PARIS – The Chinese consumer continues to lap up luxury at Hermès International, despite the economic and geopolitical turmoil in the region.
The maker of Birkin bags and silk scarves reported better-than-expected results Friday, buoyed by growth in Asia, which accounts for 49 percent of its business.
“It’s been two-and-a-half years now since we have started seeing little jolts in Asia: the government’s anticorruption measures, the democratic movement in Hong Kong and this summer’s events. That’s a lot to handle for a single industry. But we have also seen an evolution towards a notion of luxury which corresponds with ours,” observed Axel Dumas, the luxury group’s chief executive officer, speaking at a meeting with analysts and journalists at the brand’s headquarters on Rue du Faubourg Saint-Honoré here.
“There are pockets of strong growth in Asia in general, mainly Korea and Japan, but also Mainland China and Australia,” he said, noting that it was important to distinguish between Mainland China on the one hand and Hong Kong and Macau, “which have suffered more,” on the other.
The executive maintained that his strategy for China would remain unchanged.
“We will not necessarily open more stores, but they will be bigger and more attractive. In line with the strategy we have followed for the past five, six years, we plan to open — where we can — one boutique per year. We took a little break this year, because our Shanghai store required more attention, but…we are currently pondering the location of our next opening for 2016,” he said, without providing any details.
Hermès operates 23 stores in mainland China, seven in Hong Kong and three in Macau.
Dumas acknowledged that Chinese tourism remains a strong driver, which has forced the luxury goods maker to make corresponding changes in places such as Japan, where sales jumped 20.5 percent in the first half of 2015.
“Korea has been traditionally a tourist destination, though it has seen a shift in nationality from mainly Japanese to Chinese customers, while in Japan, it’s a more recent development which rests local, restricted to Tokyo and Osaka. And it’s not just Chinese customers, but Thai, Indonesian and other South-Pacific nations [that shop there]. This has meant big cultural changes for our local staff. Before everything was in Japanese,” he smiled knowingly.
Total revenues in Asia rose 10 percent in the first six months ended June 30.
Dumas was quick to add that the best strategy for a company to remain competitive was not to put all its eggs in one basket – “neither with respect to geography nor product category.”
Hermès International reported consolidated net profit totaled 483 million euros, or $539 million, in the first half of 2015, a 17 percent gain.
Operating profit advanced 20 percent to 748 million euros, or $835 million, beating analyst expectations by 2 percentage points.
Its operating margin came at 32.5 percent, versus 32.6 percent of sales in the same period last year.
The French leather goods and fashion firm warned last month that operational profitability would be “slightly down” in comparison to the first half of 2014, blaming a weaker euro.
It added on Friday that for the full year, operating profitability should be lower than 2014, coming in at 31.5 percent, negatively impacted by prevailing currency headwinds.
The company nevertheless upheld its medium-term objective of increasing revenues by 8 percent at constant rates, “despite economic, geopolitical and monetary uncertainties around the world,” it stated.
“Hermès is the most defensive name in the luxury space,” said Luca Solca, analyst at Exane BNP Paribas. “A long waiting list plus a deliberate effort to starve demand and maintain a rarity effect make it so that Hermès growth and margin performance is more stable than peers.”
The luxury goods maker referred to its “unique company model” for explanation of the ongoing momentum, vowing to a “long-term development strategy based on creativity, control of know-how and safeguarding [of] procurements,” while Dumas added that the brand was planning to train up to 250 new artisans a year to increase its production capacity.
Sales in the first half rose 8.8 percent to 2.3 billion euros, or $2.6 billion, driven mostly by leather goods and saddlery, up 13.6 percent.
All dollar rates are calculated at average exchange rates for the period in question.
Only watches, down 0.9 percent, and the house’s other divisions, down 9.7 percent fell in the first six months. The other divisions include John Lobb shoes, Saint-Louis glassware, Puiforcat silverware and Chinese luxury brand Shang Xia.
Dumas was particularly pleased with the firm’s perfumery business, which currently accounts for 5 percent of total turnover. He said this year’s launch of Jardin de Monsieur Li and the success of the perfumery division in Japan, which, traditionally, is not a strong fragrance market, were a “nice surprise.”
“We remain a small player and there is more work to be done. We are looking to progress in America and in women’s fragrance,” he said.
The executive singled out the U.S. as a “zone of vigilance,” with “encouraging fundamentals,” but “struggling retail.” Viewing the strong dollar, he suggested, the U.S. is perhaps benefiting less from tourism at the moment. Hermès is investing heavily in the region. The group already set up new shops in Washington, D.C., and Seattle this year and plans to open three more in Miami, Dallas and Houston before year-end.
According to the group’s executive vice president of finance, Eric du Halgouet, the brand is poised to invest a total of 280 million euros, or $316 million, in capital expenditure for the full year. “We already spent 100 million, and will spend the rest mainly on the new openings in the U.S.,” Du Halgouet revealed.
With regards to South America, Dumas said: “It’s bizarre, but we are doing well in Argentina, while Brazil remains a grand reservoir for growth, though high import taxes mean that a product costs a lot more there than in Miami, which is why a large number of customers travel there to shop.”
Responding to the controversy involving the use of crocodile skins for the production of the brand’s iconic Birkin bags, Dumas said he was “saddened” by the topic and “shocked” by the images distributed by PETA, which he said were unjustly linked to Hermès.
“The images were taken at a farm in Zimbabwe at a time when we were not partners, and at another farm in Texas, which never made skins for bags,” he said, adding that Hermès follows a book of rules often superior to those outlined by foreign countries.
Actress Jane Birkin had called for the croco style named in her honor to be renamed, until fairer treatments of the animals has been put into practice.