THE BUSINESS INTERVIEW

Patrick Thomas, Hermès chief executive

Friday, October 26, 2007

Top French luxury brand Hermès places high hopes on its refurbished flagship store to boost sales. Raphael Kahane discusses Hermès' prospects with the first non-family member to run the business.

 



Raphaël Kahane - Hello and welcome to this edition of the Business Interview on France 24. Just a couple of days ago, one of the luxury industry’s most exclusive brands threw a glitzy party on the fashionable rue du Faubourg Saint Honoré here in Paris to celebrate the reopening of its founding store. Hermès, the first name in French luxury goods, from fragrances to silk ties to expensive handbags, is placing high hopes on its newly-refurbished 1700-sq-m flagship store. Here to discuss the prospects of one of the oldest family-owned-and-controlled luxury names in France is the first non family member to run the business. Thank you for joining us here on France 24, Patrick Thomas.

Patrick Thomas - Good evening.

This flagship store here in Paris had been closed for over a year, and you had to buy three adjacent buildings to extend it. So my first question is how much that investment cost, and what kind of return you are expecting from it. 
It was a significant investment. Which goes to say that we will not be disclosing the exact amount, and that we are expecting substantial returns (not only in terms of revenue and profits: in terms of exposure and image as well). I’ve actually just come from there, and there were quite a few visitors there when I left…

And 4,000 people attended the party yesterday… 
Yes, 4,000 people came to pay us a visit during the night – which was quite a number – so we are delighted. The ambience was great too.


There’s a message in there too, isn’t there? I mean the store is at 24 rue du Faubourg Saint Honoré, and you threw a 24-hour-long party on the 24th of October.
Yes, absolutely.


Hermès spent €70 million to €90 million last year refurbishing and opening new stores, and you are planning to invest that much again in coming years. That’s almost one-third of your company’s profits; why are you investing so heavily, and where are you planning to invest in the near future?
We can basically grow in two ways. One is what we call “organic growth”, which is an extremely appealing and profitable option, and involves same-scope growth. The other one involves building new stores in new countries. We are combining both today: we are opening an average of eight to ten new stores – and refurbishing another ten – around the world every year. China is the fastest-growing area at this point. We are opening four or five new stores there a year. But we are also expanding very fast in good old Europe (in the UK, Germany and Switzerland, in particular), and in the US (which is growing fast). So we have a substantial investment plan covering China, Greater China and the United States.

Speaking of China, it looks like you are actually trying to catch up with your main competitors. I’m thinking of Louis Vuitton and Chanel, who opened stores there several years ago…
We’re not racing against our colleagues, or competitors, as you say. We do things our own way. When we decide to build up our image and exposure in a given market, we do so comprehensively, focusing on the pretty particular niche of people who respond to the products, craftsmanship and creativity we offer. We are not trying to grow big: we are trying to grow better.


Japan is another big Asian market for you (it accounts for more than one-quarter of your sales), but the Yen at all-time lows has made your products more expensive for Japanese customers. How has that affected your sales there?
We are seeing a short-term impact on our annual accounts. The low US Dollar and Japanese Yen hit 50% of our sales. If we manage to put our actual growth rate at 9% or 10% this year, our growth rate on our consolidated P&L statement will only be about 5%. Meaning we are looking at a 5% dent.
But that’s a short-term effect, and not a big issue for us. The long-term upshot, however, is that it slows down growth in these markets. Japan is our biggest market, and we are very much planning to keep it a priority, but we know that the currency effect will dampen our long-term potential growth prospects. Customers don’t stop buying when prices go up: they just wait. It’s the same in the car business and in any other field: there is always a point where customers say “I’ll wait a while.”

Your success on Japanese markets is actually fuelling investor concern. Are you planning to reduce your exposure there? 
We are not planning to reduce it. It will decline mechanically due to growth in China, which will become a very significant market for us very soon. But our turnover is pretty well balanced around the world (roughly one-quarter in Japan, one-quarter in the Americas, one-quarter in France and one-quarter around the rest of Europe). Which is a healthy balance for us.


The US Dollar is also near its all-time lows against the euro. It is actually at a record low right now. How does this affect your sales in North America?
It’s very difficult to know exactly how much it will hurt our sales, because we are actually enjoying very handsome growth in North America this year. The low US Dollar will obviously knock off a few points, but we don’t know exactly how many.

Hermès’ share price has been seesawing this year, partly due to lingering speculation about its future ownership. Stock prices have risen by one-third since mid-August, and are back near the €90 mark – which is a four-month high, I believe. Is there a chance that the founder’s heirs might sell their stake?
I can’t see that happening in the short to medium term. Never say never, but I know the family pretty well, and I have seen how committed they are to the company and the hands-on part they have played putting Hermès where it is today (Hermès would never have been where it is today without its core shareholder). So I can’t see that happening in the middle term. I don’t want to speak on family’s behalf because it’s up to them to say what they have to say, but they clearly want to retain control of the business, remain the main shareholders, and keep the vision alive for a certain period of time still. As you probably know, 55% to 60% of the founder’s heirs control 75% of the company.


As you know, 55% to 60% of the founder’s heirs control 75% of the company.
Yes, 72%. And it’s pretty stable.


What about recurring talk of Belgian businessman Albert Frère buying a significant stake in the company? 
You know there are rumours like that going round all the time. That one pops up every so often, but Mr Frère himself denied it in the press. He can’t do it over and over again… I don’t really want to comment on that particular rumour. I think it’s completely unfounded, and I can’t see why you would buy a minority stake in a company where another shareholder has a tight grip on the majority interest.

Precisely. How is it controlled? I understand there is a very specific scheme to prevent outside investors… 
It’s not to prevent outside investors: you can buy shares on the Stock Exchange. But, yes, there are family pacts that keep control pretty tight.


How difficult is it for a family-owned-and-run business to expand and develop its business while remaining independent?
The secret is profitability. You have to watch your financial performance and profitability to make sure you can afford to remain independent. As I said earlier, Hermès would not be where it is today without the vision of its core shareholders driving it. And I believe that it will only stay where it is today – in its benchmark position – if it stays independent. So we are working hard to keep things that way, and the best way to do it is to keep our profits high (which is the case today).


Hermès is also in a hot investment sector (the luxury industry as a whole is growing at a sturdy 7% to 9% a year, and should keep up that pace over coming years). What makes luxury goods so attractive these days, and how are you planning to cope with increasing demand?
We plan to grow better rather than bigger. In other words, we are planning to control our growth rate in order not to compromise our fundamental values – outstanding craftsmanship, creativity and innovation – in any way whatsoever. In the past, we have chosen to restrain our growth in order to remain true to those values. We just accept that. Unlimited growth is not one of the options in this business if you treasure your values. And we do.


Again, how do you explain the growth that luxury industry is enjoying around the world? You are in an extremely emotion-based and aspiration-guided business… 
More and more middle-class buyers can afford luxury goods, and more and more people in emerging markets are taking an interest in top-quality items. There is a learning curve in our business (as in any other business), and things are moving in the East, mainly, at this point.


I see what you mean about the learning curve, but you are also facing escalating competition from counterfeit goods. Just days ago, you initiated legal proceedings against online auctioneer e-Bay for selling fakes. How can luxury brands counteract counterfeiting efficiently today, in 2007?
First of all, I would like to remind you of something that Coco Chanel said: “It’s a disaster to be copied, but it’s a bigger disaster not to be!”


So there’s an advantage in there somewhere…
No. But it means that people want your products. So, in a way, it’s a good sign. But we can’t do anything much to stop it. It’s almost impossible. The Internet has spawned exponential growth in counterfeiting. It is a disaster. We have about 40 people working full-time to curb counterfeiting around the world (mainly in China, but also in countries such as Japan, Korea, etc.). In these markets, Internet has made things much more difficult.
Globally, though, we are seeing less counterfeiting in Europe (because efforts to eradicate it are becoming more effective), and more counterfeiting in the Far East. Which is bad news, because not all governments there are as earnest as they say they are when it comes to fighting fakes.


Is that hampering your growth prospects in China, or is it actually helping?
I don’t think it is harming our short-term growth prospects in China. But it’s a problem when a new customer who has never seen a Hermès product before sees a fake one instead of a genuine one, because they will associate Hermès with a standard or substandard product. And that’s the worst thing you can do to hurt a brand. 

Thank you very much, Patrick Thomas, Chief Executive Officer of Hermès International, for joining us here on France 24.
Thank you.

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