off to conquer Russia for Hermes. He literally gets on a train with a notebook and a suitcase filled with miniature versions of the saddles and the harnesses that Hermes makes. He just finds his way into the Tsar of Russia's court and lands him as a customer.

Ben: That is wild.

David: Unreal. They have to staff up a whole new atelier with 80 craftspeople to fulfill all the orders for the Tsar in Russia.

Ben: Whoa.

David: Yeah. This is Emile. He's going places. Right as he and Adolphe are taking over at the end of Charles-Emile's tenure, they decide to introduce a new product. They're not thinking that this is going to be a big thing at the time. Some of their customers, again, now that they've added saddles, once they get off the horse, they want something to carry the saddle and maybe their riding boots with them while the horse is in the stables wherever they're going.

They say, great, we can help you with this. They introduce the Haut a Courroies bag, which translates as the high belted bag to carry saddles and boots for their clients. 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. I don't know why anybody else would want a big tote bag that could carry your boots.

Ben: What's this bag look like?

David: This bag looks exactly like the Birkins and the Kellys today, except a lot bigger.

Ben: 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?

David: Yup, but it has the same trapezoid shape. It has the crossover belt, the Haut a Courroies 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.

Ben: Fascinating.

David: This accessory that we're going to add to the business becomes the spiritual heritage to the business today.

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

David: Yes. Did you get the carry case by the way?

Ben: No, I'm not going to spend another $200 on that.

David: That thing looks like a balloon. It's enormous.

Ben: Yes, and it takes up your whole backpack.

David: This bag, this accessory that would become the Kelly and then the Birkin, they introduced it just at the right time. It's 1902, as Charles-Emile is retiring. This idea of this bag that you would put stuff in, because you wouldn't bring a bag on a train—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. None of these three men could have seen it at the time, but this accessory to the real business of saddles, horses, and harnesses was going to become the perfect transition to move Hermes into the age of the automobile. Before we tell that story...

Ben: Yes, we mentioned Hermes founded in 1837 as the oldest company we've covered on Acquired, but we might have to caveat that.

David: Yes. Our presenting partner this season is JP Morgan Payments. JP Morgan Chase traces its heritage back to 1799.

Ben: Over 200 years, incredible. You only survive as long as Hermes or JP Morgan with a relentless focus on the long term and exceptionally high quality bar, and counterintuitively when talking about handbags and banks, technical innovation, which is exactly the JPMorgan Payments' story.

David: Yeah. Their current payments business was officially forged a few years ago, but many of the capabilities and products came from different parts of the firm, which were already powering the whole payments industry. You can trace their merchant acquiring to the 90s, their treasury products to well before then, and even their blockchain work started earlier than most in the mid 2010s.

When they combined all that together under one group, it really became a one of a kind, end of one business, a portfolio of treasury, online commerce, point of sale, global trade, card, cash management, fraud prevention, analytics, and more, a one stop payment shop for businesses of all sizes.

Ben: Yup. When you move 10 trillion a day in 160 countries and 120 currencies, these learnings really compound. That is exactly the story of their new offering, Embedded Banking. This actually reminds me a bit of our episode on Amazon and AWS on how companies can take internal capabilities and scale them externally as brand new products.

In this case, JP Morgan said, hey, we already facilitate credit card acceptance. We manage KYC and anti-money laundering. We pool money and split across virtual ledgers here. We disperse funds. Wow. We can embed all of these into our customers' marketplace businesses to power their end to end payments for buyers and sellers and lower risk across the whole ecosystem.

David: While Hermes explicitly avoids ecommerce for their most coveted products, as we will talk about later, for the other 99% of you out there, that's probably not your strategy. You want to do more business online. Large retailers are increasingly adopting a digital marketplace strategy to connect buyers and sellers directly. But for the underlying platform, whether that's B2C or B2B, there's a lot of complexities that come with having a frictionless payments experience. You have to create and manage the seller bank accounts, money movement, and most importantly, who's going to take on the compliance and risk of holding and dispersing the funds, the third party seller or the platform?

Ben: Yup. Macy's is a great example. They wanted to offer more selection to customers and support diverse owned small businesses at the same time. But Macy's needed a solution to onboard sellers seamlessly and manage the state by state complexity of the payouts. They turned to JP Morgan payments and their embedded banking solutions. which enables a large number of suppliers and their bank account details on a single platform supported by tokenization and utilizing a single API integration. This frictionless and secure payment solution worked, to say the least. Macy's nearly doubled its marketplace sellers in the first quarter of 2023 and increased revenue by 50%.

David: Whether you're in retail, luxury, or really any industry, there's a clear growth opportunity from having an end to end payment solution. Head on over to jpmorgan.com/acquired to discover more payment solutions driving growth for businesses, whether that's Fortune 500 startups or any stage in between. Also, if you're heading to the retail conference Shop Talk in Las Vegas in March, be sure to stop by the JP Morgan payments booth where you can learn more directly from their team of experts.

Ben: Yup. Thank you, JP Morgan. Now, David, how was Hermes perfectly positioned for the age of the automobile with this new accessory?

David: This is wild. I suspect you probably also found this in research, but when I did, my mind melted. During World War I, in 1916, Emile becomes an officer in the French military. The military sends him to the United States to learn about US industrial and military production. He's a leading industrialist in France at this time, shall we say? One of the people that he gets sent to meet with is, do you know about this, Ben?

Ben: No, I have no idea.

David: I can't believe you didn't find this.

Ben: No.

David: He meets with Henry Ford. He goes to Detroit. He sees the assembly lines. He sees the car, he sees the future.

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

David: This is what's so funny. No, he's like, this is unbelievable. To the manufacturing efficiency's point, he actually does take some elements of the assembly lines and brings them back to Hermes. It's not like they're anti-efficiency. They're pro efficiency, but in the context of being a craft, non-mechanized human master craftsman built object.

He actually does take some of the production ideas from Henry Ford, but more importantly, he's looking at this place and he's like, my God, there is a Model T rolling off the assembly line every three minutes. Ford at this point is producing half a million cars per year. Everybody knew about the automobile, but this is a different arrow. This is the same time as when we talked about our Novo Nordisk episode about the start of that company, where news didn't reach Europe. This wasn't a global world. Emile getting this window, literally seeing the assembly lines in Detroit, he's like, whoa, Once this war is over, the world is going to change forever.

Ben: Okay. Emile 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.

David: Yeah, he's quite the character, this guy. The other thing he finds in America is, I know you know this one, the zipper.

Ben: Yes, or as it was originally called...

David: The close-all.

Ben: Yes, which really does not have the same ring to it, I'm glad we changed it to zipper.

David: I couldn't believe this. The zipper was a late 1800s, early 1900s invention in America. It was primarily used for Industrial use cases. In this case, it was zippering closed the hood of a car,

Ben: I think a military car.

David: Yeah, where Emile first sees it. It's not at the Ford factory. I think it actually might have been in Canada on the later leg of his journey where he sees it on the car. It was also used for opening and closing boots. That is how the name zipper came to be. I think it was the BF Goodrich company.

Ben: Really?

David: Yeah, I believe they made a brand of boot with this close-all function and they called it the zipper, and that's where the zipper came from. Regardless, enterprising young Emile, he tracks down the inventor of the zipper, 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.

Ben: Totally.

David: It 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. It's just amazing. For years in France, the zipper would be called the Hermes fastener in France.

Ben: Yes, that's right.

David: Just wild. I think they made the right decision not to make zippers the business and instead to stay focused on leather goods.

Ben: 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. This guy's a duke, and he's wearing a zippered jacket. I'd imagine that drew some eyes at first.

David: Yeah, and a golf jacket literally for use while playing golf, while playing sport. What more modern activity to happen here? Regardless though, the big thing for Hermes that he brings back is, oh, my God, the car is coming.

Ben: Okay. We're still in Hermes family. Two brothers are running it. What's next?

David: When Emile comes back and he's running around making zippered jackets, he's collaborating with car companies, it leads to a rift between the two brothers. Adolphe, the older brother, he's much more conservative. He wants to remain in the horse market. He's depressed about the car coming. He's like, hey, I just want to remain a niche leather worker. I'm not really cool with everything you're doing here.

Ben: 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. He's stuck in horse land.

David: Right. 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.

Ben: Right, which I could understand.

David: Totally, I can totally understand that. Either way, in 1919, Emile buys him out and says, I believe in my ability to lead this company, making this transition into the automobile era. 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?

I think this is still legend around Hermes of like, what can we make with our hands that will interest our clients today? The obvious answer at the time is a version of the Haut a Courroies bag. It's bags for these cars. 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?

Ben: The business is now a meals and the business is now handbags.

David: Once again, the timing and insight here 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, start traveling a lot more. 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. But you're also out traveling a lot more, you're rubbing shoulders with elite all around the world.

The American elite are going to France. They're going to Europe, vice versa. People are starting to travel around the world. People are traveling to Asia. People are traveling to the Middle East. People are traveling to South America. Emile's going right along with all these people. Your luggage, your bags, that's what you bring with you. That's what you show.

Ben: Yeah. Importantly, it's not just that you're trying to show a label, which is a little bit different than the modern version of luxury. It's that you're trying to have something really nicely crafted. When you show up somewhere, someone should just look at your luggage and go, wow, that is beautiful. Hermes is not yet a recognized brand, so merely slapping Hermes on it won't do the trick. The way to wow the people that you want to wow is through the raw craftsmanship.

David: The product itself, yes. In 1922, Emile's wife famously complains that the large bag they've been making, the Haut a Courroies, the saddlebag, it's too large to fit through car doors, so she asks for a smaller version. This launches the handbag business in 1925.

Ben: By the way, by this point, they've put the zipper on a handbag.

David: Yes, exactly. Speaking of the zipper in 1925, they had ready to wear clothes like the legacy of the golf jacket here. The legend has it that they added clothes because a long time client came in and said, I am fed up with seeing my horse better dressed than me. Who knows if that's true, but it's a nice story. But they really go into this. In this modern world where the global wealthy, the global elite, are traveling, they're seeing each other, what outward signifiers can they supply them? Clothes, in 1927 they had jewelry, in 1928 they had watches.

Ben: Something interesting that is different than the Hermes you know today, the way that they're adding all of these things, they're finding crafts people who are experts at particular crafts. Exactly what you're talking about, David, a watchmaker. They're finding a watchmaker and they're saying, can we work with you on designing something uniquely Hermes, but you're the craftsperson? We're not trying to build this competency in-house.

David: It's not right to say that they're licensing products. It is a collaboration, but they are selling products in their stores that are not made end to end by Hermes employed craftsmen.

Ben: Right. It's interesting, because they're towing this line between first and foremost being a craftsman themselves, being a manufacturer, and being a designer, but also being a retailer, where they're just bringing in other branded goods and selling it in their shop.

David: Yes. I think all this is being figured out real time. These ideas of retailers versus brands, it was a much fuzzier line then than it was today. What does Hermes do? What does Emile do? They start opening up stores outside of Paris. Where are they going to go? They're going to go to the travel destinations where their clients are going. 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, again, not necessarily in the Londons, the Romes, or the New Yorks of the world. They're opening them up in the travel destinations.

Ben: Their mindset around additional stores at this point is it's for the same clientele in all the places that they travel.

David: Yes, and the clientele was primarily French at this point in time.

Ben: Yeah, or if not exclusively other than the czar.

David: 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, can go purchase our products there too.

Ben: Right. This, by the way, is a different retail strategy than what they have today. Today, management insists that the idea is that each store is for the local clientele. We will only expand into an area if we feel that we can serve the local clientele that lives there well. That's a recognition of the maturation of their business. The rich people are going to go find an Hermes store somewhere. It's easy for them to travel somewhere, buy it on vacation. But if we're going to open new stores, we should open it in places where there is a thriving new upper class who can buy the goods locally there in their city.

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

Ben: 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.

David: Yeah, I think they very brilliantly walk this line. The products that the shops carry are very different. We'll get into that later in the episode too. Back to this era, I think we've laid the groundwork of a few critical components of Hermes so far. First and most importantly, the craftsmanship, these things are handmade by artisans with their hands, and the family and the people who own the company are the chief artisans. That goes all the way back to Thierry.

We've talked about the connection to the legacy of French nobility, but not really French nobility. It's like status, but accessible status for the first time in the world and the modernization of the world. We've talked now here about the true modernization of the company in the transition to the automobile era. What we haven't talked about yet and what Hermes at this point certainly is not is this element of whimsy and art that is really, really critical, I think, to the company.

Ben: Yes. If you've ever been in an Hermes store, you can feel a warmth that doesn't exist in other luxury stores. If you're in a destination with a lot of luxury shops, you'll walk past a lot of bright lights, mirrors, punch you in the face reds, and black and white, and you just feel like there's a lot going on. Then you arrive at Hermes, and it feels warm, it feels soft, it feels welcoming, and it feels whimsical. There's this almost dreamlike color palette that they use, starting with a base of orange and having this explosive rainbow of fun, but in some ways it all feels natural, from the earth, and just whimsy. I think that you nailed it, David, whimsical.

David: This I think is really a very different thread than the original leather craftsmanship, and it is a critical one in the weaving of the Hermes business. This thread comes from the next generation of the family, specifically Robert Dumas. Emile had four children, but they were all daughters. Tragically, one died young, but the other three grew up and got married. Back in this day, women weren't going to take over the business, unfortunately.

Ben: Right, same story as the New York times. There was a whole generation of daughters, none of the ox daughters get the business, so it goes over to the son in law, the souls burger, and now it's the souls burger ox family that owns the business in the same way that Hermes is the Hermes-Dumas family. The son in law tends to do well in this early 20th century period of passing it down from, unfortunately, father not to daughter, but father to son-in-law.

David: In this case, when you read about the Hermes family fortune today, it's the Dumas family that are obviously the CEO and the artistic director that you hear about visibly. But really, I think all the sons-in-laws and all of their descendants become active in the business. There's Robert Dumas, there's Jean-René Guérin, and there's Francis Puech.

Ben: And these are all son-in-laws.

David: These are all son-in-laws. Those are the three family names that you still hear about to this day of the Hermès family. Back to Robert Dumas and the fourth generation, he brings this whimsy and real art into the business.

Ben: The way Hermes describes it today when you read their annual report is they talk about their trademark humor and imaginative flair. Despite the fact that they really are tied to this old French elite, they really don't take themselves too seriously in all their products, especially the entry level ones. The Birkin is the Birkin. Yeah, they'll do some special editions here and there, but there's a weight to that product line. There's an overall playfulness that's exuded from the brand that comes from this era of leadership.

David: Totally, and this comes from Robert. One of the first things he does when he joins the business is he redesigns the smaller Haut a Courroies bag, the handbag line, into what he calls the Sac a Depeches in 1935.

Ben: 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 in the City.

David: Beautiful, beautiful, elegant bag.

Ben: Sac a Depeches. Hold on to that one, listeners.

David: Yup. A little later in the 1930s, he introduces the Chaine d'ancre bracelet, which is another iconic Hermes item in their jewelry métier.

Ben: 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. If it's italicized, it's French. You can go look up what it means yourself here on Acquired. David, tell us about a métier.

David: A métier is someone's work, but in the craftsman's sense. A métier is like a trade. It's like a craft profession. This is what Hermes calls their divisions. I feel gross even just saying the word divisions. There are 16 of them today, and jewelry, of course, is one of the métiers. I feel so much better saying métier.

Ben: I bet, yeah. There's a levity here in the room now.

David: Chaine d'ancre in French means chain of anchors, anchor chain. These are anchors like boat anchors. 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, so he makes a little sketch in his notebook. He plays with it, and then he decides he's going to turn this into a bracelet.

Ben: Love it. 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, horse and carriage logo, or bright color that you're supposed to identify. This is really the origin of quiet luxury, where Hermes is handcrafting the highest quality product they can make a single artisan is the person making the good. 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.

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 a Hermes' version of slightly louder luxury. Over the years, if you look at products now, the belts have an H. They incorporate horse motifs into designs on their ready-to-wear clothing, but that really wasn't a thing yet in this era.  Hermes is on the lighter side of branding their goods today, but it's still...

David: They have to adapt to the market.

Ben: The customers want some way to let people know that they're wearing an Hermes item, even if it's lower key than other luxury brands, so Hermes builds that for them.

David: 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, we have clients, and we are here to serve our clients. There is this push pull here.

Ben: Yes. Okay, what year are we that the bracelet is entering the market?

David: That was in the mid 30s. In 1937, Robert introduces the other key pillar of Hermes products that is less talked about today relative to the bags and the leather goods, but for many, many decades was the bigger business.

Ben: Yes, I have numbers on this.

David: Silk scarves, the Hermes classic silk scarves. This is the embodiment of this art and whimsy that we're talking about. The silks that they use are the finest silks in the world. It takes 300 silk moth cocoons per scarf, as they will readily tell you to produce these things. But the designs on them, the artwork on them are whimsical like we said.

The first design, the Jeu des Omnibus et Dames Blanches or the white ladies at play, I guess you could translate that, is based on a woodblock engraving that Robert does. This is what an artist this guy is. He's about to become CEO of Hermes, but he's making woodblock engravings and then making silk scarves out of them. That's the first design that they put out there, and quickly they become a huge, huge phenomenon with Hermes clients.

Ben: Yeah. 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. Leather is 43% and silk and textiles is 7%. There was a run. This was introduced when, David, the 30s?

David: 1937.

Ben: 1937 through probably the 1990s, these silk scarves were the Hermes franchise. The reason this took off is it almost became part of the French woman's uniform to have an Hermes scarf as a part of your outfit.

David: 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.

Ben: I didn't realize that. Really?

David: Yeah. This is so iconic, Queen Elizabeth. She starts wearing them as head scarves in the 1940s. Queen Elizabeth, she's queen of England for 60, 70 years, and she's wearing these scarves, these whimsical, playful scarves on her head as the queen of England.

Ben: Fascinating. This is a good time to talk about how these silk scarves are made. 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. Here is how Hermes scarves are made today. They are first sourcing the finest silk that they can find, which is now from their owned farms in Brazil. That's where the silk comes from. Only 20 new designs are created every year and they retire old designs. There's a Disney vault aspect to this.

David: They'll bring them out of the vault.

Ben: Yes. The pipeline to get a new design into the customers hands is two years. You might be asking yourself like, come on, why is this taking two years? That's a ridiculous thing. Here is the process. They screen print every single scarf by hand.

David: Yeah, there's no digital process here. It's not like you're going to custommake.com and ordering up some Hermes scarves.

Ben: Right. Some of the design does seem like it involves computers now. If you watch documentaries about the craftsman at Hermes, which there's a couple of good ones we'll link to in the show notes if you want to just watch Hermes crafts people at work, they do seem to be translating designs off of a computer, but it's not like they're hitting command P. That's not how this works. Every single color. of the scarf is screen printed using its own mask, or basically a stencil. If your scarf has 20 colors, it has at least 20 masks that they then squeegee the ink over, and the precision is perfect.

David: This is like EUV lithography.

Ben: Yes, I was looking at my wife's twilly scarf, the little wrist or hair tie scarf that we got in Aix-en Provence. I don't know how you do this by hand, and I don't know how you do it by hand 20 times over and over and over for every single layer. If you've ever been to an Hermes store or you own one of these, you just can't believe that this is done by hand without any of the layers being out of alignment. Because if any of them are out of alignment, you ruin the whole thing and you have to start over.

If that's not enough, the masks are also hand etched by a craftsperson. Their entire job is to know how to translate a design into all the different color layers, which they then hand etch. The pipeline is designer, engraver, that's an engraver of each mask, colorist, weaver, printer, and then someone to do the finishing.

David: All of which are extremely hard to replicate and involve both extreme craftsmanship and extreme taste. The competitive barriers to the Hermes scarf, I think they're way higher than the bags, honestly, even though the bags are a bigger business now.

Ben: The skills are completely non transferable. This process doesn't really exist, certainly not at scale at any other company. Actually, I was talking to my wife about this. She brought up the idea that it's 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. The attention to detail is so staggering that once you enter the Hermes universe, then you're in that universe for the rest of your career because that is where your trade is still practiced.

David: I think also, as a client too, at least in scarves, if you entered the Hermes scarf universe, you're not buying any other scarves.

Ben: Totally, and you really like all the lore. Part of what makes Hermes Hermes at this point is their callbacks to their own history. They have a hundred and eighty seven years of history to call upon, and they do so over and over and over again. They remix and they name things after stores that used to exist at certain addresses. It's a universe.

David: Yeah. I remember growing up and my mom is half British. I'm a quarter British. To the Queen Elizabeth thing, my mom's Hermes scarves were and are among her most treasured items. You'll note all of this that's happening,  Robert, the innovations, these new products, the art, the whimsy, he's doing all this in the 1930s. This is the Great Depression era. This tells you about Hermes and Hermes clients. They are unaffected. They keep buying. This carries through right to this day. I don't know that there is a more recession insulated business than Hermes.

Ben: You're exactly right. Twelve months now after we did the LVMH episode, we're finally on the tail end of this pandemic bubble of luxury, and we're seeing a lot of these brands take a hit. Hermes is the most insulated of all the luxury brands, where they have the least cost sensitive clients.

David: After this, there's World War II. Famously, before the war, Hermes products came in cream colored boxes. Robert was very meticulous about the packaging that his crafted items and his art would come in, and it was cream. It had to be cream. During the war, there's a shortage of packaging materials, they can't get cream. The only color that is available to them in the quantities that they need is orange. That was designed for patisseries, for bakeries.

Ben: Is that what the orange ones were used for?

David: 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. There's all this orange packing material. Robert embraces it, and the Hermes orange box is born. This is crazy. I didn't know this till research. Hermes owns this color. You cannot get Hermes orange anywhere else. Pantone does not list it in their colors.

Ben: It's interesting you say Hermes owns this color. 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. They've actually gone head to head with the EU. 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.

David: Amazing.

Ben: What they've done is they've actually leaned into this, where there is a classic Hermes orange, but it presents differently on each of the leathers. They have 10 different leathers or something like that that they work with. When they die those leathers, it presents a little bit differently. They 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. They've even further winked at all of us by creating five or six other oranges.

They have Hermes fue, which is the fire. They have Hermes sanguine, which is this red hot orange like lava. Or they have the Hermes moutarde, which is their mustard. 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 pick a theme, so they play with their oranges a little bit to evoke the whimsy that they want from this year's theme.

David: Yeah. There's this metal level or corporate level playfulness to this too, of we own all the oranges.

Ben: Totally. The Hermes oranges are almost 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.

David: 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. Supposedly a number of gentlemen were refused entry to the casino, thus went to the neighboring Hermes shop next door, and said, can you take some of your beautiful silk scarves that cut and tailor them into ties for us so that we can enter the casino? I'm sure that's apocryphal, but adds to the legend here.

Ben: They are these patterns. They're just as intricate as the scarves. There's less storytelling that happens in the tie. The scarves tend to be something you could frame, put on the wall, look at in 16 different ways, and the story behind it. When you look at it, you can't believe that it was hand screen printed.

David: Totally. After World War II, Robert decides that Hermes needs a logo. Taking inspiration from the 19th century painting, le Duc Attele, Groom a L'Attente, which means Hitched Carriage Waiting Groom, the famous Hermes logo is born. The logo is the callback to the carriage. It's the nobility. I find it really interesting, especially at that point in time that Robert decided. You could imagine a galloping horse or something like that would be the appropriate logo.

Ben: No, it's so genius.

David: No, it's the carriage.

Ben: Yes, it's to intentionally ground the brand in history in something that they were a part of that is only theirs, because nobody else starting today is going to have that as a part of their history. They're leaning into the thing that makes them unique, special. The almost defensible durable asset that they have is that they participated in that era that has a nostalgia about it.

David: And no longer exists.

Ben: Yes.

David: 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. The other thing we have to talk about are the window displays. You referenced this a little bit earlier.

He hires first, Annie Beaumel, and then she's soon joined by the legendary Leila Menchari. Specifically, these two women come from theater set design just to design the window displays at the Faubourg at the flagship store on the Rue du Faubourg Saint-Honore. There are whole museum exhibits just dedicated to these window displays.

It's not like, again, you walk by XYZ other store, even the most prestigious brands and it's like the products are there. Here are the products, here's the brand you're buying, here's the LV, et cetera. These displays, it's a dream. There are probably some Hermes products in there, but it's like a museum exhibit. It's artwork.

Ben: Yes, and art is exactly the right way to put it. There is no utility to these displays. These displays, much like any advertising that you see of Hermes today, it's not about the product, it's about how you feel. I think this is an interesting place to revisit this idea that we talked about on the LVMH episode of luxury versus premium, where premium means you pay more and you get more utility out of a given product.

I pay for a bigger storage space on my iPhone and I get more utility out of that. I can store more photos. Luxury means you pay more literally because it doesn't create more utility. It is either more pleasing to you intrinsically for the feeling, or it's an extrinsic signal where you are signaling to others that you have the means to spend on this item, even though it doesn't provide more utility. It's a despite rather than a because.

Art does fall on this spectrum. Art is like luxury taken to its logical extreme. It has actually zero utility. A Birkin bag is a piece of art, but at least it also carries your stuff around. Luxury products are this interesting midpoint between extreme functionality but also artwork. When you buy an air mass product, you aren't just buying the product, you're buying a piece of art a piece of their heritage, a feeling that connects you to the maker and the place it was created.

You're trying to buy a piece of Hermes' heritage and reputation, and hoping to adopt it as a part of you, as a part of your identity. You are seeking whether it's conscious or not to let other people know about this too. 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.

David: There's this genius aspect to what Hermes is doing and what Robert's doing with the arts like these window displays. The Luxury Strategy book talks a lot about this. When you're selling luxury items, they can't just be art. They need to have some utility to them. You will never see any of these brands, Hermes included, become art galleries. They're not selling paintings, but it's critical for luxury brands to have a connection to the arts.

I think you realize this before anybody of like, the windows in our stores are these portals into this world of dream and art. You'll come in and you'll buy a scarf that you'll wear. You'll buy a bag that you'll use. Maybe you'll buy a tie, maybe you'll buy a wallet, homewares, furniture, or any of the other things over time that they sell. That will have utility, but it's connected to this dream.

Ben: Yes, you're taking a piece of that dream with you, and it's almost a daily reminder of the dream that you're now participating in. The key insight is that by adopting art as a critical piece of the bundle that is your product. It enables you as the seller to completely switch tracks to disconnect from any evaluation of value.

David: Right, or features.

Ben: Exactly. You're out of the feeds and speeds world. You are not being comped against, well, this other purse is much cheaper and serves the same function. Now, we have bundled in the function of the object and an unevaluatable...

David: Priceless feeling.

Ben: A priceless feeling. 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.

David: Yeah, totally. Speaking of dreams, we're now in the 1950s in the post World War II era, the most amazing, unbelievable, fantastical dream of the 1950s happens to Hermes in real life. That dream is Princess Grace Kelly.

I 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 Depeches. It becomes popular, but we're talking about leather goods, handbags, important, but that was the previous generation of the business. Now under Robert, it's the scarves, it's the dream, it's all this stuff. Leather's part of it, but a smaller part.

In 1956, Princess Grace Kelly of Monaco, this is a girl from Philadelphia, an American girl who goes on to become a movie star, who then goes on to become Princess Grace of Monaco. I can't imagine a bigger dream for any woman or any person in the 1950s. She is photographed using the Sac a Depeches in Life magazine.

Ben: On the cover of Life magazine.

David: 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.

Ben: Interesting. Maybe that's been played up over time.

David: This might have become part of the lore. Regardless, big picture in Life magazine. She is clutching her beloved Sac a Depeches to her midsection.

Ben: It's almost like as she's exiting a building. It almost seems like it's a paparazzi type photo.

David: It's a paparazzi photo. Her husband, Prince Rainier of Monaco is holding the door behind her. It's the most dreamlike thing you could imagine. It's in black and white. 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.

This photo just becomes iconic. Everybody wants to be Grace Kelly. Everybody wants to have this bag. One of the last things that Robert does right before he retires in 1977 is he officially changes the product name of the Sac a Depeches to the Kelly bag. 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 so truly N of one. There's no other way to describe them.

Ben: There is so much to say about these bags, how they're crafted, the lore around them, and the supply, demand, and the econ 101. Before we get to that, this is the perfect time for another story about ServiceNow. ServiceNow is one of our big partners here on Season 14 and is really an incredible company.

David: Yup. ServiceNow digitally transforms your enterprise, helping you automate processes, improve service delivery, and increase overall operational efficiency all in one platform. Over 85% of the Fortune 500 runs on them. Today, they are the 76th largest company in the world by market cap. That's wild. They're coming up on Hermes here.

Ben: Yeah. That story is really the story of their CEO, Bill McDermott. When he took over in 2019, the idea that this just 15-year-old company would be bigger than Nike or Pfizer soon was insane. ServiceNow was the leader in enterprise IT automation. But what Bill has done since, like we talk about all the time on the show, is evolve that product into a true solution for the entire enterprise.

David: Yup. It's just like our NVIDIA series. Moving from product to solution makes you an essential partner for your customers, which lets you build real enterprise value. Bill is the best in the world at this.

Ben: Bill's story is great. He started his career at age 17 in a very different business. He bought his local corner deli in working class Long Island.

David: As a high schooler. This is amazing. He buys the deli for $7000 in seller financing from the owner who is retiring. Bill realized that the kids like him who hung out at the store weren't coming there for the product. Sure, they wanted food, but it wasn't about the sandwiches. It was about hanging out with your friends. That was the solution.

This was the 1970s, Bill starts installing arcade cabinets, Pac-Man, Space Invaders, everything we talked about on our Atari and Nintendo episodes. Guess what, kids spend way more time there, and Bill makes way more profits than just selling sandwiches.

David: He literally made life changing money from this deli. He buys his parents a beach house.

Ben: After college, Bill joins the tech world in sales, rises through the ranks at Xerox, and eventually becomes CEO of SAP. But he's always bringing that mindset. Why are my customers really here? When he joined ServiceNow in 2019, he takes them from, oh, you can make it function better, to you can digitally transform my entire company.

David: The company's performance since then has been incredible. Honestly, it's like Hermes over the past couple of years. Revenue has doubled, earnings have nearly 10x'd since 2019. Bill and ServiceNow have entered the conversation with the NVIDIAs, the Microsofts, as the most important technology partners for enterprises around the globe.

Ben: If you want to learn more about the ServiceNow platform and see how it can transform your business, go over to servicenow.com/acquired or click the link in the show notes. When you get in touch, just tell them Ben and David sent you. Okay, David, Life magazine, the Kelly bag. It's out. This thing must sell like hotcakes, right?

David: Yes and no. Certainly, this plays right into this whole dream thing that we've been talking about and burnishes Hermes' already incredible brand and image. 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 fifties here, so yes, it becomes incredibly popular.

Yes, I'm pretty sure it becomes Hermes's 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. 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.

Ben: To your point, I keep saying it's launched. It's not really launch, they just rebrand to the Kelly bag. When the Kelly bag is formally launched, it's really expensive. It's a $900 handbag in the 50s, which today is $10,000-$12,000, approximately the price of a Kelly bag today. It comes out that as this thing that is completely ridiculous and inaccessible price wise, 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.

David: 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.

Ben: Yup, exactly. 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.

David: In fact, actually, sadly, quite the opposite happens. 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 starts to fall on hard times.

Ben: Which is crazy to say. I remember this moment in the Porsche episode, you're like, no, come on, Porsche skinnied 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. Hermes is not quite in those dire of straits, but they have the ingredients of Hermes that we know today. They've got the Kelly bag, they've got the orange box. They've adopted the logo.

David: They've got the scarves.

Ben: They've got the scarves. They have these small workshops where they make everything, but it's not working yet.

David: It's particularly not working because like we just talked about, that market was not that big yet. As we entered the 1970s, something really funny happens. The next generation rejects that dream. This is 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 Stevie Nicks or something like that.

The dream of Hermes that was once so elegant and so desired by so many people but inaccessible, it certainly still got its audience, but it's not as universal. This is when so many of the other what we now think of as luxury brands really start to come up. We talked about this on the LVMH episode, but they're connected to fashion. It's first Dior, and then it's Yves Saint Laurent. This is the Mondrian dress from Yves Saint Laurent. This is the revolution. It's Gucci. It's Chanel in the 80s when Karl Lagerfeld takes over. What they're selling is very, very, very different than what Hermes is selling.

Ben: This is an important distinction between Hermes and all the brands you just named. They come from the world of couture, of fashion, and of cutting edge, in your face, risky art. Mind you, by this point, they're already 120 years old, 130 years old. They come from the world of leather, horses, durable goods that stand the test of time, and frankly, styles that stand the test of time. It's not how creative and crazy we can 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? It's a rejection of risk and an almost embrace of history. It's super different than most other luxury brands, which as you point out come from fashion.

David: Right, and those brands are getting born or reborn right there in the 1970s.

Ben: Yes. David, this is probably a good time to share who we chatted with in preparation from this episode and his observation about Hermes.

David: Yes. This was super cool. One of the things that for me and for both of us just blows our mind as Acquired grows. We got to talk with Domenico De Sole, who was CEO of Gucci, during the fight with Bernard Arnault that we chronicled. Really, I think that was the best part of our LVMH episode.

Ben: Absolutely. When Domenico De Sole, Tom Ford, and that team rejected Bernard's takeover and managed to not become a part of LVMH. Obviously, then Domenico and Tom Ford left to start Tom Ford after that.

David: It was super cool. We talked to Domenico. He comes from that world. Even with the heritage of Gucci, he and Tom, it was fashion first in his perspective. 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.

Ben: Risk on, baby.

David: Risk on, yeah.

Ben: Let's figure out how to break some glass in what we're doing.

David: Grace Kelly is not breaking any glass.

Ben: Right. That Domenico helped us understand about Hermes is they have been so protective of their brand and this unbelievable steward. They're so careful at how they've chosen to deploy the brand. They make sure that the mystique is always there. They don't violate the promise. They never cut corners.

They have been above board in their brand promise and keeping that promise with customers for over a hundred years. That is a strength and a weakness. It's a strength as long as you learn how to employ it as a strength. In the world of fashion, it's butting heads.

David: Yeah, it's antithetical to fashion.

Ben: Yes, exactly.

David: 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 in probably 1977 or so, where they bring in consultants and the consultants recommend like, hey, you guys should probably do what Gucci is doing. You should probably close the atelier above the shop at the Faubourg, you should probably outsource production, and you should probably increase your number of products, your SKUs, have lower prices, and have them be more accessible.

Ben: Unbelievable.

David: That was the accepted wisdom at the time. I don't know if it was McKinsey or who was saying that.

Ben: Today, I will tell you that Hermes has a corporate policy of no consultants, and now I know where that came from.

David: This is enshrined in the luxury strategy is anti law of marketing number 19, do not hire consultants.

Ben: Wow. The recommendation was to come in and destroy everything that makes you special and follow the playbook that everyone else is running.

David: Yeah. It's working for them, and it's not working for Hermes.

Ben: It's crazy.

David: This is when the next generation transition happens to Robert's son, Jean-Louis Dumas. I can't believe it with this family. Every time they come in at a generational transfer, and the company and the brand is under existential threat, even though we think of Hermes as the most unassailable thing in the world right now, but finds itself at a moment where it can be assailed. There's a generational transfer happening. You would think this is the downward spiral. This is the dropping of the baton, and the next generation always rallies.

Ben: 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.

David: Right, probably not your nepotistic family member.

Ben: That's not the best search process to run, and yet it works. I don't think it's this magical bloodline. I think it is a deep understanding of the tradition of the business, of exactly what type of chutzpah the team has to rally and take on, having the political clout to find the right people, and empower them to make the change, to have a sixth sense for where you sit in the marketplace versus competitors and what people may want out of your brand next. It's all the intangibles that come from growing up in the business make you able to be the right person to transform it.

David: I really do think that there is an element too of the successive generations, they apprentice in the ateliers with their hands. I think there is an element of that. They also apprentice, especially these days on the business side too. Axel talks, all the time, about dinner table conversations between his uncle, Jean-Louis, who we're about to talk about now, who is the fifth generation CEO of Hermes and his mother, who was head of production at the dinner table growing up. You can't not absorb that.

I think that's the flip side of nepotism, which makes it such a challenging topic. On the one hand, obviously limiting the universe of talent. On the other hand, how do you replicate those dinner table conversations?

Ben: It's funny. I called it a sixth sense. I think the right way to describe it is actually a je ne sais quoi about what you absorb from those.

David: Totally. Okay, Jean-Louis, the fifth generation. The consultants are saying, hey, go be like Gucci.

Ben: 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. Not so.

David: 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. I think everything else is made in Pantin, which is a 20-minute drive away. It's not like the outsourced production. Anyway, we'll get to that.

Ben: Great.

David: Okay, Jean-Louis comes in.

Ben: What year is this?

David: 1978.

Ben: Great.

David: He, like all the generations before and after him, come up. He apprenticed in the business. He knows how to do the saddle stitch. It's in his hands, it's in his soul.

Ben: We've talked too many times without actually talking about the saddle stitch. It's time to actually talk about saddle stitching. Listeners, you might be wondering, why do they keep saying this? What does it mean? Saddle stitching is an amazing technique that Hermes uses for every single bag that they make. 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 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.

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

Ben: Yes. How does it work? There's something called a horse that goes between your legs. The horse holds two pieces of leather together. The whole point of the saddle stitch is to sew two pieces of leather together. You first punch little holes in the leather using likely a pricking iron as your method of doing this. 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, 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.

You can always tell. If you're looking at something and it's stitched, there are these big freaking holes, then there's this thin thread that's moving through, and there's space between the thread and the leather, you know what kind of craftsmanship went into that. If it almost looks like the stitch vanishes into the leather and you're like, is there even a hole there, it's hard to even see how this was done, that is a saddle stitch. You take your pricking iron or your awl, you poke the partial hole. There's a lot of muscle memory involved in this. You then pass one needle through going from the right to the left side, and then you have a second needle...

David: On the other end of the thread, so one thread two needles.

Ben: Yes, that you pass through the other direction. What you've done as you pull both of them through is created this incredibly strong interlocking mechanism.

David: There's tensile force going in both directions.

Ben: Yes. If it gets ripped, you're not at risk of the whole thing pulling out, your saddle, or your bag falling apart. You just lose that one stitch, and that one stitch can be repaired. The only way for you to unravel something that is saddle stitched together is to individually go through and cut every single stitch.

David: Yeah, compare that to most products that you own.

Ben: Yes, this literally provides high utility if you're in an equestrian jumping competition or if your bag needs to hold something that really needs a lot of protection and can't fall through. It's almost like it started with real necessary utility, because something life threatening could happen. Now it's just massively overkill for everything that is saddle stitch, but you appreciate the craft behind it. There are very few people who are in a life or death circumstance that are dependent on their stitch holding true.

David: I'm going to channel my inner Pierre-Alexis here, the current artistic director of Hermès. I think it still has relevance if you want your object to be permanent. If you want an object that you own to represent something wholly different and antithetical to the Amazonification or the Walmartification of items these days, you want it to be made like this.

Ben: Yup. Something that made this really special for hundreds of years, if not still, is that it had to be done by hand. If you want something of this quality, this gets this interesting idea, is handmade stuff better? Not necessarily. Axel even says this in an interview. He says in 2019, today, hand stitching is the highest quality, so machines are non negotiable. When the quality of a machine stitching gets better than hand stitching, we will do it. We are not a museum.

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? 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.

For everyone who's 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 working in a little bit but similar story, is made by one craftsman. One craftsman starts with 36 unique pieces of high quality leather.

David: As much as possible from the same animal and matched exactly.

Ben: Yes, exactly. It's not sourced from all these different places all over the world, one person is responsible for the bottoms, and someone else is responsible for the straps. It is one craftsman that takes these 36 cuts and stitches it together. It takes 20 hours. 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.

David: I think it's even more than that. It's two years of training to become a Hermes artisan, period. I don't think you're allowed to touch the Birkins and the Kellys when you start day one on the job. I believe you need at least another three years, if not more, before you're allowed to touch the Birkins and the Kellys.

Ben: Fascinating. This knowledge is passed from generation to generation. 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.

David: Hang on to this. I have a lot more to say when we get to the current generation about this.

Ben: 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?

David: I have to admit, I have not read it cover to cover.

Ben: You did more of the history, and I did more of this.

David: But I've read large sections of it.

Ben: I was reading it. I found myself laughing at how often savoir faire was used in the prose. Every other paragraph, they just throw in a savoir faire, 133 times savoir faire is referenced in the Hermes registration document.

David: Partially in their defense, savoir faire literally translates as know how. It's a proper term in French.

Ben: Yeah, fair. 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. That is how they scale production. I will put a pin in that and come back to it later.

David: Yup. The true genius of the current generation is they have scaled that to 7000 people.

Ben: It's unbelievable.

David: Unbelievable. I was going to talk about this towards the end of the Jean-Louis era, but I want to say it now because I think it's perfect. I got to talk to a woman named Beatrice Amblard, who lives here in San Francisco.

This is amazing. She was an artisan at Hermes in Paris. She was hired right at the start of Jean-Louis's tenure. She worked in the atelier at the Faubourg when Jean-Louis's son, Pierre-Alexis, current artistic director, came to train after school as a teenager. He sat next to Beatrice, and I got to chat with her about this.

Ben: She runs April in Paris in San Francisco?

David: She moved to San Francisco when Hermes opened the San Francisco store here. I was like, oh, you transitioned to the front of the house. She was like, no, no, no. I was the person for the West Coast who repaired everything for North American West Coast clients. There was one person in New York, and I was in San Francisco. We came from the Faubourg, and a few of these people go around the world.

One of the things about Hermes and actually Jean-Louis who said that the true essence of luxury and the true essence of Hermes is everything they make can be repaired. If you buy an item from Hermes, no matter what it is, they will repair it.

Ben: Yeah, I think that's true.

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

Ben: Yeah, that's true. This is flashing forward to today, 15 dedicated repair shops worldwide, and they mend 120,000 pieces a year.

David: Wow, amazing. I asked Beatrice when I was talking to her, what was this like? What was special? 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.

Ben: What years?

David: 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. I said, oh, well, why? She said, look, by the time we're at this era, nobody else was left that did this.

Everything we talked about in the 1970s, all these other brands all went in this complete other direction. The consultants were telling Hermes to go in that direction too, but they're the last one standing that did all of this by hand in the tradition handed down through hundreds of years. If that's important to you, there's no place else. You can't ply your trade doing that anywhere else.

I asked her then. I was like, okay, well, as for the products and to the clients, to the customers, why does that make a difference? 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. There's nobody else, certainly at Hermes at scale, that does that.

She ended up leaving Hermes and starting her own boutique here in San Francisco, April in Paris, and she actually also runs her own leather school here in San Francisco too to train artisans. You can get custom stuff, small boutique stuff. Beatrice is a worldwide master, you can get that from her. But the idea that a $200 billion company at scale would be doing this. There's nobody else.

Ben: Yeah, it's nuts. It's completely insane. The people who don't work for Hermes, your options are in the dozens. If you go as a customer and you want something like a saddle stitched bag, wallet, or something like Hermes would make in that traditional pre war, early 20th century fashion, there aren't that many other artisans out there. Hermes employs 7000 of them. I don't know how many other ones there are, 1000, 2000.

It's not like Hermes has cornered the market. They're hiring more people and training them as fast as they can. They're trying to preserve this market that otherwise would have entirely been zero. It's a pretty crazy thing that they've managed to scale even to the scale that they're at.

David: The other thing Beatrice said to bring it back to Jean-Louis, he is a legend. He really cared. The idea that he would follow the consultants, it was just so completely anathema to him. He's the artistic director and CEO of the company. She ran into him in the elevator in the Faubourg right after she started. He looks at her and said, you're Beatrice Amblard, welcome to Hermes. He knew everybody by name.

When she ended up leaving in 1997 to open her own store, he called her. He was genuinely shocked. Nobody ever leaves. What are you going to do? She explained that she wanted to be entrepreneurial, start her own thing. 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.

Ben: It doesn't cost me anything to do that. On the one hand, you just say they're being a kind person and gave so much to your house for so long.

David: On the other hand, this is the CEO of Hermes.

Ben: Right. I think it's important to realize, these individual craftsmen are entirely non competitive with Hermes. It's a completely different value proposition to the customer. When you're buying Hermes today, you don't start from a place of, you know, I think I want some of the very best sewn leather goods I can find. Let me evaluate the whole landscape of people who could deliver that for me, and then I'll decide which maker to go with.

Either A, you're doing that, and you are a person who knows about a bunch of individual leather craftsmen, which is rare. Or B, you actually just want to buy something from Hermes, and there's not any evaluation going on. 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.

David: Yup. Okay, Jean-Louis story. How did he turn this thing around and save Hermes from the consultants? Like we said, he'd apprenticed just like every other generation. But unlike any other generation, or I guess maybe like Emile back in the day going and meeting Henry Ford, he comes to America. Specifically, he came to America to follow his wife, Rena, who became a world famous architect. Rena was interning with IM Pei in New York.

Ben: Really?

David: Rena Dumas would go on to design all the stores that they opened up all around the world and design the atelier in Pantin when they expand production.

Ben: IM Pei, famous from a number of things, including previous acquired episode with Michael Ovitz, designed the CAA building in Los Angeles designed the Louvre Pyramid.

David: I was going to say. Think about the connections here in France and Paris.

Ben: Yeah. By the way, everyone in Paris thought the pyramid was hideously ugly at first relative to this 1700s building around it. Over time now, it's become this iconic triangle pyramid, beautiful signature of the city.

David: Yeah. Jean-Louis, when he's in America, he works for Bloomingdale's. Bloomingdale's, my god, of all places.

Ben: There was a heyday of department stores. In fact, if you go way back, do you know how Hermes entered the United States?

David: In partnership with Neiman Marcus?

Ben: Yes, 1930s. Good. Wow, you did find that.

David: It's hard to stop me, but you do it sometimes.

Ben: Okay, Bloomingdale's.

David: From that experience being in America, being in this much more mainstream audience, he comes to understand what these other brands are doing, what the consultants are suggesting, but he takes that back. He says, 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, we're going to keep our market position. But our clients want to be like these young people, particularly these young women. The moms don't want to be like their moms, they want to be like their daughters.

Ben: It's a tall order to figure out how to revitalize, rejuvenate, and make Hermes relevant for this new era with this new audience.

David: With the same products. This is key.

Ben: Right. 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. It's almost like, how do you not insult your current customer base by adapting for the next one?

David: 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.

Ben: Right.

David: 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. Remember, that's the main part of the business at this point in time, but it's all these old people who want to be like Queen Elizabeth wearing the scarves. Young women wearing the scarves, not how you would typically wear a scarf, different parts all over their body. It's the Hermes version of Not Your Mother's Tiffany.

Most importantly, they're wearing these scarves with jeans. Grace Kelly would never wear jeans. I don't know if she ever did wear jeans, but she sure as hell wouldn't be photographed wearing jeans.

Ben: Fascinating.

David: These ads are the scarves the Queen Elizabeth is wearing with jeans and in fun, interesting ways, playful ways to wear the scarves, but they're still the same scarves.

Ben: Fascinating.

David: This is a revolution. The rest of the family is really upset about it, but he pushes it through. You can still see echoes of this to this day. A big part of Hermes fashion and probably the biggest part of I think the scarf fashion these days is tying the scarves on your bags, on your accessories, on various parts of your body. Not wearing them like your mother wore them.

Ben: This is how they've adapted for the digital era too. They've come out with five or six different apps to try to figure out how we engage people in the mobile era. 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.

David: That's super cool. I think this is brilliant, because this is allowing Hermes to exist and be relevant alongside fashion without actually getting into fashion themselves. The scarves and then ultimately the bags, can be the accessories to your jeans, to your fashion to your—we're past the era of bell bottoms. but the spiritual equivalent of bell bottoms here. They can say something about you, but they're still the same products that they always were.

Ben: It's pretty interesting if you can figure out how to coexist alongside cool, fashionable new cutting edge things. Then you deserve a place in someone's lineup where they say, well, I both am embracing a current trend, but I'm also respectful of the past. I also found my own way to weave this high class, high status thing into the rest of my image. 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...

David: I'm classic.

Ben: I'm classic, and I have the money to spend on things that are very price anchored. Everyone knows what a Kelly bag costs. It's gone up a little bit, but Hermes has very high price point products that stay approximately that price forever.

David: Jean-Louis has a quote about this, which is very French. He says, "The young customers came to us more than we went to them. People saw again, but with a new eye, the beauty of materials worked by fine hands. They came, we followed." That's the most French way of ever saying this, but this is what we're talking about. He got their client base and often the young people's parents who wanted to be more like the young people here to see with new eyes the same things. Total genius.

Ben: Yup, for sure. Okay, that's brilliant.

David: That's on the product side and doing this jiu jitsu to reposition the products in Hermes. The other thing that he did, which was huge was he had the very same realization that Henry Racamier had at Louis Vuitton, and we foreshadowed this earlier. What Racamier figured out at Louis Vuitton in the 1970s was that the market now, the global wealthy, the global elite, the global rich, is so much bigger now than it was in the 1950s. The number of people with wealth on the order of Grace Kelly and Prince Rainier of Monaco, or 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.

Ben: And it's happening in this country by country way, which is perfect for a brand like this. They can go to America, and then they will observe the rise of Japan, and then they'll go to japan in the 90s and 2000s. Then they'll observe the rising upper middle class of China, so they'll go there and present day. They can really position themselves as the second mover, where they can watch and see when this wealth class exists somewhere, then set up shop, and say, hey, France's whole heritage is now available to you to adopt as part of your persona.

David: Yeah, and this is super key. I think to this day, it's a huge part of the defensibility of Hermes and Louis Vuitton too. No matter where you live in the world and no matter what your cultural background is, when you attain this status, there's still something about this connection to French and European nobility that you cannot buy from a brand from any other country.

Ben: It's super fascinating that French nobility, fashion, and heritage is universally revered everywhere. Italian is too. I would say European generally, but French specifically, has an ability to do this in any geography as it develops.

David: Yup. All of this stew comes together in 1984 with Jean-Louis's greatest achievement. Unlike the Kelly bag, which again was an accident, yes, it was his father Robert and incredible genius, and then repositioning and renaming the bag, the Kelly bag. Jean Louis, this is literally whole cloth conceived of by him, was on a flight from Paris to London in the early 1980s, where he's seated next to the French and British actress, Jane Birkin.

Ben: The It Girl of the time.

David: Here's what's really interesting. I bet 95% plus of people listening to this right now have no idea who Jane Birkin was.

Ben: 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, her modeling, and all that. She laughed and said, wouldn't that be something?

David: Yeah, right.

Ben: Totally, 95%, if not more of the listeners to this podcast will have no idea who Jane Birkin is before this episode.

David: But you definitely know the Birkin bag.

Ben: Yup, 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 know that it's unattainably expensive, high status, hard to get handbag.

David: Certainly if you follow the Hermes stock, you know what a Birkin bag is, even if you probably couldn't pick it out of a crowd.

Ben: Yes.

David: Anyway, this is the culmination of everything we've been talking about. Who is Jane Birkin? She was British. She was born in England, but she moved to France and became a French citizen, and she became a French cultural icon. Again, the tie to France is so important here too.

We didn't talk about this with Grace Kelly either. Grace Kelly was an American from Philadelphia, but she became the princess of Monaco. These two women, these two personas that are embodied in Hermes, Hermes doesn't do celebrity advertising. I think it's so important that even though neither of them were French, they became so deeply European and what they represented.

Ben: Yeah, that's a great way to put it.

David: 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. In particular, she had a trademark accessory fitting with the 1970s.

Ben: The basket?

David: Yup. Counterculture, back to the land type ethos. She carried a wicker basket with her everywhere that she went.

Ben: Which has an ethos to it, but doesn't lend itself well to overhead bins.

David: No, it does not. 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, they're seated next to each other, and Jane is struggling to get her fixed handle wicker basket up into the overhead compartment. At this point, Jane had become a mother and had kids. She had kid stuff in her basket.

Ben: She had baby bottles that were spilling out.

David: Totally. I carry a lot of kid stuff these days. You need a lot of stuff with the kids.

Ben: 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?

David: Baby forward, yes. I get it. On the one hand, this is esoteric Birkin lore. On the other hand, I think this is super important to Jean-Louis. Imagine the older generation Hermes embracing this.

Ben: You know what we should do? We should come out with a $15,000 diaper bag.

David: Right. They sit down and they start talking on the flight. Jean-Louis introduces himself. He's like, I noticed you're struggling with your wicker basket there Miss Birkin.

Ben: And she doesn't know who he is at first. It's the funniest thing.

David: Right.

Ben: She says something like, well, yeah, wouldn't that be great if there was a bigger bag that actually closed? But Hermes doesn't make that, or she made some comment. He goes, I am Hermes.

David: Yeah. The legend now. Who knows if this is true? She said, well, when Hermes makes a diaper bag, I'll use that one.

Ben: Specifically for her, she 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.

David: Yup. As they get to talking, they're talking about the Kelly. She's like, look, Kelly's the Kelly, but I can't wear it over my shoulder. Jean-Louis starts sketching out designs on the plane, and voila. The Birkin is born.

Larger than the Kelly, but smaller than the old original Hermès 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. It's the—it feels weird to say more casual version of the Kelly, given that it's the Birkin bag, but it is. It's the more casual modern version of the Kelly.

Ben: The Kelly has cleaner lines and this beautiful, almost mid century trapezoidal shape, whereas the Birkin, everything about it screams function.

David: Here's what's interesting. They released the product in 1984, and it is not an immediate success. I think part of this is that the Hermes brand transformation modernization was probably still underway. When you watch interviews with particularly, Pierre-Alexis, he'll talk about this. He's like, any other company would have given up on this product. But it takes about five years before the Birkin bag becomes the Birkin bag. The time is right. We're in the 1980s, the go-go years. These are the years that are shaping Bernard Arnault here.

Ben: There are 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.

David: Yeah. It takes five years for it to become any modicum of success for Hermès. A lot of these things, this just slow burn starts that grows, and grows, and grows, and grows.

Ben: There's a real lore around it that it's hard to get. It's just like with a kid. If you tell them they can't have something, they wanted a lot more. If you tell your very fancy clientele that you would love to be able to get something for them, there's just not enough.

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. It could be a few years, but I'll reach out as soon as we have something. You're an important customer of ours. 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.

David: Ben, you would make a great Hermes essay.

Ben: I don't think so. I actually had a wonderful Hermes associate that I worked with in the Aix-en-Provence store. It was crazy. We bought basically the most entry level Hermes products that you can buy in one of their stores. I think perfumes are sold in department stores and makeup. There are some more accessible things, but in terms of the durable goods, it started at the bottom.

I had a delightful time and decided to buy something. I think we spent an hour and a half, and I had the most wonderful service and built an almost friendship with the associate who helped us through the whole process, spending as much time with me as they spent with someone coming in to pick up their Birkin bag. It was crazy, probably the best customer service I've ever received in any retail establishment anywhere. No, I don't think I would be a good Hermes sales associate relative to where the bar has been set.

David: It's funny. My experience was different. Of course, I had to go do some research for this episode.

Ben: You drove down to the Palo Alto store, right?

David: Yes, I went to the Palo Alto store. I had to be down there anyway for some meetings. The sales associate who ultimately helped me is equally wonderful woman. I had a great experience. Her name is Susan. I'm going back to see her tomorrow as Valentine's Day and Jenny's birthday is coming up. I walked in the store with the intention of buying what I ultimately did buy, which is...

Ben: Apple watch band. I thought that's what that was.

David: An Apple watch band, yup. We'll get to the Apple partnership in a little bit. I was passed around between a few different people in the store until ultimately, Susan helped me out. She was great. I think she actually might be a higher level essay. But when I expressed that I was there to buy an Apple Watch, Ben...

Ben: Interesting.

David: Yeah. I don't know if that was just the day in the store or if that is part of the policy.

Ben: I have to imagine it's a little bit different experience in the French countryside as compared to...

David: The Stanford shopping center.

Ben: Yeah, I can see that. Back to the Birkin bag, by 2001, it becomes so widely known that there is a waiting list, an 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. Samantha figures out that there's a way to jump the five-year waitlist.

David: 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.

Ben: She name drops one of her celebrity clients and In order to say, it's actually for them to try to move up the waitlist. Calamity ensues, they actually figure out that it's for her, not the client. I actually haven't watched the episode, but this is a cultural touchstone for the Birkin going from something that is whispered about in handbag circles and well-known by the wealthy elite to something that is now a very well known phenomena, which is good luck ever getting a Birkin bag and the crazy stories about the most expensive one ever selling for $500,000 on the secondary market, and Victoria Beckham having a collection of over a hundred. It's crazy. It has become the Patek Philippe Nautilus of handbags, and people look at it almost as an investment.

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

Ben: Which is crazy. It's starting at $12,000 handbag. What you're saying is that's actually not the constraint.

David: Yup. But also what you're talking about, with echoes of our Nike episode here, the minute that you are in possession of a Birkin bag, you could immediately sell it for a lot more than what you paid for it.

Ben: And your Hermes essay will not be very happy that you did that, because the point of buying one is to own one, use one, and appreciate the craft, the work, and the beauty that went into this product. 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.

David: Yeah. That would be the last Birkin bag that you'll ever buy. Every bag, I think maybe even every item that Hermes makes, has what Hermes calls a blind stamp on it. This is a series of symbols and numbers.

Ben: There's one on my belt right now.

David: Yup, and 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.

Ben: There are some very cool stories of people who are transitioning from a crafts person 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. 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? To get it back 10, 20 years later and see it has got to be crazy cool.

David: Yes.

Ben: Today, everything we're talking about here, the Birkin bag, the Kelly bag, these $10,000-$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. This is essentially the opposite of everything you learned in econ 101.

David: As is everything about this company.

Ben: Yes. Normally, price is where supply meets demand. 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. Price ends up being a signal that the item is desirable, and thus it stimulates demand now.

Interestingly, David, this is exactly what you were talking about before. Birkin bags sell below the market clearing price. That is another defiance of microeconomics. Normally, things should Be priced exactly at the intersection of supply meeting demand.

David: I was just laughing as you're talking about Veblen goods there. 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.

Ben: It's 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. Another way to look at it is that it's an investment in the brand.

There's a very good Substack writer, 310 value, that will link to in the show notes, who observed the supply demand mismatch creates scarcity in these two bags 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's other goods to build a relationship with the company in hopes of being allocated a bag at the below market retail price.

David: 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, or five times the price that they do. They'll show up on Goat or StockX all the time regularly at higher prices than Nike releases them for. I believe that the reason that they do this is to maintain goodwill with their customer base and maintain Nike's image as a brand that is accessible to everyone.

Hermes is doing the opposite. They want this to happen in order to maintain the image of Hermes, specifically the Birkins and the Kellys, as a brand and a product that is not accessible to everyone.

Ben: Yes. It's not as simple as, well, they just keep raising the prices to make people keep wanting them more. You read that in The Luxury Strategy, and many luxury brands do that. In fact, Chanel has done it in record amounts the last couple of years. I think it's called the Chanel classic flap medium or something like that. That's had this crazy appreciation over the last few years where Chanel is just raising the price. Hermes doesn't do that.

David: We'll talk about this more later in the episode. 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.

Ben: So it's like 4% or 5% above inflation?

David: Yup, which is more, but not an egregious amount.

Ben: 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. I'm trying to figure out what the motivation here is because it's a tremendous restraint. There's no cash grab happening. Maybe it's because, what bad things would happen to Hermes if they decided, you know what, Birkins are 20 now, not 12?

David: Right. They're already viewed as the most expensive handbags in the world. What harm done to go from 12 to 20?

Ben: Right. They sell a lot of them, so that actually would be a lot of profit dollars.

David: Right. 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? Probably not.

Ben: Right. The Wall Street Journal estimated in 2020 that there's about 120,000 of the combined Birkin and Kelly created each year, so 120,000 bags a year. If you decide that you want to make another 8000 of pure profit on each bag, that is tempting. I think it actually says a lot about Hermes' obsession with conservatism that they don't meaningfully increase the price.

The Kelly is not far above its original 1950s price, inflation adjusted. I think the Birkin bag, the retail price was around $2000 when it launched in 1984, so call it maybe 6000 inflation adjusted. You're looking at maybe twice the price that it launched out on an inflation adjusted basis.

I guess the point I'm making here is, I think we should keep in the back of our mind the rest of the episode this question of, why doesn't Hermes raise the prices? They're already getting the benefit either way of the trickle down of people participating in the Hermes ecosystem to hopefully get the call one day. Why not make it even more expensive when you do get the call?

David: Interesting. All right, let's come back to that later in the episode.

Ben: Yeah. Okay, 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.

David: I was just thinking about that as we were chatting here. This makes sense to me that it wouldn't be a hit right away. Because it takes time to build the lore and aura around this bag, you can't just drop a new product and have it become this immediately in this category.

Ben: Correct.

David: You're never going to have like an iPhone of luxury handbags.

Ben: Correct. It has to be like a Taylor Swift concert. Actually, I think it's a reasonable comp that her concert was extremely scarce, brand new product, priced at an extreme premium. That did sell right away, because the product had so much of the brand in it, like you knew exactly what you were going to get from going to the Taylor concert because you're extremely familiar with the brand. But it's not necessarily well understood that the Birkin equals Hermes in the way that The Eras Tour equals Taylor Swift.

David: Totally. It's also that the product was The Eras Tour, the product was not Midnights. If it were like, oh, I'm going to go to Taylor's concert and listen to her play all the songs on the new album, of course a lot of people would still go. But it was like, no, I'm going to go to Taylor's concert and hear all of Taylor.

Ben: All the amazing Hermes scarves from over the years released out of the vault.

David: Yes, the Disney plus of Taylor. All right, different episode here. Okay, back to Jean-Louis. This is how he does it. He does two incredible things to save the company. (1) He repositions the prem. 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 Birkin bag and everything that that represents. (2) The internationalization, discovering, and running the same playbook that Racamier ran at Louis Vuitton.

By the end of Jean-Louis' tenure in 2006, a couple of years after the famous Sex in the City episode, Hermes has gone from well less than a hundred million dollars when he took over. The consultants were saying, outsource, shut it down, essentially. By the end of the decade of the 80s, he was just under half a billion dollars in revenue. In 2006, he's taken it to $2 billion in annual revenue. From nice family business to this is a real, real thing.

Ben: One more time on those numbers.

David: 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 42 billion when he retires in 2006.

Ben: So 40x in 30 years?

David: Yeah, 40x in under 30 years.

Ben: Wow.

David: Pretty good. Pretty transformative for the family business. Along the way, as the company clearly becomes more and more valuable, remember, he is the family member who's running it, but we're now on the fifth generation of the family. We're starting to bleed into the sixth generation of the family. They're now over 80 family members out there. Many of whom are involved in the business, but many of whom aren't. 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.

Ben: Right. Every single one of those family members, most valuable asset and their entire net worth is their privately held Hermes stock that nobody can really put a price tag on. It's just sitting there in everyone's mind of like, it sure would be easier to live my life if I knew that this 90% of my net worth actually worth something that I could access and an even split. That's $25 million a person. I'm pretty sure it's the most valuable thing that any of them owns.

David: Right. In 1993, Jean-Louis lists Hermes on the Paris Stock Exchange. Collectively, when the dust settles, the family has sold 19% of Hermes to the public. They still own 81%. Now, the public float grows a little bit over the years. As more family members sell, more generational transfer happens. More or less still, 70% plus family owned and controlled. It would really take some sort of absolute financial genius to come in and even consider. We owned over 70% of this business, we're unassailable. Who on earth could possibly make a run at our company?

Ben: It would take a real wolf, I'll tell you.

David: This has been so fun. I've had so much fun with this episode. All this history, I just revel in the French connection and everything. This is Hermes' finest moment that we're about to talk about here, through it all.

Ben: It's interesting, it's not their product.

David: No. It has nothing to do with the product. The fight with Bernard Arnault.

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David: Critically, your security reviews are now real time instead of static, which you can monitor and share with your customers and partners. Vanta's platform helps you continuously monitor compliance alongside reporting and tracking risk. Plus, you can save countless hours by completing security questionnaires with Vanta AI.

Ben: Yup. Vanta scales all the way from seed stage startups to large enterprises. If your company is ready to automate and streamline security reviews like 7000 other customers, go back to making your beer taste better and head to vanta.com/acquired, and just tell them that Ben and David sent you. Thanks to our friend Christina, Vanta's CEO. All Acquired listeners get 1000 of free credit at vanta.com/acquired. David Rosenthal, us return to Bernard Arnault. It's been 12 months.

David: It's been too long.

Ben: I've been wanting to hear the other side of the story.

David: I know. Okay, 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. Gucci is the one that gets away, Bernard isn't able to buy it. Right after the Gucci fight ends in the early 2000s, the same story plays out with Hermes.

I think really in an even more dramatic fashion, in 2001, right after he lost Gucci, Bernard quietly buys an initial stake in Hermes of 4.9%. I believe that was just under the threshold that they would have to disclose it under French securities, regulations.

Here's what they do that the Hermes families couldn't see coming that only Bernard could engineer. He continues buying for the next 10 years using equity swap derivatives. It looks like other entities are buying these shares on the open markets, but LVMH have the rights to exercise options to actually take those shares. 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.

Ben: That's 8%-9% of what it is today.

David: When Bernard first starts buying in the early 2000s, it's below $10 billion. 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. 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 billion.

Ben: Which is interesting. You say he spotted Hermes. It wasn't hard to spot. The interesting thing is not that he realized it was the crown jewel of luxury, it was that he realized that the crown jewel of luxury could be worth 20-30 times as much as it was already worth.

David: He starts buying Hermes shares. Axel, I think, jokes about this in an interview. He's like, look, Bernard isn't buying your shares just because he wants to make an investment or he wants to have some fun. Obviously, he wants to own Hermes.

Ben: By the way, when David and I are referencing these Axel interviews, it's one interview. He made a random appearance here and there, but he has done one long form, on stage interview, and it is fantastic.

David: Yes, it's great. We'll link to it in the sources. You should go watch it. Why is Bernard doing this? Obviously, on the one hand, he sees the value here. For God's sakes, that Sex in the City episode was just dedicated to the Birkin. There's a lot of value to be unlocked here, shall we say, in owning Hermes. But it's not just that.

I hope on our LVMH episode, this is some of the nuance that we painted about Bernard. He's not just a corporate raider. He actually is an operator. He is one of, if not the best luxury operator out there. He sees two things in Hermes that maybe aren't as obvious to the rest of the world and that he thinks actually are going to create an opportunity for him.

(1) Generational transfer is about to happen. Jean-Louis can't live forever. It's not immediately clear who the next successor is going to be. Jean-Louis's son, Pierre-Alexis, takes over as artistic director. Pierre-Alexis went to America for college. He went to Brown University.

Interesting. In an interview, I found this. He initially wanted to study computer science at Brown, but he switched to art history, very fitting. He comes in and he joins Hermes right after graduation in 1992. He's being groomed, but Jean-Louis wants to separate out the artistic director role and the CEO role.

Ben: They had been coupled before?

David: Yeah, he held both. Robert held both. Emile was both, Thierry was certainly both.

Ben: Right. 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.

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

Ben: Right. He did that internship, his five year apprenticeship, but then he left, right?

David: Yes. The story is that Axel really wanted to go work in China. He goes into investment banking after undergrad. He goes to Sciences Po. Remember, Jean-Louis was his uncle, but his mother who actually was not a family member was the managing director for production for Hermes. Axel has this dinner table trading in addition to the apprenticeship craftsman trading, but he goes off into the investment banking world. He works first in China and then in New York for BNP Paribas.

Ben: Wow. He is an expert in corporate structure, and he's an expert on this pretty interesting luxury market in the next 20 years China.

David: Yup, and America too. But he doesn't join the business until 2003 when Jean-Louis taps him. Again, on the one hand, as we've talked about, this is a nepotistic business, on the other hand, they're not going to just give him the CEO title right away. He needs to come pay his dues. He starts in the finance department in 2003. Then in 2006, when Jean Louis retires, Axel takes over running the Jewelry métier as CEO of Jewelry.

Ben: 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. 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 1% to 3%.

David: He does that for two years. In 2008, he goes and takes over the leather goods and saddlery business, the big one.

Ben: That's 43% of the business, and I think at the time it was closer to 50%.

David: Yes. Bernard sees, okay, we've got a generational transfer opening here. In fact, when Jean-Louis retires in 2006, he promotes his COO right hand person, Patrick Thomas, to be the first non family member CEO running the business side of the house alongside Pierre-Alexis on the artistic side.

Ben: 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 billed it as, well, they needed someone to look after the business in the interim period before the family was ready to have the next heir.

David: I think there's as much chance as not that that was right, but at a minimum, I think this shows the ignorance. I don't want to say lackadaisicalness of the family here because it's certainly not that, but maybe ignorance or naivete that, hey, you're now a public company, and there are people like Bernard Arnault out there. You can't just be like, oh, yeah, we're going to do public company CEO transition in this way and take our time. You can, but you're opening the door for the Arnaults of the world. That's one thing that Bernard sees.

The other, and I really think this is a testament to his vision, despite all of the strength within Hermes and everything that Jean-Louis did, they actually are showing some cracks. This we had to piece together a little bit and talking to folks in the industry helped us out here. There's no questioning Hermes's financial results and on-the-surface brand value at this point in time in the 2000s, early 2010s, but there are a few things that are just starting to slip as they scale. 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 I believe it was in Japan, they had a product, a bag.

Ben: Yeah. This is so interesting, listeners. If you listen to other coverage of Hermes, you will hear this story.

David: You never hear it from the perspective that we're about to tell it. Okay, here's how the story goes. Call it the late 2000s, early 2010s. Hermes is selling a canvas beach bag in Japan, and it is flying off the shelves, selling like hotcakes. It's like an equivalent of $150 canvas tote bag beach bag. This obviously gets the attention of management and the company that this is happening.

They decide that they are going 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. They come into a board meeting with all the family members. The management 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.

Ben: The family and the board is so aligned that no one even asked a question about this, they just stood and gave applause. Here's how this went on a meta level listeners. I heard this story, David heard this story. David texted me at one point and was like, isn't this an odd story? I was like, what do you mean? We realized, oh, this is not ever told by any of the family members or company executives anywhere. It's just out there, and the company is not secretive.

David: They love telling these legendary Hermes stories.

Ben: 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. It rings a little bit odd. It's like, okay, well, why are they not telling this story given how often it's bandied about?

David: 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?

Ben: Exactly. A canvas beach bag in Japan?

David: For $150?

Ben: And they're making enough of it that it's flying off the shelves? What company is this?

David: How on earth did this happen? This story here is not a heroic one of we destroyed the supply. This is a tragic one.

Ben: It's almost like when I was sitting there watching Wonder Woman 84. I was just so appalled at what I was watching that on this meta level, it occurred to me like, the story here isn't the plot of this movie. The story here is, how do you have such a process failure at Warner Brothers where this thing was let out the door? That is a failure of creative leadership, and that is what you have going on with a $150 canvas tote bag after 175 years of successful Hermes brand stewardship.

David:  Right, and building up the Birkin and the Kelly. For God's sakes, the scarves sell for $500. That I think is the most visceral illustration of this. Two other things that I saw in the research and I think Bernard probably saw here, too. Towards the end of Jean-Louis tenure, he and Hermes started buying and investing in other companies. But why is Hermes doing this?

Ben: Right. This is the weird stuff going on at Nike when they were buying Converse was the good example, but Starter. It was almost like they didn't realize, oh, we should be concentrating our firepower behind our one hero brand that they were trying to create the constellation of weak brands.

David: The best Hermes could ever hope for by doing this is they're going to be a subscale. They're not even going to be a Richemont and Kerin.

Ben: One argument, bootmaker John Lobb and all these other companies that they either bought in whole or in part, it became important for them to own their key supplier relationships.

David: Yes, those I think were probably strategic acquisitions.

Ben: Yeah, especially in watches where they actually fairly 25% position in the company that makes the movements to make sure that they have enough supply coming to them. That wasn't all of what they were doing. They were also buying other brands.

David: Yeah. Did you find the biggest disaster? This is in your wheelhouse.

Ben: I don't know.

David: I was wondering if I could stump you with this. They bought, I believe a 30%-35%. They were the largest shareholder in a German company that makes what is really a piece of technology, an old piece of technology, but not something that should be a luxury brand. This is very much in the performance end of the spectrum. They became the largest shareholders in Leica, the camera company.

Ben: Really?

David: Yeah. The motivation is like, oh, they're beautiful, they're luxurious cameras, they have leather on the, and we can put Hermes leather on the Leica cameras.

Ben: Yeah, if they made an Hermes edition Leica camera.

David: They did.

Ben: I should probably look into that.

David: Okay, you're talking about a very narrow target market here. It's a technology product. We'll get into this with Apple in a minute. It didn't go well, let's put it that way. They ended up divesting the stake.

Ben: 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.

David: Yeah, unless that is the core strategy of what you are doing like LVMH.

Ben: Yes.

David: The third thing that they do, they incubate and create a new luxury brand and company in China called Shang Xia. I believe I'm pronouncing that right. 2009 is when they launched it. It literally means up down or past-present. The idea is that the Chinese market is so big and so important to Hermes. They're going to lend the Hermes brand to this new brand that is going to have Hermes principles, but take traditional Chinese craftsmanship of which there's a long multi thousand year history.

Ben: Yup. I actually like the strategy.

David: Yeah. It sounds good on paper, but here's the problem like we were talking about earlier. Nothing compares to French culture as an export and when you are buying luxury. This is a great experiment to run, sure. But the reality is that for probably most countries in the world, when you're talking about spending $20,000 on a piece of leather, you want that to be from Hermes and you want that to be from France. I think this is especially true in China.

Ben: 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.

First of all 76% of production in France is incredible the fact that they do this with all these different workshops that are scattered around the country. The incredible French history that is encapsulated by the brand, the French nobility, and the French sense of place, it really is just an intangible connection to the culture that is lusted after everywhere in the world. Why on earth would you throw that away when that really is the essence of your core asset?

David: Now, easy for us to armchair quarterback here. Obviously, it didn't work. They end up selling it off actually pretty recently to the Agnelli family from Italy, which is the family behind Fiat. Certainly that one, the Leica thing, it's the combination of all these and the beach bag incident. Bernard sees all this.

Here's what he says in the press at the time. "I would never diminish the quality of Hermes. Hermes can be an even rarer and greater quality business if they ever wanted to work with us." I think he's genuine about that. The family obviously circles the wagons and mounts their rebel alliance here, mounting their defense against the empire.

Ben: Which I think is quite impressive.

David: Absolutely.

Ben: The fact that they were able to link arms like this and say in the face of someone trying to make you and all your relatives collectively a multi billionaire in liquid cash, it's incredible to link arms and manage to rebuff it.

David: Totally. We'll tell the story here, and it's amazing. I think this is like a really important point that I want to land. I don't think Arnaud was wrong. I think he had a point, and I think the company at the time didn't get it. They certainly do now. Okay, what's the story? What happens? Finally, in October of 2010, Arnault is patient.

Ben: He spent nine years.

David: Nine plus years that he's just building this stake, being patient. In October, 2010 LVMH exercises its options on the equity swaps that it owns and announces that it had now controls 14.2% of Hermes shares. Bernard at the time says, I had to do it, because other luxury groups were also talking about making a run at Hermes, and I didn't want this crown jewel of France to be owned, heaven forbid, maybe by a non-French organization. A quote here, "I could not sit by and allow a competitor or another investor to take a stake in Hermes." He's good. He's so good.

Ben: I love it.

David: In response to this is the famous or infamous, if you will, quote from Patrick Thomas, the then CEO of Hermes, which we're not going to say the full thing here on air. You can go google it. This is an official press conference with investor relations people. He says, "If you want to seduce a beautiful woman," Obviously Hermes being the beautiful woman here, "You don't start in the fashion that Bernard is" And he doesn't use those words.

This is hilarious. This is amazing. That makes, of course, a huge splash in the French and international press. The drama here is delicious. Karl Lagerfeld is asked his thoughts on what's going on here. Lagerfeld, of course, is a legend. He's the longtime creative director of Chanel. He comments publicly. "If you don't want to be taken over, don't put your business on the public market."

Ben: Game recognize game. That's a great point.

David: He's got a point.

Ben: If you want liquidity, this is the trade off you make.

David: Of course, Lagerfeld, yes, famously is the creative director of Chanel, but he wasn't exclusively the creative director of Chanel, who he is also working for at this point in time. He is also, I believe, the men's wear creative director for Fendi, which is owned by By LVMH.

Ben: He's on payroll.

David: 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%. The family owns 73% of the company at this point, so Bernard now owns almost the entire public float of Hermes.

Ben: There's 3.5% of Hermes that's publicly floated he doesn't own?

David: Yeah. Hermes is in danger of being delisted from the stock exchange.

Ben: Crazy.

David: This is what's so brilliant. You might ask, why does this matter? The family owned 73%, Bernard can't do anything. Price is a function of supply and demand. As Bernard is shrinking the float of this company, the shares that are available for trade on the public markets, what happens to the stock price?

Ben: Skyrocket.

David: It goes through the roof. Now you've got 80 family members, and they already thought they were really wealthy. They already wanted liquidity. Now, Bernard's coming to them. This is a strategy. Let's just go pick off individual family members one by one, keep increasing his stake, and saying, 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.

Ben: Crazy.

David: What happens? This is why I think this really was the family and the company's finest moment. That temptation must have been extreme. That's just the externally identifiable motivations. I'm sure Bernard, other people at LVMH, and everybody else in the industry is doing everything they can to convince family members to sell.

Ben: Right, and all it takes is one week link or probably a few week links, because the ownership is so divided into tiny chunks by this point. Six generations in, it's pretty peanut buttered around.

David: I think also just from a psychological perspective, a couple dominoes fall here. As a family member, you start looking around and being like, do I want to be the last one? It's like a crowded theater running for the exits. At the time, you're thinking about like, holy crap.

Ben: This is the best it's ever going to get.

David: I may never see another opportunity to get liquid at this price ever. The minute that other family members start selling, supply and demand, the price goes down.

Ben: Right, I cannot be the last, and it would suck to be the second or the third.

David: In 2011, the family comes together and over 50 of the 80 family members collectively contribute 50.2% of the equity in the company into a new cooperative vehicle that's called H51, as in 51% of Hermes, as in this vehicle will have majority control of the company. When they contribute their equity into this vehicle, they contractually agree that that equity will be locked up and cannot be sold at least 20 years.

They're basically saying that 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.

Ben: It's so badass.

David: It's so badass.

Ben: Dude, you and I should contribute. We should make A51. Even though it's completely unnecessary, it just feels right for Acquired. I think you and I can each maintain 24.5% stakes, but A51 really should...

David: I love it. We haven't floated our business on the public markets yet, so we're taking Karl Lagerfeld's advice. We don't need to incur the legal fees around doing this. That vehicle was and is still headed by one of the family members, Julie Guerrand, who was an investment banker at Rothschild. She leaves and full time becomes head of the defense, I assume alongside Axel, who obviously comes from the banking world, too.

Ben: 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? 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. 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?

David: I don't believe these documents are public. My understanding from comments that family members and Axel 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.

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

David: I believe it's pretty ironclad that these shares cannot be sold.

Ben: Wow.

David: In addition to that, two of the Puech brothers, Bertrand and Nicolas, Nicolas is the one that there's the gardener drama about right now.

Ben: We should say, listeners, in case you don't know, there's a lot of stories floating around in the press right now that Nicolas Puech is going to give half of his stake in Hermes, which represents something like a little under 3% to his gardener or his ex gardener, who's now 51, nobody knows his name.

David: Nicolas does not have children, heirs, or other heirs.

Ben: Right. There's a press story right now that just shy of 3% of Hermes could be given to the family gardener.

David: Anyway, the two Puech brothers do not contribute their shares to H51, but they give H51 a right of first refusal on their shares. They could sell their shares, but at whatever price they agree to, the rest of the family has an offer on purchasing them.

Ben: Interesting.

David: That's another, probably 10%-15% of Hermes right there.

Ben: Whoa. Okay, that's significant. I wonder how this gardener thing is going to play out.

David: Yeah. Those shares would be, I believe, subject to that offer, 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 are 80 people here.

Ben: The fact that they actually rebuffed this offer and that Bernard sold down his stake is crazy.

David: Let's get into what happens with Bernard's stake, because famously, as Domenico De Sole said in the press at the end of the Gucci affair, even when he loses, he still wins, and Bernard still wins here. This effectively ends the takeover bid when H51 is put in place. Meanwhile, there are all sorts of lawsuits going on, particularly around how LVMH amassed this stake in secret with the equity swaps.

Ben: It was basically illegal, right?

David: In 2014, the French court rules that this was illegal. LVMH has to pay a fine, I believe  a $10-$15 million fine for having done this.

Ben: Pennies.

David: Yeah, right. As we'll see, it's truly pennies. They also mandate that LVMH needs to distribute out that Hermes stake to its own shareholders. LVMH can no longer hold the stake. Who's the largest shareholder in LVMH? It's Group Arnault, which is Bernard Arnault's family office. They get 8% of Hermes personally into his family office entity. This is the brilliance of Bernard. They take that value, which is on the order of $5 billion. Remember, when they started buying, the whole company was trading at a market cap below $10 billion.

Ben: 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.

David: He has unlocked shareholder value for sure, even in the absence of a change of control transaction. 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. He already owned Dior that he had gotten out of bankruptcy from Boussac.

Ben: That's right. He had this Russian doll structure, where he owned a slim majority of an entity that owned a slim majority of an entity, that owned a slim majority. 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 Arnault, because he was technically the majority owner of each of them.

David: Yes, but he and LVMH didn't own this 25% minority stake in Dior. He takes the Hermes shares and does a share swap. Swaps that value directly with the 25% of Dior that he doesn't own to bring that first into Group Arnault, his family office, and then he trades that into LVMH. LVMH now, finally, as a result of this, is able to take 100% control of Dior.

In exchange for group are no trading this asset into Dior, Bernard's ownership of LVMH goes from 36% up to 46%. He gets an extra 10 percent of LVMH. Here's the most incredible aspect of this. Not a single dollar in tax is paid on all of this because it's all share swaps. Basically, Bernard just gets 10% more of his own company as a result of this.

Ben: Which would then go on to appreciate.

David: 400%-500% over the next five to six years.

Ben: 5x'd since 2017?

David: Yeah.

Ben: Wow. Even when he loses, he wins.

David: Unbelievable. This is a situation where everybody wins. I don't think there are any losers here. The Hermes families absolutely are not losers. You could even say they have the last laugh here. Yes, Bernard gets to benefit from an extra 4x-5x appreciation in LVMH's market cap here. From the real beginning of when LVMH publicly announces their stake in Hermes, 2010, Hermes' market cap is up 16x.

Ben: It's crazy. The reason why no one's a loser here and everyone's a winner is because Hermes truly is the crown jewel. It is such an unassailable, exceptional business. The last 12 months, it did $14 billion in revenue, $5.7 billion in operating income. They have a 71% gross margin and a 44% operating margin. It's a software business that doesn't need any R&D.

David: 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. 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. That is the story of the sixth generation of Pierre-Alexis and Axel, who I think have certainly fixed those problems, but have really led Hermes, the business, and the company into a whole new era.

Ben: Yes, that is absolutely right. There is a quote that I want to start with for the Axel Dumas era, which is possibly the best articulation that I've ever heard of business strategy anywhere. He did it in the interview that we were talking about. He says, "Every decision that we make has got some reverse effect." Which I think is like a French translation for trade off.

"Every decision we make has got some trade off. There's something I really like about strategy in Michael Porter. Strategy is accepting that you are doing something better than the other, and the other is doing something better than you. You have to pick your fight. I'm always a little bit disappointed when I see someone on my team say that we do everything at the same time. Great. That doesn't happen in real life. You have to pick your fight, and Hermes picks their fights better than anyone/"

David: What they've done over the last 10 years since the Bernard fight is that they have figured out how to scale handcrafted artisanal production.

Ben: Yes.

David: On the surface, those are completely oxymoronic terms. Those are completely diametrically opposed.

Ben: 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, no brand, it'd be really hard to discover them, and frankly, they would all just go out of business. Most of them go out of business anyway.

David: Totally. What was the stat that you said a little while ago that there are 120,000 Birkins and Kellys produced every year?

Ben: Yup, exactly.

David: If they were still making these things on the third floor at the Faubourg, no way. This was 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.

Ben: Right, you have a global brand now. You need to figure out how to serve the demand for your brand.

David: Yup. The Patrick Thomas quote that I want to start with is so great. "The luxury industry is built on a paradox. The more desirable a brand becomes, the more it sells. But the more it sells, the less desirable it becomes." We've been talking about this whole episode, but then he continues. "I believe Hermes' vision provides a solution to this dilemma." This is what the current generation has found, the solution.

Today. I think we referenced this earlier in the episode, Hermes employs 7000 master craftspeople, artisans. 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 du Saint-Honoré in Paris.

In 1992, they moved production to Pantin in the suburbs of Paris. That building is amazing, but only houses about 250-300 craftspeople. Actually, still to this day, Axel talks about this a lot, any one of their production sites does not have more than 250-300 craftspeople.

Ben: Yes. They believe that every single person should know each other by name. They think that 250-300 is the natural limit on that. Axel even says, if you have more than 300, it is not a workshop, it's a factory.

David: Yup, 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. As the company gets larger and larger, today that means adding 500 artisans every year.

Ben: Crazy. When Axel started at the company all the way back in the 80s, there were 250 craftsmen, period. They hired two craftsmen per year in the late 80s.

David: Right. Here's the issue though. How on earth are you going to do this? Like you were saying, this is a dead art. Nobody else does this.

Ben: Little maker with a workshop in San Francisco or a workshop in Paris, but how are you even going to find them?

David: Right. Those people, the Beatrices here in San Francisco, they're entrepreneurs. They're not going to go back to joining Hermes, because they all came from Hermes in the first place. How are you going to hire 500 a year? It's not like they can go higher from their competitors. They're not doing this.

Ben: Right. Their competitors have all outsourced production and embraced assembly lines.

David: They do the only thing that you can do. They build the pipeline of training master craftspeople and artisans entirely themselves. They build schools, they build training centers. They go to parts of France that are in rural areas, that have high unemployment.

They go to those areas, they open trade schools, and they say, we're going to train you. They have 100% graduation rates. They're like, we're not going to give up on you, we're going to make sure you learn this trade that you graduate. You may not come work for Hermes when you graduate, but we're going to give you this skill. Then we're going to offer you a job as a master craftsman.

Ben: It's crazy.

David: It's unbelievable. Even through the Jean-Louis era, the fifth generation, Beatrice was the anomaly as a woman. These were all old men that were doing this stuff. Today, the average age of the Hermes artisan workforce is 30 years old and 80% are women.

Ben: It's wild.

David: It's a wholesale transformation. They are training them. They actually just opened in 2021, their first official French governmentally sanctioned degree granting program, the École Hermès de Savoie Ferre. This is the savoir faire that pops up in the annual report a hundred whatever times.

Ben: Let's name a school after it too.

David: Yeah. They're getting into government policy here. They are preserving and growing this art form in France.

Ben: 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. It behooves the French government to try to figure out how to make this last another hundred years.

David: Yup. Today, there are 31 Hermès ateliers, artisan manufacturing facilities all throughout the country, each with no more than 250-300 people in it.

Ben: Right. It's the cloud computing idea of scaling horizontally.

David: Totally. This is AWS. This is the point I'm getting to.

Ben: Right. They're building data centers.

David: They were Amazon and they added AWS. They are adding two to four of those every year.

Ben: It's so funny, you had that thought too. It's all people. It's all sticking to the thing that got them here, which is every product or at least every leather goods product, every handbag made end to end by one artisan trained in the traditional early 20th century way.

David: Speaking of cloud computing, we want to share a fun thing that our friends at NVIDIA have given us. For anyone considering attending GTC this year, Acquired listeners get a 20% discount. This is their big annual conference that Ben and I have watched over a dozen keynotes from to prep for our NVIDIA series.

Ben: Yup. It'll be March 18th-21st, 2024 at the San Jose Convention Center. It is the first time back in person in five years, which is crazy. It's the most important AI conference in the world. Jensen will be speaking to 10,000 people live in person.

David: Wow. There are also researchers speaking from OpenAI, Meta, Google, DeepMind, Microsoft, Forge, Genentech, Disney, National Labs, and more. It's crazy. They will have a whole bunch of futuristic vehicles, robots on display.

Ben: Yup. If you want to check it out, click the link in the show notes and enter the code ACQUIRED at checkout  to give you 20%. Thanks to our friends at NVIDIA. Now, back to Hermes.

David: This is an insane idea that leather goods, which is 43% of the business, Hermes did €11.6 billion in revenue last year. They're on track to probably do €14 billion.

Ben: Yup. The last 12 months is €14 billion.

David: 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. €6 billion worth of that every year growing at 15%-20% a year? Yeah, wild.

Ben: This is a really important thing to understand about the company. (1) They firmly believe that only 250-300 craftsmen can work in a building. (2) It takes two-plus years for someone to learn the craft and apprentice. (3) Every one of these things must be created by one individual by hand. If you believe all those three things for sure, then it forces a very specific constraint on your business, and you must work backward from that.

You can only train so fast. You can only produce so fast, which then of course means that it affects your products, it affects the availability, and it affects the price, which of course means that it affects the customer set. There's a way to view Hermes, which is they want the very highest end customer with zero price sensitivity. They do whatever they need to serve that master.

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. When you hold true to that ethos at its most extreme, you end up with the company's brand and posture that you have today as the only logical end point. They can only hire 300, 400, or 500 craftsmen a year. They can only do this other stuff. Good luck getting a Birkin bag. It's just one of these things where you can say they're artificially constraining supply all you want.

David: As long as they do things this way, this is the max throughput.

Ben: 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, and every craftsman is 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.

David: Yeah. The Amazon comparison is so apt here. Hermes has this incredible unassailable flywheel, but it operates in the exact opposite way of an Amazon flywheel. It's not about maximizing the cycles, it's slowing. It's minimizing. It's an intentionally rate limited flywheel, and it all works together.

Ben: At the end of the day, it is probably true that neither one is the starting place, and neither one is the ending place. The two things that I'm referring to here are the method of craftsmanship and the price and scarcity. They just work harmoniously together. One is not driving the other. It is that they both want the brand posture that they have, and they want the constraints that they have, so it works together perfectly.

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.

David: Totally. We've told the whole episode. 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. If a machine made it in an assembly line, it does not.

Ben: Right. Maybe, but sure. In an assembly line with crappy ingredients, blah, blah, blah, sure, but can craftsmen use better tools? Yes. Will Hermes continue to embrace tools that make craftsmen more efficient? At some point, did they use sharper knives than were previously available in the past? They totally did. Will they use things that make the needle go a little faster? Maybe.

David: Totally. Let's take a step back here. We got to consider the exact opposite case study of this, which is a hundred percent happening to great success, which in a lot of ways is the same thing that the consultants told Jean-Louis back in the day, look at the rest of the industry. Louis Vuitton, which as we talked about, has the same caliber of heritage and history as Hermes.

Ben: Yes. It could have Hermes's gravity if it wanted to, but instead you can buy a checkerboard cotton sweatshirt with 120 LVs on it.

David: Right. They are having the same level of success, the same margins. It's working like a charm.

Ben: But it's less durable.

David: I think that's the question. Is it less durable, or is it just that these are different strategies? 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.

Ben: Out of left field, very surprising, very odd for the brand to do this.

David: I have a lot of complicated feelings about the thing on my wrist, including primarily that I love it. Okay, here's the story. In 2015, Apple launches the Apple Watch. Supposedly, the story goes that Jony Ive, and the watch I think was really Jony's pet project as his last hurrah before leaving Apple, he had all these quotes at the time of the Swiss watch industry, better watch out, we're coming for them, et cetera.

Ben: Which was true. Different market, but it's by far the best selling watch in the world.

David: Yes, but as far from been the death knell of the Swiss watch industry.

Ben: Right, yeah. The Swiss watch industry has done just fine since the Apple watch came out on the high end.

David: Yes. Marc Newson was consulting for Apple specifically on the watch, and Jony asked Marc to introduce him to Pierre-Alexis, Axel, and to Hermes. Apple was looking for a luxury fashion brand. Remember, there is the Apple watch edition in the beginning that was like the gold Apple watch and all that.

Ben: Man, $10,000 for something that was going to be obsolete in a year. It's crazy.

David: Yeah. That clearly didn't work.

Ben: But it's beautiful.

David: 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.

Ben: It's funny. I hadn't actually made that connection that that's why it's Hermes and not...

David: I think there are two reasons. That's one reason. The other reason is they needed a brand that was going to appeal to pretty much everybody. For everything we've talked about with Louis Vuitton and how successful that's been, it's polarizing.

Ben: Totally. Apple also needed to go to the very top of whatever they were going to grab. The thing about Hermes is whatever they make...

David: Nobody is ever going to say that Hermes makes crap.

Ben: Right. They make the most fully realized version of whatever they're making. If they have an idea, they want to release the best possible, most extreme, exquisite version of that thing. That's very Apple. 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 doesn't play for Apple's brand. They need to partner with someone unassailable.

David: Axel and Pierre Alexi talk about this all the time when they're asked about, oh, XYZ flashy celebrity is carrying a Birkin bag, blah, blah, blah, they say, look, we don't judge. We never judge here at Hermes. Our clients are our clients, whether it's Grace Kelly or Kim Kardashian. That's what Apple needed.

Axel has a great quote on this. 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? 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. 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.

Ben: A hundred percent. I love the Hermes slim to Hermes watch. I looked at that thing five times during research lusting after it and ultimately closed the browser tab being like, I wear an Apple watch all day every day. There's just no world where it actually makes sense for me to own a different watch.

David: Right. Even more than my phone, this thing is part of me. When I was looking to do research for this episode and buy a bit of the Hermes dream, I couldn't imagine anything more appropriate be closer to me than literally it's on my wrist 23 hours a day. At the same time, I find it absolutely terrifying from the perspective of what it means for Hermes and the Hermes' future, not because I think that Apple and technology is going to take over the world, but I think there are some serious problems with this product along the lines of the issues that Bernard identified in the company when he was making his run.

Let's start with the price. I bought the deployment buckle version of the strap, because I thought it looked amazing. It is the most expensive version of the band that Hermes sells as such, and it costs $540.

Ben: Which is expensive for an Apple watch band, but it's in the ballpark of Apple accessories, or it's at least maybe twice as much as normal Apple accessories.

David: This is among the cheapest leather products that Hermes sells. As a comparison, if you want to go buy an Hermes luggage tag, $640. Let's move out of leather goods for a second. If you want to go buy an Hermes sweatshirt, over $2000. If you want to buy an Hermes piece of furniture, and they make incredibly beautiful furniture, $40,000 minimum. $540 for this thing, it's not priced right for an Hermes product. It's too low.

Ben: It's somehow bridging the gap between an Apple product and an Hermes product.

David: Yes, and maybe that's because it's also sold in Apple stores, et cetera. But related to that, you start to think about that, wait, why is the price so low? 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.

Ben: So Hermes' belts, I believe they're Apple watches, and there are other things, are machine zone?

David: This to me is like, wow. Would I have spent $2000 on a handmade Apple Watch Hermes band? Maybe, maybe not. I don't know. Whether I would have is irrelevant. Hermes should be selling $2000 handmade Apple Watch bands.

Ben: Even if people aren't buying them, that's 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 the logical extreme. They're not going to compromise. They're not going to figure out how to address a lower market. They're going to sell the same expensive scarf that they sold their grandma to you, but they're going to have a different way to advertise it. This is weird.

David: It's weird.

Ben: 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. 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.

David: Right, yeah. 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.

Ben: You're right, it does feel like a profanity. Apple is the you know most valuable brand in the world, but the most common brand in the world. For Hermes to associate with such a common brand feels odd. Apple is the definition of mass market at this point.

David: I think that is certainly part of it The thing that is really just head scratching to me about it is, why did they not sell these things for four times as much and make them by hand? What are they getting out of selling a machine made strap for $540?

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

David: I think that's true. I mean, I'm going back tomorrow.

Ben: What are you getting tomorrow?

David: I don't want to spoil Jenny's birthday/Valentine surprise. I'm actually getting two things, but we'll talk about this on a future episode.

Ben: Okay. Sounds good. Cliffhanger.

David: Cliffhanger. Just to put some numbers and finish out the story, by 2018, revenue has grown from €3.5-€4 billion when Axel took over in 2013. By 2018, that's €6 billion. In 2019, it's €7 billion. It dips a bit during 2020 with the pandemic, but then €9 billion in 2021. Last year, €11. 6. Like we said, on track for €14 billion in 2023. This is an absolutely resounding success.

As we've said, what Axel, Pierre-Alexis, and this generation of the family has done like all the generations before them has been nothing short of amazing, starting with the defense against Bernard. Incredible. I don't want to fully judge or leave a negative mark on the company solely because of the Apple watch thing, but I just got to say, we've seen with a few times here in these generations that the seeds of the next challenge are sown in the current generation. I wonder if this is it here.

Ben: 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. Okay, a few more stats on the business today before we move into analysis. Does that sound good to you, David?

David: Great.

Ben: I thought one fascinating thing was Axel 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. What's pretty interesting is, they have a reasonably low reinvestment rate. They're dividending out a lot of cash, and they're holding onto a lot of cash. Two thirds of it.

What's obvious there in the numbers that we've talked about in a more subjective way is they have a limited ability to actually reinvest in the business. It's much like Costco. They're constrained by factors other than capital. You give them more money, they can't do anything with it, which I just find fascinating. They can only train the craftspeople so fast.

Frankly at some point, they'll saturate the market too. If they're going to address the whole world, they're going to have to change what they sell, and the Apple Watch may be the first little version of that. They grew 20%-25% last year. They can't keep growing at 25% without changing what Hermes stands for. Even if they could train these craftspeople as fast as possible, they have another governor, which is scarcity, product image, price. At some point, they'll bump up against the walls of that, and no additional craftspeople and no additional money can help them grow anymore.

David: That's such a good point. 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. It has to meet its clients where they are. Like I said, I wear this thing 23 hours a day. I couldn't imagine buying any other product from them.

Ben: I'm sure there are some members of the family that want to walk around with their nose in the air, be a museum, and say, Hermes is pure, and I want to go my whole life and then die with Hermes remaining pure. There are other members of the family that are like, can we serve customers and grow this business? My God. That Apple Watch represents the second faction.

David: Yup, totally.

Ben: Next, their cash position. They've got $10 billion in cash, and that is after materially increasing the dividend for the first time in a decade. They've recently just started dividending out more cash, which again is emblematic of the same idea of money is not our constraint, which is pretty new for the business. That's a decade or two old problem that never existed over the first 170 years.

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. It's interesting to see how management 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.

David: Yup. Now, certainly there is an element too to the dividend that is part of making the family shareholding lock up an easier pill to swallow.

Ben: Yes, quite palatable. The segments of the business, leather goods and salary is 43%. That's the big guy. We didn't talk about this much on the episode, but ready to wear and accessories is 27%. That's a big chunk.

The second largest chunk of the business is clothing, effectively. I have an open question of whether they should be in clothing. Isn't it antithetical? 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.

David: Yeah. They're not a fashion brand, and yet they participate in it.

Ben: Yup. Next largest segment after that is silk and textiles. It's so remarkable how small the scarf business has become of their overall mix given that it used to be close to half the business. After that is perfume and beauty at 4%, watches at 4%, and then there's a couple categories of others, which I think it's really interesting to look at perfume and beauty as another glimpse of what's to come. They make a hundred dollar bottles of perfume, and they sell them at department stores.

David: Yup, and they launched beauty in 2020 with lipstick.

Ben: 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. Again, it feels antithetical to Hermes as this pure brand. But on the other hand, it's a continuation of the Apple Watch strategy even further.

David: Yup. 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.

Ben: Yeah. Here are some stats. In 2006, France was already down to 19% of sales. It started at 100% of sales, so that's why I say down to 19% in 2006. This is a while ago or almost 20 years ago. At that point in time, Japan represented 27% of sales. There's all this talk about China and luxury today, Japan was that in the early 2000s. Crazy, right? Japan was one and a half times France in terms of sales for Hermes.

Today, France is down to just 9% of sales. Let's flash back to 2006 again. We talked about Japan being at 27% of sales. Asia Pacific, outside of Japan, was only 17%. Japan was almost one and a half times as large as rest of Asia. Today, rest of Asia is 48%. Half of Hermes' business is Asia excluding Japan.

David: AKA China.

Ben: Exactly. That's crazy. I think Russia accounted for a decent amount of that.

David: Interesting. The Japan story, actually, I think is still significant. Japan today is 10% of revenue?

Ben: Yeah, Japan's larger than France. It's 9% in France, 10% in Japan.

David: Right. I actually looked into that and was like, huh. The rest of Asia, again, AKA China is 48% of the business. But on a per capita basis, Japan buys twice as much Hermes as China.

Ben: That's interesting.

David: Still, Japan is, I believe, around a 10th of the size of China and is 10% of Hermes sales versus 48% for rest of Asia. For a small country, like France, it's still very, very significant for the business.

Ben: 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 SKUing younger there. Eighty percent of clients in China are below 40.

David: Wow. Again, this is a huge, unique success for Hermes. China has been big for the whole luxury industry over the last decade plus, but the past few years, particularly the last two years, China has been real tough for the luxury industry, and yet Hermes is still growing there.

Ben: Yup. Employee count, they have 21,000 total employees, 7000 are artisans, 62% of employees work in France. They really have stayed French, they've not outsourced. They have 54 production sites in France or what they call workshops, and they manufacture 76% of the objects that they sell in their stores in their own exclusive workshops. They do still have these partnerships with other companies that they own part of, 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.

Over the years, they've done this with shoes, umbrellas, leather jackets, raincoats, silverware, and glove. They've had all these independent craftsmen that they contracted with who have these really small shops, really small operations, and don't have the brand reach that Hermes does, but they make Hermes products that are actually made by those people. So it's interesting. I think they are decreasing that when I give the number that at this point, 76% of objects are made in its own exclusive workshops, but it is more correct than not to think about Hermes as they control everything from design to production, to brand, to retail today.

David: Yup. I think a lot of those, there's a silversmith and a tableware manufacturer that they own large stakes into, so it's like a related party.

Ben: Yup,  exactly They have over 300 stores in 45 countries. David, as I mentioned earlier, in 2020, the Wall Street Journal estimated that about 120,000 Birkin and Kelly bags were made in that year. That's about 25%-30% of total revenue coming from just those two bags, which again, you can't buy, and also, you can't even see.

David: Yeah, they're not on display in the stores.

Ben: I went to a few Hermes stores over the last year, (1) because I love the brand, (2) because I was thinking we might do this episode at some point. I saw zero Birkin or Kelly bags even on display. This is the thing that they generate all their buzz about and make 30% of their revenue from, and you can't see it in a store. Crazy.

David: Totally crazy.

Ben: If you just do some napkin math at 25 hours per bag, that's 1500 craftsmen just making Birkins and Kellys all day long.

David: Sounds about right.

Ben: They have 16 métiers, and one in particular that I want to talk about is Petit H. This is one of my favorite Hermes things, period. It started in 2010. It's a very interesting idea. For other leather brands, you typically see them trying to use the second best leather cut in some of their bags, but at Hermes they'll never do that. There's no bag that's ever produced with any imperfections or any part of the leather that they think is any lesser than the best.

What do they do with all that leftover material? For years, they were just storing it. This is everything from the leathers to the felts, to the silks. All this extra material where they were just like, there's a tiny little bit that's usable, but not enough to actually make another bag to our standards, so into the closet it goes.

In 2010, they launched Petit H. What they basically do is they collaborate with other artists for tiny little goods that can be cut from the scraps, that are super whimsical, super fun. Think luggage tags that are cute little animals. It's just enough of a shape to know that it's a bull, a bear, or a cat. You look at it and you're like, oh, that's really clever What they call it is creation in reverse, you start designing with the materials, not the end product in mind.

It's the opposite of everything else that Hermes has ever done, which is think about what's the perfect good we can create to solve this problem for a customer. This was like, no, we've got a bunch of scraps, what's fun stuff we can do? That is that whimsy coming through.

David: Yes.

Ben: One thing that I want to say about the luxury bubble cooling is that earlier, I 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. That is true, but there are other parts of it too.

Hermes' obsession with responsible growth, limiting production, and slower price appreciation also plays into the desirability and the durability of their goods. If they were out there cranking the prices of Birkin bags, you might think less of them. 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. It's how they conduct business that has caused them to be in a better position than the rest of the luxury industry right now in this pullback.

David: 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.

Ben: Essentially, there's consumer surplus in economic terms.

David: Right. I said, I think they increased prices across the product range by about 7% per year. Where I got that from is if you look at the compounded annual revenue growth rate of Hermes for the last 10 years, the sixth generation era, it's 15%. Revenue has grown 15% compounded annually since Axel took over in 2013. They've increased production 7% per year. That's their stated goal.

If you say, okay, of the 15% revenue growth, take out the 7% production growth, that leaves 7%-8%. That's got to be attributable to price increases, which I think this is the answer. 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 6th generation. We want to ensure it's around for the 12th generation. Yes, we're leaving consumer surplus on the table here, because we don't want to be seen as that brand that is $100,000 handbags, even though they are $100,000 handbags.

Ben: Right. Yeah, there's a fine line.

David: There's a gaucheness to it.

Ben: Right, exactly. They need to have a price that's high enough to signal this is something really, really special. We are more unique than every other luxury brand who's trying to make similar products and have similar positioning, but also it's not so expensive that it's gauche. I think the latter part, it's not actually about the dollar amount. It's about the price difference, because if it's three times as much as it was a decade ago, it's harder to trust the intrinsic value of the good if it's fluctuating all over the place.

David: There probably is an element of 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.

Ben: This is an intentional strategy over a Rolex. They increase prices a certain amount per year, and they want to show a track record of that so that if you buy one, you can rest assured that it's going to increase in value over time and that it's a good investment, because counterintuitively, by increasing the price more than the rate of inflation every year, or especially more than the rate of 5%-7% stock market return, it spurs people to buy that otherwise wouldn't have bought because they feel more safe making the purchase.

David: This concept landed for me during our Porsche episode, working with Doug DeMuro. There's a class of. Almost every car that you would ever buy. The old adage is true that the day you drive it off the lot, it's worth 20% less than it was the day when you bought it. For luxury cars, collectors, cars, rare cars, et cetera, the opposite is true. These are investment vehicles. If you buy a Carrera GT, you're going to spend a million dollars for it, but you can also be confident that you're not going to lose money on that purchase. It's an investment.

Ben: Right. There's a business unit that we didn't talk about yet called Hermes Horizons.

David: Yes, which is not an official métier, right?

Ben: It is not a métier. They break it out under other products. They have four categories of other products. There's Internet of Things, which is Apple Watch. There's tanneries and precious leathers. There's metal parts, which is a J3L subsidiary that I think literally makes the clasps and stuff like that.

David: My deployment buckle.

Ben: Yes, and then there's Hermes Horizons.

David: This is so great.

Ben: Hermes Horizons is perfectly named. What it basically says is...

David: If you have a private jet and you want it outfitted with Hermes seats, we've got the division for you.

Ben: We will make you seats.

David: Yes. There's an amazing quote from an article, probably 10, 15 years old. The person who is running this division said something like, "We get a lot of clients who come in here, and they want a big H on whatever it is they want us to make. We have to have a discussion with those clients that if that's what you want, we are not the place for you." It's so great. Maybe one day be Hermes Horizons customers.

Ben: Maybe, we'll see.

David: All right. Let's transition officially to analysis and start with power as we always do. Hamilton Helmer's Seven Powers.

Ben: 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. The seven that Hamilton has identified are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource.

The question we asked, David, on the LVMH episode was for luxury brands, is there anything else other than branding power? 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. In Hermes' case, it may not actually be branded, but you might still know it as Hermes and be willing to pay more for it.

David: Yeah. If you know, you know.

Ben: Yes. Again, we're drawing a lot of attention to quiet luxury here. Hermes is not as quiet luxury as they once were. I think it's safe to say it would have an H, a horse, woven H into the fabric, or something like that if presented to you here. But obviously, there's a tremendous amount of branding power.

David: On the LVMH episode, we talked a lot about, and I think this truly was maybe the most brilliant thing that Bernard Arnault did. He realized when nobody else did that there were scale economies in luxury to a group of luxury brands. There's the opposite of scale economies to an individual luxury brand, but at the group level, there is power and specifically scale economies power that does not exist the brand level. Clearly, none of that is happening here.

Ben: Yup. Okay. I have two cases to make for non-brand powers that come into play.

David: Okay, great.

Ben: Cornered resource.

David: Yes, I agree. They literally have all the craftsmen.

David: Agree.

Ben: Except for the ones that are opening their own independent shop, and those ones don't have brand power. An Hermes craftsman can make a wallet, an independent craftsman can make a wallet, you're going to pay a lot more for the Hermes one. In fact, you're never even going to be aware that the independent craftsman exists. If someone else wanted to go compete with Hermes, it'd be hard because they don't have the brand, they don't have the history, but also, you literally can't find any more craftsmen, so you'd have to train them yourselves.

David: I think even the other luxury brands out there, most of them probably do have some craftsmen, some stuff that's done by hand, some components of some products done by hand. But nobody does what Hermes does, and Hermes does all the craftsmen, so cornered resource for sure.

Ben: Yup. 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? Louis Vuitton has no ability to switch gears and say, ooh, it's important to compete on the vector of handcrafted.

David:  Right, there are a lot of t shirts out there.

Ben: Right. They have to serve too many customers, but Hermès doesn't. It's flimsy counter positioning.

David: 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. I think there's an element of that. You could dissect how much of that particular element is actually part of the Hermes brand versus counter positioning in and of itself, but I buy it. I think at the end of the day, though, we spent however long this episode will be when it ships, recounting the myth of the brand here like brand is the power.

Ben: Yup, brand is the power.

David: Yes.

Ben: Okay, playbook. I called David earlier this week and said, we have a problem There's this really good part of the LVMH episode, and we're going to need to repeat it point for point on the Hermes episode, and that is why handbags are just the best freaking product to sell ever as a business. David planted the seed with me. Perhaps it's actually going to be a pretty different point once we really tell the whole story. David, you are right.

The point that was made on the LVMH episode are handbags are the best product ever because they're super easy to sell versus clothing. They don't require you trying anything on or sizing. You look at it. If you like it, you buy it, done. Much better than a fashion product. They're easier to create and produce than perfumes, which is another common luxury category

The profit margin is astounding for most luxury brands. The profit is between 10 and 12 times the cost to make them. At Louis Vuitton, 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 in 2000. By 2004, that number was more than four, so it's this high volume product.

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. 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.

David: It's amazing. 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 home wearers company. There's a lot of table wear and there's a lot of furniture.

Ben: There's clothing, there's ready to wear.

David: There's clothing, there are some leather goods, and there are scarves. You would really think, wow, I'm in the most expensive Ikea ever.

Ben: It's such a funny way to describe it. In terms of trying on the handbags, when you do get your moment in the sun, and you have your 90-minute appointment and your glass of champagne, and you have the opportunity to buy one of the two or three Birkin bags that they have in store...

David: You can't say no, you have already accepted.

Ben: Right. It doesn't have the benefit of saving square footage the way that I mentioned. Oh, you don't need to try on handbags. There's nothing to impede your velocity. Hermes is impeding your velocity, and they're taking up square footage with these private rooms for you to go and spend time in. They don't take advantage of that benefit either.

The only thing that it has in common are these goods are sold at a phenomenal margin, just like Louis Vuitton. I came around to this idea that actually, we're not making any of the same points at all. They managed to sell the same exact product category totally different, and they've constructed an entirely different business model around the same products.

David: 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 there's Hermes and there's Louis Vuitton. They're both connected all the way back to Empress Eugenie, France, the nobility, and all of that. It's so interesting that they have such different strategies and they are the two pinnacles.

Ben: Right. This is a good moment to bring up this idea that Hermes likes to espouse that they have no marketing department.

David: Yes. This is a whimsical element of Hermes that I love.

Ben: Yes. They make the point that everyone at the company is responsible for marketing, which is wonderful. What a great comment, but there's some truth to it. There's obviously a lot of PR, events, and stuff that they do, but it's worth looking at some of the numbers. They spend 23% of their revenue on sales and marketing costs, but just a small fraction of that is actually on marketing or what they call communication. It's just 4.5% of their revenue.

If you compare that to LVMH, which spends over one third of their revenue on sales and marketing combined, that's 23% for sales and marketing at Hermes compared to 33% at LVMH. That's a huge difference. When you compare apples to apples just on marketing, LVMH says they spend 12% of total sales on advertising and promotion. Hermes spends 4.5% on communication. I think that is actually apples to apples.

David: Yeah, that's the media spend of Hermes, I believe.

Ben: It's still not right though. It's all marketing, that 4.5% versus 12%. Remember, you pointed out to me earlier before recording, two thirds of Hermes' communication is actually events. 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%.

David: Yeah. This is really cool I saw a very large, splashy media buy from Hermes very recently. I was shocked when I saw it because I didn't expect it, but then doing all the research, understanding the strategy, it makes total sense to me. It was at the Ballet here in San Francisco at SFB at the program for Mere Mortals, which was as I talked about on the Novo Nordisk episode, we went to see at opening night, just incredible, incredible piece allegory for Pandora's box, AI, and ballet in the modern world here in San Francisco.

The back of the program was a full page Hermes ad. I was like, whoa, I think I texted you a picture. I was like, Hermes is buying full page marketing ads. But no, this is in the program at the ballet. This is not on the back of Vogue. There's a difference.

Ben: Right. This is, in some ways, event spend.

David: Yes. It's much closer to that.

Ben: 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. That's how they spend their media buys.

David: Also, their event spend, you might say, wait, how did they spend twice as much on events as they do on media? You haven't read about Hermes events. Even just the pure marketing events like a store launch or product launch, they'll spend a million dollars on a party.

Ben: Right. Another place that they save a lot of money is that they don't do celebrity endorsements, unlike virtually every other luxury brand. This gets back to control, control, control. Hermes is the master of its own image. In these other companies, celebrities do dumb stuff all the time, and it reflects on the company. You have to change your spokesperson. You look at Kanye. You have to just decide to stick with him and tough it out, and Nike has done this a number of times, to say, 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. 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? There are celebrities running around who get paid to endorse other brands, who will pay full price to wear Hermes out and about.

David: Part of the status is getting the ability to buy one, getting the appointment with your SA, spending the money. That's part of the status.

Ben: 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.

David: Yup. I'm pretty sure that Grace Kelly bought her Sac a Depeches.

Ben: 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. The brand is built through the lore around the products. 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. Honestly, they just don't need to do that much marketing.

David: 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 China. 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.

Ben: 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.

David: Yup. 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, Birkin appointments and reveals, and all that. It's huge. There are millions and millions of people that watch this.

Ben: Yup. One thing that we did not talk about is how they merchandise the stores. This is another thing that sets Hermes apart from other brands. They have a pull model versus a push model for all you software engineers out there. Basically, they embrace this idea that every store is for the local clientele and that store managers know their clients the best. Therefore, store managers should get to pick what is in each store.

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. The point is distribution. Whatever salespeople we hire to work at those stores, they're going to sell the same iPhones and iPads that we have everywhere else at every other store. That is not Hermes.

At Podium every year, which is this event that they have every six months where they show off all the new references, here's all the new designs for all the new products, each store manager gets a budget. They have the freedom to "buy" basically stock and get allocations of whatever they want at their store under the constraint that you can't ask for 120,000 Birkin bags at your one store.

David: I believe there's also regulation that every store needs to carry at least one item from each métier.

Ben: That's cool. I didn't realize that. I like that.

David: This operates like a retail buying event. It's bizarre, but awesome.

Ben: Even though they're wholly owned, they get the benefit of not being wholly owned.

David: Right, the market signals.

Ben: The cool thing about a retailer that's decoupled from the manufacturer is that the retailer can stock whatever cool stuff they want. As long as the métiers 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. It leads to this cool thing that no two stores are identical. It's fun to see what this Hermes shop has versus that Hermes shop whenever you travel.

David: There's a Costco treasure hunt element to it.

Ben: Yes, exactly. I will tell you, I was in the Aix-en-Provence store. Someone came in and said, I want to buy this particular item. The store manager said, well, we don't have it. They have a policy against anyone calling ahead to know what's where. He was asking, well, can you call the other store that I think was in Marseille or something like that and see if they have it there? She said, no, we don't do that. You can go there and you can find out.

I think this person was trying to buy something and flip it. They were on to that. He was also trying to take pictures of things in the store and they said, you can't do that, sir. 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 cause you can flip it online for that much. They have pretty tight controls around that.

David: I love it. Luxury strategy, anti love marketing number six, dominate the client.

Ben: Dominate the client. Their ecommerce strategy is just pretty funny. It's not like you can go online and buy a Birkin bag, but there's not even a product detail page with a sold out button. There's just this educational page about what Birkin bags are all about, how neat the designs are, and what the category is.

David: But there's no buy button.

Ben: 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. That's a great strategy for them for ecommerce that you say, look, the special things are the special things. But for people who we want to come experience the brand for the first time, great, we've got a website for you.

I think you can sort of tell that internally they're torn, since that's not the full Hermes experience. You don't get the experiential part of being in the store. But they also do a lot of volume through it, it's a way to reach a new audience, and it's an expectation at this point.

David: This is a really uniquely Hermes thing and is related to their airport strategy too. I experienced this too. When I went to Palo Alto, I just walked into the store. I was pretty intimidated as a first time buyer and you don't have an SA or sales associate relationship. It can feel very intimidating, especially knowing what I know about the company and the brand, the weight of history, walking into this store. It's not like walking into an Ikea.

This is very intentional, the ecommerce strategy. The airport strategy is, hey, nobody feels intimidated in an airport. Obviously, you don't have to have an appointment to walk into the airport Hermes store. It's a way to get first time buyers into the fold, establish the relationship with them, and get them more comfortable in this buying experience, which is wholly unique to Hermes.

Ben: Yup. In some ways, it seems wholly on Hermes. But in other ways, the Apple watch thing that they do or the perfume, they are looking for ways to be more approachable.

David: Right.

Ben: Another one worth mentioning is employee turnover. The employees, especially the craftsmen, basically stay forever. As we've been saying, there's really no other game in town. If Hermes wasn't there, these people probably wouldn't have been trained to be craftsmen in the first place. What does that look like numerically? There is 6% annual turnover, and only 4.5% leave of their own desire. 4.5% of their entire workforce every year leaves of their own desire.

David: That translates to a longer than 20-year average tenure. This is like Costco level employment retention.

Ben: It's funny you say that. Costco is 7% a year, but Costco cheats a little bit and that the stat is after the first year, whereas Hermes is attrition of 6% and includes the first year.

David: Wow.

Ben: Yeah. Just compare this with all industries in the US, that's a 3.4% monthly turnover. In the United States across all industries, and thanks to Jeremy Diamond in the Slack for pointing this out, one third of the entire workforce churns on average every year. When you're trying to figure out, is 6% good? Six percent is unbelievable, because the benchmark is 33%.

David: Especially in the context of think about the two areas that are the bulk of Hermes' employees. It's craftspeople and sales associates.

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

David: Right, that's the point I'm making.

Ben: Even software developers churn at 15%-20% per year, and that's just the voluntary numbers. This is much better than software engineers who get paid hundreds of thousands of dollars to have a very cushy job. Finally, let's go real apples to apples. Let's compare this to LVMH.

LVMH is total turnover in 2022 was 24% versus Hermes' 6%. Hermes may be obsessed with this whole savoir faire, transmission of craft, and their annual report, but it is totally real. The entire thing works because of the knowledge and craft of their people.

David: They have incredible YouTube videos and documentaries. They put out like you referenced. You go see these people and you really feel, like factories. They're not factories. These ateliers are something truly unique.

Ben: Yeah, and they're only getting more obsessed with 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. That's now 74%. 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.

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. This is three pillars for their entire business. This is the strategy at the top of the annual report. Creation, craftsmanship, and an exclusive distribution network. That's probably the way to sum up Hermes.

All right, to close playbook, I just have one more, which is really this idea of, what is the job to be done by Hermes? I had this great conversation with Derek Guy. He's colloquially known on Twitter as the menswear guy, @dieworkwear is his handle. 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.

He pointed out this really interesting thing to me, which is the value propositions of Hermes are essentially a bundle. That bundle is exclusivity, service, craftsmanship, shopping experience, and a great brand. You basically can't get that bundle anywhere else. That doesn't have competitors.

David: Yeah, you can get individual elements of that bundle elsewhere.

Ben: Absolutely.

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

Ben: It used to exist. In a pre war, early 20th century era, you could. But Hermes was the only one that sort of chose to keep doing things the old way and scale, and everyone else kind of went out of business or changed their methodology to scale. For example, Louis Vuitton has the branding. They have exclusivity, but the craftsmanship isn't there. They don't make things in that early 20th century way.

Supreme can offer you exclusivity and brand, but again, there's no real craftsmanship there. You've got all these individual artisans, a craftsperson and a little workshop somewhere in Paris making the highest quality, Hermes quality things, but there's no brand. Would you buy that? Would you pay even half the price for that? I think a lot of people who are buying Hermes are buying it because it's Hermes. And they want the brand.

There are other things that are missing from that too. There's no shopping experience, service is unknown because you don't know how long that maker is going to be around. You know for a fact that 50 years from now, you can get your Hermes thing serviced. There's some great makers like Chester Mox, April in Paris, or I heard great things about Mila Jito. These are exceptional craftsmen, hand making items in the same way, but it's a different bundle of value propositions.

David: Yeah, completely different product.

Ben: 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.

David: Yup, totally agree. Nothing more to add.

Ben: Thanks, Charlie.

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

Ben: Yes 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? Canonically, Craigslist creates a ton of value. Wikipedia creates a ton of value. It capture's very little of it. On the other hand, Google 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.

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. That's a reasonable viewpoint.

However, I think there's an interesting way to look at Hermes in particular, which is if what you desire is the highest quality craft they offer at an extreme price, a guarantee to be able to get that super high quality craft. That's different than every other luxury brand that is no longer about craftsmanship, but it's about hype and logos.

David: Brands. Let's bring up brand and fashion.

Ben: Yes. 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.

David: 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, no, they are leaving a lot of surplus on the table for their consumers.

Ben: Another element to value creation, value capture is what they're doing good for the world, period, regardless of what they're able to capture. Anybody who's doing things with exotic leathers, you may have a problem with. Farmed crocodiles in mass quantities in order to create the Himalaya print Birkin bags

David: There's actually a brief period where Jane Birkin boycotted Hermes bags and asked them to take her name off of them.

Ben: Do you know how that got solved? Why is she cool with it now?

David: 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.

Ben: For everyone who's like, it's absolutely cruel to do this to crocodiles, to make handbags, Hermes doesn't really have a counterpoint. They don't have like a, well, they live good lives. That's not a part of their defense. Their defense is purely around sustainable farming, which is, hey, these are endangered species in many scenarios with these exotic leathers. What we do is for the ones that we farm, we also release a bunch into the wild to try to replenish the population.

Even though we're not actually taking away from the population in the wild because we're not hunting them, we are trying to, almost in an eye for an eye way, say, look, we're creating a bunch of crocodiles, so we're releasing a bunch of them into nature also. I don't know, it sits medium with me.

David: Yeah. It's not a great response.

Ben: Right. Similarly, you see piles and piles and piles of cow hides for the leather production. The response is, well, look, these were beef cows, 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.

David: To me, that is a better argument than we farm the crocodiles for the skins. It's funny. Actually, doing the Novo Nordisk episode gave me a new perspective on this with animal products, and obviously insulin doesn't come from animals anymore. It's genetically engineered, but a lot of pigs and cows went into producing insulin for many many many decades. That's a new perspective to look at things because people would have died otherwise. Is that what's happening here with Hermes? Absolutely not.

Ben: Right. Other brands, Chanel, Karl Lagerfeld, Mulberry, a bunch of them are banning exotic leathers in their products. I think Hermes has played around with mushroom leather, but do I think Hermes is going to go all vegan anytime soon? Absolutely not. It's just not happening.

The last thing that you can definitely be mad about if you are into animal welfare is the fact that Hermes cares so deeply about their brand that they burn imperfect products so they never see the light of day. That's a bummer. I understand Hermes' position of not wanting these bags to get out there and have their brand on it. People realize, oh, some Birkin bags look crappy. But if you're destroying product that could otherwise have utility, especially when it's made from animals, bummer.

David: Agreed.

Ben: They spend a lot of time in their annual report talking about how much more they're getting efficient in their manufacturing processes, how the rates of this are going down. They don't specifically call out burning bags, but how they're able to use more and more of the raw material and have everything that goes in the top of the funnel get used in products all the way at the bottom of the funnel. The company has taken a lot of heat for it over the years, and it's something that they spend a lot of time working on.

All right. David, I think that brings us to the question, which is, what is your big takeaway from this episode? What is a big idea you're obsessed with after spending all this time with Hermes?

David: We've been struggling for a while with, how do we end these episodes, these books that we're in right now?

Ben: Right, we're not going to grade them the way that we used to grade.

David: Right, that doesn't make sense. That was always hokey anyway. We've done bear case and bull case. Again, are we going to do that better than an equity research analyst? I don't know.

Ben: Importantly, bear case bull case has to take into account what people's current expectations, so you have to dissect the stock price.

David: Right, which isn't really the point of Acquired.

Ben: Right. We figure by the time you get to this point of the episode, you 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...

David: Here's an incredible new insight that will change your perspective on the stock. No.

Ben: Right.

David: We've been casting about for honestly a while here of like, how do we land the plane on these episodes? What we're trying here for the first time, and let us know what you think if you like it, is in a very Hermes like way, we dedicate really a month plus of our life to each of these episodes. 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. It's insane.

Ben: It's craft. We joke, but it's craft.

David: 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. The last four weeks, it's been every waking moment for us. 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?

It ends up being personal for us. What resonates for us from having told this story, done this work, and what resonates for Acquired, honestly? For me, we've touched on this a little bit throughout the episode with the whimsy and the dream element of Hermes, but there's something also to this company that I think is deeply interconnected with the fact that it's on the sixth generation of the family.

You ask yourself, how is that possible? How six generations later is this company stronger than ever, and the family members are more committed than ever to running it? I think it's because they have fun. Again, this comes through in the whimsy. This comes through in the annual reports. This comes through when you watch the interviews with Axel and Pierre-Alexis, when you read the articles, and hear people talk like Beatrice about Jean-Louis, they are really having fun doing what they're doing.

It's an amazing culture, and it's hard to have in an environment where you are also, I think, the 47th largest market cap company in the world. I think about other companies, it's about winning. You think about a professional sports team. I think my mind goes to like the New England Patriots. Honestly, it goes to like Benchmark and Sequoia, like the best venture capital firms out there. These are organizations that are 100% dedicated to winning. It's not that Hermes isn't dedicated to winning, but they're even more so dedicated to having fun and enjoying themselves.

Ben: Yeah. They’re fun and they're staying true to their identity. Both of those things are more important than winning some numerical game.

David: Right. For me, that's the splinter in my mind over the last set of months with Hermes. Honestly, it's what acquired is for me and for us. Hermes could go out tomorrow and they could follow the consultants. They could borrow a page from the LVMH playbook, and they could vastly increase their sales and profitability overnight. If they were solely focused on winning, that might be what they do, but they are never going to do that.

Ben: But if they do that, it's still only a short term right thing to do.

David: Right. I think it's tied into this short term, long term perspective thing. The reason I say it's fun is the family wants to keep doing this. If it weren't fun, they would probably maximize value, they would hit the short term bid, and they would sell to Bernard. But they don't.

Ben: Yup, 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. Louis Vuitton and Hermes, on the face of it, do the same thing. As soon as you start digging in, you realize that these companies could not be more different. All of the puzzle pieces that fit together to create Hermes is an entirely different puzzle than the pieces that fit together to create Louis Vuitton.

It's a great reminder that just because you are in the same product category as someone else, you don't have to build a similar business, and you might not even be competing with them. There's a large number of people for whom Louis Vuitton and Hermes are not actually in a consideration set together ever. I think that's fascinating.

David: Right. These are Mutually exclusive brands for a lot of people. 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, it's not to compete with them.

Ben: Or at least be open to a, we don't have to do anything alike. Open to that idea.

David: Right. This is Android and iOS.

Ben: Right.

David: 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. All of our episodes are, but I just really loved this one.

Ben: Sometimes we get to learn about an industry that's interesting to know things about like healthcare or something we're a fan of, like the NFL episode. But sometimes we do an episode like Hermes and it really teaches us how to run our own business. Again, Acquired is not luxury, but we do create a product that has real scarcity, both on the listener front, because we only have an episode a month and on the sponsor front, because we only have three sponsors a season. There is so much to learn studying the purity of Hermes when you run a business that's predicated on scarcity.

David: Yes.

Ben: This one was extra indulgent for you and I.

David: Yes, totally. Okay, carveouts. Let's do it. What you got?

Ben: I have three.

David: Fun.

Ben: And none of them are a Vision Pro, even though the Vision Pro is sitting next to me on my desk. The reason is not because I can't recommend it, but because this is Acquired, and we can't possibly do anything that's too current. I need more time to evaluate.

David: The Hermes of podcast indeed.

Ben: Okay. First one, the Anker Prime charger. I'll give you the model number, because Anker products are impossible to figure out what's what. This is the A2343 model. It is a 100-watt charger that has two USB C ports and one USB A port, and it is tiny. It's lightweight. It's dense. You'll pick it up and be like, oh, my God, this is really heavy, but it's lightweight compared to large bricks.

Here's the important thing. In those diagonal airline charging seats, you can plug it in and it doesn't fall out. It's a hundred watts. You can super fast charge phone, laptop, whatever. There are two ports, two USB ports and one USB A, and it works on airlines. It's the only thing that I travel with now. It's the new gallium nitride GAN charging technology, which I think is totally game changing.

David: Nice. I've got a 60-watt Anker that is same concept. Totally, the  only thing I travel with.

Ben: Is it gallium nitride?

David: No, it's a few years old.

Ben: Okay, yeah. I don't understand why nobody's talking about it, because it feels like it completely revolutionized chargers. It makes everything 50% the size, even though it has super high power delivery.

David: I might need to upgrade my travel setup. Maybe I need an Hermes leather case for it.

Ben: Might need to do it. All right, we'll link it in the show notes. Two more are apps, 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. For years, I used Instapaper. It was great, but it just hasn't been touched in forever.

Matter is Instapaper but better. It is also an amazing way to listen to things that you save in a very realistic voice. Long time listeners know, I don't absorb stuff very well by reading. I absorb it really well by listening.

David: You're talking about text to speech, not saving podcast episodes.

Ben: 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 and have it read it to you. It bundles in text to speech, podcasts, email newsletters, and read it later type services into one app. I did half the research for this by taking long things to read including PDFs. It has an ability to parse PDFs now and listening while running.

My son was asleep in a carrier and I'm walking around the house, I'm in a dark room somewhere, or I'm on the treadmill in the garage. I really like Matter. The team behind it is awesome. They actually were kind enough to reach out and have David and I collaborate with them on a couple of guest blog posts for their Words that Matter series of some of our favorite readings and writings of all time. The team was great, which was my entree into it, but the product has exceeded expectations.

David: Okay. I haven't actually tried the app yet. I love those guys, now I got to try the app.

Ben: It's awesome. My third one is another thing that dramatically has helped my research, which is Perplexity AI.

David: Yeah.

Ben: If I could stop using Google, I would, because Perplexity is better for everything that I use to Google, period.

David: Wow, okay. All right, we got to have Perplexity on ACQ2 or something. More to come on this.

Ben: It's all the good things about ChatGPT, all the good things about Google, and none of the bad things of either. It's reliable, it links to sources, it has good UI. I trust it because I've fact checked it so many times, and it just keeps being right. It makes it easy to fact check. Accessing information is one of these things that if it's 97% good, it's bad. So it needs to be always good.

David: Honestly, this is why I don't use ChatGPT for acquired work, I feel like we need to be a hundred percent all the time.

Ben: Here's the best use case for perplexity. The other day, I couldn't find something on Google. I went over to perplexity, I asked it the question, and it said, the answer to this is unknown on the internet. I was like, that is amazing. You just gave me confidence.

David: Getting that answer. Otherwise, you're going to spend half an hour on Google trying to find it.

Ben: Yes.

David: That's amazing.

Ben: It was both time saving and confidence inducing.

David: I love it. Okay. I've heard from so many people about Perplexity. I got to give it a go in the next episode research.

Ben: It's phenomenal.

David: I'm so disappointed in myself, but also it's just the reality of my life right now. I've become the middle of the bell curve technology adopter. I used to be the bleeding edge early adopter. Man, getting old is hard. Joanna Stern had a great quote about this in the Wall Street Journal, and she was interviewed by Ben Thompson recently. She said, "Man, I wish I had the access that I have now when I was younger." I would be unstoppable pulling all nighters. I'd be using it to its full degree. I don't have the energy now. I got kids. I'm like, man, I feel that.

Ben: 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.

David: Your access, everything.

Ben: Yeah. You've gotten better at your craft. You can never have both, but you live your life anyway. You'll make it through.

David: What's the Dune quote? Life is not a problem to solve, but a reality to experience.

Ben: Yeah, I think that is it.

David: There you go. Okay, my carve out. We are recording this. By the time the episode comes out, the Super Bowl will have been played and won by somebody. Man, I am fired up. Go Niners, San Francisco 49ers, Brock Purdy. Hell yeah. I'm channeling my inner JT O'Sullivan and QB School YouTube channel here. I'm so excited. Brock's story is amazing. I was trying to think, okay, I can't have the Niners and the Super Bowl be my carve out.

Ben: Especially if this airs after they lose. Are we leaving it in?

David: Right, especially if they lose. But what I can have as my carve out and is perfect for Acquired, years ago, I read Bill Walsh's book. Bill Walsh was the legendary coach of the 49ers during the Joe Montana, Steve Young era. He invented the West Coast offense. 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 the title says it all.

It's related to Hermes, it's related to Acquired. It's the splinter in the mind, everything we've been talking about. It includes some ideas like scripting. This is now so commonplace in the NFL and football everywhere, but everybody scripts out your first set of 5, 10, 20 plays, et cetera. Bill Walsh invented that. We do the same thing on Acquired. We have scripts, I have a script, and you have a script. Obviously, the episode doesn't follow the script any more than an NFL game.

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

David: Right. Obviously, Bill Walsh didn't invent that idea writ large, but he invented it for the NFL. There's also some really good stuff in there about when to persist with doing something different and continue to do it versus stop doing it, and what are the right reasons to do it? Especially in the early days when it's working or not working, I'm thinking about launching the Birkin and all that. Anyway, it's a great book. Bill Walsh was a legendary figure. Go Niners. Hell yeah.

Ben: There you go. Wishing you the best of luck. Listeners, you know it already happened.

David: 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.

Ben: I tweeted this that Taylor plus the NFL is literally the perfect bundle, because they've both fully saturated their markets that Taylor is America's musical cultural icon of this moment. There's no one who could be a Taylor superfan. That's not already a Taylor superfan. The NFL similarly has had close to a hundred year history, and it is the fullest realization of itself already. The NFL is America's sport, so they've already got all the superfans they're going to get. By bundling together, this is so awful.

David: No, this is the ultimate collab.

Ben: Yes. They can address each other as casual fans who wouldn't have tuned in specifically for one or the other.

David: 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. Of course, she's thinking about this.

Ben: Yup. What's the phrase that Shishir Mehrotra 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.

David: Jenny has negative interest in football, but she's telling me about what Taylor is wearing, whether she's going to be able to make it back from Japan from the Super Bowl.

Ben: We'll see. All right, listeners, we have a bunch of thank yous. Huge thank you to Domenico De Sole, the former CEO of Gucci and the co-founder of Tom Ford with Tom Ford. Domenico, your conversation was just invaluable in preparing for this episode, and obviously, yes, a legend. Adam Pritzker, a good friend of the show, is the co-founder of Assembled Brands and the company Kate, which is in the fashion and luxury space. Adam is Super kind and a huge contributor to this episode, just like he was to LVMH.

To Derek Guy, who is @dieworkwear on Twitter for teaching me about saddle stitching, what makes Hermes special, and a bunch of the other brands that we mentioned that do boutique leather goods, and for putting April in Paris on my radar. That was very helpful. Reginald-Jerome de Mans or RJ, which is 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. It was really educational to talk with him about this and fact check a lot of my Hermes history.

Finally, there is a lot written about the company. I do think the best way to understand Hermes is just to go right to the source. There are 586-page annual report. They just lay out the whole strategy. If you're curious about the company, that's an amazing place to look.

David: It's funny, we did not talk to anyone at the company we'd usually never do when we're making an episode.

Ben: It's just awkward.

David: Yeah. We usually talk to them afterwards, but not during. In this case, we didn't need to. It's right there. They wrote down everything.

Ben: Yup. David, I know you had a couple of cool conversations.

David: Yeah. Speaking of April in Paris, Beatrice Amblard here in San Francisco, was so fun to talk to, an actual former Hermes artisan. There's personal stories of Jean-Louis and the family. They really gave me a sense of just how special the family is, the company is, and the work that they do.

I also have to think Lauren Sherman. Lauren is, I think, pretty much bar none, the very best business of fashion and business of luxury reporter out there. She was at the business of fashion for a long time. She's now at Puck. She's Puck's fashion correspondent. She launched the fashion vertical for Puck.

Lauren is awesome. I chatted with her for a long time. She gave me a lot of great perspective on Hermes within the industry. Really, there are a few journalists out there. I'm thinking of Brad Stone, Emily Chang at Bloomberg, and Kara Swisher obviously, but they're incredible journalists. They really, really understand the business and the industry that they're covering, and Lauren is one of those. It was super great to get to chat with her.

Ben: Yup. Our huge thank you to JP Morgan Payments, ServiceNow, and Vanta. You can click the link in the show notes to learn more about each of those companies. You can sign up for notifications on when new episodes drop at acquired.fm/email. You can also get little tidbits at what next episode will be and play the guessing game with the rest of the community at acquired.fm/slack. We'll also be including listener corrections in acquired.fm/email.

Subscribe to ACQ2 in any podcast player. We've got some great ones coming. After you finish this episode, come get some of that sweet Acquired merch that everyone is talking about at acquired.fm/store.

David: Acquired-Hermes collab coming soon.

Ben: One day. We will see you next time.

David: We will see you next time.

Note: 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.

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