Hermès

0:00 So I don't know if you realize this. Hermes is reporting earnings in like two days. Yes. And at first I was like We should probably not do this episode because their annual report comes out in two days. What if we're not current? And then I realized This is Hermes. The short term is of no consequence. Yeah. Also, the AirMez annual reports are the most beautiful

0:22 Annual reports. ever created in the history of the financialization of mankind. You might think you can't do all of your charts in orange. You need different colors, but you would be wrong. The illustrations, the themes. You can tell they care. You can tell.

0:38 Alright, let's do it. Let's do it. Who got the truth? Is it you, is it you, is it you Who got the truth now? Is it you, is it you, is it you?

0:51 Me down Another story Welcome to season fourteen, episode two of Acquired, the podcast about great companies and the stories and playbooks behind them.

1:04 I'm Ben Gilbert. I'm David Resenthal. And we are your hosts. Today we tell the story of a handbag company that won't sell you a handbag. A traditional saddle maker. that makes very little of their revenue from saddles.

1:18 A company that somehow has grown to be worth over two hundred billion dollars. Despite rejecting manufacturing efficiencies and economies of scale. A company so obsessed with craft and a reputation for quality That they have stayed independent. Well, every other luxury brand has merged into conglomerates. That's right, listeners today.

1:39 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 eight. Yeah. In Paris, France. The crown jewel of the luxury industry.

1:53 Air Ms. Ben, do you know What company? was also founded in eighteen thirty seven that we have discussed quite a bit on acquired. Hm.

2:03 No, I do not, David. That would be the other iconic color luxury company. Tiffany. Oh, really? Also founded in eighteen thirty seven. Ah, Chuck T.

2:15 Well, this episode, listeners, has been probably just under twelve months in the making. L VM H was just after one year ago. And it was in that episode that I feel like I got a real penchant for everything that Air Mez stood for. you know, after 187 years still under family control, they're on their sixth generation of family leadership at the helm. I don't know, David, everything Ermez does is just so

2:39 focused and intentional and pure As much as they sort of get lumped together with brands owned by L VMH, they are in many ways the anti LVMH. Oh, we've got a great discussion of that later in the episode. I used to think that and I no longer think that. But after our L V M H episode, I mean you were so inspired by learning about Hermes.

2:59 You went out and you bought. Your first. luxury object, right? And it was not an L VMH brand. Yes, that is true. My wife and I were on our honeymoon listeners after LVMH, so last summer. And we were in Exam Provence and we walked by an Hermes store and I thought this would be a great time to go in and get each other something as a honeymoon gift. So My wife got a little uh twilly scarf and I got an Airbaz belt.

3:22 And uh is the only luxury item I own of any luxury brand. Traditional luxury brand. Yeah, as foreshadowed on our holiday special episode a couple of months ago. Yep. Well, listeners, if you want to know every time an episode drops, you can sign up at acquired.fm slash email. You'll get hints at what the next episode will be and follow up facts from previous episodes. when we learn new information.

3:44 Come discuss this episode with us at acquire.fm slash slack. Come check out our second show, ACQ two. where we interview founders, investors, and experts often as follow ups to these episodes. So 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 eighteen thirty seven. Yes, but not too much before eighteen thirty seven. All right. We're not going to like the sort of Egyptian invention of a handbag or

4:15 Anything like that. Boy, let me tell you I was tempted. I was tempted. Well, if you read The Luxury Strategy, which is a great book that we've referenced many times on Acquired, they start back Fifty thousand years ago. We start. In eighteen oh one

4:30 Not in Paris, not even in France. No, as we've been talking about the land of beauty. Luxury, enlightenment. Where Mes, of course, was founded and is still based today, and uniquely Hermes. Still.

4:43 does eighty five percent of their production by hand by mastercrafts 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.

4:58 The future land of the porches of the world that is right. Germany. A century before the Porsches and Volkswagens of the world. Yes. Where Thierry Hermes.

5:10 was born in the town of Crefield, which is just outside of Dusseldorf. Where he's the sixth child of a family of Innkeepers. So Hermes, is that a German name? A French name? Hermes.

5:22 Obviously not a German name. I mean even I know that. Thierry's father. was French. And his mother was German. And

5:32 Shortly after Thierry is born, he was born in eighteen oh one, Something uh Pretty major happens. In France and then throughout Continental Europe.

5:42 That will become very, very important to our story here. And that is that Napoleon comes to power. In France. I mean, this is the era we're talking about here, like Napoleon. We finally did it here on Acquired. Your AP European history class has now merged with business history. We're covering Napoleon. He is critical to what is about to happen here. So in the aftermath of the French Revolution

6:04 Napoleon essentially stages a coup. declares himself emperor first of France, and then he Basically begins conquering. all of continental Europe, including Germany. Now

6:15 This Napoleonic conquest. Was At the same time both. the very best thing that could happen to young Thierry. I mean, it leads directly to Or Miz.

6:25 But Also the very worst. And truly worst. You did all this conquering, this glory of France that we're gonna talk about becomes important to Armes. That's the result of wars. So Terry's entire family

6:38 His parents, his mom, his dad, all five of his siblings. They are all killed. either directly in the Napoleonic Wars or by disease and famine as a result of this. I mean Absolutely terrible. And

6:51 The result is that Thierry by the time he's twenty years old. He's an orphan. He is the last Ermes left. So David, eighteen twenty one, you know, pretty rough time out in the world. Do you know who was born in this year, eighteen twenty one? And was also an orphan.

7:07 Oh We have talked about them onacquired. Obviously not Rockefeller, which is where my mind first went because we talk a lot about his dad. Yep. Louis Vuitton himself. He will also come up here in a minute. twenty years younger than Thierry Hermes, but also an orphan.

7:25 Wow, I didn't know he was also an orphan. Yep. Wow, it's just crazy. Two orphans, one of whom was German. Go on to found the two most important, most French, most luxurious brands and really communicators of status in the modern world.

7:42 That's wild. 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 and were orphans and

7:59 at their greatest aspirations were crafts people for the elite, uh they were almost servants. Yes. So In eighteen twenty one. Terry leaves Crefield.

8:09 Leaves Germany. He abandons his original kind of destiny as an innkeeper. And he moves to France. Not to Paris, but to Normandy. In the north.

8:19 And there He becomes An apprentice. Under a master craftsman. Learning the art of equipage craftsmanship.

8:28 Now equipage. Is the business of outfitting horse drawn Carriages. And who were the customers of Horse drawn carriages.

8:37 Ben, like you're talking about. But nobility. The nobility. You know, horses were extremely important to the world back then. The horse was the car. It was the Ford F one fifty, it was the Toyota Camry.

8:50 It was also the Rolls Royce that Drew. The carriage. And only the Rolls Royce is where the carriage is. So when Thierry moves to Normandy and Takes up as an apprentice.

9:01 He apprentices for sixteen years. Wow. And it's not until eighteen thirty seven. that he finally moves to Paris as now a Master craftsman.

9:12 And opens up his own shop in Paris on the Rue Basse du Rampart. In the ninth Aaron D Small? Which That whole street today no longer exists. And there's

9:23 He establishes himself as Really quite an exceptional. Harness maker for Horse drawn carriages. Now.

9:31 It's kinda unclear to me at this point. If he's using the famous saddle stitch, which becomes So important to Hermes. And the reason it's unclear to me is because He's not making saddles. Saddles are what other people are making.

9:45 It's not that the nobility Don't Ride horses. They do. But they ride horses like the elite today drive a Ferrari.

9:53 It's not something they do every day. Right. Their daily driver is a Bentley because someone else is driving them and they have a Ferrari for when they occasionally want to drive a Ferrari. They'll climb in a saddle occasionally, but mostly they're in the carriage. Yep. So when Thierry arrives in Paris in eighteen thirty seven, He pretty quickly becoming known as Really the best.

10:14 Harness maker and carriage outfitter. In Paris, serving the nobility. Which is pretty impressive. I mean, here he's this immigrant from Germany, apprenticed in Normandy, he shows up in Paris. And all of a sudden he's making the best stuff out there. Turns out he was just really good at the craft. And

10:32 He had exceptionally good timing. We spoke about Napoleon a little bit earlier. When Thierry finally comes to Paris. At this point

10:43 Napoleon the first has been defeated, the Battle of Waterloo, that was eighteen fifteen. France has now. Seesawed through like a whole bunch of different republics and the monarchy comes back and you know, it's crazy French history stuff. But Shortly after Thierry returns, he

11:00 Napoleon's nephew, Napoleon III, Stage is another coup. And reestablishes the empire in France. And this is Super important, Ben, to what you were talking about earlier about hey, this guy's an orphan. Louis Vuitton was an orphan. How did they become so important?

11:16 When Napoleon the Third comes to power in France He does two things. One. He completely modernizes the city. So if people have heard of the Baron Osman who kind of rebuilt Paris,

11:30 That happens at this time. under Napoleon I Third. They transform Paris from a medieval city with super tight streets. Like if you go up to Mamar, those streets around there. That is old Paris, but what you think of the Eifall Tower The museums, the grand boulevards, the champs of lycée.

11:48 That's happening right at this. Time. And He's kinda like Robert Moses was in New York in the mid twentieth century, remaking New York.

11:59 He is given full latitude and direction by Napoleon the Third to Burn Paris to the ground. And remake this city. As a modern city.

12:10 Fascinating. And this is Super important for Thierry and Hermes for two reasons. One. In the old medieval streets,

12:18 In Paris. Not that many people were going up and down them. Not that many people were gonna see the nobility in their carriages in all their finery. Now you've got The Champs Elysee, the Grand Boulevards, everything about the sort of gallantry of Paris that we know today. It's all on display now.

12:36 So this becomes really important. for showing off For signifying your wealth, your status. The other kind of related thing here that happens with Napoleon and Napoleon III is that Status is no longer just about what you were born into.

12:53 In the old system, the nobility, the royalty, it was like look, you're born noble or you're not. And it's kinda independent of how much money you have or what you do or what influence you have. Under Napoleon. In this modern idea that you could shift your class. I mean he was essentially a nobody and he became the emperor of Europe. That'll completely upset the mindset of people.

13:17 Yeah. So all this is happening. This is the best thing that could ever happen to Thierry. He's the Best

13:24 Art is in most exclusive crafter of 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.

13:44 Great for business. These are like the disruption waves that enabled him to create a business. Yes. Before all this, before this era. There's no way that this evolves into Ermez, or honestly, that Louis Vuitton and what he's doing with luggage and with trunks. There's no way that that evolves into Louis Vuitton.

14:02 So speaking of Both Hermaz. Anvitan. Have

14:08 One really important client. A key influencer, so to speak. That they both land at this time. I remember Louis Vuitton's key client was the Empress Eugenie.

14:20 Is Air Mez the same client? Yes. The same client. So Napoleon the Third's wife, the Empress Eugenie. becomes a client. of both of these men. For her carriages.

14:34 In the case of Hermes. And for her luggage and for her trunks. And actually I think also for her packing. Like I think Louis Vuitton was the royal Latier, I believe, and he packed the trunks. He was the luggage guy. Hermes was the carriage guy.

14:47 Which is so funny because that is still in some ways both of their legacy today. Yes, absolutely. Ujnie and everything going on at this time. makes Louis Vuitton and makes Thierry. I miss.

15:00 But It's interesting, right? Vu ton and luggage. That is inherently of the world that's coming, the modern world. The train.

15:10 That exists at this point in time. Steam engines are a thing. And then the car is about to come. And Louis Vuitton and trunks and luggage, it all translates directly. Right. It's sort of built for the upcoming world. Yes. Not the case.

15:24 With her Miz. And Actually today I think this is One of the biggest strengths of Hermes, and they still, you know, the equestrian theme, the horse is so much of their brand. They talk about it so much of their products, the saddle stitching.

15:39 It's calling back. to that other era. Like that. pre modern era where the horse was Primary. Right, Ermes is deeply rooted.

15:50 in French history and Parisian history and really a key part of How France as a nation. has the identity that it has today. But

16:01 It would all be irrelevant if the brand didn't translate out of the horse era and into the car era. Right. Which was not Thierry Hermes is doing. Nor was it his son's doing. So Thierry dies in eighteen seventy eight.

16:16 And his son. Charles Emile. Takes over. Now He

16:22 apprentice coming up in the shop. In exactly the same way that Thierry apprenticed. He just apprenticed for his dad. So by the time he takes over, he's been working in the shop. As a craftsman. For twenty years.

16:37 And By the way. This sort of family tradition and way of Business.

16:43 Continues to this day. So Axel Dumas and Pierre Alexis Dumas. Who are the two descendants of Hermes, the sixth generation, that are running the company today AXL as the CEO and Pierre Alexis is the artistic director. They apprenticed.

16:58 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. Now obviously they also sort of learned the business from their parents, but

17:13 They're not learning the business the way that Learn know children are learning the business at L VMH. As executives. They're learning with their hands as crafts people how to make this stuff. Which is wild. XL is the CEO of a two hundred billion dollar plus company.

17:28 crazy and to bring it back to the late eighteen hundreds. 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. So he thought, well, why don't I carry it on in exactly the same manner, Tyri, that you did. And so There's not this grand ambition to innovate and change with the times. It's well, how do I learn exactly your crack, exactly the way you do it, and then

17:55 Continue that. Right. The business and the craft are Intimately intertwine. They cannot be separated. And this is a playbook theme I wanna pull all the way forward, but it's So critical to understand about her mesm and what

18:08 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.

18:20 Who partner With world class best in the world creatives. At her mez. These are not different people. Now, obviously there is a different CEO and artistic director that are both members of the same family and who are cousins.

18:34 But in spirit. They're cut from the same cloth and they apprentice as creative craftspeople. And they collectively and the family. is in charge as much of the creative side of the house.

18:48 As they are of the business side. Yeah, makes sense. So Back to Charles Emile and the second generation. He finally adds

18:55 Saddle re to the business. That's his big expansion. He adds saddles. Bana. Banana. Which, you know, again, like as Paris is modernizing as you can now Buy your way into status. For the first time in Paris, you couldn't be seen Writing in addition to characters.

19:13 And 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 Osmot.

19:26 I am doing things for the state for the country I'm doing big thing. It's kinda like American in its way, and the Rockefellers. Right. You're not just famous for being famous, you are famous because you've achieved something, or you're in the act of achieving something, or you hold a high office in which you were elected or appointed to get a specific goal done. You're on the move. You got stuff to do and you know, you got to get there.

19:48 Exactly. And you need a saddle for that. So Shout him on. He had saddles.

19:53 And in eighteen eighty he moves the workshop in the store. Venkat. Rue du Fauburg, San Honore. Twenty four. Rue.

20:01 Fob San On Ray. In the eighth Arendt of Paris. The famous address. Today known as Le Faubourg.

20:09 By everybody in the Hermes universe. Um This street in this location is one of the most iconic Streets in the world. Buildings in the world.

20:18 Headquarters in the world. It was stunning to walk it last summer when I was there. You can feel the presence. of AirMaz and all the other brands that are there. Yeah, the Rue du Fauburg Saint Honore is where the

20:30 French presidential residences, it's where the British Embassy is, it's where French Vogue is today. Probably because Hermes is there and because all of the other luxury flagships are there. So Charles Emile runs the business for twenty five years. He adds saddles, he moves the company to the Faubourg. And then in nineteen oh two

20:51 Yeah. Retires. And his two sons. Adolph and Emile. who have apprenticed in the business just like him, just like every generation will do for many generations to come.

21:02 They take over and they change the name of the company to Hermes Fre. 'Cause the two brothers. are now running the company. And they're gonna do this forever together and they're gonna be thick as thieves and You know, they are of one mind on how this company should go. They've been apprentice together. They're gonna be like Axel and Pierre Alexi today. Well

21:23 Of the two brothers, I think it is fair to say that Emile I believe is the younger brother. Is the sort of Much more ambitious and much more adventurous one. There's this great story that in the late eighteen nineties, so before his father, Charles Emil retires, The young Emil.

21:40 sets off to conquer Russia for Hermes. He literally like gets on a train with a notebook and a suitcase filled with miniature versions of the saddles and the harnesses that Or Mesmakes. And he just finds his way into the Tsar of Russia's court.

21:56 And lands him as a customer. That is wild. Unreal. They have to staff up a whole new atelier with like eighty craftspeople to fulfill all the orders for the Tsar in Russia. Whoa. Yeah.

22:09 So this is Emil. He's Going places. And right as he and Adolph are taking over, kinda at the end of Charles Emile's tenure. They decide to introduce a new product. Now they're not thinking that this is gonna be a big thing. at the time.

22:23 But Some of their Customers again now that they've added. Saddles. Once they get off the horse, they want

22:29 something to carry the saddle and maybe their riding boots. With them while the horses In the stables at wherever they're going. So they say, Great, we can help you with this. And they introduce the Ote Aqua.

22:42 Bag Which translates as the high belted bag. To carry. Saddles and boots. For their clients.

22:50 Now, like I'm saying here, this was intended to be an accessory to the main business of Equipage 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. What's this bag look like?

23:07 Well, this bag looks exactly like the Berkins and the Kelly's today, except a lot bigger. Interesting. 'Cause you're putting a whole saddle in it, like you're desaddling your horse and then you're putting that in this bag. Yeah. But it has the same

23:20 Trapezoid shape. It has the crossover belt, the Ota Kurwa, that means the high belted bag, it has the belt. It has the turnstile lock closure for the belt at the top of the bag. Fascinating. So this accessory that we're gonna add to the business. This becomes the spiritual heritage to The business.

23:41 Today. That's crazy. It's like if Apple eventually transitioned to being not the Vision Pro company, but the Vision Pro carrying case company. Yes. Oh did you get the carry case, by the way? No, I'm not gonna spend another two hundred dollars on that. That thing looks like a balloon. It's enormous. Yes. And it takes up your whole backpack. So this

24:01 Bagsory. That would become the Kelly and Than the Burgen. They introduce it. Just uh

24:09 the right. Time. It's nineteen. Oh two. Kinda as Charles Emil is retiring.

24:15 And this idea of this bag That you would put stuff in.'Cause you wouldn't bring a bag on a train. You know, if you're of this class, you need a trunk. Yeah, flat packed trunk that Louis Vuitton is gonna make for you. And

24:27 None of these three men. Could have seen it at the time, but this Accessory. to the real business of saddles and horses and harnesses. was going to become the perfect

24:38 Transition to move Hermes into the age of the automobile. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

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27:05 Now, David, how was Air Mez perfectly positioned for the age of the automobile with this new accessory? So This is wild. I suspect you probably also found this in research. But when I did, my mind melted.

27:21 So during World War One. In nineteen sixteen. Emile becomes a officer in the French military. And the military sends him to the United States to learn about kind of US industrial and military production. You know, he's sort of a

27:36 leading industrialist in France at this time, shall we say. And One of the people that he gets sent to meet with is Is Do you know about this, Ben?

27:47 I I can't believe you didn't find this. No. He Meats. With Henry Ford. No.

27:54 He sees the assembly lines. He sees the car, he sees the future. He see the assembly lines and then he like had blinders on. He's like Oh Pay no attention to them. Manufacturing efficiencies they've got going on over there. This is what's so funny. No, he's like, This is

28:11 Unbelievable. And to the you know manufacturing efficiencies point, he actually does take some elements of the assembly lines. And brings them. Back to our miss. It's not like they're anti efficiency. Their pro efficiency But in the context of being a craft, you know, non mechanized human

28:28 Master Craftsman built object. So 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.

28:42 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 era. This is kinda the same time as when we talked about our Novo Nordisk episode about the start of that company, where like News didn't reach Europe. This wasn't a

29:04 global world. And so Emile getting this window, like literally seeing the assembly lines in Detroit, he's like Wow, once this war is over. The world is gonna change forever.

29:18 Okay, so Emile both figures out how to open business in Russia and goes to America, meets with Henry Ford, understands the automobile is gonna change the world. Yeah, he's quite the character, this guy. The other thing he finds in America is I know you know this one. Yeah. The zipper. Yes. Or as it was originally called. The clothes all yes.

29:38 Which really does not have the same ring to it. I'm glad we changed to zipper. I couldn't believe this. The zipper was a late eighteen hundreds, early nineteen hundreds invention in America And it was primarily used for industrial use cases.

29:51 In this case it was zippering closed the hood of a car. I think like a military car. Yeah. where Emile first sees it. It's not at the Ford factory. I think it actually might have been in Canada on the kind of later leg of his journey where he sees it. On the car. It was also used for opening and closing boots, and that

30:09 is how the name zipper came to be. I think it was the BF Goodrich company. Really? Yeah, I believe they made A brand of boot. With this. close all function and they called it the zipper and that's where

30:20 The zipper came from. Regardless, enterprising young emile. He tracks down the inventor. of the zipper, like the holder of the patent in America. He

30:29 Obtains an exclusive license for two years in France. This literally is like the Novo Nordisk episode. Totally. Brings it back to France and makes the first zippered products. He makes the first zippered jacket ever created. Anywhere in the world. It is a leather golf jacket for the British Duke of Windsor, the heir to the throne. Just amazing. For years in France, the zipper would be called the Hermes fastener.

30:54 In France. Yes. That's right. Just a while. I think they made the right decision not to make zippers the business and instead to stay focused on Platter Kids.

31:06 It does show their penchant for innovation. the idea that we can push the envelope forward in functionality and what people would be willing to wear. I mean, this guy's a duke and he's wearing a zippered jacket. I'd imagine that drew some eyes at first. Yeah, and a golf jacket. Literally for use while playing golf, while playing sport. You know, what more modern activity to happen here. Yep.

31:28 Regardless, though. The big thing. Firm as that he brings back is. Oh my god. The car is coming.

31:33 Okay, so We're still in the third generation of the Airmez family. Two brothers are running it. What's next? When Emile comes back.

31:43 And he's running around making zipper jackets. He's collaborating with car companies. leads to a rift between the two brothers. Adolph, the older brother, he's Much more conservative. He

31:56 Wants to remain In the horse market He's kinda depressed about the car coming. He's like, Hey I just want to remain a niche leather worker and uh I'm not really cool with everything you're doing here. This is literally like he wants faster horses of the analogy of like if you would ask people what they want, they'd say a faster horse. Like he's stuck in horse land. Right. No, I don't know if it was

32:18 That he had his head in the sand or more just like he didn't want to go build a big company. Right. Which I could understand. Totally. I can totally understand that. Either way, in nineteen nineteen, Emile Buy some help.

32:29 And says I believe in My ability to lead this company making this transition into the automobile era. And legend has it. That's

32:38 He goes The craftsman. In the atelier above the shop in the Faubourg. And says. Okay.

32:46 What are we gonna do? What Can we make with our hands here in this atelier. That will interest our clients today. And I think this is still kinda legend around

32:57 Or minute of like What can we make? With our hands. That will interest our clients today. And the obvious answer at the time is

33:06 A version of the Ota Kurua. Bag, you know, it's bags for these cars. And if you want. The most exquisite bags, the most exquisite things to show in your Automobiles that you're buying.

33:20 Who better? Then Hermes and Finely handcrafted Leather bags and accessories.

33:27 That you can outfit your car in the same way you could outfit your horse. So the business is now emals and the business is now handbags. And Once again.

33:37 Insight here, kinda like Thierry in the original case. What the automobile does, and it's not just automobiles, it's also improvements to trains and improvements to ships. The global Rich the global elite. They start traveling a lot more.

33:54 Yeah, we're now in the nineteen twenties, the roaring twenties. 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

34:12 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.

34:25 Emile's going right along with all these people. And your luggage, your bags. That's what you bring with you. That's what you show. Yeah. And importantly, it's not just that

34:36 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.

34:51 A recognized brand So merely slapping her mez on it. Won't do the trick. The way to wow the people that you want to wow is Through the raw craftsmanship.

35:02 The product itself, yes. Yeah. So in nineteen twenty two Emile's wife. famously complains that the large bag they've been making the Ota Corwa

35:14 The saddlebag. It's too large to fit through car doors. So she asked for a smaller version. And this launches The handbag. Business. In

35:24 Nineteen twenty five. And by the way, by this point, they've put the zipper on a handbag. Yes, exactly. And speaking of the zipper in nineteen twenty five they had ready to wear clothes. Like the legacy of the golf jacket here. The legend has it that they added clothes because a longtime client came in and said, I am fed up with seeing my horse better dressed than me. Which, you know, who knows if that's true, but it's a nice story. But they really go into this.

35:49 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. Nineteen twenty seven they had jewelry.

36:01 Nineteen twenty eight, they had watches. And something interesting that is different than the Air Meds you know today. The way that they're adding all of these things They're finding craftspeople.

36:13 who are Experts at particular crafts. Exactly what you're talking about, David. A watchmak they're finding a watchmaker and they're saying Can we work with you on designing something uniquely Air Mez

36:23 But you're the crafts person. We're not trying to build this competency in house. Right. It's not right to say that they're licensing products. You know, it is a collaboration, but They are selling

36:35 Products in their stores. That are not. Made end to end by Hermes. Employed craftsmen. Right. And

36:43 It's interesting'cause they're sort of towing this line Between first and foremost being a craftsman themselves and being a manufacturer and being a designer, but also kind of being a retailer. where they're just bringing in other branded goods and selling it in their shop. Yes. And I think all this is

37:02 being figured out real time. These Ideas of retailers versus brands. It was a much fuzzier line then than it was today.

37:14 So What is their Messi? Do what does Emil do? They start opening up stores outside of Paris. And

37:21 Where are they gonna go? they're gonna go to the travel destinations where their clients are going. So the first store is in the Côte d'Azure in the south of France. And then they start opening up more stores. around the world. You know, again, not necessarily in like the London's

37:35 Or the Rome's Or the New York's of the world. They're opening them up in the travel destinations. Their mindset around additional stores at this point is it's for the same clientele in all the places that they travel. Yes.

37:49 And the clientele was primarily French at this point in time. Yeah. Or if not exclusively. Other than the Tsar and yeah. I suspect though that it was strategic of like Our French clients are gonna go to these places, they're gonna rub shoulders with the Americans, with the British. And then we're gonna have a store there.

38:07 So that those Americans, those British, you know, elite they can go purchase our products there too. Right. This, by the way, is a different retail strategy than what they have today. Today management sort of insists that the idea is that each store is for the local clientele. And we will only expand into an area if we feel that we can serve the local clientele that lives there well.

38:31 And that's sort of a recognition of the maturation of their business. The rich people are gonna go find an Air Mez store somewhere. It's easy for them to travel somewhere, buy it on vacation, but if we're gonna 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. Yes. Now I think

38:53 Some element of this certainly still exists. You had a nice time going into the Armes store in X, right? 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. Yeah. I think they

39:15 very brilliantly walk this line. And the products that the shops carry are very different. We'll get into that later in the episode too. But back to this era. So I think we've laid the groundwork of

39:28 a few critical components of Ermes 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 Terry.

39:45 We've talked about the connection to the legacy of French nobility, but not really French nobility. It's sort of like status, but accessible status for the first time in the world and the modernization of the world. We've talked now here about the

39:59 true modernization of the company in the transition to the automobile era. What we haven't talked about yet and what her mes at this point Certainly is not. Is this element of like Whimsy an art.

40:14 That is really, really critical, I think. to the company. Yes. If you've ever been in an Airmes store. You can feel a warmth.

40:24 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 and mirrors and punch you in the face reds.

40:37 And black and white and you just feel like there's a lot going on. And then you arrive at Hermes. And it feels warm and it feels soft and it feels welcoming. And it feels whimsical. And there's this almost

40:53 dream like color palette that they use, starting with a base of orange and having This explosive rainbow of fun. But in some ways it all feels natural and from the earth. And Just whimsy. I think that you nailed it, David Whimsical.

41:08 And this I think is really a very different Threads. Then the original kind of leather craftsmanship. And it is a

41:17 critical one in the kind of weaving of The Hermes business. And this thread comes from the next generation. of the family. Specifically.

41:26 Robert. To Ma. So email. Had four children. But they were all

41:32 Daughters. And tragically, one died young. But the other three grew up And They got married.

41:39 And back in this day. women weren't gonna take over the business, unfortunately. Right. Same story as the New York Times. There was a whole generation of daughters. Well None of the ox daughters get the business. And so it goes over to the son in law of the Solsburger, and now it's the Solzburger Ox family that owns the business in the same way that Hermes is the Hermes Dumas family. The uh son in law tends to do well in this early twentieth century period of passing it down from unfortunately father not to daughter, but father to son in law.

42:09 And In this case, when you read about the Hermes family fortune today it's the Dumas family that are obviously the CEO and the artistic director that you hear about visibly. But really I think all the sons in laws and all of their descendants become active in the business. So there's Robert Dumas. There's Jean Rene Garde.

42:28 And there's Francis Poech. And these are all son in laws. And these are all son in laws. And those are the three family names that You still hear about to this day of the R Mez family.

42:37 But back to Robert Dumas and the fourth generation. He brings this whimsy in real art. into the business. And the way Hermes describes it today when you read their annual report is they talk about their trademark humor and imaginative flair. And despite the fact that they really are tied to this old French elite. They really don't take themselves too seriously.

42:58 In all their products, especially the entry level ones. I mean the Birkin is the Birkin. Yeah, they'll do some special additions here and there, but there's a weight to that product line. But there's an overall playfulness that's exuded from the brand that comes from this era of leadership. Totally. And this comes from Robert. So one of the first things he does when he joins the business

43:18 is he redesigns the kind of smaller Otakoa bag, the handbag line. into What he calls the sack a depeche in Nineteen thirty five. Really great name. It's got a ring to it. I feel like that's gonna go be a viral hit and appear on Sex in the City and Beautiful, beautiful.

43:37 Elegant bag. So sake de peche. Hold on to that one, listeners. Yeah. A little later in the nineteen thirties, he introduces the Shen Dunkra.

43:46 Bracelet. Which is another. Iconic Hermes item in there. Jewelry Metier. Wait, David, I can't let you get away with that. Metier. 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 and

44:04 You can go look up what it means yourself. Here on Acquired. David Tell us about a Metier. A métier is like a uh someone's work, but in the like the craftsman's sense. A métier is like a trade. It's like a craft profession.

44:18 And this is what Hermes calls there. Divisions. I feel gross even just saying the word divisions. There are sixteen of them. Today. And jewelry, of course, is one of the métier.

44:30 Oh, I feel so much better saying Metier. I bet, yeah, there's a levity here in the room now. So Shendanka. In French means chain of anchors, you know, anchor chain. And these are anchors like boat anchors.

44:40 And the way that this bracelet comes about Is Robert is walking along the beach in Normandy one day And he's just inspired by the scene of these boat anchors on this foggy beach. And so he makes a little little sketch in his notebook. And then he plays with it. And then he decides he's gonna turn this into a bracelet.

45:00 Love it. And so An important thing to know here is When you're buying AirMez products They're really not pushing the brand.

45:09 There is not an iconic recognizable Air Mez. H. Or 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

45:29 Artisan is the person making the good and You know, 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. And It's super different. than luxury today because it is just not branded.

45:49 And Hermes hadn't even really developed the iconography yet. That would become Ermes's version of you know slightly louder luxury over the years. If you sort of look at products now, the belts have an H. You know, they incorporate horse motifs into designs on their ready to wear clothing, but that really wasn't a thing yet in this era.

46:09 Airmez is on the lighter side of branding their goods today, but it's still the customers want some way to let people know that they're wearing an AirMez item, even if it's lower key than other luxury brands. So Airmes builds that for them. The family talks about this a lot. The words they use is this is not a museum.

46:31 There is this artistic element to what we do. But We are not a museum. We are a business and we have clients and we are here to serve our clients. There is this

46:42 Push pull here. Yes. Okay, so what year are we that the bracelet is entering the market? So that was in kind of the mid thirties. So then in nineteen thirty seven.

46:52 Robert introduces the other key pillar of Vermez products that is Less talked about today relative to the bags and the leather goods, but for many, many decades was the bigger business. Oh.

47:04 Yes, I have numbers on this. So Silk. Scarves. The Armes classic. Silk scarves. And this is the embodiment of this art and whimsy that we're talking about.

47:16 The silks that they use are the finest silks in the world. It takes three hundred Silk Moth cocoons. Per scarf, as they will readily tell you to produce these things. But the designs on them, the artwork on them. Or Whimsical, like we said. So the first design

47:34 The jeu des omnibus said dame blanche. Uh the sort of uh white ladies at play, I guess you could translate that. is based on a wood block engraving. That Robert does. I mean, this is like what an artist this guy is. Like he's about to become CEO of Vermez.

47:49 But he's making wood block 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

48:02 Yeah, and so fast forward all the way to nineteen eighty eight, when Excel Dumas has his very first internship with the company. This is crazy. Silk. was fifty five percent of the company's sales. Leather was only nine percent.

48:19 You compare that to today. It is a completely different story. Leather is forty three percent. and silk and textiles is seven percent. So there was a run. I mean, this was introduced when, David, the thirties? Nineteen thirty seven.

48:32 So nineteen thirty seven through probably the nineteen nineties, where these silk scarves were the Air Mez franchise. And the reason this sort of took off is It almost became part of the French woman's uniform. to have an Air Mez scarf as a part of your outfit.

48:51 Well, it's funny you say the French woman's uniform. Yes, that is entirely true. But the woman. who really popularizes them around the globe. Is a British woman.

49:02 Specifically. Queen Elizabeth. Oh, I didn't realize that, really. Yeah. This is so iconic, Queen Elizabeth. She starts wearing them as head scarves in the nineteen forties. And I mean Queen Elizabeth, she's Queen of England for what, like 60, 70 years. Yeah. And she's wearing these scarves, these, you know, whimsical, playful scarves on her head as the Queen of England. Fascinating.

49:25 So this is a good time to talk about how these silk scarves are made. And I was gonna do this later when we talk about their modern day production process, but It turns out that their modern day production process is Not that different. than it used to be. So here is how Aramez scarves are made today. They are

49:44 First sourcing the finest Silk. that they can find which is now from their own Owned farms. In Brazil.

49:52 So that's where the silk comes from. Only twenty new designs are created every year, and they retired old designs. There's sort of a Disney vault aspect to this. They'll bring'em out of the vault. Yes. the pipeline to get a new design into the customers hands is two years.

50:11 Now 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. Yeah, there's no digital process here. It's not like you're going to custom make.com and like ordering up some Hermes scarves. Right. Some of the design does seem like it involves computers now. Like if you watch documentaries about the craftsmen at Airmez, which there's a couple of good ones we'll link to in the show notes if you want to just sort of watch Airmes craftspeople at work.

50:40 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 colour of the scarf is screen printed using its own mask or basically a stencil. So if your scarf has twenty colors,

50:57 It has at least twenty masks that they then squeegee the ink over. In the precision Is Perfect. This is like EUV lithography. Yes. I was looking at my wife's sort of twilly scarf, the little wrist.

51:11 Or hair tie scarf that we got in Exon Provence. I mean I don't know how you do this by hand, and I don't know how you do it by hand twenty times over and over and over for every single layer. If you've ever been to an Airmes 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. Cause if any of them are out of alignment, you ruin the whole thing and you have to start over. And so if that's not enough

51:36 The masks are also hand etched. By a crafts person. Their entire job is to know how to translate a design into all the different color layers. Which they then hand etch. So the pipeline is

51:49 Designer. Engraver. That's an engraver of each mask. Colorist. Weaver.

51:56 Printer. And then someone to do the finishing. All of which are like Extremely hard to replicate and involve Both extreme craftsmanship and extreme taste.

52:08 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. And the skills are completely non-transferable. This process doesn't really exist, certainly not at scale at any other company. Actually, I was talking to my wife about this. She brought up the idea that it's kind of like Disney Imagineers or almost like Pixar employees. Where you specialize in this one crazy little piece of the production process that no other company has your same production process. And the attention to detail is so staggering. That once you enter the AirMez Universe

52:40 Then you're sort of in that universe for the rest of your career because that is where your trade is still practiced. And I think also, you know, as a client too, at least in scarves. Like if you enter the Hermes scarf universe You're not buying any other starves. Totally. And you really like all the lore.

52:58 Part of what makes Hermes Hermes at this point is their callbacks to their own history. I mean they have a hundred and eighty seven years of history to call upon, and they do so over and over and over again and they remix and They name things after stores that used to exist at certain addresses. It's a universe. Yeah. I mean, I remember growing up and my mom is half British. I'm a quarter British.

53:21 And Give it to the Queen Elizabeth thing. Ermes scarves, you know, my mom's Hermes scarves. Were and are among her most treasured items. Yep.

53:30 So You'll know. All of this that's happening. Robert, the innovations, these new products, the art, the whimsy. He's doing all this in the nineteen thirties.

53:41 This is the Great Depression era. This tells you about Hermes and Hermes clients. They are unaffected. They keep buying. And this carries through right to this day. I mean, I don't know that there is a more recession.

53:58 insulated business then Hermes. You're exactly right. twelve months now after we did the L VMH episode, we're finally on the tail end of the sort of pandemic bubble of luxury. And we're seeing a lot of these brands Take a hit.

54:12 Airmez is the most insulated of all of the luxury brands. Where they have the sort of least cost sensitive clients. So after this there's World War Two. And famously. Before the war

54:25 Hermes products came in cream colored boxes. Robert was very meticulous about the packaging. That is. crafted items and his art would come in. And it was cream. It had to be cream.

54:38 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 Aren't that was designed for uh pâtisseries for bakeries.

54:52 Oh, is that what the orange ones were used for? That's why there was an excess of it, because it was used for bakeries and bakeries weren't baking as many croissants and pen au chocolat during the war, et cetera. There's all this orange packing material. Robert embraces it. And uh Hermes Orange box. Is born.

55:10 Crazy. I didn't know this till research. Armes. owns this color. You cannot get Ermez orange, anywhere else. Pantone. does not list it in their colors.

55:21 It's interesting you say Hermes owns this color. So you are correct that Hermes has selected a non-panone color. But What AirMez tries to do is say, Well, we own orange. We can't be nailed down by a Pantone specific code.

55:38 we own orange more broadly. And they've actually gone head to head with the EU. And this has gone to court where it's been determined that no, you can't own orange. You can't just own all the oranges. Amazing. And so what they've done is they've actually leaned into this where There is a classic Hermes orange, but it presents differently On each of the leathers. you know, they have 10 different leathers or something like that that they work with. When they dye those leathers, it presents a little bit differently. And so they sort of have this Sure there's a digital perfect representation of

56:13 the color of classic orange. But there's this whole spectrum of the way that it shows up on leather. And they've sort of even further kind of winked at all of us. by creating five or six other oranges. They have Ermes Fu, which is sort of the fire.

56:30 They have Hermes Sanguine, which is sort of this red hot orange like lava. Or they have to do it. The Hermes Moutard, which is sort of their mustard. And each of these is a little bit of I think it's to continue to assert that we own the whole spectrum of oranges, but it's definitely to be able to Stay current, stay present.

56:49 encapsulate the theme of a season because every year they sort of pick a theme and so they play with their oranges a little bit to evoke the whimsy that they want from this year's theme. Yeah, there's this sort of like you know, meta level or like corporate level playfulness to this too of we own all the oranges. Totally. The Airmez oranges are almost like to continue the Disney analogy, it's almost like the people that go to the park and look for the hidden Mickeys. It's a way to even more deeply participate in the Airmez universe. So Few other things that Robert adds over the years. He adds the men's silks métier.

57:22 Aka Ties. The legend behind that one is pretty great. Supposedly in can A number of gentlemen were refused entry to the casino.

57:32 And thus went to the neighboring Or Mes shop, you know, next door and said. Can you take some of your Beautiful scarves and 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.

57:47 And they are these patterns, you know, they're just as intricate as the scarves. There's less storytelling that happens in the tie. The scarfs tend to be something you could frame and put on the wall and look at in sixteen different ways and the story behind it. But it's still. I mean when you look at it. You kind of can't believe that it was hand screen printed.

58:06 Totally. After World War Two, Robert decides that Hermes needs a logo. So taking inspiration from the nineteenth century painting Le Duc Atela Groom Alatante. Which means hitched carriage waiting groom.

58:20 Yeah. Famous Armes logo is born. The logo is the callback to The carriage. It's the nobility, you know. I find it really interesting, especially at that point in time. That Robert decided

58:33 You can imagine like, you know, a galloping horse or something like that would be the appropriate logo. No, it's so genius. No, it's the carriage. 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 gonna have that as a part of their history. They're leaning into the thing that makes them unique, special, the almost like defensible, durable asset that they have is that they participated in that era that has a nostalgia about it. And No longer exists. Yes. Horses in the equestrian world still exist.

59:09 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

59:22 Are the window displays. You referenced this a little bit earlier. So he hires first Annie Baumell and then she's soon joined by the legendary Layla Monchari. specifically these two women, they come from theater set design. just to design the window displays at the Faubourg.

59:41 At the flagship store on the Rufaberg San On Re. I mean there are a whole Museum exhibits. Just dedicated. To these.

59:49 Window displays. And it's not like, you know, again, you walk by X Y Z other store, even the most prestigious brands, and it's like the products are there. You know, here's the products, here's the brand you're buying, here's the L V, et cetera. These displays, it's a dream. They're

1:00:07 Are probably some Hermes products in there, but it's like a museum exhibit. It's artwork. Yes. And Art is exactly the right way to put it. There is no utility to these displays, and these displays much like Any advertising that you see of Hermes today.

1:00:23 It's not About the product. It's about How you feel. So I think this is an interesting place to revisit.

1:00:31 this idea that we talked about on the L VMH 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 you know, more utility out of that. I can store more photos. Luxury means you pay more literally because it doesn't create more utility.

1:00:53 It is either more pleasing to you intrinsically for the feeling or 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 sort of despite

1:01:08 Rather because But art. It does fall on this spectrum. Art is like luxury taken to its logical extreme.

1:01:17 It has actually zero utility. A Birkenbag is a piece of art, but at least it also carries your stuff around. Luxury products or this interesting midpoint between extreme functionality, but also Artwork.

1:01:31 And so when you buy an AirMaz 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's heritage and reputation and hoping to adopt it as a part of you, as a part of your identity. And you are seeking, whether it's conscious or not, to let

1:01:52 Other people know about this too. And you're not necessarily trying to signal it to everyone, but you do want to signal it to the right people who would appreciate it. There's this genius aspect too to what Armes 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

1:02:11 selling luxury items. They can't just be art. They need to have some utility to them. Yeah. You will never see any of these brands, or Mez included, become art galleries. They're not selling paintings. But

1:02:25 It's critical for luxury brands to have a connection to the arts. I think he realized this before anybody. Of like The windows in our stores. Uh these portals.

1:02:36 Into this world of dream and art. And you'll come in and you'll buy a scarf that you'll wear. You'll buy a bag that you'll use, maybe you'll buy a tie, maybe you'll buy a wallet. or homewares or furniture or any of the other things over time that they sell. And that will have utility.

1:02:52 But it's connected to this dream. 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.

1:03:07 As a critical piece. Uh the bundle that is your product. It enables you as the seller Two

1:03:16 Completely switch tracks to disconnect. from any evaluation of value. Right. Or features. 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.

1:03:33 Now we have Bundled in the The function of the object. And And

1:03:40 unevaluatable. Priceless feeling. A priceless feeling. And so now we can sell the goods for whatever we want because it's impossible to know the value of that second component that we've bundled in.

1:03:53 Yeah. Totally. So speaking of dreams. We're now in the nineteen fifties in the post World War Two era. The most

1:04:02 Amazing Unbelievable. Fantastical dream. of the nineteen fifties. Happens.

1:04:11 Two Hermes. In real life. And that dream Is Princess Grace Kelly. So I sort of mentioned a little while back.

1:04:21 that one of the first things that Robert did when he came into the business was redesign the handbag. And Christen it the sack a depeche. Well. It becomes

1:04:32 Popular, but like we're talking about. Leather goods, handbags, you know, important. But that kinda was the previous generation of the business. Now under Robert It's these scarves, it's the dream, it's all this stuff, and leather's part of it, but a smaller part. Well in nineteen fifty six.

1:04:47 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

1:05:01 Princess Grace of Monaco. I can't imagine A bigger dream. For any woman or any person in the nineteen fifties. She is photographed.

1:05:12 Using The Saka de Pesh. In Life magazine. On the cover of Life magazine. So the legend is that it was on the cover of Life magazine.

1:05:22 But I Googled a lot of nineteen fifty six covers of Life magazine and I didn't find it on the cover. Oh, interesting. So maybe that's been sort of played up over time. This might have become part of the lore, regardless. Big picture in Life magazine. She is clutching her beloved Saka de Pesh.

1:05:40 Two her midsection. And it's almost like as she's exiting a building and it's it almost seems like it's like a paparazzi type photo. It is it's a paparazzi photo, and her husband, Prince Rainier of Monaco, is holding the door behind her. It's like the most Dream like thing you could imagine. Yeah, it's in black and white. And the reason that she is clutching this fairly large bag

1:06:01 unbeknownst to the world at the time, is she's trying to hide her pregnancy. From the paparazzi. She's pregnant with her First daughter. And this photo just becomes

1:06:12 Iconic. Everybody wants To be Grace Kelly. Everybody wants. To have this bag.

1:06:20 And one of the last things that Robert does right before he retires in nineteen seventy seven. Is he officially changes. the product name of the Saka de Pesh. To the Kelly bag.

1:06:32 And this is the birth of I don't even know what to call it. The Kelly and the Birken are ends of ones, but these leather good products That transcend Everything. That are like

1:06:44 So truly N of one, there's no other way to describe them. And there is so much to say about these bags and how they're crafted and the lore around them and The supply and demand and the Econ one oh one. But before we get to that.

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1:08:37 So you can get$1000 off Vanta at vanta.com slash acquired. That's V-A-N-T-A.com slash acquired for$1,000 off. And just tell'em. That Ben and David sent you. Okay, David, so Life magazine.

1:08:52 The Kelly bag. It's out. So this thing must sell like hotcakes, right? Well Yes and no.

1:09:00 Certainly this plays right into this whole dream thing that we've been talking about. And burnishes Urmaz's already incredible brand and image. I mean My God, Princess Grace Kelly of Monaco.

1:09:16 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 like yes. It becomes incredibly popular.

1:09:28 Yes, I'm pretty sure it becomes Armes's Biggest selling bag. But the market isn't quite there yet in the way that it is today with the Berkins and the Kelly's. Global rich

1:09:41 Isn't that big of a population. And like yeah, I'm sure they're all buying Kelly's. 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.

1:09:53 And to your point. I keep saying it's launched. It's not really launched. They just rebrand to the Kelly bag. But when the Kelly bag is formally launched. It's really expensive.

1:10:03 It's a nine hundred dollar handbag in the fifties. Which today is ten to twelve thousand dollars. Approximately the price of a Kelly bag today. So it comes out. as this thing that is completely ridiculous and inaccessible price wise.

1:10:20 So the people who are buying it are the Grace Kelly's of the world and there's not really this stratified class. below that that's got this huge amount of purchasing power. Right. The

1:10:31 number of people who could spend the equivalent of twelve thousand dollars on a bag back then was just much, much, much smaller than it is today. Yep, exactly. So no, handbags do not immediately become a huge part of the business, or I should say The dominant Whatever it is today, six or seven times larger than silk part of the business.

1:10:51 Right away. And in fact. Actually, sadly. Kind of quite the opposite happens. So As we head through the sixties and into the nineteen seventies and the end of

1:11:01 Robert's tenure in his generation. As the head of Hermes. The company kind of starts to fall on hard times. Which is crazy to say, right? I remember this moment in the Porsche episode, you're like, No, come on. Porsche skinny down the entire lineup to only making the nine eleven because they couldn't justify any of the other products and the whole company was a frickin' mess.

1:11:21 Hermes is not quite in those dire of straits, but I mean They have the ingredients of AirMez that we know today. They've got the Kelly bag, they've got the orange box, they've adopted the logo. They've got the scarves. They've got the scarves. They have these small workshops where they make everything. But it's not working yet. And it's particularly not working because

1:11:43 Like we just talked about. That market. Was not that big yet. And as we enter the nineteen seventies Something really

1:11:52 Funny happens. The next generation rejects that dream. This is, you know, you and me, our parents generation. The hippies.

1:12:02 The nineteen seventies. This is democratization. Little girls don't wanna be Grace Kelly anymore. They wanna be like Stevie Nick's or you know, something like that. And

1:12:16 The dream of Vermez that was once so elegant and so desired by so many people. But inaccessible. It's kinda now like Yeah.

1:12:27 You know, it's 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.

1:12:37 really start to come up and we talked about this on the L VM H episode, but they're connected to fashion. You know, it's first your And then it's Yves Saint Lorraine, you know, this is the Mondrian dress from Yves Saint Lorraine. This is, you know, the revolution. It's Gucci, it's Chanel in the eighties when Carl Lagerfeld takes over. And

1:12:55 What they're selling is very, very, very different than what Armes is selling. This is an important distinction between Airmez and all the brands you just named. They come from the world of Katur. And of fashion.

1:13:09 And of Cutting edge. In your face. Risky art. And Hermes comes from

1:13:18 I mean, mind you, by this point they're already a hundred and twenty years old, hundred and thirty years old. They come from the world of leather. And horses. And durable goods that stand the test of time and frankly styles that stand the test of time. It's not

1:13:34 How creative and crazy can we be. It's 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.

1:13:48 It's a rejection. of risk and an almost embrace of history. So it's super different than most other luxury brands, which as you point out come from fashion. Right. And those brands are getting born or reborn. Right there in the nineteen seventies. Yes.

1:14:04 And David, this is probably a good time to share who we chatted with in preparation from this episode and his observation about Airmes. Yes. This was super cool. And you know, one of the things that for me and for both of us just kinda blows our mind as acquired Gross. We got to talk with Domenico De Sole, who was CEO of Gucci.

1:14:23 During the The fight with Bernard, I know that we chronicled. Really, I think that was the best part of our L VMH episode. Absolutely. When uh Domenico Desole and Tom Ford and that team rejected Bernard's takeover and managed to not become a part of L VMH and

1:14:41 Obviously then Domenico and Tom Ford left to start Tom Ford after that. But it was super cool when we talked to Domenico He comes from that world, even, you know, with the heritage of Gucci He and Tom It was fashion first, and

1:14:54 In his perspective, and I think the perspective of many folks that are coming out of this seventies, eighties era of luxury. That's what's interesting. That's what's fresh. Risk on, baby. Risk on. Yeah. Let's figure out how to break some glass in what we're doing. Grace Kelly is not breaking any glass. Right. That uh Domenico helped us understand about Air Mez is

1:15:15 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

1:15:32 above board in their brand promise and keeping that promise with customers for over a hundred years. And That is a strength and a weakness. It's a strength as long as you learn how to employ it as a strength.

1:15:45 In the world of fashion. It's butting heads. Yeah, it's Antithetical to fashion. Yes.

1:15:51 Exactly. So all this culminates towards the end of the nineteen seventies as Robert is nearing the end of his tenure at Hermes and the end of his life. Sadly. There's a moment. This is like probably nineteen seventy seven or so.

1:16:05 Where they bring in consultants and the consultants recommend like hey You guys should probably do what Gucci is doing. And you should probably close the atelier above the shop at the Fauborg and you should probably outsource production and you should probably increase your number of products and your SKUs and have lower prices and have them be more accessible. Unbelievable. That was the

1:16:27 accepted wisdom at the time. I don't know if it was McKinsey or you know who was saying that. Well today I will tell you that Hermes has a corporate policy of no consultants. And now I know where that came from. I mean, this is enshrined in the luxury strategy is anti law of marketing number nineteen. Do not hire consultants. Wow, so the recommendation was to come in and destroy everything that makes you special and follow the playbook that everyone else is running.

1:16:54 Yeah, I mean it's working for them and it's not working for Hermes. It's crazy. And this Is when The next generation transition happens.

1:17:04 To Robert Son, Jean Louis Dumas. I kinda 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 her met as you know, the most unassailable thing in the world right now. But

1:17:21 finds itself in a moment where it can be assailed. There's a generational transfer happening. You would think this is like the downward spiral. This is the dropping of the baton. And the next generation always rallies. And isn't it amazing? You would think

1:17:37 the best person out there to brilliantly come up with both the business strategy and the creative element. Is probably not. your direct descendant. Right. Probably not your nepotistic family member. That's not the best search process to run. And yet

1:17:54 It works. There's something about the I don't think it's like this magical bloodline. I think it is a deep understanding of the tradition of the business, of exactly what type of sort of chutzpah the team has to rally and take on. having the political clout to find the right people and empower them to make the change.

1:18:15 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.

1:18:31 I really do think that there is An element too of The successive generations They apprentice in the Atelier. It's like with their hands. I think there is an element of that.

1:18:43 And they also apprentice, especially these days, on the business side too. You know, Axel Talks. all the time about dinner table conversations between his uncle, Jean-Louis, who we're about to talk about now, who is the fifth generation CEO of Hermes. And his mother, who was head of production at the dinner table growing up.

1:19:02 You can't not absorb that. I think that's the flip of nepotism, right? Which makes it such a challenging Topic. On the one hand. Obviously limiting the universe of talent.

1:19:13 On the other hand, how do you replicate those dinner table conversations? You know, it's funny, I called it a sixth sense, I think the right way to describe it is actually a Genesequois. about what you sort of absorbed from those. Totally. Okay.

1:19:27 Jean Louis. The fifth generation. the brand, you know, the consultants are saying, Hey, go be like Gucci. shut down your shop where they still today make Birken and Kelly bags by hand one artisan at a time. in the most famous address in all of luxury and fashion.

1:19:44 Not so. Well I do have to correct you though. That is not specifically true. It's certainly spiritually true. I believe now the only products that are made in the Faubourg our saddles. Oh really? I think everything else is made in Pentan.

1:19:58 Which is a twenty minute drive away. It's not like they outsourced production. Anyway, we'll get to that. Great. Okay. Jean Louis comes in.

1:20:07 What year is this? Nineteen seventy eight. Great. He, like all the generations before and after him, he's come up, he's apprenticed in the business, he knows how to do the saddle stitch. It's in his hands, it's in his soul.

1:20:18 We've talked too many times with that. actually talking about the saddle stitch, it's time to actually talk about saddle stitching. So listeners, you might be wondering, why do they keep saying this? What does it mean? Saddle stitching is an amazing technique that Air Mez uses for every single bag that they make. It can either I can't tell if this is true or not, it can either only be done by hand

1:20:40 or until recently only be done by hand. But It is a far more effective high quality and durable form.

1:20:50 relative to the typical s 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. It's also incredibly beautiful. It's got a slight diagonal valence to it as opposed to the normal straight line stitching. Yes. So how does it work?

1:21:10 So there's something called a horse that goes between your legs. And the horse holds two pieces of leather together. The whole point of the saddle stitch is to sew two pieces of leather together. So You first punch little holes in the leather using likely a pricking iron as your method of doing this. And if you're good.

1:21:32 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. And you can always tell if you're looking at something and it's stitched and there's these big freaking holes and then there's this thin thread that's moving through and there's space between the threat. You know what kind of craftsmanship went into that.

1:21:59 If it almost looks like the stit 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. So you take your pricking iron or your all You poke the hole. Or the partial whole.

1:22:14 So there's a lot of muscle memory involved in this. You then Pass one needle through Going to be a call it from the right to the left side.

1:22:23 And then You have a second needle on the other end of the thread. So one thread, two needles. Yes. that you pass through the other direction. And so what you've done As you pull both of them through.

1:22:35 Is created this incredibly strong sort of interlocking mechanism. There's tensile force going in both directions. Yes. If it gets ripped. You're not at risk of the whole thing pulling out and your saddle or your bag falling apart.

1:22:52 You just lose that one stitch and that one stitch can be repaired. And so the only way for you to unravel something that is saddle stitched together is to individually go through and cut. Every single stitch. Yeah, compare that to most products that you own. Yes, this literally provides high utility if you're in an equestrian jumping competition or if your bag needs to hold something that really needs a lot of protection and can't fall through.

1:23:20 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.

1:23:38 holding true. I'm gonna channel my inner Pierre Alexi here, the current Artistic director of Hver Ms. I think it still has relevance.

1:23:47 If You want your object to be permanent. If you want An object that you own.

1:23:55 Two represents something wholly different and antithetical to let's call it the Amazonification or the Walmartification. of items. These days. You want it to be made like this.

1:24:09 Yep. And something that made this really special For hundreds of years, if not still. is that it had to be done by hand. So if you want something of this quality, this gets this interesting idea.

1:24:20 Is handmade stuff better? Well, not necessarily, and XL even says this in an interview. He says in twenty nineteen, today hand stitching is the highest quality. So machines are a non negotiable. When the quality of a machine stitching gets better than hand stitching, we will do it. We are not a museum. And David, this is where you're getting your we are not a museum quote from. But it really gets to this.

1:24:41 Element of the Why are handcrafted goods desirable? Well, in this case, it literally creates something higher quality, more durable, certainly more aesthetically pleasing, since when done well, you know, you can't see that hole in between the Red and the leather. It's a pretty special process. And

1:24:58 For everyone who's sort of wondering, okay, but what does the rest of creating one of these bags look like? Start to finish. A Kelly bag. And we'll talk about Birken in a little bit, but similar story. Is made by one

1:25:11 Craftsmen. So one craftsman starts with thirty six unique pieces of high quality leather. As much as possible from the same animal and matched exactly. Yes, exactly. And so it's not sourced from all these different places all over the world and one person's responsible for the bottoms and someone else is responsible for the straps. It is one craftsman.

1:25:33 that takes these thirty six cuts. and stitches it together. It takes twenty hours And

1:25:40 This is over the course of a few weeks to create this. So 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.

1:25:56 Oh, I think it's even more than that. It's two years of training. To become a Or Mes Art is in period. I don't think you're allowed to touch the Berkins and the Kelly's when you start day one on the job.

1:26:07 I believe you need at least another three years, if not more, before you're allowed to touch The Berkins and the Calies? Fascinating. So this knowledge is passed from generation to generation, and Hermes refers to this as the savoir faire. Or the know how or the expertise.

1:26:25 about the materials and the exceptional technique that's transmitted from one craftsperson to another. Mm-hmm. Hang on to this. I have a lot more to say when we get to the current generation about this. Do you know, David? And I'll stop after this, but I thought this was pretty funny.

1:26:40 Have you read the annual report, the six hundred page document that They release once a year. I have to admit I have not read it cover to cover. You did more of the history and I did more of this. But I I've read large sections of it.

1:26:53 I was reading it, I found myself laughing at how often Savoir Fair was used in the prose. Every other paragraph they just sort of throw in a savoir fair. One hundred and thirty three times savoir fare. is referenced in the AirMez registration document. Partially in their defense, Savoir Fair.

1:27:11 Literally translates as know how to do It's kind of like a proper term and French Yeah. Fair.

1:27:18 But I think the takeaway is real that This knowledge is transmitted from one generation to the other in the very same way that it was from father to son all the way back at the founding of the company. And that is how they scale production. And we'll put a pin in that and come back to it later. Yeah.

1:27:34 That's the true genius of the current generation is they have scaled that. To seven thousand people. It's unbelievable. Unbelievable. I was gonna talk about this towards the end of the Jean Louis era, but I wanna say it now'cause I think it's perfect. I got to talk to a woman named Beatrice Amblard. who lives here in San Francisco.

1:27:52 This is amazing. She was an artisan. At Armes in Paris. She was hired right at the start of Jean Louis. Tenure.

1:28:02 She worked in the atelier at the Fauborg. when Jean Louis son, Pierre Lexi, 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. She runs April in Paris in San Francisco. So she moved to San Francisco when Hermes opened the San Francisco store here and asked. I was like, Oh, you transitioned to the front of the house. And she was like No no no

1:28:24 I was the person for the West Coast who Repaired. Everything for North American West Coast clients. There was one person in New York and I was in San Francisco and we came from the Fauborg.

1:28:37 And you know, a few of these people go around the world. And one of the things about Hermes and actually Sean Louis Oh, say that this like the true essence of luxury and the true essence of Hermes is everything they make can be repaired. And so if you buy an item from Remez. No matter what it is, they will repair it. Yeah, I think that's true. Even if it's a hundred years old. You bring it in, they will repair it.

1:28:55 Yeah, that's true. They have fifteen, this is flashing forward to today, fifteen dedicated repair shops worldwide and they mend one hundred and twenty thousand pieces a year. Wow. Amazing. Yeah. So I asked Beatrice when I was talking to her. What was this like? You know, what was special? And she said

1:29:13 Look, you have to understand. When I was training as a young person and decided I wanted to go into this field Ermez. was Absolutely.

1:29:23 the greatest company that anyone Could hope to work for the year. It wasn't even close. There was no comparison. What years? This was in the late eighties, early nineties. She said, Look, I decided

1:29:34 that either I was gonna get a job at Hermes or I was gonna leave this industry and go do something else. It is in that high of esteem. And I said, Oh well, why? And she said, Look. By the time. We're at this era. Nobody else was left that did this.

1:29:49 Right. Everything we talked about in the nineteen seventies, all these other brands, they all went in this complete other direction. The consultants were telling her mez to go in that direction, too, but they're the last ones standing that did all of this by hand. In The tradition handed down through hundreds of years.

1:30:07 If that's important to you There's no place else. You can't apply your trade doing that anywhere else. I asked her then. I was like, Okay, well As for the products. And today.

1:30:18 Clients to the customers. Why does that make a difference? And what she said is what you'll hear the family talk about all the time. She said, Look, it's about soul. This product has a soul. Somebody made that thing with their bare hands.

1:30:33 That means something. And there's nobody else Certainly at her mescale. That does that. You know, she ended up leaving her meds 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.

1:30:50 You can get Custom stuff. Small bouti stuff, you know, Beatrice is a worldwide master, you can get that from her. But the idea that

1:30:59 I two hundred billion dollar company at scale would be doing this. Like there's nobody else. Yeah, it's nuts. It's completely insane. And the people who don't work for Hermes.

1:31:10 Your options are in the dozens. If you go As a customer and you want something like A saddle stitched bag or wallet or something like Hermes would make in that traditional sort of pre-war early twentieth century fashion.

1:31:26 There aren't that many other artisans out there. Ermez employs seven thousand of them. I don't know how many other ones there are. One thousand, two thousand? And it's not like our MS 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.

1:31:45 It's a pretty crazy thing that they've managed to scale even to the scale that they're at. The other thing. Beatrice said, you know, to bring it back to Jean Louis. He is a legend. He really cared.

1:31:58 The idea that he would follow the consultants, like 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 faux borg right after she started. You're Beatrice Amblard.

1:32:13 Welcome to Hermes. You know, she knew everybody by name. And then when she ended up leaving in nineteen ninety seven to Open her own store. He called her. And he was like

1:32:25 Genuinely. Shocked. Nobody ever leaves. Like what are you gonna do? And She explained that Well, she wanted to be entrepreneurial, start her own thing.

1:32:34 And then shortly after the San Francisco Chronicle Did an article about her. He found the article, read it in France, cut it out, mailed it to her. And with a note of congratulations handwritten. And it doesn't cost them anything to do that because I mean, on the one hand, you just say they're being a kind person and

1:32:51 gave so much to your house for so long. On the other hand, this is the CEO of Hermes. Right. And I think it's important to realize these individual craftsmen Are entirely non competitive.

1:33:03 with her mes. It's a completely different value proposition to the customer. When you're buying your mez today, you don't start from a place of You know I think I want

1:33:14 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.

1:33:27 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.

1:33:36 you actually just want to buy something from Airmes and there's not any evaluation going on. And maybe there is between big luxury brands, but probably not. The value proposition is not you have a need for a leather good and you can bake off all the competitors. It's You either want something from AirMez or you're a different type of customer. Yep.

1:33:55 Okay. So Jean Louis story. How Did he Turn this thing around and save Hermes from the consultants.

1:34:03 Well, Like we said, he'd apprentice just like every other generation. But Unlike any other generation, or I guess maybe sort of like at meal back in the day going and meeting Henry Ford. He comes to America.

1:34:15 And specifically he came to America to follow his wife, Rena, Who became a World famous architect. Rena was interning with IMP. In New York. Really? And

1:34:27 Renner Dima Would go on to design all the stores that they opened up all around and design the atelier in Pentin when they expand production. I am pay famous from a number of things, including previous acquired episode with Michael Lovitz, designed the CAA building. in Los Angeles designed the Louvre Pyramid.

1:34:48 I was gonna say. Think about like the connections here in France and Paris. Yeah. Which by the way, everyone in Paris thought the Pyramid was hideously ugly when it first relative to this seventeen hundreds building around it. And over time now it's become this like iconic triangle pyramid beautiful signature of the city. Yeah.

1:35:07 Jean Louis When he's in America he Works for bloomingdales. Blooming Dales. My God, of all places. Well, there was a heyday of department stores

1:35:16 In fact, if you go way back Do you know how Ermes entered the United States? In partnership with Neiman Marcus. Yes. Nineteen thirties. Good. Wow. So you did find that.

1:35:28 It's hard to stump me. Yeah. But you do it sometimes. Okay, so Bloomingdales. So from that experience, you know, being in America being in this much more mainstream Yeah, audience.

1:35:41 He Comes to understand What these other brands are doing, you know, what the consultants are suggesting. But he takes that back.

1:35:52 And what he says, like, look, the way forward is we're gonna figure out how to make Hermes. Relevant. We're not gonna throw away everything we've done. We're gonna keep our tradition, we're gonna keep our craftsmanship, we're gonna keep our market position. But Our clients wanna be like

1:36:08 These young people. Particularly these young women, you know. The moms don't want to be like their moms, they wanna be like their daughters. And it's a tall order to figure out how to Revitalize, rejuvenate, make AirMez relevant for this new era with this new audience. With the same products. This is key. Right. Keeping the same products. And not violating everything that Air Mez currently stands for.

1:36:33 We talked about this on L VMH, 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. This is such a tight needle to thread to use a pun here.

1:36:47 They need to run the Y Not Your Mother's Tiffany campaign. Without actually running the Knock Your Mother Stephanie campaign. Right. So Well, the first thing in nineteen seventy nine, the first year he takes over. He launches a new ad campaign.

1:37:01 In Paris. With young Parisian. Women. Wearing

1:37:07 the iconic Hermes scarves, which remember, like that's the main part of the business at this point in time. But it's you know, all these old people who want to be like Queen Elizabeth wearing the scars. Young women wearing the scarves. not how you would typically wear a scar. Different parts all over their body.

1:37:24 It's the Airman's version of Not Your Mother Stephanie. And most importantly. They're wearing these scarves. With genes. Grace Kelly.

1:37:33 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. Fascinating. These Adds. Are

1:37:42 The scars the Queen Elizabeth is wearing. With jeans. And in Fun, interesting ways. Playful ways. To where

1:37:51 The scarves, but they're still the same scarves. Fascinating. And this is like A revolution. I mean the rest of the family is really upset about it. But

1:37:59 He pushes it through. Yeah, and you can still see echoes of this to this day. Like a big part of Vermes 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. You know, not wearing them.

1:38:18 Like your mother wore them. And this is how they've adapted for the digital era too. They've come out with like five or six different apps to try to figure out like how do we Engage people. in the mobile era. And one of the ideas that they had was this app that basically gives you suggestions and all the different ways you could tie a scarf.

1:38:36 Mm. That's super cool. Yeah. But I think this is brilliant because This is allowing Armes

1:38:45 To exist and be irrelevant alongside Fashion. without actually getting into fashion themselves. The scarves. And then ultimately the bags.

1:38:57 Can be the accessories. to your genes, to your fashion, to your, you know, we're past the era of bell bottoms, but like the spiritual equivalent of bell bottoms here. And they can say something about you, but they're still the same products that they always were. And it's pretty interesting if you can figure out how to coexist alongside cool, fashionable, new cutting edge things. Then

1:39:20 You sort of 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

1:39:38 the rest of my image. And I think that especially at their price points they're serving someone who wants to raise one hand and say I look cool and raise the other hand and say I'm classic.

1:39:50 Well, I'm classic and I have the money to spend on things that are very price anchored. Everyone knows what a Kelly bag costs. And like it's gone up a little bit, but Hermes has very high price point products that stay approximately that price forever. Yeah.

1:40:05 So Jean Louis has a quote about this. Oh it 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.

1:40:19 They came, we followed. That's the most French way of ever saying this, but like 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.

1:40:33 To see with new eyes. The same things. Yep. Total genius. Yep, for sure. Okay, so that's brilliant.

1:40:41 So that's on the product side and kind of doing this jujitsu to reposition. the product center meds. The other thing that he did was Which was huge, was he had the very same realization that Henri Racomier had at Louis Vuitton, and we foreshadowed this earlier.

1:40:57 What Rack Em Yeah. Figured out it. Louis Vuitton in the nineteen seventies was The market now. The global wealthy, the global elite, the global rich

1:41:10 is so much bigger now. than it was in the nineteen fifties. The number of people with wealth On the order of Grace Kelly and Prince Renier of Monaco, or you know, even a few rungs below them. But the number of people who can be in our client base around the world.

1:41:28 is just so, so, so much larger than it used to be. And it's happening in this country by country way, which is perfect for a brand like this. Like they can go to America And then they will observe the rise of Japan and then they'll go to Japan in the nineties and two thousands. Then they'll observe the rising upper middle class of China. So they'll go there in present day. they can really position themselves as sort of the second mover where they can sort of watch See when this wealth class exists somewhere.

1:41:55 And then Set up shop. And say hey France's whole heritage is now available to you to adopt as part of your persona. Yeah, and this is super key. And I think

1:42:06 to this day is a huge part of the defensibility of Or Mes. 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.

1:42:18 There's still something about this connection to French and European nobility, but That You cannot buy from a brand from any other country. It's super fascinating that French.

1:42:31 Nobility. fashion and heritage is universally revered everywhere. And Italian is too, like I would say European generally, but French specifically has an ability to do this in Any Geography as it develops.

1:42:47 Yeah. So All of this Stuff. Comes together.

1:42:53 In nineteen eighty four. With Jean Louis's greatest achievement. And unlike the Kelly bag, which you know, again was an accident, like yes, it was His father Robert and

1:43:03 Incredible genius and then repositioning and renaming the bag, the Kelly bag. Jean Louis, this is literally whole cloth conceived of by him. On a flight. From Paris to London. In the early nineteen eighties.

1:43:17 Where he's seated next to the French and British actress. Gene. Working. The it girl of the time. Now here's what's really interesting.

1:43:26 I bet. Ninety-five plus percent of people listening to this right now have no idea who Jane Birken was. Which is so funny because in interviews with her as the Birkenbag was Blowing up. Or at least getting a lot of attention.

1:43:40 an interviewer joked that she was gonna be more famous for the bag than for her acting career. And her modeling and all that. And she sort of laughed and said, Wouldn't that be something? Yeah, right. But Totally 95%, if not more, of the listeners to this podcast will have no idea who Jane Burkin is before this episode.

1:43:58 But you definitely know the Birkenbag. Yep. Or at least you know of the Birkenbag. I'd bet. Seven out of ten, maybe eight out of ten people listening to this couldn't spot it. But if you say a Birkenbag, you sort of know that it's like a

1:44:12 unattainably Expensive, high status, hard to get handbag. Well, certainly if you follow the Hermes stock. You know what a broken bag is, even if you probably couldn't pick it out of a crowd. Yes. But Anyway.

1:44:25 This is the culmination of everything we've been talking about. Who is Jane Burkin? She was British. She was born in England. But

1:44:32 She moved to France and became a French citizen and she became like a French cultural icon. I mean, again, the tie to France is so important here, too. And we didn't talk about this with Grace Kelly either. Grace Kelly was an American from Philadelphia. But she became the princess of Monaco. These two women, these two personas that are embodied in Hermes. Like Hermes doesn't do celebrity advertising. I think it's so important that even though

1:44:57 Neither of them were French. They became so deeply European in what they represented. Yeah, that's a great way to put it. And For

1:45:06 Jane Burken. She was this next generation. She was an actress both in film and theater She was a singer. She was incredibly beautiful.

1:45:16 She was the it girl, but in a very, very different way than Grace Kelly. She wore jeans. And in particular, she had a trademark accessory. fitting with the you know nineteen seventies. Oh, the basket? Yep. counterculture, you know, back to the land type ethos. She carried a wicker basket.

1:45:37 With her everywhere that she went. Which it has a ethos to it, but doesn't lend itself well to overhead bins. No, it does not. So As the two of them.

1:45:47 CEO and artistic director of Vermes, 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 hurt. fixed handle wicker basket up into the Overhead compartment.

1:46:02 And at this point. Jane had become A mother and had kids. And she had, you know. Kid stuff.

1:46:09 In her basket. She had baby bottles that were like spilling out. Totally. I mean I carry a lot of kids' stuff these days. Like you need a lot of stuff. with the kids. By the way, how crazy is it that the Kelly bag was to hide a pregnancy and the Birkin bag was designed to carry baby Bottles and Baby Forward. Yes. And again, on the one hand, this is sort of esoteric Burken Lore. On the other hand, I think this is super important to Jean-Louis, like imagine

1:46:34 The older generation are mez embracing this. You know what we should do? We should come out with a fifteen thousand dollar diaper bag. Right, right, right. So they sit down, they start talking on the flight, and John Louis introduces himself and it's like I didn't notice you're struggling with your wicker basket there, Miss Burkin. And she doesn't know who he is at first. It's the funniest thing. Right, right, right. And she says something like, Well, yeah, wouldn't that be great if there was a bigger bag that actually closed and you know, but Armes doesn't make that, or she made some comment. And he goes.

1:47:04 I am Hermes. Yeah. The legend now who knows if this is true, is that she said, Well when Hermes makes a diaper bag, you know, I'll I'll use that one. And specifically for her, she sort of fancies herself someone that has a lot of stuff and wants to bring all my stuff with me. So I just need a big bag and it needs to close easily. Fashion be damned, I just need a huge freaking tote.

1:47:26 Yeah. And as they get to talking. They're talking about the Kelly and she's like, Look, you know Kelly's the Kelly, right? But I can't wear it over my shoulder. So Jean Louis starts sketching out designs on the plane and

1:47:38 Voila. The Birkin is born. Larger than the Kelly. But smaller than the old original Hermes bag. It's a tote bag and it has two handles, unlike the Kelly, which has one handle, and so with two handles you can put it over your shoulder. Yeah, it's this sort of

1:47:53 It feels weird to say more casual version of the Kelly, given that it's, you know, the Birkenbag, but it is. It's the more casual modern version of the Kelly. And the Kelly has cleaner lines and this sort of beautiful almost mid century trapezoidal shape, whereas the Birken, everything about it. kind of screams function. So here's what's interesting. They release

1:48:14 The product in nineteen eighty four. And it is not an immediate success. I think part of this is that the Ormez. kind of brand transformation modernization was probably still underway.

1:48:28 When you watch interviews with Particular Pierre Lexi. He'll talk about this. He's like Any other company would have given up on this product. But

1:48:36 It takes about five years before the Birkenbag becomes The Birkenbag. And like the time is ripe. We're in the nineteen eighties. The go go years, you know, this is the the years that are shaping Bernard Arnaud here. There's tons of American wealth being created. People are looking to be a little bit flashier. Now, granted, Airmes is the least flashy

1:48:55 of the luxury labels you could adopt, but People know the brand. Yeah, I mean, it takes five years for it to become Any monicum of success for Mes and then Like a lot of these things.

1:49:07 This just kinda slow burn starts that grows and grows and grows and grows. And there's a real lore around it that It's hard to get. And It's just like with a kid.

1:49:20 If you tell'em they can't have something, they want it a lot more. And if you tell your very fancy clientele that you would love to be able to get something for them, but there's just not enough. And we don't have it today, but gosh. If you are a great customer of ours and we maintain a relationship with you Let me write down your number.

1:49:40 I feel like We may just have something for you. Soon. Could be a few years, but I'll reach out as soon as we have something. You're an important customer of ours. And if you want to show us you're an even more important customer, Please do, by all means, and I'll see what I can do.

1:49:54 Ben, you would make a great Hermes essay. I don't think so. I actually had a wonderful Hermes associate that I worked with. in the Exon Provence store. And It was crazy. I mean we fought

1:50:07 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 make up there's some more accessible things. But in terms of the Durable goods.

1:50:20 Started at the bottom. You know, had a delightful time and decided to buy something. And I think we spent an hour and a half and I had the most wonderful service and built a Almost friendship.

1:50:32 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 broken bag. It was a crazy probably that best customer service I've ever received in any retail establishment anywhere. So

1:50:47 No, I don't think I would be a good AirMet sales associate relative to uh where the bar has been set. It's funny, you know, my experience was different. Of course I had to go do some research for this episode. You drove down to the Palo Alto store, right? Yes, I went to the Palo Alto store. I had to be down there anyway for some meetings. And

1:51:06 The Sales Associate who ultimately helped me is Equally wonderful. woman 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.

1:51:18 But I walked in the store with the intention of buying what I ultimately did buy. Which is Apple Watchband. I thought that's what that was. An Apple Watch Band. Yep.

1:51:28 And Well, we'll get to the Apple partnership in a little bit, but I was passed around between a few different people in the store until Ultimately. Susan helped me out and she was great. And I think she actually might be a uh

1:51:41 higher level essay, but When I expressed that I was there to buy a an Apple Watch then. Oh, interesting. Yeah. I don't know if that was just the day in the store or if that was part of the policy. I have to imagine it's a little bit different experience in the French countryside as compared to the Stanford shopping center. Yeah.

1:51:58 I can see that. But Back to the Birkenbag by two thousand and one It becomes so widely known that That

1:52:06 there's a waiting list, a sort of almost secret shrouded in mystery waiting list to get one of these things. That It is the main storyline of a Sex in the City episode. And

1:52:19 Samantha figures out that there's a way to jump the I think they use the number five five year wait list. Well the scene where she walks in to try and buy it is just iconic where the sales associate this you know responding to it like it's twelve thousand dollars or whatever, like oh

1:52:35 I know. There's a waiting list, of course. And she name drops one of her clients, her celebrity clients. in order to say it's actually for them to try to move up the wait list, you know, calamity ensues. They actually figure out that it's for her, not the client. I actually haven't watched the episode, but This is a cultural touchstone for the Birken going from something that is sort of uh Whispered about in handbag circles and well known by the wealthy elite to something that is now a very well-known phenomena, which is

1:53:06 good luck ever getting a Birken bag and, you know, the crazy stories about the most expensive one ever selling for five hundred thousand dollars on the secondary market and Victoria Beckham having a collection of over a hundred and you know, it's crazy. You know, it has become the Patek Philippe Nautilus of handbags and People look at it almost as a

1:53:27 Investment. A way of summing up what you're saying is The hard thing about buying a Birken is not coming up with the money. And which is crazy, right? It's a starting at twelve thousand dollar handbag. And what you're saying is that's actually not the constraint.

1:53:41 Yeah. But Also what you're talking about. You know, with echoes of our Nike episode here. The minute that you are in possession of a birken bag.

1:53:49 you could immediately sell it for a lot more than what you paid for it. And your Aramez SA will not be very happy that you did that. Because The point of buying one is is to own one and use one and appreciate

1:54:02 The craft and the work and the beauty that went into this product. And Hermes is not trying to sell it to people that are gonna flip it. They're trying to sell it to valued customers who will be

1:54:13 People who appreciate the Hermes dream for the rest of their life. Yeah. That will be the last brick and bag that you ever buy. Every bag, I think maybe even every item. Yes. That Ermes makes

1:54:25 What Hermes calls a blind stamp on it. And this is a series of symbols and numbers. There's one on my belt right now. Yep, it's some on my watch. Band right now. That are stamped.

1:54:37 Into the leather that uniquely identify That item, the year it was made, and the crafters who made it. And there are some very cool stories of People

1:54:49 Who Our 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. And that is the coolest, craest, full circle Airmez moment for any Airmez craftsperson to see.

1:55:09 This thing that I made that I really wanted to be durable and stand up in the world, how did it actually perform? And to get it back 10, 20 years later and see it has got to be crazy cool. Yes. So today Everything we're talking about here, the Birkin bag, the Kelly bag, these ten to hundred thousand dollar retail handbags. Depending on the type of exotic leather and everything.

1:55:30 And the scarcity. Are referred to as a category of Veblin goods. And so This is essentially the opposite of everything you learned in econ one oh one.

1:55:41 As is everything about this company. Yes. So normally price is where supply meets demand. So as the price of a good increases, demand for it would go down. A Veblin good is the opposite. As price increases, people actually want it more.

1:55:58 So price ends up being a signal that the item is desirable and thus it stimulates demand. Now, interestingly, David, this is exactly what you were talking about before. Birkenbags sell below the market clearing price. Yes.

1:56:13 That is another defiance of microeconomics. Normally things should be priced exactly at the intersection of supply meeting demand. I was just laughing as you were talking about Velpin gets there and I whipped out my copy of the luxury strategy. And flip to anti-love marketing number thirteen. Raise your prices as time goes on in order to increase.

1:56:35 Demand. So interesting. But One way to look at this is oh, it's lost revenue. Their prices aren't high enough because

1:56:43 They can only make so many of'em. And they're selling them below the price people are willing to pay, so there's money left on the table. But Another way to look at it is that it's an investment in the brand. So there's a very good substack writer, three ten value, that we'll link to in the show notes, who observed

1:57:00 The supply-demand mismatch creates scarcity in these two bags, and that scarcity likely creates more demand for the bags, elevates the overall status of Airmes, and creates demand for Airmes' 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. Yes. This is the same dynamic

1:57:27 With I think a very different set of motivations, as we talked about on the Nike episode. I very firmly believe That Nike could sell many of their shoes. For two, three, four, five times the price that they do.

1:57:43 And 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.

1:57:58 And maintain Nike's image as a brand that is accessible to everyone. Ermez is doing the opposite. They Want this to happen.

1:58:12 In order to maintain the image of Urmes and specifically the Berkins and the Kelly's. as a brand and a product that is not Accessible to everyone. Yes. And It's not as simple as well, they just keep raising the prices to make

1:58:28 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 with the I think it's called the Chanel Classic Flap Medium or something like that. But that's has had this crazy appreciation over the last few years where Chanel is just raising the price.

1:58:47 Airmas doesn't do that. We'll talk about this more later in the episode, but By my very back of the envelope calculations, they are Raising their prices On average

1:58:58 Across the entire line seven percent per year for the last ten years. So it's like five percent above, four or five percent above inflation. Yeah. Which is more, but not an egregious amount. Right.

1:59:10 There was a study that found that the Birken thirty, 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. And maybe it's because

1:59:29 What bad things would happen. to Airmaz if they decided, you know what, Berkens are twenty now, not twelve. Right. There are any viewed as the most expensive handbags in the world.

1:59:41 So What harm done to go from twelve to twenty. Right. And they sell a lot of them. So like that actually would be a lot of profit dollars. Right.

1:59:52 And for somebody who's gonna spend twelve thousand dollars on a handbag. Are that many more of those people gonna be Price sensitive at that. swing from twelve to twenty? Like probably not. Right.

2:00:04 The Wall Street Journal estimated in twenty twenty that there's about a hundred and twenty thousand of the combined Birken and Kelly created each year. So a hundred and twenty thousand bags a year, I mean, if you decide that you want to make another eight thousand of pure profit on each bag. That is tempting, and I think it actually says a lot about Hermes's

2:00:25 obsession with conservatism that they don't meaningfully increase the price. Like the Kelly is not far above its original nineteen fifties price Inflation adjusted. I think the Birkenbag The retail price was around two thousand dollars when it launched in nineteen eighty four, so call it maybe six thousand dollars inflation adjusted. So you know, you're looking at maybe twice the price that it

2:00:50 launched out on an inflation adjusted basis. So I guess the point I'm making here is I think we should keep in the back of our mind the rest of the episode this question of why Doesn't it. Airmez raise the prices. They're already getting

2:01:03 the benefit either way of the sort of trickle down of people participating in the Hermes ecosystem to hopefully get the call one day. So Why not make it even more expensive when you do get the call? Interesting. Alright, let's come back to that later in the episode.

2:01:16 Yeah. Okay. So nineteen eighty four. Birken release, doesn't sell well for the first five years, then it becomes this cultural touchstone and gains steam every year after that. And I was just thinking about that as we were chatting here. This makes sense to me that it wouldn't be a hit right away.

2:01:31 Because it takes time to build the lore. Yes. And Aura around this bag. You can't just drop a new product and have it become like this. immediately in this category. Correct. You're never gonna have like an iPhone of luxury handbags.

2:01:49 Correct. It has to be like Taylor Swift concert. In order to instantly Yeah, but I actually think it's a reasonable comp though, like

2:01:58 Her concert was A extremely scarce Brand new product. Priced at an extreme premium. That did sell.

2:02:07 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 were extremely familiar with the brand. But it's not necessarily well understood that the Birkin equals Hermes in the way that the Erez tour equals Taylor Swift. Totally. It's also that the product was the Air's Torah. The product was not midnight. If it were like, Oh, I'm gonna 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.

2:02:37 But it was like no I'm gonna go to Taylor's concert in here. All of Taylor. all the amazing Hermes scarves from over the years released out of the vault. Yes.

2:02:49 The Disney plus of Taylor. Different episode here. Okay. Back to John Louis. So this is how he does it. He Does two incredible things. To save the company. One.

2:03:04 He repositions the brain. I mean, this is just like I can't believe he pulled this off. He pulls off Not Your Mother's Tiffany without Saying not your mother, Stephanie. And the culmination of that is the Birkenbag and everything that that represents. And then two the internationalization and discovering and running the same playbook that Rakamier ran at Louis Vuitton.

2:03:24 By the end of Jean Louis's tenure in two thousand six, so couple 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, you know, outsource, shut it down, essentially. By the end of the decade of the eighties, he was just under half a billion dollars in revenue. And then in two thousand six

2:03:48 He's Taken it to two billion dollars. in annual revenue. From You know, nice family business to like

2:03:56 This is a real Real thing. So one more time on those numbers. So I don't know the exact revenue figure when he took over, but let's call it fifty million dollars in annual revenue. We know it was well less than a hundred. to two billion.

2:04:10 when he retires in two thousand six. So forty X in thirty years. Yeah, forty X in under thirty years. Wow. Pretty good. Pretty transformative for the family business. Well

2:04:24 Along the way. As The company. clearly becomes more and more valuable. You know, remember he is

2:04:33 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 Eighty. Family members out there. Eight zero. Many of whom are involved in the business, but many of whom aren't.

2:04:49 And Now this business that they all own is is doing two billion dollars a year in revenue at very, very high margins. There starts to be some demand for liquidity here.

2:05:02 Right, every single one of those family members most valuable asset in their entire net worth is their Privately held Air Mez stock that Nobody can really

2:05:14 But It's just sort of sitting there in everyone's mind of like It sure would be easier to live my life if I knew that this ninety percent of my net worth

2:05:24 actually worth something that I could access. And an even split, that's twenty five million dollars a person. I'm pretty sure it's the most valuable thing that any of them owns. Right. So In nineteen ninety three.

2:05:35 Jean Louis lists Hermes on the Paris Stock Exchange. Collectively when the dust settles, the family has sold nineteen percent of her mez to the public. They still own eighty one percent. Now the public flute.

2:05:51 grows a little bit over the years as more family members sell, more generational transfer happens. But You know, more or less still, you know, seventy percent plus. Family owned and controlled. It would really take

2:06:04 Some sort of absolute financial genius to like Come in and even consider, you know, we own over seventy percent of this business. We're unassailable. Who on earth could possibly make a run.

2:06:16 That our company. It would take a real wolf, I'll tell ya. Which brings us to, you know, this has been so fun. I've had so much fun with this episode. All this history, I just revel in the French connection and everything.

2:06:31 This is Hermes' finest moment that we're about to talk about here. Through it all. And it's interesting, it's not their product. No. Has nothing to do with the product. Yeah.

2:06:39 Yes. The fight. With Bernard Arno. Yes. All right listeners.

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2:08:35 What Us returned. To Bernard Arnaud. Been twelve months. It's been too long. I've been wanting to hear the other side of this story. I know, I know.

2:08:43 Okay, so For anybody who's listened to our L VMH episode. As we talked about earlier. The climax of the story is Bernard's fight. With Gucci.

2:08:53 In that episode. And Gucci is the one that gets away, Bernard isn't able to buy it. Right after the Gucci fight ends. In the early two thousands. The same story plays out with her Mez.

2:09:07 I think really in an even more dramatic fashion. So in two thousand one Right after he lost Gucci.

2:09:15 Quietly buys an initial stake in her mes of four point nine percent. No, I believe that was just under the threshold that they would have to disclose it under French securities regulations. And then Here's what they do that the Hermes families couldn't see coming, that only Bernard could engineer. He continues buying.

2:09:35 For the next ten years. Using equity swap derivatives. So it looks like other entities are buying these shares on the open markets. But L VMA to have the rights to exercise options to go actually take those shares.

2:09:52 Now This is really hard to remember. I had to Triple check these numbers. At this point in time, Ermes's market cap is below twenty billion.

2:10:02 That's like eight, nine percent of what it is today. And when Bernard first starts buying in the early two thousands It's below ten billion. Wow. But you could say lots of things about Bernard and genius should be top of your list.

2:10:16 But He is one of the best investors of all time. I mean to identify your Miz at this point in time. And as we will see, he makes a Incredible amount of money on these trades.

2:10:27 You know, today Air Mes is a two hundred and thirty billion dollar market cap company and he starts buying at below ten. Which is interesting. You say he's spotted Air Mez. 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 twenty to thirty times as much as it was already worth. So

2:10:48 He starts buying her mes shares and Axel I think jokes about this in an interview but he's like Look, Bernard isn't buying your shares just because He wants to make an investment or he wants to have some fun. Like obviously he wants to own. Hermes. And by the way, when David and I are referencing these XL interviews. It's one interview.

2:11:06 He's made a random appearance here and there, but he has done one long form on stage interview and it is fantastic. Yes. It's great. We'll link to it in the sources. You should go watch it. So why is Bernard doing this? Obviously on the one hand he sees the

2:11:22 the value here. I mean, for God's sakes. 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 or mess. But it's not just that.

2:11:36 I hope on our LVMH episode, this is some of the nuance that we painted about Bernard. He's not Just a corporate reader. He actually is An operator.

2:11:48 And he is one of, if not the best, luxury operator out there. So he sees Two things in her mesh. That maybe aren't as obvious to the rest of the world and that he thinks actually are gonna create an opportunity for him. One.

2:12:03 generational transfer is about to happen. Jean Louis can't live forever. And It's not immediately clear who the next successor is gonna be. So Jean Louis's son, Pierre Alexis, is Takes over as artistic director.

2:12:18 Pierre Alexey went to America. For college. He went to Brown University. Interesting, in uh interview I found this he initially wanted to study computer science at Brown. But he switched to art history. Very fitting.

2:12:32 And he comes in and he joins Ermes right after graduation in nineteen ninety two. So he's being groom, but Jean Louis wants to separate out the artistic director. role and the CEO role. Oh, they had been coupled before.

2:12:45 Well yeah, he held both. So Robert held both. Yeah, was both Yeah, you is certainly both. Right. So that really illustrates the point you were making earlier that the creative and the business sides of the house are one side of the house. Yes, until this generation it was one person.

2:13:01 There was no separation at all. So Pierre Alexi is clearly the Artistic air. There's not

2:13:09 a clear CEO air. And in fact Jean Louis Choice. Excel, who ultimately does become CEO, He's not in the business yet.

2:13:20 Right. He did that internship, his sort of five year apprenticeship, but then he left, right? Yes. So the story is that Excel really wanted to go work in China. And so he goes into investment banking after undergrad. He goes to Seance Poe Yeah, and remember, Jean Louis was his uncle, but his mother, who actually was not a family member, was the managing director for production.

2:13:44 For Hermes. Excel has this sort of, you know, dinner table trading in addition to the apprenticeship craftsman training. But he goes off into the investment banking world. He works First in China and then in New York for

2:13:58 B and Pay Parry Bus. Wow, so he is uh an expert in corporate structure. Yep. And he's an expert on this Pretty interesting luxury market in the next twenty years China. Yep. And America, too.

2:14:12 Huh. But He doesn't join the business until two thousand three. When Jean Louis taps him.

2:14:19 And Again. on the one hand, as we've talked about, this is an nepotistic business. On the other hand, they're not gonna just give him the CEO right title right away. He needs to come pay his dues. He starts in the finance department in two thousand three. And then in two thousand six, when Jean Louis retires

2:14:36 Excel takes over running the jewelry métier as CEO of Jewelry. Which listeners, you should know, jewelry is not an important part of the Hermes business. It's one of the sixteen Meters. They don't even break it out in earnings. It probably rolls up under other Air Mez 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 twelve percent. So I'm gonna guess this thing is like one to three percent.

2:15:02 So he does that for two years and then in two thousand eight He goes in. takes over the leather goods and salary business. So The big one. Which that's forty three percent of the business. And I think at the time it was closer to fifty percent.

2:15:15 Yes. So Bernard sees Okay. Got a generational transfer opening here. And in fact, when Jean Louis retires in two thousand six. he promotes his sort of COO right hand person.

2:15:30 Patrick Thomas. To be the first non family member CEO. Running the business side of the house alongside Pierre Alexi on the artistic side. And at least In retrospect, they try to make this seem like not a big deal that a non family member took over as CEO. They sort of bill it as,

2:15:48 Well, uh they needed someone to look after the business in the interim period before the family was sort of ready to have the next heir. I think there's as much chance as not that that was right. But at a minimum I think this shows The sort of ignorance. You know, I don't wanna say

2:16:05 lackadaisicalness of the family here,'cause it's certainly not that, but Maybe sort of ignorance or naivety that Hey, you're now a public company and there are People like Bernard Arnaud out there. You can't just be like, Oh yeah.

2:16:20 We're gonna do public company CEO transition in this way and take our time. You can. But you're opening the door for the R nos of the world. So that's one thing that Bernard sees. The other and I really think this is a testament to his vision.

2:16:37 Despite all of the strength within Hermes and everything that John Louis did. They actually are showing some cracks. And this we had to kinda piece together a little bit, and talking to folks in the industry helped us out here, but Look, there's no questioning Hermes's financial results And sort of on the surface.

2:16:58 brand value at this point in time. in the two thousands, early twenty tens. But there are a few things that are just kind of starting to slip as they scale. And I think actually. The best

2:17:11 story that illustrates this. Is one that The family members themselves do not tell, but that you'll hear out there in the lore about Hermes. Which is that in uh I believe it was in Japan. They had a product, a bag. Oh yeah, this is so interesting, listeners. If you listen to other coverage of Air Mez, you will hear this story.

2:17:30 And You never hear it from the perspective that we're about to tell it. Okay, so here's how the story goes. It's call it the late two thousands, early twenty tens. And

2:17:41 Armes is selling a canvas beach bag in Japan. And it is flying off the shelves, selling like hotcakes. It's like a equivalent of call it a hundred and fifty dollar canvas. Tote bag, beach bag. And This obviously gets the attention of management and the company that this is happening and

2:18:01 They decide that they are going to in true or mes fashion because it is selling so well, they are going to Not only stop selling the product. They're gonna take all their supply of it and destroy it. And They come into a board meeting, you know, with all the family members and

2:18:16 management they sort of announced this and it is met with a standing ovation. from the family. This is upholding What Hermes is, which is we don't sell beach bags. The family and the board is so aligned that No one even asked a question about this. They just stood and gave applause. And

2:18:34 Here's how This went on a meta level, listeners. I heard this story, David heard this story. And David texted me at one point and was like Isn't this an odd story?

2:18:44 And I was like, What do you mean? And we sort of realized Oh. This is not ever told by any of the family members or company executives anywhere. It's just sort of out there. And the company is not secretive. They love telling these

2:18:57 Legendary Hermes stories. Yeah. And they've got a 600-page document they release once every year that clearly lays out their entire strategy. They produce documentaries interviewing their artisans, showing videos of their factories. So It rings a little bit odd it's like okay well Why are they not telling this story, given how often it's bantied about?

2:19:18 So then you think about it a little bit and you're like Wait a minute. Why? The F. Did this happen in the first place? Exactly.

2:19:28 A canvas? Beach bag in Japan for a hundred and fifty dollars. And they're making enough of it that it's flying off the shelves. What company is this? How on earth Did this happen?

2:19:42 The story here is not a heroic one of we destroyed the supply. This is a tragic one. It's almost like when I was sitting there Watching Wonder Woman eighty four. And I was just so appalled at what I was watching. that on this meta level it occurred to me like

2:19:58 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.

2:20:11 And that is what you have going on. with a hundred and fifty dollar canvas tote bag. after a hundred and seventy five years of successful AirMez brand stewardship. Right. And Building up.

2:20:23 The Birken, the Kelly. I mean, for God's sakes, the scarves sell for like$500. Yeah. So okay. That I think is the most visceral illustration of this. Two other things that we're gonna do. 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

2:20:45 And investing in other companies. But why is there Metz doing this? Right. This is like the weird stuff going on at Nike when they were buying You know, Converse was the good example, but starter and it was almost like they didn't realize, oh, we should be concentrating our firepower behind our one hero brand. They were trying to create the constellation of weak brands.

2:21:04 The best Hermes could ever hope for by doing this is They're gonna be a sub scale, like they're not even gonna be reach monitor caring. Now one argument, you know, bootmaker John Lobb and all these other companies that they either bought in whole or in part. it became important for them to Own

2:21:20 their key supplier relationships. Yes. Those I think were probably strategic acquisitions. Yeah, especially in watches, where they actually fairly recently took a twenty five percent position in the uh company that makes the movements to make sure that they have enough supply coming to them. But That wasn't all of what they were doing. They were also buying other brands. Yeah, did you find the biggest disaster? This is kinda in your wheelhouse. Ooh. I don't know. I was wondering if I could stump you with this.

2:21:47 They bought I believe a thirty, thirty five percent stake they were the largest shareholder. In a German company. That makes What is really a piece of technology.

2:21:58 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. Really? Yeah. Huh. Which, you know, I mean sort of the motivation's like, oh, you know, they're beautiful and they're like luxurious cameras and they have leather on them and we can put her mes leather on the Leica cameras. Yeah.

2:22:22 If they made a Airmes edition like a camera with a They did? I should probably look into that. But okay. You're talking about a very narrow target market here and it's just You know, it's a technology product. I mean, we'll get into this with Apple in a minute, but It didn't go well, let's put it that way. They ended up divesting the stake. It reminds me of when the New York Times did all of this with all the T V stations in the nineties, too. It's almost like every company that ever thinks it's a good idea to start buying up other brands is wrong. Yeah.

2:22:53 Unless that is the core strategy of what you are doing, like L VM H. Yes. Yeah. The third thing that they do. They Incubate and create

2:23:04 A new luxury branding company in China. Called Shangxiya. I believe I'm pronouncing that right. In

2:23:12 Two thousand nine is when they launch it. It literally means up down or like Past present. And the idea is that you know the Chinese market is so big and so important, Armes. they're going to lend the Hermes brand to

2:23:25 This new brand that is gonna have Hermes principles, but take traditional Chinese craftsmanship. Of which there's a long multi thousand year history. Yep. I actually like the strategy. Well

2:23:38 Yeah, I mean it sounds good on paper, right? But here's the problem, like we were talking about earlier. Nothing compares to French culture as an export. And when you are buying luxury. And

2:23:50 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

2:23:59 twenty thousand dollars on a piece of leather. You know, you want that to be from Hermes and you want that to be from France. Right. And I think this is especially true in China. 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, seventy six percent of their production is in France and eighty five percent is sold outside of France. Yep.

2:24:24 First of all, 76% of production in France is kind of incredible the fact that they do this with all these different workshops that are sort of scattered around the country. But yeah, the incredible French history that is encapsulated by the brand and the French nobility and the French sense of place. It really is just an intangible connection to the culture.

2:24:44 That is lusted after everywhere in the world. Why on earth would you throw that away when that it really is the essence of your core asset? Right. Now

2:24:54 Easy for us to arm chair quarterback here. Like obviously it didn't work. They end up selling it off actually pretty recently. to the uh Anneli family from Italy, which is the family behind Fiat. Now look. Certainly that one

2:25:09 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 her mes.

2:25:21 Ermez can be an even rarer and greater quality business if they ever wanted to work with us. And I think he's genuine about that. Yeah. The family Obviously circles the wagons and like mounts. They're uh you know, like they're like the Rebel Alliance here, you know, mounting their defense against the Empire. Which I think is quite impressive. Absolutely. The fact that they were able to link arms like this and say

2:25:43 in the face of someone trying to Make you and all your relatives. collectively a multi billionaire. in liquid cash, it's kind of incredible to link arms and manage to rebuff it. Totally.

2:25:57 We'll tell the story here and it's amazing. But I think this is like a really important I Don't Think

2:26:04 Or no was wrong. I think he had a point and I think the company at the time didn't get it. Hm. They certainly do now. So okay, what's the story? What happens? Finally

2:26:15 In October of twenty ten. Or no, he's patient. He spent nine years Nine plus years. Yeah. That he's just building this stake, being patient.

2:26:25 In October twenty ten. LVMH exercises its options on the equity swaps that it owns. And announces that it had now controls Fourteen point two percent. Of her men's.

2:26:37 Shares. And Bernard at the time he says. I had to do it. Because Other

2:26:43 Luxury groups. We're 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, you know, organization. Uh quote here. I could not sit by and allow a competitor or another investor to take a stake in her mist. Oh, he's good. He's so good. I love it. In response to this.

2:27:05 is the famous or infamous, if you will, quote from Patrick Thomas, the then CEO of Vermez. Which we're not gonna say the full thing here on air. You can go Google it. But the

2:27:17 Response. And this is an official Press conference, you know, with investor relations people. He says if you want to seduce a beautiful woman, obviously her mez being the beautiful woman here. You don't start. In the fashion that

2:27:29 Bernardist 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. Carl Lagerfeld. is asked his thoughts on what's going on here in Lagerfeld, of course, he's a legend and you know he's the longtime creative director of Chanel.

2:27:49 He comments publicly. Well, if you don't want to be taken over, don't put your business on the public market. Which hey, uh game recognized game. That's a great point. He's got a point. If you want liquidity I mean, this is the trade off you make. Now

2:28:04 Of course, Lagerfeld, yes, famously is the creative director of Chanel. But he wasn't exclusively the creative director of Chanel, who is he also working for at this point in time. He is also, I believe, the menswear creative director for Fendi. Which is owned by L VMH.

2:28:20 Oh yeah, it's He's on payroll. He's on payroll. This continues on for months.

2:28:26 In the public markets and in the press. By December of twenty eleven, The L VMH stake has grown to twenty two point six. Percent.

2:28:35 Now The family owns seventy three percent of the company at this point. So Bernard now

2:28:42 Owns. Almost The entire public float of her miss. There's what, like three and a half percent of Vermez that's publicly floated he doesn't own?

2:28:51 Yeah, Ermes is like in danger of being delisted from the stock exchange. Crazy. Now, this is what's so brilliant. You might ask Why does this matter? The family owns seventy three percent. Bernard can't do anything. Price is a function of supply and demand. So as Bernard is shrinking the float. Of

2:29:09 this company. The shares that are available for trade on the public markets. Well, what happens to the stock price? Skyrocket. It goes through the roof. So now you've got eighty family members.

2:29:23 And they already thought they were really wealthy. And they already wanted liquidity. And now Bernard's coming to them, and this is his strategy. They just go pick off individual family members one by one. Keep. Increasing his stake and saying like Yeah.

2:29:37 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. Crazy. So

2:29:47 What happens. You know, this is why I think this really Was The family and the companies. Finest moment.

2:29:55 That temptation. I mean must have been extreme. And that's just the externally identifiable motivations. You know, I'm sure Bernard and other people at L VMH and everybody else in the industry is

2:30:09 doing everything they can to convince family members to sell. Right, and all it takes is one week link. Or probably a few weak legs because the ownership is so divided into tiny chunks by this point, you know, six generations in, it's pretty peanut buttered around. But still

2:30:24 I think also just from a psychological perspective, a couple dominoes fall here. And then as a family member, you start looking around and being like, Do I want to be the last one? It's kinda like a crowded theater, you know, running for the exits. Right. At the time, you're thinking about like, holy crap. This is the best it's ever gonna get. I may never see another opportunity to get liquid at this price.

2:30:46 Ever. And the minute that other family members start selling, well supply and demand. The price goes down. Right. I cannot be the last and I it would kinda suck to be the second or the third. Right. So in twenty eleven.

2:30:59 The family comes together. And over fifty of the eighty family members collectively Contribute. Fifty point two percent.

2:31:08 Of the equity in the company. Into a new Cooperative vehicle. That's called H fifty one. As in.

2:31:16 Fifty one percent of her mes. As in This vehicle will have majority control. of the company. when they contribute their equity into this vehicle.

2:31:27 They contractually agree. That that equity will be locked up. And cannot be sold. For At least twenty years.

2:31:35 So they're basically saying to Bernard, no matter what you do You could pick off anybody else after this. For a minimum of twenty years. with potential to extend beyond that, you will never, never, never You or anybody else have controls. So bass cover mez. So badass. Dude, you and I should contribute. We should make an A fifty one, even though it's completely unnecessary.

2:31:58 It just feels right for acquired, you know. Like I think you and I can each maintain twenty four and a half percent stakes, but A fifty one really should uh I love it. I love it. Well, hey, you know We haven't floated our business on the public markets yet, so we're taking Carl 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 Garon, who was an investment banker at Rothschild.

2:32:27 So she leaves and Full time becomes Head of the defense, I assume, alongside XL, who obviously comes from The banking world too. It's so interesting. I wonder if you actually can

2:32:38 structure articles of incorporation to say under no circumstances can this entity Cell. What it owns. Because normally what you would do is say like 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. And so I wonder exactly, I mean, this is not a public document, so we can't really know, but I wonder.

2:33:03 How airtight can you really make something and how irreversible. I don't believe these documents are public. But My understanding from comments that family members and Excel make about them. And spoiler alert.

2:33:16 recently they've renewed the term of this for another ten years. So it's Into the mid twenty forties. They're like, Bernard, you will be dead when this expires. That's exactly what that is. But I believe it's pretty ironclad that these shares cannot be sold. Wow.

2:33:33 So In addition to that Two of the Pueche brothers, Bertrand and Nicholas Nicholas is the one that there's the Gardner drama about right now. Which we should say, listeners, in case you don't know, there's a lot of stories floating around in the press right now that Nicholas Push is going to give half of his Steak.

2:33:53 in AirMez, which represents something like a little under three percent. to his gardener or like his ex-gardener, who's now like fifty one, nobody knows his name. Nicholas does not have children or heirs or other heirs. Right. So there's a press story right now that just shy of three percent of air mets could be given to the family gardener.

2:34:14 Anyway. The two Quest brothers. They do not contribute their shares to H fifty one. But They give

2:34:22 H fifty one is a right of first refusal on their shares. So they could sell their shares. But at whatever price they agree to, the rest of the family has a rofer on purchasing them. Oh, interesting. So that's another probably Ten to fifteen percent of her mes right there. Whoa okay, that's significant.

2:34:40 I wonder how this Gardener thing's gonna play out. Yeah, right. And those shares would be, I believe, subject to that rover. Assuming that that has stayed in place. Anyway. This is really just an incredible

2:34:53 Coordination. Yes, it's a family. They're all family, but there's eighty people here. The fact that they actually rebuff this offer and that Bernard sold down his stake. Is crazy. Well, let's get into what happens with Brighton. Because famously, as Domenico De Sole said in the press at the end of the

2:35:10 Goochie affair. Even when he loses. He still wins. And Bernard still wins here. So

2:35:17 This effectively ends the takeover bid when H fifty one is put in place. But meanwhile there are all sorts of lawsuits going on. particularly around how L VMH. amass this stake in secret with the equity swaps.

2:35:31 It was basically illegal, right? Well, in twenty fourteen, the French court rules that this was illegal. L VMH has to pay a fine, I believe like a ten, fifteen million dollar fine. For having done this. Pennies. Yeah, right. As we'll see, it's truly pennies.

2:35:47 And they also mandate That L VMH needs to distribute out that Ermez stake to its own shareholders. LVM H can no longer hold the stake. Well, who's the largest shareholder in LVMH? It's Group Arnaud.

2:36:01 Which is Bernardo knows family office. So they get Eight percent. Of

2:36:07 Ermes personally into his family office entity. Which This is the brilliance of Bernard. They take That

2:36:16 value, which is call it on the order of five billion dollars. And remember When they started buying, the whole company was trading at a market cap below Ten billion dollars. So massively appreciated stock. They basically created value out of nowhere here. This billions of dollars landing in Bernard's personal bank account. He has created that money out of nowhere.

2:36:38 He has unlocked shareholder value for sure. Even in the absence of a uh change of control transaction. So Back when Bernard was engineering his takeover of LVMH, One of the

2:36:51 financial instruments that he used to do it. was he IPO'd A twenty five percent stake. in Dor. He already owned Dior that he had gotten out of bankruptcy from Busek.

2:37:04 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. And so he was able to generate a bunch of liquid cash from all the minority shares that he sold off, but he still got to control 'Cause he was

2:37:27 technically the majority owner of each of them. Yes. He and L VMH didn't own this twenty five percent minority stake in Dior. He takes The Ermes shares.

2:37:38 And does A share swap. So swaps. that value directly With the twenty five percent.

2:37:47 To bring that first into group Arnaud. his family office and then he trades that into LVMH. So LVMH now finally as a result of this is able to take one hundred percent control DR.

2:38:02 And In exchange for Group are no trading this asset into Dior. Bernard's ownership of L VMH goes from thirty six percent up To forty six percent. So he gets an extra ten percent of L VMH.

2:38:17 And here's the most incredible aspect of this. Not a single dollar in tax is paid on all of this. Oh my gosh. Because it's all share swaps. Basically, Bernard just gets ten percent more. Of his own company. As a result of this.

2:38:30 Which would then go on to appreciate. call it four or five hundred percent over the next Five, six years. Five X'd? Since twenty seventeen

2:38:38 Yeah. Wow. Even when he loses, he wins. Unbelievable. Now.

2:38:46 This is a situation where everybody wins. I don't think there are any losers here. And the Urmez families. Absolutely are not losers. And you could even say They sort of have the last laugh here.

2:38:58 Because yes. Bernard gets to benefit from, you know, an extra four to five X Appreciation in Lates his market cap here. From

2:39:08 Let's call it the real beginning of when LVMH publicly announces. their stake in Hermes. So twenty ten. Armes's market cap is up sixteen X. It's crazy. And the reason why No one's a loser here and everyone's a winner is because Airmaz truly is the crown jewel. It is such an unassailable

2:39:30 Exceptional business. The last twelve months it did fourteen billion in revenue, five point seven billion in operating income. They have a seventy one percent gross margin and a forty four percent operating margin. It's a software business that doesn't need any R D. Tech companies go like I don't know what are Mezcolor to call it, but some color with envy over this. But

2:39:53 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 sixteen X. Market cap increase. He was right, like I was saying earlier. There were, I think, some real problems in the business. And

2:40:10 That is The story of the sixth generation of Pierre Alexi and XL. Who I think have Certainly fix those problems, but have really led Ermes the business and the company.

2:40:24 Into a whole new era. Yes, that is absolutely right. There is a quote that I want to start with. for the XL Duma era. Which is

2:40:33 possibly the best articulation that I've ever heard of business strategy anywhere. And he did it in the interview that we were talking about. So he says Every decision that we make has got some reverse effect, which I think is like a French translation for trade off. So every decision we make has got some trade off. There's something I really like about strategy in Michael Porter.

2:40:54 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.

2:41:10 And Hermes picks their fights better than anyone. And What? They've done it. over the last ten years.

2:41:20 Since the Bernard Fight. Is that They Have figured out

2:41:26 how to scale. And Crafted. Artisanal production. Yes.

2:41:33 On the surface, those are completely like oxymoronic terms. Those are completely diametrically opposed. This is a dead art in the world and AirMez manages to crank out hundreds of thousands of products. That Otherwise.

2:41:48 would only be created by individual makers with no infrastructure and no brand and 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. Totally. What was the stat that you said A little while ago that there are A hundred and twenty thousand Berkins and Kelly's. Produced every year. Yep, exactly.

2:42:08 Yeah. If they were still making these things on the third floor at the faux board. No way, no way. And this was kind of the problem and what the consultants were saying at the start of Jean Louis tenure of like, hey, you need to outsource production, you need to scale production, you need to make this more accessible. Right. You have a global brand now, like you need to figure out how to serve the demand for your brand. Yeah.

2:42:30 So The Patrick Thomas quote that I want to start with. Is So great. The luxury industry is built on a paradox.

2:42:39 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 it continues. I believe

2:42:50 Ermes's vision provides a solution. to this dilemma. And this is what the current generation has found, the solution. So Today.

2:43:00 I think we referenced this earlier in the episode. Ermez employs seven. Thousand. Mastercraft people. Yeah.

2:43:10 Most of the story that we've been telling thus far. You know, until nineteen ninety two, all of the craftspeople in the company, more or less We're working in the Faubor. In this one relatively small building. on the Ruf de Saint Honore in Paris.

2:43:27 In nineteen ninety two, they moved production to Pantan, in the suburbs of Paris. That building is amazing, but only houses about Two hundred and fifty, three hundred craftspeople. And actually still to this day, Axel talks about this a lot. Any one of their production sites

2:43:42 does not have more than two hundred fifty to three hundred crass people. Yes. They believe that Every single person should know each other by name. And they think that two fifty to three hundred is the natural limit on that. And Excel even says if you have more than three hundred, it is not a workshop. It's a factory. Yep. And they are not in the business of factories. At the same time He and the company

2:44:05 Have Stated as an explicit goal. that they will ramp up production capacity by seven percent every year. Well, As the company gets larger and larger, today that means adding five hundred artisans every year.

2:44:19 Crazy. And when XL started at the company all the way back in the eighties, there were two hundred and fifty craftsmen, period, and they hired Two per year. Two craftsmen per year in the late eighties. Right.

2:44:31 Now here's the issue though. How on earth are you gonna do this? Like you're saying, this is a dead art. Nobody else does this. Little maker with a workshop in San Francisco or a workshop in Paris, but like how are you even gonna find them?

2:44:44 Right. And those people, you know, the Beatrices here in San Francisco, they're entrepreneurs. They're not gonna go back to joining her mes because they all came from Hermes in the first place. How are you going to hire five hundred a year? It's not like they can go higher from their competitors. They're not doing this. Right, their competitors have all outsourced production and embrace assembly lines. So

2:45:03 They do the only thing that you can do. They build. The pipeline. Master crafts people and artisans.

2:45:12 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.

2:45:24 And they open trade schools. And they say we're gonna train you. They have a hundred percent graduation rates. They're like, We're not gonna give up on you. We're gonna make sure U Learn this trade that you graduate. You may not come work for Hermes when you graduate, but we're gonna give you this skill.

2:45:40 And then we're gonna offer you a job. As a master craftsman. It's crazy. It's unbelievable. So Back in the You know, even through

2:45:49 The Jean Louis era the fifth generation. Beatrice was the anomaly as a woman. These were all like Old men that were doing this stuff. Yeah.

2:45:58 Today The average age of the Hermes artisan workforce is thirty years old. And eighty percent are women. It's wild. It's a wholesale transformation. And

2:46:10 They are. training them. They actually just opened in twenty twenty one. Their first Official French governmentally sanctioned degree granting program.

2:46:21 The Ecole Hermes de Savoir Faire. This is the savoir faire that pops up in the annual report, you know, a hundred and whatever times. Let's name a school after it too. Yeah, yeah, yeah. They're like getting into like government policy here. They are preserving and growing this Art form in France. Yeah, they're not France's largest export.

2:46:41 because they have a very constrained way that they can create the products, but they may be France's finest export. So it behooves the French government to try to figure out how to Make this last another hundred years. Yep. So today there are thirty one

2:46:57 Ateliers. You know. Art is in manufacturing facilities. All throughout the country. Each with no more than, you know, two hundred and fifty, three hundred people in it. Right. It's the cloud competing idea of scaling horizontally.

2:47:08 Totally. This is AWS. This is the point I'm getting to. Right. They're building data centers. They were Amazon and they added AWS. And they are adding Two to four of those every year. So funny. You had that thought too. Totally. And it's all people. I mean it's all sticking to the thing that got them here, which is every product or at least every leather goods product, every handbag

2:47:32 Made end to end by one artisan. trained in the traditional early twentieth century way. So this is an insane idea. that leather goods, which is forty three percent of the business.

2:47:44 Hermes did what, eleven point six billion Euros in revenue. Last year. They're on track to probably do call it fourteen billion.

2:47:54 In Euros. Yeah. Last twelve months is fourteen billion. Yeah, that six billion of that. is gonna be handcrafted items where one artisan makes one item at a time.

2:48:06 And they're sold around the world like six billion euros worth of that every year. Growing? Uh Fifteen, twenty percent a year. Yeah, wild.

2:48:16 This is a really important thing to understand the company. They firmly believe that Only two hundred and fifty to three hundred craftsmen can work in a building. So that's one. Two, it takes Two plus years for someone to

2:48:29 learn the craft and apprentice. And three That Every one of these things must be created by one individual by hand. And if you believe all those three things for sure, then it forces a very specific constraint on your business and you must work backward from that. You can only train so fast, you can only produce so fast. Which then of course means

2:48:49 that it affects your products. And it affects the availability and it affects the price. Which of course means that it affects the customer set. So there's a way to view Hermes, which is they want the very highest end customer with zero price sensitivity, and they do whatever they need to serve that master. But I think there's another very real way to look at it, which is how the company describes themselves that starts with the constraints of the craft.

2:49:12 And when you hold true to that ethos at its most extreme. you end up with the company's brand and posture that you have today as the only logical end point. They can only hire three, four, or five hundred craftsmen a year. They can only Do this other stuff. Good luck getting a Birken bag. I mean, it's just one of these things where

2:49:30 You can say they're artificially constraining supply all you want. do things this way, this is the max throughput. And so they would have to change something. They would have to say, Hey There's some new fancy saddle stitching machine that it turns out makes us just as high a quality product and every craftsman gets, you know, twice as effective or something like that. But

2:49:49 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. Yeah, the Amazon. Comparison is so.

2:50:02 Up tier. Or Mez. Has This incredible unassailable flywheel. But

2:50:09 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 a intentionally rate limited flywheel, and it all works together. At the end of the day, it is probably true that Neither one is the starting place and neither one is the ending place. And the two things that I'm referring to here are the method of craftsmanship and the price and scarcity.

2:50:33 they just work harmoniously together. One is not driving the other. It is that They both want the brand posture that they have. and they want the constraints that they have. And so it works together perfectly. But a cynical person could be like

2:50:47 Well, yeah, all that handcrafted mumbo jumbo only exists because that's how you justify the uh brand pricing and availability that they've put in place. But I think it all works in concert. Totally. I mean like we've told the whole episode and I'm thinking back to what Beatrice told me when I asked her Why? If a master craftsperson made this thing by hand, it has a soul.

2:51:09 And if a machine made it. in a assembly line. It does not. Right. Maybe.

2:51:15 But Sure, in an assembly line with crappy ingredients, blah blah blah, sure. But Can craftsmen use better tools? Yes, and will Hermes continue to embrace Tools that make craftsmen

2:51:27 More efficient. At some point did they use sharper knives than were previously available in the past. They totally did. And so will they use Things that make the needle go a little faster, maybe. Totally.

2:51:38 Let's take a step back here. We gotta 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.

2:51:52 Louis Vuitton, which as we talked about, has the same caliber of heritage and history as Ermes. Yes. It could have Airmes' gravity if it wanted to, but instead You can buy a checkerboard. cotton sweatshirt with a hundred and twenty L Vs on it.

2:52:08 Right. They are having the same level of success. The same margins. It's working. Like a charm. But it's less durable.

2:52:16 Well, I think that's sort of the question. Is it less durable? Or is it just these are different? markets or different strategies. Now here's the crux of it that we've also been teasing on the episode that I think now's the time to come back to. This thing that I'm wearing on my wrist.

2:52:33 Mm. The Apple Watch partnership. out of left field, very surprising. Very odd for the brand to do this. I have a lot of complicated feelings about the thing on my wrist.

2:52:43 Including primarily that I love it. Okay, here's the story. Twenty fifteen, Apple launches the Apple Watch. Supposedly, the story goes. The Johnny I've

2:52:55 And the watch, I think, was really Johnny's kind of like pet project as his last hurrah before leaving Apple. He had all these quotes at the time of the Swatch industry better watch out, we're coming for the you know, et cetera, et cetera. Which was true. I mean different market, but it's by far the best selling watch in the world. Yes, but as Far from been the death knell of the Swish watch industry.

2:53:15 Right. Yeah. The Swiss watch industry has done just fine since the Apple Watch came out. On the high end. Yes. Mark Newsen was consulting for Apple specifically on the Watt, and Johnny asked Mark to introduce him to

2:53:29 Pierre Alexia and XL in two. Or Maz. Apple was looking for A luxury fashion brand. Remember there was the Apple Watch edition in the beginning that was like the gold Apple Watch and all that. Oh man, ten thousand dollars for something that was gonna be obsolete in a year. It's crazy.

2:53:47 Yeah. That clearly didn't work. But it's beautiful. Yeah, totally beautiful. But they needed a luxury brand. They needed a brand

2:53:54 That was not deeply in bed with The traditional Swiss watch. industry. Which some of these luxury groups are. Oh, it's funny, I hadn't actually made that connection that that's why it's Aramez and not

2:54:06 Well, I think there's two reasons. That's one reason. The other reason is they needed a brand that was going to appeal to Pretty much everybody. Yeah. For everything. we've talked about with Louis Vuitton and how successful that's been. It's polarizing. Totally. And Apple also needed to go to the very top of whatever they were gonna grab. Like that's the thing about Arames is

2:54:27 Whatever they make Nobody is ever gonna say that Hermes makes crap. 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. And that's very Apple. I mean, Apple has to make compromises for the scale that they're at.

2:54:48 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 kinda doesn't play for Apple's brand. They need to partner with someone unassailable.

2:55:02 Axel and Pierre Alexi talk about this all the time when they're asked about Oh XYZ flashy celebrity, you know, is carrying a brick and bag, blah, blah, blah. They say like look, we don't judge. We never judge Eric or Mess. Our clients are our clients, whether it's Grace Kelly or, you know, Kim Kardashian. Yeah.

2:55:18 And that's what Apple needed. So Axel is a great We had an incredible talk with Jonathan Ive.

2:55:25 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.

2:55:41 Okay. This thing on my wrist is exactly what Axel is saying there. It is a contemporary, elegant object. That is Beautiful leather.

2:55:51 The reason I bought it is For my Life and modern life. This thing is on my wrist twenty three hours a day. I sleep with it.

2:55:59 A hundred percent. I love the Aimez Slim to Hermes watch. I like looked at that thing. I don't know, five times during research lusting after it. And ultimately close the browser tab being like

2:56:11 I wear an Apple watch all day, every day. There's just no world where like it actually makes sense for me to own a different watch. Right. I mean even more than my phone. This thing is part of me. When I was looking to do research for this episode and buy

2:56:24 a bit of the Hermes dream. I couldn't imagine anything More appropriate. Yeah. Literally it's on my wrist twenty three hours a day.

2:56:33 Right. At the same time. I find it absolutely terrifying from the perspective of what it means for a medicine. The Irmes future, not because I think that Apple and technology is gonna take over the world, but I think there's some serious with this product. Along the lines of the issues that Bernard identified in the company

2:56:52 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 Ermes sells as such.

2:57:07 And it cost five hundred and forty dollars. Which is Expensive for an Apple watch band. But it's sort of like in the ballpark of Apple accessories. Or it's at least maybe twice as much as normal Apple accessories. This is

2:57:21 Among the cheapest leather Products that are mes cells. As a comparison, if you want to go buy uh Hermes luggage tag Six hundred and forty dollars. Let's move out of Leather Good for a second. If you want to go buy a Nermes sweatshirt.

2:57:36 Over two thousand dollars. If you wanna buy an Emes piece of furniture and they make Incredibly beautiful furniture. Forty thousand dollars minimum. Five hundred and forty dollars for this thing.

2:57:50 It's not priced right for a Nermes product. Yeah. It's too low. It's somehow bridging the gap between an Apple product and an Arames product. Yes. And maybe that's because it's also sold in Apple stores, et cetera, et cetera. But related to that.

2:58:04 You start to think about that, like, Wait, why is the price so low? Nowhere on the exquisite orange packaging and box that this thing came in. Nowhere on it, nor on the product page on the website does it say that it was handmade. So Are Mezes belt and I believe they're Apple Watches and

2:58:23 There are other things are machine zone. And this to me is like Wow. You know, would I have spent Two thousand dollars.

2:58:33 On a handmade. Apple watch herm as ban. Maybe, maybe not. Like I don't know whether I would have is irrelevant. Ermez should be selling two thousand dollar handmade. Apple Watch Bands.

2:58:46 Even if people aren't buying'em. That's sort of the question. I agree with you because what I think this does is it defies How I think of Air Mez, which is Whatever they're gonna do, they're gonna do it at that logical extreme. They're not gonna compromise. They're not gonna figure out how to address a lower market.

2:59:03 They're going to sell the same expensive scarf that they sold their grandma to you, but they're gonna have a different way to advertise it. And This is weird. It's weird. It's a compromise.

2:59:15 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. Like it feels like uh They don't promise that everything they make is hand sewn, but it feels like a mild violation of the brand promise. Right, yeah. So

2:59:34 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.

2:59:45 You're right. It does feel like a profanity. I mean Apple is the you know, most valuable brand in the world, but the most common brand in the world. And for Hermes to associate with such a common brand feels odd. Yeah.

2:59:59 Apple is the definition of mass market at this point. Well, I think that is certainly part of it. The thing that is really just kinda head scratching to me about it. Is Why do they not sell these things for four times as much and make them by hand?

3:00:13 Yeah. What are they getting out of selling a machine made strap for five hundred and forty dollars. Maybe you're now an Airbus customer and over the next fifty years. You're on a journey with them.

3:00:26 I think that's true. I mean I'm going back tomorrow. What are you getting tomorrow? I don't want to spoil Jenny's Birthday Valentine's surprise.

3:00:34 I'm actually getting two things, but we'll talk about this on a future episode. Okay, sounds good. The cliffhanger. Cliff Hanger. So Just to put some numbers and finish out the story. Bye.

3:00:45 twenty eighteen. Revenue has grown from Call it. three and a half, four billion euros when XL took over in twenty thirteen. By twenty eighteen that's six billion euros. Twenty nineteen, it's seven billion. It dips a bit during twenty twenty with the pandemic, but then nine billion in twenty twenty one.

3:01:04 Last year eleven point six. And like we said, on track for call it. Fourteen. billion. Urows.

3:01:11 in twenty twenty three. This is an absolutely resounding success. As we've said, what Axel and Pierre Alexi in this generation of the family Has done. like all the generations before them, has been nothing short of amazing. Remarkable. Starting with the defense against Bernard.

3:01:27 Incredible. I don't wanna fully judge or leave a negative. Mark on the company. solely because of the Apple Watch thing. But I just gotta say though

3:01:35 We've seen with a few times here in these generations that the seeds of the next challenge are sown. Wait in the current generation and uh I wonder if this is it here. Our mez has always thrived by figuring out how to be above it all and it be

3:01:49 counterposition to the rest of luxury. It's an open question, I think, of whether the Apple partnership helps that or hurts that. Yeah. All right listeners. Now is a great time to talk about one of our favorite companies, StatSig. Yes, there is a reason why the best product teams rely on StatSig, whether they are iterating on their core product features or shipping AI powered experiences at scale.

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3:02:45 to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Okay, a few more stats on the business today before we move into analysis. That sound good to you, David? Great. Great.

3:03:05 Well, I thought one fascinating thing was XL saying that with the uh four point three 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. And What's pretty interesting is They have a reasonably low reinvestment rate. They're dividending out a lot of cash.

3:03:27 And they're holding on to a lot of cash. Two thirds of it. And so What 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.

3:03:40 It's much like Costco. They're constrained by factors other than capital. You give more money, they can't do anything with it, which I just find fascinating. They can only train the craftspeople so fast, and frankly, at some point they'll saturate the market too. If they're going to address the whole world They're gonna have to change

3:03:58 what they sell. And the Apple Watch may be the first little version of that. They grew what, twenty, twenty five percent last year. They can't keep growing at twenty five percent without changing what Air Mez stands for. And so even if they could train these craft people as fast as possible, They have another governor which is Scarcity. product image.

3:04:18 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. That's such a good point. And that's the counterpoint to my impassioned concern a minute ago. Okay, great.

3:04:33 David, everything you were just saying that translates to Hermes' a Museum. And Armes is not a museum. Right. And it has to meet its clients where they are. And like I said, I wear this thing twenty three hours a day. I couldn't imagine buying any other product from them.

3:04:48 And I'm sure there's some members of the family that want to walk around with their nose in the air and be a museum and say Are Mez is pure and I want to go my whole life and then die with Aramez remaining pure. And there's other members of the family that are like, can we serve customers and grow this business, my God? And that Apple Watch represents the second faction. Yep, totally. Next to 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

3:05:20 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 hundred and seventy years. And so that's kind of an interesting thing to know about a business is it was always run under the constraint of. Even if we see growth opportunities, we don't have enough cash to pursue all of them. Now they actually do. And so it's interesting to see how management sort of responds in this opportunity for abundance that they have. And figures out how to treat

3:05:48 certain elements of the business as a scarce resource, even though they don't have to. Yeah. Now, certainly there is an element to to the dividend that is part of making the family shareholding lock up an easier pill to swallow. Yes. Quite palatable. The segments of the business, leather goods and saddle 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%.

3:06:13 That's a big chunk. That's the second largest chunk of the business is clothing, effectively. And I sort of have an open question of whether they should be in clothing. Isn't it kind of antithetical? I mean certainly

3:06:25 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. Yeah. They're not a fashion brand. And yet they participate in it.

3:06:38 Yeah. Next largest segment after that. is silk and textiles. So remarkable how small the scarf business has become of their overall mix, given that it used to be what, close to half the business. after that is perfume and beauty at four percent and watches at four percent. And then there's a couple of categories of others, which I think it's really interesting to look at perfume and beauty as Another

3:07:02 They make hundred dollar bottles of perfume and they sell'em at department stores. Yeah. And they launched Beauty in twenty twenty. With lipstick.

3:07:12 Yep. 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 Air Mez.

3:07:27 as this sort of pure brand. But on the other hand. It's a continuation of the Apple Watch strategy even further. Yep. There's one more elephant in the room to me. That we

3:07:39 Haven't. addressed via the story. Which is the The business is a global business for sure. But

3:07:46 Really today? This business is an Asia business. Yeah, so here's some stats. In two thousand and six France was already down to nineteen percent of sales.

3:07:57 I mean it started at a hundred percent of sales, so that's why I say down to nineteen percent. Two thousand six, this is a while ago, or almost twenty years ago. At that point in time. Japan represented 27% of sales. So there's all this talk about China and luxury today. Japan was that in the early 2000s. So

3:08:16 Crazy, right? Japan was one and a half times France in terms of sales for AirMez. Well, today France is down to just nine percent of sales. So let's flash back to two thousand and six again. So we talked about Japan being at twenty seven percent of sales. Asia Pacific outside of Japan.

3:08:33 Seventeen percent. Oh wow. Japan was almost one and a half times as large as rest of Asia. Well, today, rest of Asia is forty eight percent.

3:08:45 half of Air Mez's business. Is Asia excluding Japan. Aka China. Exactly.

3:08:52 That's crazy. And I think Russia accounted for a decent amount of that. Hm, interesting. The Japan story actually, I think, is still Significant.

3:09:02 Japan today is what, like ten percent? Of revenue. Yeah, Japan's larger than France. It's nine percent in France, ten percent in Japan. Right. So I actually looked into that, I was like, huh. Yeah, the rest of Asia, you know, again, AKA China is forty eight percent of the business.

3:09:17 But on a Per capita basis. Japan buys twice as much Hermes as China. Mm, that's interesting. Still. Japan is, I believe, around a tenth of the size of China.

3:09:29 And is ten percent of our mes sales versus Forty eight percent for Restorator. Huh. For a small country. Kind of like France, it's still very, very significant for the business.

3:09:39 Yeah. I will say that You listen to management commentary. Hermes is very excited about China's middle class. And they have done a really good job skewing younger there. Eighty percent of clients in China are below forty.

3:09:53 Wow. And you know, again, this is A huge unique success for Armes. China's been.

3:10:01 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.

3:10:13 And yet. Or Mez is still growing there. Yep. Employee count. So they have twenty one thousand total employees, seven thousand are artisans.

3:10:22 sixty two percent of employees work in France. So they really have stayed French. They've not outsourced. They have fifty four production sites in France or what they call workshops. And they manufacture seventy six percent of the objects that they sell in their stores in their own exclusive workshops. So they do still have these partnerships with other companies that they

3:10:42 own part of or just have a partnership with or a distribution deal with. Usually what it means is it's sold as an Air Mez product, but it's made by another manufacturer. And over the years they've done this with shoes and umbrellas and leather jackets and raincoats and silverware and gloves. Like they've had all these independent craftsmen that they sort of contracted with who have these really small shops, really small

3:11:05 operations, don't know the brand reach that AirMez does. But they make Air Mez products that are actually made by those people. So it's interesting. I think they're sort of decreasing that when I give the number that At this point, seventy six percent of objects are made in its own exclusive workshops, but Is

3:11:23 More correct. than not to think about Air Mez as They control everything from design to production to brand to retail today. Yeah.

3:11:33 And I think a lot of those like There's a silversmith and uh Table where we're going to be able to do it. manufacturer that they own large stakes into. So it's like a related party. Yeah. Exactly.

3:11:45 They have over three hundred stores in forty five countries. David, as I mentioned earlier. In twenty twenty, the Wall Street Journal estimated that about one hundred and twenty thousand Birken and Kelly bags were made in that year. That's about twenty five to thirty percent of total revenue coming from Just those two bags.

3:12:03 Which Again. You can't buy. And also you can't even see. Yeah.

3:12:09 They're not on display in the stores. I went to a few AirMed stores over the last year, A because I love the brand. B because I was thinking we might do this episode at some point. I saw zero Birken or Kelly bags even on display. This is the thing that they

3:12:22 generate all their buzz about and make thirty percent of their revenue from and you can't see it in a store. Yep. Crazy. Totally crazy. I mean, if you just do some napkin math at twenty five hours per bag, that's fifteen hundred craftsmen just making Birkins and Kelly's all day long. Sounds about right.

3:12:40 They have sixteen Metier, and one in particular that I want to talk about is Petite H. This is One of my favorite Airmaz things period. So it started in twenty ten.

3:12:51 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.

3:13:03 But 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. So What do they do with all that leftover material? Well, for years they were just storing it. And this is everything from the leathers to the felts to the silks. All this extra material where they were just like

3:13:24 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. And in twenty ten. they launch Petite H. And what they basically do is they collaborate with other artists for tiny little goods that can be cut from the scraps that are super whimsical, super fun. Think luggage tags that are Cute little animals, but

3:13:45 It's just enough of a shape to know that it's a bull or a bear or a cat. And you look at it and you're like, oh, that's really clever. And what they call it is creation in reverse. You start designing with the materials, not the end product in mind. And it's kind of the opposite. of everything else that Hermes has ever done, which is think about what's the perfect

3:14:06 good we can create to solve this problem for a customer. This was like Now we've got a bunch of scraps. What's fun stuff we can do? And that is that whimsy coming through. Yes. One thing that I want to say about the luxury bubble cooling.

3:14:19 Is that Earlier I sort of chalked it up to well, Hermes has the most exclusive brand posture. So they have the least price sensitive customers. So they're gonna feel the pullback less than everyone else. And

3:14:33 That is true, but there are other parts of it too. Are mez's 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 Birkenbags.

3:14:51 You might think less of them. Yeah. 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. So it's how they conduct business. that has caused them to sort of be

3:15:05 in a better position than the rest of the luxury industry right now in this pullback. Yeah. 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

3:15:17 Pricing power on the table. Or essentially there's consumer surplus. In economic terms. Right. And I said I think they increase prices across the product range by about seven percent per year. So where I got that from.

3:15:30 is if you look at the compounded annual revenue growth rate of URMs for the last ten years, you know, the sixth generation era. It's fifteen percent. Revenue's grown. Fifteen percent compounded annually since Excel took over in twenty thirteen.

3:15:46 They've increased production Seven percent per year. That's their stated goal. So if you say like okay, of the fifteen percent revenue growth, take out the seven percent production growth, that leaves seven to eight percent of That's gotta be a tributable to Price increases.

3:16:00 Huh. Which I think this is the answer. Now Is it the right strategy? Probably it is the right strategy if you're thinking about Hey, this is a generational business. We're on the sixth generation. We want to ensure it's around for the twelfth generation.

3:16:14 Yes, we're leaving consumer surplus on the table here because we don't want to be seen as That brand that You know, is like Hundred thousand dollar handbags, even though they are hundred thousand dollar handbags. Right.

3:16:26 Yeah, there's a fine line. There's a ghoshness to it. Right, exactly. They need to have a price that's high enough To signal This is something really, really special, and we are more unique than

3:16:39 every other luxury brand who's trying to make similar products and have similar positioning. But also it's not so expensive. Then it's gauche. And 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.

3:16:59 If it's fluctuating all over the place. There probably is an element of like uh I wanna say almost defense that they can fall back upon of well, yes, we sell these things for twelve thousand dollars, twenty thousand dollars, whatever, but The moment you take possession, you can turn around and sell it for more. Oh.

3:17:15 This is an intentional strategy over at 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 gonna increase in value over time and that it's a a good investment. Because Counterintuitively.

3:17:31 By increasing the price more than the rate of inflation every year, or especially more than the rate of five to seven percent stock market return. Yeah. spurs people to buy that otherwise wouldn't have bought because they feel more safe making the purchase. This Concept landed for me during our Porsche episode.

3:17:50 Working with Doug DeMiro. There's a class of Almost every car that you would ever buy, you know, the old Adage is true that the day you drive it off the lot it's worth, you know, twenty percent less than It was the day you when you bought it. Yeah.

3:18:03 For I don't know what the right word is. Luxury cars. collector's cars, you know, rare cars, et cetera. The opposite is true. These are investment. Vehicles.

3:18:14 If you buy a Carrier GT. You're gonna spend a million dollars for it. You can also be confident that You're not gonna lose money on that.

3:18:24 Purchase. Right. It's an investment. Right. Then there's a business unit that we didn't talk about yet called Airmes Horizons. Yes, which is not a official Metier, right? It is not a Metier. They break it out under other products. They have four categories of other products. There's Internet of Things, which is Apple Watch.

3:18:42 There's tanneries and precious leathers. There's metal parts, which is a J three L subsidiary that I think literally makes the clasps and stuff like that. My deployment buckle. Yes. And then there's Hermes Horizons. This is so great. Air Mez Horizons is perfectly named. What it basically says is If you have a private jet and you want it outfitted with Hermes seats. And we don't make seats. We've got the division for you. We will make you seats.

3:19:08 Yes There's an amazing quote from an article. Probably ten, fifteen years old. The person who was running this division said. Something like We get a lot of clients who come in here.

3:19:22 And they want a big H on whatever it is they want us to make. And we have to have a discussion with those clients. That if that's what you want, we are not the place for you. Yeah. Yes. So great.

3:19:36 Maybe one day be uh Hermes Horizons customers. Maybe. We'll see. All right, well let's transition officially to analysis and start with power as we always do. Hamilton Helmut seven powers. And listeners, this is the question of what enables a given business to achieve persistent differential returns.

3:19:55 or to be more profitable than their closest competitor on a sustainable basis. And the seven that Hamilton has identified are counter positioning, scale economies, switching costs. network economies Process power. Branding.

3:20:11 and cornered resource. And the question we asked David on the LVMH episode was For luxury brands, is there anything else other than branding power? Because the definition of branding power is if I present you two identical objects and one of them Is branded.

3:20:27 and one of them is unbranded, it is literally quantified as the premium that you are willing to pay me for the brand. Now in Hermes's case, it may not actually be branded, but you might still know it is Airmes and be willing to pay more for it. Yeah. If you know, you know. Yes. Again, we're drawing a lot of attention to quiet luxury here. Air Maz is not as quiet luxury as they once were, so I think it's safe to say it would have an H or a a horse or a

3:20:53 woven H into the fabric or something like that if presented to you here. But obviously. There's a tremendous amount of branding power. Now on the LVMH episode We talked a lot about and I think this truly was

3:21:06 Maybe the most brilliant thing that Bernard Arnaud. did was he realized When nobody else did. That there were scale economies In luxury to a group.

3:21:17 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.

3:21:29 That Does not exist. Uh. The brand level. Clearly none of that is happening here. Yep.

3:21:35 Okay, I have two cases to make. for non brand powers that come into play. Oh, okay, great. Cornered Resource. Yes.

3:21:42 Agree. They literally have all the craftsmen. Agree. Except for the ones that are opening their own independent shop. And those ones don't have brand power.

3:21:49 An Aramaz craftsman can make a wallet. a independent craftsman can make a wallet, you're gonna pay a lot more for the AirMez one. In fact, you're never even gonna 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'em yourselves. Well, and I think even the other luxury brands out there.

3:22:09 Most of them probably do have some. Craftsman. Yes. Some stuff that's done by hand, some components of some products done by hand. But nobody does what Hermes does and Hermes is all the craftsmen, so cornered resource for sure. Yeah. The other one that is a little bit squishier

3:22:25 Are they counterposition 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. Hmm. Louis Vuitton has no ability to switch gears and say, Ooh, it's important to compete on the vector of handcrafted. Right. There are a lot of T shirts out there. Right.

3:22:45 They have to serve too many customers. But Raz doesn't. Right. It's kind of flimsy counter positioning.

3:22:52 Uh no. I like that actually. It's rare to have counter positioning at scale. As Hamilton would put it, counter positioning is usually a takeoff phase power. Yep. I think there's an element of that. You could dissect how much of

3:23:07 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. Maybe we spent However long this episode will be when it ships.

3:23:18 recounting the myth of the brand here. Like brand is the power. Yeah. Brand is the power. Yes. Okay.

3:23:25 Playbook. I called David earlier this week and I said We have a problem. There's this really good part of the L VMH episode and we're gonna need to repeat it. Point for point.

3:23:35 on the AirMaz episode, and that is Why handbags are just the best freaking product to sell ever. As a business. And David planted the seed with me.

3:23:46 Perhaps It's actually gonna be a pretty different point once we really tell the whole story. And David, you are right. So the point that was made on the L VMH episode are

3:23:57 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 ten and twelve times the cost to make them at Louis Vuitton, it's something like 13 times.

3:24:23 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 two thousand and by two thousand and four that number was more than four. So it's this high volume product. And at Louis Vuitton's immense four floor global store in Tokyo, forty percent 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 Hermes.

3:24:52 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. So certainly not In that first room. It's amazing, you know, at least in the Palo Alto Hermes, which is the you know one I've most recently been in. You walk in and You would think this is a homewares company.

3:25:11 Yes. There's a lot of tableware and there's a lot of furniture. And there's clothing there's ready to wear. And there's clothing and there's some leather goods. There's scarves, but You would really think, wow, I'm in the most expensive IKEA ever. Uh it's such a funny way to describe it.

3:25:30 In terms of trying on the handbags. When you do get your moment in the sun and you have your ninety 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. You can't say no. You have already accepted. Right. And it doesn't have the benefit of saving square footage, the way that you know I mentioned, oh, you don't need to try on

3:25:52 handbags. There's nothing to impede your velocity. Airmez is impeding your velocity and they're taking up square footage with these private rooms for you to go and spend time in. So they don't take advantage of that. benefit either. I mean the only thing that it has in common are these goods are sold at a phenomenal margin, just like Louis Vuitton. But

3:26:11 I sort of 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. Yes. And I think that's really the story. Yes, there are other brands. There's Chanel.

3:26:29 Scoochie, this is a I I don't want to Say that those luxury brands and those handbag brands are not. Incredible. They are. But

3:26:37 There's Hermes and there's Louis Vuitton. And they're both connected all the way back to Empress Eugenie and France and the nobility and all of that. And It's so interesting that they have such different strategies and they're the two pinnacles. Right.

3:26:53 This is a Good moment to bring up this idea. that Aramez likes to espouse that they have no marketing department. Yes. This is a whimsical element of her mes that I kinda love. Yes. So they make the point that everyone at the company is responsible for marketing, which is wonderful. What a great comment.

3:27:12 But there's some truth to it. There's obviously a lot of PR and events and stuff that they do, but it's worth looking at some of the numbers. They spend twenty three percent of their revenue on sales and marketing costs.

3:27:26 But just a small fraction of that is actually on marketing or what they call communication. It's just four and a half percent of their revenue. And if you compare that to L VMH, which spends over one third of their revenue on sales and marketing combined, so that's twenty three percent for sales and marketing at Airmas compared to thirty three percent at L VMH. I mean, that's a huge difference. When you compare Apples to Apples just on marketing, L VMH says they spend twelve percent of total sales on advertising and promotion. Airmes spends four point five percent on communication.

3:27:58 I think that is actually apples to apples. Yeah, that's the media. Spend of Hermes, I believe. It's still not right though. Oh. It's all marketing that four point five percent versus twelve percent.

3:28:11 But Remember you pointed out to me earlier before recording Two thirds of Aramez's communication is actually events. So

3:28:20 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 L VMH's twelve percent. Yeah. This is really cool. I saw a Very large. splashy media buy from Hermes very recently.

3:28:39 And I was shocked when I saw it,'cause I didn't expect it, but then Now doing all the research, understanding their strategy, it makes total sense to me. It was at The ballet here in San Francisco at S F.

3:28:51 At the program for Mere Mortals, which was Just as I talked about on the Nova Nordisc. episode we went to see at opening night. Just incredible, incredible piece. You know. Allegory for Pandora's box and AI.

3:29:03 And ballet in the modern world here in San Francisco. The back of the program was a full page or Mezad. And I was like, Whoa, I think I texted you a picture. I was like Armes is buying full page marketing ads. But no no no.

3:29:15 This is in the program at the ballet. This is not on the back of Vogue. There's a difference. Right. This is in some ways event spend. Yes, it's much closer to that. They also go really hard when they're gonna spend money.

3:29:28 They don't blanket the world. They decide these concentrated ways that they want to do something really unique and special, and that's how they spend their Media buys. Also there. Event spend. You might say, like, wait, how do they spend twice as much on events as they do on media? You haven't read about Hermes events.

3:29:44 Yeah. Even just the pure marketing events like a store launch or product launch, they'll spend a million dollars on a party. Right. Another place that they save a lot of money is is that they don't do celebrity endorsements. unlike virtually every other luxury brand, and this gets back to control, control, control.

3:30:04 Hermes is the master of its own image. And these other companies Celebrities do dumb stuff all the time. And

3:30:11 It reflects. on the company. You have to change your spokesperson. I mean you look at Kanye you have to just decide to stick with them and tough it out. The Nike has done this a number of times. to sort of say, like we think we're gonna come out the other side and we think they're gonna get through this. Hermes.

3:30:26 No. We control our own image, no one else reflects on us. And Who needs celebrity endorsers when you make your products? so desirable and so expensive that

3:30:37 The celebrities will just buy them anyway, and they want to be seen in it. So There are celebrities running around who get paid to endorse other brands who will pay full price to wear Hermes out and about. It's part of the status is getting the ability to buy one, getting the appointment with your essay, spending the money. That's part of the status. Not only

3:30:57 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. Yeah. I'm pretty sure that Grace Kelly bought her sack of the pesh. Unbelievable. At the end of the day The AirMaz brand really has a tremendous amount of word of mouth from people who are big fans of it. And the brand is built through the lore around the products.

3:31:24 and they just don't need to do that much media. Because They have A community. They have slowly organically Built.

3:31:34 This. At this point, large number of people around the world that aspire To buy AirMez. And Honestly, they just don't need to do that much marketing.

3:31:43 This is gonna 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. Yep.

3:31:55 That audience is forty plus percent China. That audience is Still. French. People with the w preface duh in their names, i.e. you know, old nobility.

3:32:06 That audience is the wealthiest people in America. That audience is Cardi B and Megan the Stallion. 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. Yep. I don't think we want to go down this rabbit hole, but there is a whole TikTok and Instagram culture of

3:32:30 Ermez sales associate appointments and Birken appointments and reveals and all that and like, you know It's huge. There are millions and millions of people that watch this. Yep. Okay, one thing that we did not talk about is how they merchandise the stores.

3:32:44 And this is another thing that sets Airmes apart from other brands. They pull model versus a push model for all you software engineers out there. Basically They embrace this idea that every store is

3:32:57 for the local clientele and that store managers know their clients the best. So therefore, store managers should get to pick what is in each store. And headquarters does not dictate What every store stocks. Which is super different than every other brand. You open retail stores.

3:33:14 In order to just get your product out. That's the point is distribution. Whatever salespeople we hire to work at those stores, they're gonna sell the same iPhones and iPads that we have everywhere else at every other store. That is not Air Mes. So at podium every year, which is this event that they have every six months where they show off all the new references. Here's all the new designs for all the new products. Each store manager gets a budget and they have the freedom to buy, quote unquote, buy basically stock and get allocations of whatever they want at their store. under the constraint that you can't ask for 120,000 broken bags at your one store.

3:33:48 I believe there's also a regulation that every store needs to carry at least one item from each métier. Oh, that's cool. I didn't realize that. I like that. But yeah, this operates like a retail buy event. It's Bizarre, but awesome. Even though they're wholled, they get the benefit of not being wholly owned, you know? Right. The market signals. The cool thing about a retailer that's decoupled from the manufacturer is that the retailer can kind of

3:34:14 stock whatever cool stuff they want. You know, 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. So It leads to this cool thing that no two stores are identical. It's kind of fun to see what this Airmez shop has versus that Airmez shop whenever you travel. There's like a Costco treasure hunt element to it. Yes, exactly.

3:34:39 I will tell you, I was in the um Exxon Provence store and someone came in and said I want to buy this particular item. And the store manager said, Well, we don't have it. And they have a policy against anyone sort of calling ahead to know what's where. And he was asking, Well, can you call the other store that I think was in Marseille or something like that and see if they have it there? And she said, No, we don't do that. You can go there and you can find out. And I think this person was trying to like buy something and flip it and so they were sort of on to that.

3:35:09 He was also trying to take pictures of things in the store and they said you can't do that, sir. Like you can't take photos of what we have in stock because they don't want people standing up websites to say tip go buy this here because you can flip it online for that much. But I love it. They have pretty tight controls around that. I love it. Luxury strategy anti love marketing number six. Dominate the client.

3:35:29 Dominate the client. Yeah. Their e commerce strategy is just pretty funny. It's not like you can go online and buy a Birken bag. But there's not even a product detail page with like a sold out button.

3:35:41 There's just this educational page about what Birkenbags are all about and how neat the designs are and what the category is. But there's no buy button. It's also for a different audience. Interestingly, seventy percent of buyers online for all the stuff that you can buy online were new to AirMez. So that's a great strategy for them for e commerce. You say, look, the special things are the special things, but for

3:36:03 people who we want to come experience the brand for the first time. Great, we've got a website for you. And I think you can sort of tell That internally they're torn, since that's not the full AirMaz experience. Like you don't get the experiential part of being in the store. but they also do a lot of volume through it and it's a way to reach a new audience and it's kind of an expectation at this point. This is a really uniquely

3:36:25 Or Mez thing. And Is related to their airport strategy too. Oh yeah. And I experienced this too.

3:36:33 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 a An Sales Associate.

3:36:42 relationship. It can feel very intimidating, like especially knowing what I know about the company and the brand. you know, the weight of history like walking into this store. It's not like walking into an IKEA. You know, this is very intentional, the e commerce strategy and then the airport strategy is Hey, nobody feels intimidated in an airport. Obviously you don't have to have an appointment to walk into

3:37:04 The airport. It's a way to get first time buy into the fold, establish the relationship with them, get them more comfortable. in this buying experience, which is wholly unique to Hermes. Yeah.

3:37:17 In some ways it seems wholly unermes. But in other ways, kind of like the Apple Watch thing that they do or the perfume, they are looking for ways to be more approachable. Right. Another one worth mentioning is employee turnover. So

3:37:32 The employees, especially the craftsmen, basically stay forever. As we've been saying, there's really no other game in town, and if Fermez wasn't there, these people probably wouldn't have been trained to be craftsmen in the first place. So what does that look like numerically? There is six percent annual turnover. And only four point five percent leave of their own desire. four point five percent of their entire workforce every year.

3:37:56 Leaves of their own desire. So that translates to a longer than twenty year average tenure. This is like Costco level employment retention. It's funny you say that. So Costco is seven percent a year, but Costco

3:38:10 cheats a little bit and that the stat is after the first year. Whereas Aramez's attrition of six percent. includes the first year. Well. Yeah.

3:38:19 So just compare this with all industries in the US. That's a three point four percent monthly. Turnover. So in the United States across all industries, and thanks to Jeremy Diamond and the Slack for pointing this out. One third of the entire workforce churns

3:38:35 On average. Every year. So when you're trying to figure out, geez, is six percent good, six percent is unbelievable. 'Cause the benchmark is thirty three percent. Especially in the context of think about

3:38:47 the two areas that are the bulk of Armes' employees. It's Crafts people. Yep. And sales associates. Which, if you are to use different language, is manufacturing and retail, which are super high churn categories. Right.

3:39:02 That's the point I'm making. I mean, even software developers churn at fifteen to twenty percent per year, and that's just the voluntary numbers. This is much better than software engineers who get paid hundreds of thousands of dollars to have a very cushy job. So finally, let's go real apples to apples. Let's compare this to LVMH. Well, L VMH's total turnover in twenty twenty two

3:39:23 was twenty four percent. versus Airmez's Six percent. So Aramez may be obsessed with this whole savoir faire and transmission of craft in their annual report, but it is totally real. I mean, the entire thing works because of the knowledge and craft of their people. I mean they have a

3:39:41 incredible YouTube videos and documentaries they put out, like you referenced and you go see these people and like you really Yeah. factories, you know, they're not factories, these ateliers Are

3:39:53 Something truly unique. Yeah. And they're only getting more obsessed with control. I mean controlling everything end to end. AirMez 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%. So they're getting rid of what they refer to as the concessionaires, which are essentially franchise stores. and closing them in favor of the wholly owned businesses. So this is again, they're just trying to figure out

3:40:22 How do we control more of our production of our everything soup to nuts? They describe this strategy as having three pillars. This is like three pillars for their entire business. This is like the strategy at the top of the annual report. Creation.

3:40:36 Craftsmanship. an exclusive distribution network. And that's probably the way to sum up. Air Maz. Alright, so

3:40:46 To close playbook. I just have one more. Which is really this idea of What is the job to be done? by AirMez. And I had this great conversation with Derek Guy, he's sort of colloquially known on Twitter as the menswear guy.

3:41:00 Die workware is his handle. And He has some amazing threads. They're very worth reading about if you're interested in ironing pants or why suits don't fit the way they used to. But he pointed out this really interesting thing to me, which is The value propositions of Hermes are essentially a bundle.

3:41:17 And that bundle is exclusivity. Service. Craftsmanship. shopping experience.

3:41:25 And a great brand. And You basically can't get that bundle anywhere else. That

3:41:33 doesn't have competitors. Yeah. You can get individual elements of that bundle elsewhere. Absolutely. But By nature.

3:41:42 Given what This. is in the luxury industry. You can't Assemble this experience, the Hermes experience, out of separate components.

3:41:51 And it used to exist in sort of a pre war early twentieth century era. You could. But Airmez was the only one that sort of chose to keep doing things the old way. And scale. And everyone else kinda went out of business or changed their methodology to scale. So for example, you know, Louis Vuitton has the branding, they have exclusivity, but the craftsmanship isn't there. They don't make things in that early twentieth century way.

3:42:15 Supreme can offer you exclusivity and brand, but again, there's no real craftsmanship there. And then you've got All these individual artisans, you know, a craftsperson in a a little workshop somewhere in Paris making the highest quality, you know, AirMez 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 Hermes.

3:42:37 And they want the brand. Right. And you know, there's 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 fifty years from now you can get your AirMez thing serviced. So

3:42:51 There's some great makers like uh Chester Mox or April in Paris, where I heard great things about Mila Gito. These are like Exceptional craftman handmaking items. In the same way. But It's a different

3:43:04 Bundle value propositions. Yeah. Completely different. Product. To me, what sums up the analysis is that the magic of what Airmes has done is managed to

3:43:14 scale the old way. with the complete bundle. Yeah. Totally agree. Nothing more to add.

3:43:21 Thanks, Charlie. Yeah. All right, should we do value creation, value capture, and then we've got a new Way to wrap up episodes here. Yes.

3:43:30 Well, this section was originally created by us five years ago or something to basically assess of the value created in the world. How much Does it the company actually capture of it. So

3:43:42 Canonically. Craigslist creates a ton of value. Wikipedia creates a ton of value. Captures very little of it. But you look at On the other hand, Google

3:43:50 They create a lot of value. You can find stuff on the internet. They're pretty damn good at capturing it. They've built a huge business on that. So There I think is a reasonable indictment to make that many of you will want to make on all of luxury and say it's just excess They don't actually create value in the world.

3:44:07 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. And

3:44:16 That's a reasonable viewpoint. However. I think there's an interesting way to look at Hermes in particular. Which is

3:44:26 If what you desire is The highest quality craft. They offer at a extreme price. A guarantee

3:44:36 to be able to get that super high quality craft. And that's different than every other luxury brand that is no longer about craftsmanship, but is kind of about Hype and logo. Yeah. Yes. So I would say Hermes has figured out that there actually is a pretty big niche for craftship.

3:44:54 Or at least people who desire the brand of craftsmanship. And they're exceptional at value capture around that. Well, it's interesting. Yes. But the secondary market is this very direct if you're talking purely about economic Value creation, value capture.

3:45:12 very direct data point that like, no, they are leaving a lot of surplus on the table for The consumers. Yep. Another element to value creation, value capture is is what they're doing good for the world. period, regardless of what they're able to capture.

3:45:26 Anybody who's doing things with exotic leathers. you may have a problem with. Farming. Crocodiles in mass quantities. In order to create

3:45:36 The Himalaya print. Birken bags. There's actually a brief period where Jane Burkin Boycotted Ermet's bags and asked him to take her name off of them. Do you know how that got solved? Like why is she cool with it now? I could be wrong, but I believe this is when Ermez took the

3:45:50 Crocodile farming in house and improved a lot of the animal welfare standards. So for everyone who's like, you know, it's absolutely cruel to do this to crocodiles to make handbags. Hermes doesn't really have like a counterpoint. They don't have like a well They lived good lives.

3:46:05 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. And so 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.

3:46:28 We are trying to sort of Almost in like an eye for an eye away. say, look, we're creating a bunch of crocodiles and so we're releasing a bunch of them into nature also. And I don't know.

3:46:39 It sits medium with me. Yeah. It's not. A great response. Right. Similarly.

3:46:45 You see piles and piles and piles of Cow hides for the leather production. And the response is Well look. These were beef cows. And so

3:46:54 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. To me, that is a better argument than We farm the crocodiles for the skins. It's funny, actually doing the Nova Nordisc episode gave me a new perspective on

3:47:12 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'cause people would have died otherwise.

3:47:27 Yep. Now, is that what's happening here with their mess? Absolutely not. Right. I mean other brands, Chanel, Carl Lagerfeld, Mulberry, a bunch of them are banning exotic leathers in their products. So I think Airmez has played around with mushroom leather, but do I think Airmez is gonna go all vegan anytime soon? Absolutely not. It's just not happening.

3:47:46 The last thing that you can definitely be mad about if you are into animal welfare is the fact that Airmez care 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's position of not wanting these bags to get out there and have their brand on it. And you know, people realize like, oh, some broken bags look kind of crappy. But if you're destroying product that could otherwise have utility. Especially when it's made from animals.

3:48:15 Bummer. Agreed. So They spend a lot of time in their annual report talking about how much more they're getting efficient in their manufacturing processes, how the rates of this are going down. They don't specifically call out burning bags, but how they're able to use more and more of the raw material and have

3:48:30 Everything that goes in the top of the funnel kind of get used in products all the way at the bottom of the funnel. So the company's taken a lot of heat for it over the years and it's something that they spend a lot of time working on. Yeah. All right. David. I think that brings us to the question which is

3:48:45 What is Your big takeaway from this episode. What It's like a big idea you're obsessed with after Spending all this time with Hermes.

3:48:55 We've kind of been struggling for a while with how do we end these episodes? These like Books that we write now. Right. We're not gonna grade'em the way that we used to grade. Right. That doesn't make sense. That was always kinda hokey anyway. And we've done bare case and bull case and like Again, are we gonna do that better than an equity research analyst? Like I don't know.

3:49:14 Well, and importantly, bare case, bull case has to take into account what are people's current expectations. So you sort of have to dissect the stock price. Right. Which isn't really the point of acquired. Right. And we figure by the time you get to this point of the episode you kinda already have a bear case and a bullcase in your head. It's not like we're gonna sit here and paint

3:49:33 Well, if people keep being excited about luxury goods. Here's an incredible new insight that'll change your perspective on the stock. Like no. Right. So, you know, we've been casting about for honestly a while here of like, how do we land the plane on these episodes? And so what we're trying here for the first time, and let us know what you think if you like it. In a very Air Mes like way. Yeah, we dedicate

3:49:54 Really a month plus of our life. Two each of these episodes. Like this is all we're doing. For Certainly the last four weeks, every day we've been getting up, we've been studying this company, we've been writing, you know, it's sort of insane. It's craft. We joke, but it's craft. And really, like you said, Ben, this episode started a year ago when we did the L VMH episode and it's been percolating and percolating and percolating and

3:50:16 The last four weeks it's been Every waking moment for us. And so I think A fun way to try to end the episode is When we wake up in the middle of the night.

3:50:26 And our mes is on our mind. What are the aspects of our mes and why? And It ends up being personal for us. Like what resonates for us from having told this story and done this work? And what resonates for acquired, honestly. And for me

3:50:40 We've touched on this a little bit throughout the episode. Kinda with the whimsy. And the dream element. Over Mes. But there's something also

3:50:51 To this company. That I think is deeply interconnected with the fact that it's on the sixth generation of the family. Uh, you ask yourself, how is that possible? How Six generations later is this company stronger than ever and the family members

3:51:08 are more committed than ever to running it. And I think It's because they have fun. And like again, this comes through in the Whimsy, this comes through in the annual reports. This comes through when you

3:51:21 Watch the interviews with XL and Pierre Alexi. And when you read the articles and hear people talk like Beatrice about Jean Louis They are really having fun doing what they're doing. It's an amazing culture and it's kinda hard to have

3:51:38 in a environment where you are also, I think, the forty seventh largest market cap company in the world. I think about other companies like it's about winning, right? You think about a professional sports team or like I think my mind goes to like the New England Patriots, you know, or like Honestly, it goes to like benchmark and Sequoia, like the best venture capital firms out there. These are organizations.

3:51:58 That are one hundred percent dedicated to winning. And it's not that Hermes isn't dedicated to winning, but they're kind of even more so dedicated to like having fun. and enjoy themselves. Yeah, there's a fun and there's staying true to their identity and Both of those things are more important than winning some

3:52:17 numerical game. Right. So for me, that's the splinter in my mind. Oh, very. the last set of months with our Mez is honestly it's what quite is for me and for us.

3:52:27 Hermes could go out tomorrow. And they could follow the consultants. They could borrow a page from the L VMH playbook. And they could vastly increase their sales and profitability overnight.

3:52:39 And If they were solely focused on winning that might be what they do, but they are never gonna do that. But if they do that, it's still only a short term right thing to do. Right.

3:52:49 So I think it's kinda tied into this short term, long term perspective thing. The reason I say it's fun is The family wants to keep doing this. And so if it weren't fun, they would probably maximize value and they would hit the short term bid and they would sell to Bernard. But they don't. Yeah.

3:53:04 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.

3:53:15 And Louis Vuitton and Hermes. On the face of it. Do the same thing. And as soon as you start digging in, you realize that these

3:53:24 Companies could not be more different. And all of the puzzle pieces that fit together to create Air Mez. is an entirely different puzzle. than the pieces that fit together to create Louis Vuitton. It's a great reminder that

3:53:38 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.

3:53:57 And I think that's fascinating. Right. Mutually exclusive brands for a lot of people. Yeah. Certainly not all, but a lot of people.

3:54:05 I was thinking about That too a little bit in the context of the Oftentimes in a market, the best way to compete with your best competitor is is to do the exact opposite of them. You know, is not to compete with them. Or at least be open to a We don't have to do anything alike.

3:54:20 Open to that idea. Right. This is Android and iOS. Right.

3:54:25 Well, all right. That's our landing of the AirMez plane. Let us know what you think. I just love doing this one. This was one of the most enjoyable experiences for me. I mean, all of our episodes are, but like I just really love this one. Well, 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.

3:54:47 But sometimes we do an episode like Air Mez 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.

3:55:09 Yes. So this one was extra indulgent for you and I. Yes. Yes, totally. Mm-hmm. Okay. Carts.

3:55:17 Let's do it. What you got? I have three Ooh, fun. And none of them are a Vision Pro, even though the Vision Pro is sitting next to me on my desk. And the reason is not because I can't recommend it, but because this is acquired and we can't possibly do anything that's too current. I need more time to evaluate. The herb has a podcast indeed. Okay.

3:55:37 First one. The Ankar Prime Charger. I'll give you the model number because Anchor 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.

3:55:55 It's lightweight. It's dense. You'll pick it up and be like, Oh my God, this is really heavy, but it's lightweight compared to large bricks. And here's the important thing. In those diagonal airline. Charging. seats, you can plug it in and it doesn't fall out.

3:56:11 And so it's a hundred watts. You can super fast charge phone, laptop, whatever. There's two ports. two USB C ports and one USB A and it works on airlines. So it's the only thing that I travel with now. And it's the new um gallium nitride GAN charging technology, which I think is totally game changing. Nice. I've got a um sixty watt anchor that, you know, kind of same

3:56:33 Concept. And yeah, totally. Only thing I travel with. Is it gallium nitride? No, no, no, it's a few years old. Okay, yeah. I don't understand why nobody's talking about it'cause it feels like it completely revolutionized chargers. It makes everything fifty percent the size. Even though it has super high power delivery.

3:56:48 I might need to upgrade my travel setup. Maybe I need an intermez liter case for it. Might need to do it. All right, we'll link it in the show notes. Two more are apps or websites or Web services, I don't know what we're supposed to call them these days. The first one is an app called Matter, which I have replaced For years I used insta paper.

3:57:06 And it was Great. But it just hasn't been touched in forever. And matter is instapaper but better.

3:57:14 It is also an amazing way to listen to things that you save in a very realistic voice. So longtime listeners know I don't absorb stuff very well by reading. I absorb it really well by Listening and so much of the research. Correct. You can save podcast episodes, but you can forward an email newsletter and have that read it to you. You can use the bookmarklet on a website, have it read it to you. So it sort of bundles in Text to speech. and podcasts and email newsletters and read it later type services into one app. I mean, I did half the research for this by taking long things to read, including PDFs. It has an ability to parse PDFs now and like listening while running, or my son was asleep in a carrier and I'm like walking around the house or I'm in a dark room somewhere or I'm on the treadmill in the garage. So

3:58:03 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. Okay. I haven't actually tried the app yet. I love those guys. Now I gotta try the app. It's awesome.

3:58:25 My third one is another thing that dramatically has helped my research, which is perplexity AI. Oh yeah. If I could stop using Google, I would because perplexity is better for everything that I used to Google. Period. Oh wow. Okay. All right, we gotta have perplexity on A CQ two or something like all right. I'm more to come on this. It's all the good things about ChatGPT and all the good things about Google and none of the bad things of either. It's

3:58:51 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 ninety seven percent good, it's bad.

3:59:07 So it needs to be always good. Honestly, this is why I don't use chat TPT for acquired work. I feel like we need to be a hundred percent all the time. Here's the best use case for perplexity. The other day I couldn't find something on Google and I went over to Perplexity and I asked it the question and it said The answer to this is unknown on the internet. And I was like, that is amazing. You just gave me confidence.

3:59:29 Oh, getting that answer. Otherwise you're gonna spend half an hour on Google trying to find it. Yes. Oh, that's amazing. Yeah. So it was both time saving and confidence inducing. I love it. Okay. I've heard from so many people about perplexity. I gotta give it a go and next episode research.

3:59:45 It's phenomenal. I'm so disappointed in myself, but also it's just the reality of my life right now. I've become like the, you know, middle of the bell curve technology adopter. I used to be the bleeding edge, you know, early adopter. Just Man, getting old is hard. Joanna Stern had a great quote about this, the Wall Street Journal, when she was interviewed by uh Ben Thompson recently. She said, Like, man, I wish I had the access that I have now when I was younger.

4:00:10 I would be unstopped. I'd be pulling all nighters. I'd be using it to its full degree and I don't have the energy now, like I got kids, like and I'm like, Man, I feel that. 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, your access, everything. Yeah. you've gotten better at your craft and You can never have both. But

4:00:33 You live your life anyway. You'll make it through. What's the Dune quote? Life is not a problem to solve, but a reality to experience. Ooh, yeah, I think that is it. There you go.

4:00:42 Okay, my car value. We are recording this. By the time the episode comes out, the Super Bowl will have been played. And one by somebody but Man, I am. Fired.

4:00:52 Uh Go Niners, San Francisco forty Niners. Brock Purdy. Hell yeah. I'm channeling my inner GTO Sullivan and uh QB school YouTube channel here. I'm so excited.

4:01:05 Brock story is amazing. So I was trying to think, okay, I can't have like the Niners and the Super Bowl be my carve out. Especially if this airs after they lose. Are we leaving it in? Right. Especially if they lose, right? Like But what I can have as my carve out, and it's perfect for acquired. Years ago I read Bill Walsh's book. Bill Walsh was the legendary coach of the forty niners during the Joe Montana Steve Young era. He invented the West Coast offense. And he wrote this book called The Score Takes Care of Itself. And it's so good. It's just like a great leadership book.

4:01:37 But you know, the title says it all. It's related to Hermes, it's related to acquired, it's you know the splinter in the mind, everything we've been talking about. Yeah. Include some ideas like scripting. This is now so commonplace in the NFL and football everywhere, but Everybody. scrips out your first set of, you know.

4:01:53 Five, ten, twenty plays, et cetera. Bill Walsh invented that. And like we do the same thing on acquire. We have scripts, like I have a script, you know, you have a script. And obviously the episode doesn't follow the script any more than an NFL game. But you need a way to start that's predictable or at least something you've thought through. Right. Obviously Bill Walsh didn't invent that idea writ large, but he invented it for Yeah.

4:02:15 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 like what are the right reasons to do it? Like, especially in the early days when it's working or not working, like I'm thinking about. Yeah, launching the Birk in and all that.

4:02:32 Anyway, it's a great book. Bill Walsh was a legendary figure. Yeah, go niners. Hell yeah. There you go. Wishing you the best of luck and listeners. You know what already happened.

4:02:43 Well, either way I'm celebrating because either the Niners won or we're gonna see a lot of Taylor Swift and Travis Kelsey. So I'm thrilled. Uh 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 Super fan that's not already a Taylor Super fan. And the NFL similarly has had close to a hundred year history.

4:03:12 And Mm. is the fullest realization of itself already. The NFL is America's sport. And so

4:03:19 they've already got all the super fans they're gonna get. And so by bundling together This is so awful. Oh. No, this is the ultimate collab. Yes. They can address each other's sort of casual fans who wouldn't have tuned in specifically for One or the other. 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.

4:03:40 writ large period bar none and like of course she's thinking about this. Yeah. What's the phrase that Shashir Maroto 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. Jenny has negative interest in football, but she's telling me about like what Taylor is wearing, you know, whether she's gonna be able to make it back from Japan from the Superbowl.

4:04:07 We'll see. All right, listeners, we have a bunch of thank yous. Uh huge thank you to Domenico Desole, the former CEO of Gucci and the co-founder of Tom Ford with Tom Ford. Domenico, your conversation was just Invaluable in preparing for this episode and obviously, yes, a legend.

4:04:26 Adam Pritzker, good friend of the show. is the co-founder of Assembled Brands and the company Kate. Which is in the fashion luxury space and Adam is super kind and uh huge contributor to this episode, just like he was to L VMH. to Derek Guy, who is at Die Workware.

4:04:43 on Twitter for teaching me about Saddle stitching. and what makes AirMez 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 Demon, or RJ, which is sort of a funny pen name, he wrote a book called Swan Songs Souvenirs of Paris elegance.

4:05:06 He's uh Obsessed. for lack of a better phrase, with Parisian luxury. and the history of it. And so it was really educational to talk with him about this and fact check a lot of my uh

4:05:17 Air Maz history. And finally, there is a lot written about the company. I do think the best way to understand Dermes is just To go right to the source. Their five hundred and eighty six page annual report. They just lay out the whole strategy. So if you're curious about the company.

4:05:31 That's an amazing place to look. It's funny, you know, we Did not talk to anyone at the company. We usually never do when we're making an episode. Just kinda awkward. 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. Yep.

4:05:45 And David, I know you had a couple of cool conversations. Yeah. Well speaking of April in Paris, Beatrice Amblard here in San Francisco. So fun to talk to an actual former Hermes artisan. There's personal stories of Jean Louis and the family.

4:05:58 They really gave me a sense of Just how special. The family is, they are, the company is. And the work that they do. And then I also have to think Lauren Sherman.

4:06:08 Loren is I think Pretty much. Bar none. The very best

4:06:15 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.

4:06:28 Awesome. I chatted with her for a long time. She gave me a lot of great perspective. on Ermez within the industry. Really there are a few journalists out there. You know, I'm thinking of like Brad Stone and Emily Chang at Bloomberg and

4:06:42 Kara Swisher, obviously, but They're incredible journalists. And they really, really understand the business and the industry that they're covering and Lauren is one of those. And It was super great to get to chat with her. Yep.

4:06:56 Well, you can sign up for notifications on when new episodes drop at acquire.fm slash email. You can also get little tidbits at what next episode will be. and play the guessing game with the rest of the community at acquire.fm slash slack. We'll also be including listener corrections in acquired.fm slash email. Subscribe to ACQ two and any podcast player. We've got some great ones coming. And after you finish this episode, come get some of that sweet acquired merch that everyone is talking about at acquired.fm slash store. Acquired AirMez collab coming soon. One day.

4:07:31 We'll see you next time. We'll see you next time. Who got the truth? Is it you, is it you, is it you who got the truth now

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