PARIS – Hermès may be entering a new phase, one where even the most resilient name in luxury is no longer insulated from changing global headwinds.
“The reality is that luxury demand is not particularly strong these days,” said Bernstein analyst Luca Solca, pointing to a combination of weakening Chinese consumption and geopolitical disruption that is testing the sector’s long-held assumptions.
For Hermès, he added, the challenge could soon be more structural. “We may be getting closer to a time when they need to pull a rabbit out of the hat, when they need to launch something new, when they need to excite consumers again,” Solca said.
The French house, long defined by its tightly controlled supply and reliance on a handful of iconic leather goods, is now facing a more complex backdrop. A slowdown in China – the industry’s most important growth engine for more than a decade – combined with the current disruption in the Middle East has exposed the limits of a model built on scarcity, pricing power and steady demand for core products.
First-quarter results released Wednesday offered a glimpse of that tension. Company sales rose 6 percent at constant currency, making Hermès the strongest performer among its luxury peers in a week of weak results.
LVMH Moët Hennessy Louis Vuitton reported sales growth of 1 percent at constant currency, while Kering, whose first-quarter sales decreased 6.2 percent, continues to grapple with a Gucci-led turnaround.
But Hermès numbers still fell short of expectations, with analysts looking for closer to 8 percent growth.
According to the house, the shortfall was driven largely by the immediate effects of temporary geopolitical disruption in the Middle East, rather than structural weakness in demand, said Hermès executive vice president of finance Eric du Halgouët on a call with analysts. “We estimate that the impact for the group will be 1.5 percent for Q1,” he said.
But analysts weren’t convinced.
Even stripping out the impact of geopolitical disruption, growth came in softer than anticipated, said Adam Cochrane, analyst at Deutsche Bank Research. “There was definitely a slower overall growth rate than expected,” he said, noting that investors have grown accustomed to Hermès consistently outperforming.
More than the current situation in the Middle East, China continues to weigh on the sector, said Solca. “The bulk of the difference … continues to be dependent on a relatively subdued Chinese consumer,” he said, noting that demand there is “not at all close to where it had been pre-Covid.”
Demand in China is becoming more selective, as the economy is recovering unevenly and consumers are increasingly seeking novelty and local products.
“Chinese consumers are becoming a little bit more choosy about which brands they show up with,” said Cochrane, adding that any recovery is likely to be gradual, rather than snap back to double-digit growth.
Localization, from store formats to product design, is becoming increasingly important as consumers show less willingness to buy standardized and ubiquitous global products, he added.
At the same time, underlying demand dynamics are shifting across regions.
China’s continued fragility in the housing market and lack of jobs for new university graduates has made people there “feel poorer” and consumer confidence has taken a hit.
Some of the same underlying economic factors are true in the U.S., but sales have been buoyed by wealth effects of the stock market, “which has created a strong feel-good factor,” to keep luxury goods afloat, said Solca.
Hermès Birkin bags.
Getty Images
For Hermès, the implications could signal a need for newness. The group has long relied on its leather goods business as its primary growth driver, with tight supply underpinning premium pricing power and exclusivity. But that model may be showing its limits in a slower-growth environment.
Cochrane pointed to emerging cracks in the broader demand funnel. “Non-leather goods is a better proxy for some of the more aspirational customers that you get coming into the Hermès brand,” he said, noting that categories such as ready-to-wear and beauty were flat in the first quarter, despite the recent introduction of two new fragrances and a 27-shade makeup line.
At the same time, foot traffic has flatlined. “Consumers – whether it’s sticker shock, whether it’s consumer confidence – they’re not coming into the stores and that appears to not be changing that quickly.”
Even Hermès is not insulated from shifting demand patterns. “They don’t have this immunity from the consumer slowdown that people maybe a year ago thought that they would have,” Cochrane said.
That raises a deeper question about the group’s next phase. While Hermès has continued to expand production and invest in new capacity, with three new handbag production facilities slated to open by 2030, analysts suggest that sustaining momentum may require more than incremental increases in supply.
“It’s not in the Bible that Hermès only needs to have the Birkin and the Kelly range,” said Solca. “They could do more if they wanted.”
He drew a parallel to where LVMH’s Louis Vuitton was a decade ago, pre-Capucine, when the monogram and Damier check bags had become ubiquitous, and the core product had saturated demand. “The army of new consumers that got into the market had already bought,” said Solca.
He suggested Hermès look to the Rolex model, which introduces a new family of watches every few years.
Du Halgouët said that the company does not want to be over-reliant on specific models. He emphasized that while Hermès keeps increasing production capacity, it also continues to test new designs.
“Some disappear after a couple of years, while others emerge later on down the road,” he said. “We want to create other bags, not just the Kelly and the Constance.”
More broadly, Cochrane noted a lack of “brand heat” for Hermès, compared with competitors such as Chanel, where new creative director Matthieu Blazy has generated excitement that resulted in lines down the block when his first collection arrived in stores.
Hermès is awaiting the debut of newly-appointed menswear creative director Grace Wales Bonner, which is expected to inject some energy to the brand, as well as its long-awaited couture collection. The fashion division “should be able to benefit from that even higher collection. With the couture plans on track, Hermès should be fine on that front,” said Solca.
The key shift is that Chinese consumers are becoming more selective and less responsive to globally standardized luxury products, added Cochrane.
There is a growing expectation for localization – as seen with the Laopu Gold phenomenon – through product design, marketing and in-store experience. This includes more region-specific ambassadors, tailored store layouts, and potentially even China-specific product designs and sizing. He cited Adidas’ model, which has outpaced competitors there with a locally designed and manufactured offering.
With Chinese consumers no longer automatically receptive to Western-designed luxury goods in the way they once were, luxury brands may need to adapt more deeply to local preferences to maintain relevance and growth.
