Hermès (Audio)

Ben Gilbert 0:00 So I don't know if you realize this, Hermès is reporting earnings in, like, two days.

David Rosenthal 0:05 Yes!

Ben Gilbert 0:05 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 Hermès. The short term is of no consequence [laughing] .

David Rosenthal 0:16 Yeah. [laughing] Also, the Hermès annual reports are the most beautiful annual reports ever created in the history of the financialization of mankind.

Ben Gilbert 0:28 You might think you can't do all of your charts in orange, you need different colors, but you would be wrong.

David Rosenthal 0:33 The illustrations, the themes, you can tell they care.

Ben Gilbert 0:37 You can tell. All right, let's do it.

David Rosenthal 0:40 Let's do it.

Speaker 0:41 Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Hm. Is it you? Is it you? Is it you? Sit me down, say it straight. Another story on the way. Who got the truth?

Ben Gilbert 0:57 Welcome to season 14, episode two of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David Rosenthal 1:05 I'm David Rosenthal.

Ben Gilbert 1:07 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. A company that somehow has grown to be worth over $200 billion, despite rejecting manufacturing efficiencies and economies of scale. A company so obsessed with craft and a reputation for quality, that they have stayed independent, while every other luxury brand has merged into conglomerates. That's right, listeners, today, we tell the oldest story we have ever told here on Acquired, older than Standard Oil or The New York Times. This company dates back to 1837 in Paris, France, the crown jewel of the luxury industry, Hermès.

David Rosenthal 1:54 Ben, do you know what company was also founded in 1837, that we have discussed quite a bit on Acquired?

Ben Gilbert 2:02 Hmm. No, I do not, David.

David Rosenthal 2:05 That would be the other iconic color luxury company, Tiffany.

Ben Gilbert 2:10 Oh, really?

David Rosenthal 2:11 Also founded in 1837.

Ben Gilbert 2:13 Ah, Chuck T. Well, this episode, listeners, has been probably just under 12 months in the making. LVMH was just after one year ago, and it was in that episode that I feel like I got a real penchant for everything that Hermès 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 Hermès does is just so focused, and intentional, and pure. As much as they sort of get lumped together with brands owned by LVMH, they are in many ways the anti-LVMH.

David Rosenthal 2:49 Ooh! 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 LVMH episode, I mean, you were so inspired by learning about Hermès, you went out and you bought your first luxury object, right? And it was not a LVMH brand.

Ben Gilbert 3:05 Yes, that is true. My wife and I were on our honeymoon, listeners, after LVMH, so last summer, and we were in Aix-en-Provence, and we walked by an Hermès store, and I thought, "Well, 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 Hermès belt, and, uh, it's the only luxury item I own of any luxury brand, traditional luxury brand.

David Rosenthal 3:28 Yeah. As foreshadowed on our holiday special episode a couple months ago.

Ben Gilbert 3:32 Yep. Well, listeners, if you wanna know every time an episode drops, you can sign up at acquired.fm/email. You'll get hints at what the next episode will be, and follow-up facts from previous episodes when we learn new information. Come discuss this episode with us at acquired.fm/slack. Come check out our second show, ACQ2, where we interview founders, investors, and experts, often as follow-ups to these episodes. And before we dive in, we want to briefly share that our presenting sponsor this season is J.P. Morgan, specifically their incredible payments business.

David Rosenthal 4:04 Yeah, we really uncovered the breadth of J.P. Morgan Payments as we went deep into industry research for our Visa episode last year. And just like how we say every company has a story, every company's story is powered by payments, and J.P. Morgan Payments turns out to be a part of so many of our Acquired companies' journeys.

Ben Gilbert 4:20 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 1837.

David Rosenthal 4:32 Yes, but not too much before 1837.

Ben Gilbert 4:35 All right, we're not going to, like, the sort of Egyptian invention of the handbag or anything like that?

David Rosenthal 4:41 Boy, let me tell you, I was tempted. [laughing]

Ben Gilbert 4:42 I was tempted. [laughing]

David Rosenthal 4:44 Well, if you read The Luxury Strategy, which is a great book that we've referenced many times on Acquired, they start back 50,000 years ago. We start in 1801, not in Paris, not even in France. You know, as we've been talking about, the land of beauty, luxury, enlightenment, where Hermès, of course, was founded and is still based today. And uniquely, Hermès still does 85% of their production by hand by master craftspeople in France, as we will talk a lot about. But instead, we start in the land of hardness and precision, of engineering, of exactitude, the future land of the Porsches of the world. That is right, Germany.

Ben Gilbert 5:27 A century before the Porsches and Volkswagens of the world.

David Rosenthal 5:31 Yes, where Thierry Hermès was born in the town of Krefeld, which is just outside of Düsseldorf, where he's the sixth child of a family of innkeepers.

Ben Gilbert 5:43 So Hermès, is that a German name, a French name?

David Rosenthal 5:46 Hermès is obviously not a German name.

Ben Gilbert 5:49 [laughing]

David Rosenthal 5:49 I mean, even I know that. Thierry's father was French, and his mother was German. And shortly after Thierry is born, he was born in 1801-... something, uh, pretty major happens in France, and then throughout continental Europe that will become very, very important to our story here, and that is that Napoleon comes to power in France. I mean, this is the era we're talking about here, like Napoleon.

Ben Gilbert 6:15 We finally did it here on Acquired. Your AP European History class has now merged with business history. We're covering Napoleon.

David Rosenthal 6:24 He is critical to what is about to happen here. So in the aftermath of the French Revolution, Napoleon essentially stages a coup, declares himself Emperor, first of France, and then he basically begins conquering all of continental Europe, including Germany. Now, 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 Hermès, but also the very worst, and truly worst. You know, all this conquering, this glory of France that we're gonna talk about becomes important to Hermès. That's the result of war. So Thierry's entire family, 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 the result is that Thierry, by the time he's 20 years old, he's an orphan. He is the last Hermès left.

Ben Gilbert 7:22 So David, 1821, you know, pretty rough time out in the world. Do you know who was born in this year, 1821, and was also an orphan?

David Rosenthal 7:32 Ooh.

Ben Gilbert 7:32 We have talked about them on Acquired.

David Rosenthal 7:35 Obviously not Rockefeller, which is where my mind first went, because we talk a lot about his dad.

Ben Gilbert 7:40 Yep, Louis Vuitton himself.

David Rosenthal 7:42 Ah, [laughs] he will also come up here in a minute.

Ben Gilbert 7:45 20 years younger than Thierry Hermès, but also an orphan.

David Rosenthal 7:49 Wow, I didn't know he was also an orphan.

Ben Gilbert 7:52 Yep.

David Rosenthal 7:52 Wow, it's just crazy. Two orphans, one of whom was German, go on to found the two most important, most French, most luxurious brands and really communicators of status in the modern world. That's wild.

Ben Gilbert 8:08 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 at their greatest aspirations, were craftspeople for the elite. Uh, they were almost servants.

David Rosenthal 8:29 Yes. So in 1821, Thierry leaves Krefeld, leaves Germany. He abandons his original kinda destiny as an innkeeper, and he moves to France, not to Paris, but to Normandy in the north. And there, he becomes an apprentice under a master craftsman, learning the art of équipage craftsmanship. Now, équipage is the business of outfitting horse-drawn carriages, and who were the customers of horse-drawn carriages, Ben, like you're talking about?

Ben Gilbert 9:03 The nobility.

David Rosenthal 9:05 The nobility. You know, horses were extremely important to the world back then. The horse was the car. It was the Ford F-150. It was the Toyota Camry. It was also the Rolls-Royce that drew the carriage, [laughs] and only the Rolls-Royces were the carriages. So when Thierry moves to Normandy and takes up as an apprentice, he apprentices for 16 years.

Ben Gilbert 9:29 Wow!

David Rosenthal 9:30 And it's not until 1837 that he finally moves to Paris as now a master craftsman, and opens up his own shop in Paris on the Rue Basse-du-Rempart in the ninth arrondissement, which that whole street today no longer exists. And there, he establishes himself as really quite an exceptional harness maker for horse-drawn carriages. Now, it's kinda unclear to me at this point if he's using the famous saddle stitch, which becomes so important to Hermès, and the reason it's unclear to me is because he's not making saddles. Saddles are what other people are making. It's not that the nobility don't ride horses, they do, but they ride horses like the elite today drive a Ferrari. [laughs] It's not something they do every day.

Ben Gilbert 10:20 Right. Their daily driver is a Bentley because someone else is driving them, and they have a Ferrari for when they occasionally wanna drive a Ferrari. They'll climb in a saddle occasionally, but mostly they're in the carriage.

David Rosenthal 10:30 Yep. So when Thierry arrives in Paris in 1837, he pretty quickly starts becoming known as really the best harness maker and carriage outfitter in Paris, serving the nobility, which is pretty impressive. 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.

Ben Gilbert 10:53 Turns out he was just really good at the craft.

David Rosenthal 10:56 And he had exceptionally good timing. We spoke about Napoleon a little bit earlier. When Thierry finally comes to Paris, at this point, Napoleon I has been defeated, the Battle of Waterloo, that was 1815. 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, Napoleon's nephew, Napoleon III, stages another coup [laughs] 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?" When Napoleon III comes to power in France, he does two things: one, he completely modernizes the city. So if people have heard of the Baron Haussmann, who kind of rebuilt Paris, that happens at this time under Napoleon III. They transform Paris from a medieval city with super tight streets... Like, if you go up to Montmartre, those streets around there, that is old Paris. But what you think of, the Eiffel Tower, the museums-

Ben Gilbert 12:10 Mm

David Rosenthal 12:10 ... the grand boulevards, the Champs-Élysées, that's happening right at this time.... and the Baron Haussmann, he's kinda like Robert Moses was in New York in the mid-20th century, remaking New York. He is given full latitude and direction by Napoleon III to burn Paris to the ground and remake this city as a modern city.

Ben Gilbert 12:35 Fascinating.

David Rosenthal 12:36 And this is super important for Thierry and Hermès for two reasons: one, in the old medieval streets 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-Élysées, the grand boulevards, everything about the sort of gallantry of Paris that we know today, it's all on display now. 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. [chuckles] 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, he brought 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.

Ben Gilbert 13:41 Yep.

David Rosenthal 13:42 So all this is happening. This is the best thing that could ever happen to Thierry. He's the best artisan, most exclusive crafter of carriage wear, of équipage. The city is being transformed so that this can all be displayed prominently. Social stratifications are becoming more blurry. People can spend money for the first time to buy status. Great for business!

Ben Gilbert 14:10 These are like the disruption waves that enabled him to create a business.

David Rosenthal 14:15 Yes. Before all this, before this era, there's no way that this evolves into Hermès, 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. So speaking of, both Hermès and Vuitton have one really important client, a key influencer, so to speak, that they both land at this time.

Ben Gilbert 14:41 I remember Louis Vuitton's key client was the Empress Eugénie. Is Hermès the same client?

David Rosenthal 14:46 Yes, the same client.

Ben Gilbert 14:49 Ah.

David Rosenthal 14:49 So Napoleon III's wife, the Empress Eugénie, becomes a client of both of these men for her carriages, in the case of Hermès, and for her luggage and for her trunks, and actually, I think also for her packing. Like, I think Louis Vuitton was the royal laîtier, I believe, and he packed the trunks. He was the luggage guy, Hermès was the carriage guy. [chuckles]

Ben Gilbert 15:11 Which is so funny, because that is still, in some ways, both of their legacy today.

David Rosenthal 15:17 Yes, absolutely. Eugénie and everything going on at this time makes Louis Vuitton and makes Thierry Hermès. But it's interesting, right? Vuitton and luggage, that is inherently of the world that's coming, the modern world. The train, 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.

Ben Gilbert 15:44 Right, it's sort of built for the upcoming world.

David Rosenthal 15:46 Yes. Not the case with Hermès, and actually, today, I think this is one of the biggest strengths of Hermès, 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. It's calling back to that other era, like that pre-modern era, where the horse was primary.

Ben Gilbert 16:12 Right. Hermès is deeply rooted in French history, in Parisian history, and really a key part of how France as a nation has the identity that it has today.

David Rosenthal 16:25 But it would all be irrelevant [chuckles] if the brand didn't translate out of the horse era and into the car era.

Ben Gilbert 16:32 Right.

David Rosenthal 16:33 Which was not Thierry Hermès's doing, nor was it his son's doing. So Thierry dies in 1878, and his son, Charles-Emile, takes over. Now, he apprenticed 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 20 years. And by the way, this sort of family tradition and way of business continues to this day. So Axel Dumas and Pierre-Alexis Dumas, who are the two descendants of Hermès, the sixth generation, that are running the company today, Axel is the CEO and Pierre-Alexis is the artistic director, they apprenticed in the business. When they were teenagers, for five years after school, they went to the atelier, they learned the saddle stitch, they made bags, they made items with their hands. Now, obviously, they also sort of learned the business from their parents, but they're not learning the business the way that the Arnault children are learning the business at LVMH as executives. They're learning with their hands, as craftspeople, how to make this stuff, which is wild. Axel is the CEO of a $200 billion-plus company.

Ben Gilbert 17:52 It's crazy, and to bring it back to the late 1800s, I think the point you're making here is, when Charles-Emile was apprenticing, there was no other example of what this company could become, so he thought, "Why don't I carry it on in exactly the same manner, Thierry, 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 craft, exactly the way you do it, and then continue that?"

David Rosenthal 18:21 Right. The business and the craft are-... intimately intertwined. They cannot be separated, and this is a Playbook theme I wanna pull all the way forward, but is so critical to understand about Hermès and what really, in my mind, differentiates it from LVMH. LVMH, as we talked about on that episode, has world-class, best-in-the-world business executives who partner with world-class, best-in-the-world creatives. At Hermès, 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, 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 as they are of the business side.

Ben Gilbert 19:14 Yeah, makes sense.

David Rosenthal 19:15 So back to Charles-Emile and the second generation. He finally adds saddlery to the business. [chuckles] That's his big expansion, he adds saddles.

Ben Gilbert 19:23 Ba-da-na! [chuckles]

David Rosenthal 19:24 Ba-da-na. 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 could be seen riding in addition to carriages, 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 Haussmann. I am doing things for the state, for the country. I'm doing big things." It's kinda like American in its way, and the Rockefellers.

Ben Gilbert 19:58 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 gotta get there.

David Rosenthal 20:12 Exactly, and you need a saddle for that. So Charles-Emile, he adds saddles, and in 1880, he moves the workshop and the store to Vanta, Rue du Faubourg Saint-Honoré, 24 Rue du Faubourg Saint-Honoré in the Eighth Arrondissement of Paris.

Ben Gilbert 20:29 The famous address.

David Rosenthal 20:30 The building that is today known as Le Faubourg by everybody in the Hermès universe, and this street and this location is one of the most iconic streets in the world, buildings in the world, headquarters in the world.

Ben Gilbert 20:44 It was stunning to walk it last summer when I was there. You can feel the presence of Hermès and all the other brands that are there.

David Rosenthal 20:52 Yeah, the Rue du Faubourg Saint-Honoré is where the French presidential residence is. It's where the British Embassy is. It's where French Vogue is today, probably because Hermès is there- [chuckles]

Ben Gilbert 21:02 [chuckles]

David Rosenthal 21:02 ... and because all of the other luxury flagships are there. So Charles-Emile runs the business for 25 years. He adds saddles, he moves the company to The Faubourg, and then in 1902, he retires, and his two sons, Adolphe and Emile, who have apprenticed in the business, just like him, just like every generation will do for many generations to come, they take over, and they change the name of the company to Hermès Frère, Hermès Brothers, 'cause the two brothers are now running the company.

Ben Gilbert 21:35 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.

David Rosenthal 21:42 They've been apprenticed together. They're gonna be like Axel and Pierre-Alexis today. Well, of the two brothers, I think it is fair to say that Emile, who 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 1890s, so before his father, Charles-Emile, retires, the young Emile sets off to conquer Russia for Hermès. He literally, like, gets on a train with a notebook and a suitcase filled with miniature versions of the saddles and the harnesses that Hermès makes, and he just finds his way into the Tsar of Russia's court and lands him as a customer.

Ben Gilbert 22:23 That is wild.

David Rosenthal 22:24 Unreal. They have to staff up a whole new atelier with, like, 80 craftspeople to fulfill all the orders for the Tsar in Russia.

Ben Gilbert 22:31 Whoa!

David Rosenthal 22:32 Yeah. So this is Emile. He's going places, and right as he and Adolphe 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, but some of their customers, again, now that they've added saddles, once they get off the horse, they want something to carry the saddle and maybe their riding boots with them while the horse is in the stables at wherever they're going. So they say, "Great, we can help you with this," and they introduce the Haut à Courroies bag, which translates as the high-belted bag, to carry saddles and boots for their clients. Now, like I'm saying here, this was intended to be an accessory to the main business of équipage and saddles, the equestrian business. It's not really practical for anything else. I don't know why anybody else would want a big tote bag that could [chuckles] carry your boots.

Ben Gilbert 23:30 What's this bag look like?

David Rosenthal 23:31 Well, this bag looks exactly like the Birkins and the Kellys today, except a lot bigger.

Ben Gilbert 23:36 Interesting, 'cause you're putting a whole saddle in it? Like, you're de-saddling your horse, and then you're putting that in this bag?

David Rosenthal 23:43 Yeah, but it has the same trapezoid shape. It has the crossover belt-

Ben Gilbert 23:48 Ooh!

David Rosenthal 23:49 ... the Haut à Courroies. It means the high-belted bag. It has the belt. It has the turnstile lock closure for the belt at the top of the bag.

Ben Gilbert 23:57 Fascinating.

David Rosenthal 23:58 So this accessory that we're gonna add to the business, this becomes the spiritual heritage to the business today.

Ben Gilbert 24:06 That's crazy. It's like if Apple eventually transitioned to being not the Vision Pro company, but the Vision Pro carrying case company. [chuckles]

David Rosenthal 24:14 Yes, yes, yes. Oh, did you get the carry case, by the way?

Ben Gilbert 24:17 No, I'm not gonna spend another $200 on that.

David Rosenthal 24:19 That thing looks like a balloon. It's enormous.

Ben Gilbert 24:22 Yes, and it takes up your whole backpack.

David Rosenthal 24:25 So this bag, this accessory that would become the Kelly and then the Birkin, they introduce it-... just at the right time. It's 1902, kinda as Charles Emile is retiring, 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, you need a flat-pack trunk that Louis Vuitton is gonna make for you. And 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 transition to move Hermès into the age of the automobile. But before we tell that story-

Ben Gilbert 25:08 Yes, we mentioned Hermès, founded in 1837, is the oldest company we've covered on Acquired, but we might have to caveat that.

David Rosenthal 25:16 Yes, our presenting partner this season is J.P. Morgan Payments, and J.P. Morgan Chase traces its heritage back to 1799.

Ben Gilbert 25:24 Over 200 years! Incredible. You only survive as long as Hermès or J.P. Morgan with a relentless focus on the long term, an exceptionally high quality bar, and counterintuitively, when talking about handbags and banks, technical innovation, which is exactly the J.P. Morgan Payments story.

David Rosenthal 25:41 Yeah, their current payments business was officially forged a few years ago, but many of the capabilities and products came from different parts of the firm, which were already powering the whole payments industry. You can trace their merchant acquiring to the '90s, their treasury products to well before then, and even their blockchain work started earlier than most in the mid-2010s. When they combined all that together under one group, it really became a one-of-a-kind, N-of-one business, a portfolio of treasury, online commerce, point-of-sale, global trade, card, cash management, fraud prevention, analytics, and more, a one-stop payment shop for businesses of all sizes.

Ben Gilbert 26:19 Yep, and when you move $10 trillion a day in 160 countries and 120 currencies, these learnings really compound, and that is exactly the story of their new offering, embedded banking. This actually reminds me a bit of our episode on Amazon and AWS, on how companies can take internal capabilities and scale them externally as brand-new products. In this case, J.P. Morgan said, "Hey, we already facilitate credit card acceptance. We manage KYC and anti-money laundering. We pool money and split across virtual ledgers here. We disperse funds. Oh, wow! We can embed all of these into our customers' marketplace businesses to power their end-to-end payments for buyers and sellers and lower risk across the whole ecosystem."

David Rosenthal 27:00 So while Hermès explicitly avoids e-commerce for their most coveted products, as we will talk about later, for the other 99% of you out there, that's probably not your strategy. You wanna do more business online. Large retailers are increasingly adopting a digital marketplace strategy to connect buyers and sellers directly, but for the underlying platform, whether that's B2C or B2B, there's a lot of complexities that come with having a frictionless payments experience. You have to create and manage the seller bank accounts, money movement, and most importantly, who's gonna take on the compliance and risk of holding and disbursing the funds, the third-party seller or the platform?

Ben Gilbert 27:36 Yep. Macy's is a great example. They wanted to offer more selection to customers and support diverse-owned small businesses at the same time. But Macy's needed a solution to onboard sellers seamlessly and manage the state-by-state complexity of the payouts. So they turned to J.P. Morgan Payments and their embedded banking solutions, which enables a large number of suppliers and their bank account details on a single platform, supported by tokenization and utilizing a single API integration. This frictionless and secure payment solution worked, to say the least. Macy's nearly doubled its marketplace sellers in the first quarter of 2023 and increased revenue by 50%.

David Rosenthal 28:14 So whether you're in retail, luxury, or really any industry, there's a clear growth opportunity from having an end-to-end payment solution. Head on over to jpmorgan.com/acquired to discover more payment solutions driving growth for businesses, whether that's Fortune 500, startups, or any stage in between. And also, if you're heading to the retail conference Shoptalk in Las Vegas in March, be sure to stop by the J.P. Morgan Payments booth, where you can learn more directly from their team of experts.

Ben Gilbert 28:40 Yep. Thank you, J.P. Morgan. Now, David, how was Hermès perfectly positioned for the age of the automobile with this new accessory?

David Rosenthal 28:50 So this is wild. I suspect you probably also found this in research, but when I did, my mind melted. [chuckles] So during World War I, in 1916, Emile becomes a officer in the French military, and the military sends him to the United States to learn about kinda US industrial and military production. You know, he's sort of a leading industrialist in France at this time, shall we say, and one of the people that he gets sent to meet with is... Do you know about this, Ben?

Ben Gilbert 29:24 No, I have no idea.

David Rosenthal 29:25 I, I can't believe you didn't find this!

Ben Gilbert 29:26 No.

David Rosenthal 29:27 He meets with Henry Ford.

Ben Gilbert 29:30 No!

David Rosenthal 29:30 He goes to Detroit, he sees the assembly lines, he sees the car, he sees the future.

Ben Gilbert 29:37 He see the assembly lines, and then he, like, had blinders on? He's like, "Oh, pay no attention to the manufacturing efficiencies they've got going on over there." [laughing]

David Rosenthal 29:44 [laughing] This is what's so funny. No, he's like, "This is unbelievable," and to the, you know, manufacturing efficiencies point, he actually does take some elements of the assembly lines and brings them back to Hermès. It's not like they're anti-efficiency. They're pro-efficiency but in the context of being a craft, you know, non-mechanized, human, 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 rolling off the assembly line every three minutes." Ford, at this point, is producing half a million cars per year. [chuckles] 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 global world, and so Emile getting this window, like, literally seeing the assembly lines in Detroit, he's like-... Whoa! Once this war is over, the world is gonna change forever.

Ben Gilbert 30:55 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.

David Rosenthal 31:03 Yeah, he's quite the character, this guy. The other thing he finds in America is, I know you know this one-

Ben Gilbert 31:09 Yeah.

David Rosenthal 31:10 The zipper.

Ben Gilbert 31:10 Yes. Or as it was originally called-

David Rosenthal 31:14 The closeall.

Ben Gilbert 31:15 Yes, which really does not have the same ring to it. I'm glad we changed to zipper.

David Rosenthal 31:19 I couldn't believe this. The zipper was a late 1800s, early 1900s invention in America, and it was primarily used for industrial use cases. In this case, it was zipper enclosed the hood of a car.

Ben Gilbert 31:33 I think like a military car?

David Rosenthal 31:34 Yeah, where Emile first sees it. It's not at the Ford factory. I think it actually might have been in Canada on the-

Ben Gilbert 31:39 Yep

David Rosenthal 31:40 ... kinda later leg of his journey, where he sees it on the car. It was also used for opening and closing boots, and that is how the name zipper came to be. I think it was the B.F. Goodrich Company.

Ben Gilbert 31:50 Really?

David Rosenthal 31:51 Yeah. I believe they made a brand of boot with this closeall function, and they called it the zipper, and that's where the zipper came from. Regardless, enterprising young Emile, he tracks down the inventor of the zipper, like, the holder of the patent in America. He obtains an exclusive license for two years in France. This literally is like the Novo Nordisk episode.

Ben Gilbert 32:12 Totally.

David Rosenthal 32:13 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 Hermès fastener in France.

Ben Gilbert 32:33 Yes, that's right.

David Rosenthal 32:35 Just wild. I think they made the right decision not to make zippers the business and instead to stay focused on leather goods.

Ben Gilbert 32:43 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.

David Rosenthal 32:58 Yeah, and a golf jacket, literally for use while playing golf, while playing sport. You know, what more modern activity to happen here?

Ben Gilbert 33:05 Yep.

David Rosenthal 33:05 Regardless, though, the big thing for Hermès that he brings back is, oh, my God, the car is coming.

Ben Gilbert 33:11 Okay, so we're still in the third generation of the Hermès family. Two brothers are running it. What's next?

David Rosenthal 33:19 When Emile comes back and he's running around making zippered jackets, he's collaborating with car companies, leads to a rift between the two brothers. Adolphe, the older brother, he's much more conservative. He wants to remain in the horse market. He's kinda depressed about the car coming. He's like: "Hey, I just wanna remain a niche leatherworker, [chuckles] and I, I'm not really cool with everything you're doing here."

Ben Gilbert 33:46 This is literally, like, he wants faster horses, of the analogy of, like, if you were to ask people what they want, they'd say a faster horse. Like, he's stuck in horse land.

David Rosenthal 33:54 Right. Now, I don't know if it was that he had his head in the sand or more just, like, he didn't wanna go build a big company.

Ben Gilbert 33:59 Right, which I could understand.

David Rosenthal 34:01 Totally. I could totally understand that. Either way, in 1919, Emile buys him out and says, "I believe in my ability to lead this company in making this transition into the automobile era." And legend has it that he goes to the craftsman in the atelier above the shop in the Faubourg and says, you know, "Okay, 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 Hermès of like, what can we make with our hands that will interest our clients today? And the obvious answer at the time is a version of the Haut à Courroies 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, who better than Hermès? And finely handcrafted leather bags and accessories that you can outfit your car in the same way you could outfit your horse.

Ben Gilbert 35:08 So the business is now Emile's, and the business is now handbags.

David Rosenthal 35:12 And once again, to timing and 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. You know, we're now in the 1920s, the Roaring '20s. This is what F. Scott Fitzgerald is writing about. The visible symbols of wealth, it's when you're home, it's in your car, and the bags and the accessories you're using with your car, but you're also out traveling a lot more. You're rubbing shoulders with elite all around the world. The American elite are going to France. They're going to Europe. Vice versa. People are starting to travel around the world. People are traveling to Asia. People are traveling to the Middle East. People are traveling to South America, and 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.

Ben Gilbert 36:11 Yeah, and importantly, it's not just that you're trying to show a label, which is a little bit different than the modern version of luxury. It's that you're trying to have something really nicely crafted. When you show up somewhere, someone should just look at your luggage and go, "Wow, that is beautiful!" Hermès is not yet a recognized brand, so merely slapping Hermès on it won't do the trick. The way to wow the people that you wanna wow is through the raw craftsmanship.

David Rosenthal 36:40 The product itself, yes.

Ben Gilbert 36:42 Yep.

David Rosenthal 36:43 So in 1922, Emile's wife famously complains that the large bag they've been making, the Haut à Courroies, the saddle bag-... It's too large to fit through car doors, so she asked for a smaller version. [laughing] And this launches the handbag business in 1925.

Ben Gilbert 37:03 And by the way, by this point, they've put the zipper on a handbag.

David Rosenthal 37:06 Yes, exactly. And speaking of the zipper, in 1925, they add 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."

Ben Gilbert 37:21 [laughing]

David Rosenthal 37:22 Which, you know, who knows if that's true, but it's a nice story. But they really go into this. In this modern world, where the global wealthy, the global elite, are traveling, they're seeing each other, what outward signifiers can they supply them? Clothes. 1927, they had jewelry. 1928, they had watches.

Ben Gilbert 37:41 And something interesting that is different than the Hermès you know today, the way that they're adding all of these things, they're finding craftspeople who are experts at particular crafts. Exactly what you're talking about, David, a watchma- they're finding a watchmaker, and they're saying, "Can we work with you on designing something uniquely Hermès? But you're the craftsperson. We're not trying to build this competency in-house."

David Rosenthal 38:05 Right. It's not right to say that they're licensing products. You know, it is a collaboration, but they are selling products in their stores that are not made end-to-end by Hermès-employed craftsmen.

Ben Gilbert 38:20 Right, and it's interesting 'cause they're sort of toeing 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.

David Rosenthal 38:38 Yes, and I think all this is being figured out real time, these ideas of retailers versus brands. It was a much fuzzier line then than it was today. So what does Hermès do? What does Emile do? They start opening up stores outside of Paris, and 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'Azur, in the south of France, and then they start opening up more stores around the world. You know, again, not necessarily in, like, the Londons or the Romes or the New Yorks of the world. They're opening them up in the travel destinations.

Ben Gilbert 39:19 Their mindset around additional stores at this point is it's for the same clientele in all the places that they travel.

David Rosenthal 39:26 Yes, and the clientele was primarily French at this point in time.

Ben Gilbert 39:30 Yeah, or if not exclusively, other than the tsar, and yeah.

David Rosenthal 39:34 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 so that those Americans, those British, you know, elite, they can go purchase our products there, too."

Ben Gilbert 39:51 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, and that's sort of a recognition of the maturation of their business. The rich people are gonna go find an Hermès 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.

David Rosenthal 40:28 Yes. Now, I think some element of this certainly still exists. You had a nice time going into the Hermès store in Aix, right?

Ben Gilbert 40:36 Yes, for sure, but it plays well for me, as someone who is on vacation and shopping [chuckles] to believe that I'm shopping in a store that is for the locals. It's less fun to be shopping somewhere that is very clearly created for you as a tourist.

David Rosenthal 40:52 Yeah, I think they very brilliantly walk this line, and the products that the shops carry are very different, and we'll get into that later in the episode, too. But back to this era. So I think we've laid the groundwork of a few critical components of Hermès so far. First, and most importantly, the craftsmanship. These things are handmade by artisans with their hands, and the family and the people who own the company are the chief artisans. That goes all the way back to Thierry. We've talked about the connection to the legacy of French nobility, but not really French nobility. It's 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 true modernization of the company and the transition to the automobile era. What we haven't talked about yet, and what Hermès at this point certainly is not, is this element of, like, whimsy and art that is really, really critical, I think, to the company.

Ben Gilbert 41:56 Yes. If you've ever been in an Hermès store, you can feel a warmth that doesn't exist in other luxury stores. If you're in a destination with a lot of luxury shops, you'll walk past a lot of bright lights and mirrors and punch-you-in-the-face reds and black and white, and you just feel like there's a lot going on. And then you arrive at Hermès, and it feels warm, and it feels soft, and it feels welcoming, and it feels whimsical. And there's this almost dreamlike color palette that they use, starting with a base of orange and having this e- 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.

David Rosenthal 42:46 And this, I think, is really a very different thread than the original kinda leather craftsmanship, and it is a critical one in the kinda weaving of the Hermès business.... and this thread comes from the next generation of the family, specifically Robert Dumas. So Emile had four children, but they were all daughters, and tragically, one died young. But the other three grew up, and they got married, and back in this day, women weren't gonna take over the business, unfortunately.

Ben Gilbert 43:21 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, the Sulzberger, and now it's the Sulzberger 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 20th [chuckles] century period of passing it down from, unfortunately, father, not to daughter, but father to son-in-law.

David Rosenthal 43:47 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-Louis Dumas, and there's Francis Puech.

Ben Gilbert 44:08 And these are all son-in-laws?

David Rosenthal 44:09 And these are all son-in-laws, and those are the three family names that you still hear about to this day of the Hermes family. But back to Robert Dumas and the fourth generation. He brings this whimsy and real art into the business.

Ben Gilbert 44:22 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 in all their products, especially the entry-level ones. I mean, the Birkin is the Birkin, and yeah, they'll do some special editions 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.

David Rosenthal 44:51 Totally, and this comes from Robert. So one of the first things he does when he joins the business is he redesigns the kinda smaller Haut à Courroies bag, the handbag line, into what he calls the Sac à Dépêches in 1935.

Ben Gilbert 45:06 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 and the City and [laughing]

David Rosenthal 45:14 Beautiful, beautiful, elegant bag.

Ben Gilbert 45:16 So Sac à Dépêches. Hold onto that one, listeners.

David Rosenthal 45:19 Yep. A little later in the 1930s, he introduces the Chaîne d'ancre bracelet, which is another iconic Hermes item in their jewelry métier.

Ben Gilbert 45:29 Wait, David, I can't let you get away with that. Métier, please enlighten listeners.

David Rosenthal 45:33 [laughing]

Ben Gilbert 45:34 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 you can go look up what it means yourself. Here on Acquired, David, tell us about a métier.

David Rosenthal 45:47 A métier is like a, uh, someone's work, but in the, like, the craftsman sense. A métier is like a trade. It's like a craft profession, and this is what Hermes calls their divisions. [chuckles] I feel gross even just saying the word divisions. There are 16 of them today, and jewelry, of course, is one of the métier. Oh, I feel so much better saying métier.

Ben Gilbert 46:09 I bet. Yeah, there's a levity here in the room now.

David Rosenthal 46:12 So Chaîne d'ancre in French means chain of anchors, you know, anchor chain, and these are anchors, like boat anchors. 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.

Ben Gilbert 46:38 Love it. And so an important thing to know here is when you're buying Hermes products, they're really not pushing the brand. There is not an iconic, recognizable Hermes H 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 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, and Hermes hadn't even really developed the iconography yet that would become Hermes'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. Hermes is on the lighter side of branding their goods today, but it's still-

David Rosenthal 47:52 Well, they have to adapt to the market.

Ben Gilbert 47:53 The customers want some way to let people know that they're wearing an Hermes item, even if it's lower key than other luxury brands, so Hermes builds that for them.

David Rosenthal 48:03 The family talks about this a lot. The words they use is, "This is not a museum." There is this artistic element to what we do, but we are not a museum. We are a business, and we have clients, and we are here to serve our clients. There is this push-pull here. [chuckles]

Ben Gilbert 48:21 Yes. Okay, so what year are we that the bracelet is entering the market?

David Rosenthal 48:25 So that was in kind of the mid-'30s. So then in 1937, Robert introduces the other key pillar of Hermes products that is less talked about today relative to the bags and the leather goods, but for many, many decades was the bigger business.

Ben Gilbert 48:42 Oh, yes, I have numbers on this.

David Rosenthal 48:44 So silk scarves, the Hermes classic silk scarves, and this is the embodiment of this art and whimsy that we're talking about. The silks that they use are the finest silks in the world. It takes 300 silk moth cocoons per scarf-

Ben Gilbert 49:01 [laughing]

David Rosenthal 49:01 ... as they will readily tell you, to produce these things. But the designs on them, the artwork on them, are-... whimsical, like we said. So the first design, the Jeux des Omnibus et dames blanches, or the sort of, uh, white ladies at play, I guess you could translate that, is based on a woodblock engraving that Robert does. I mean, this is like what an artist this guy is. Like, he's about to become CEO of Hermes, but he's making woodblock engravings [chuckles] and then making silk scarves out of them. That's the first design that they put out there, and quickly they become a huge, huge phenomenon with Hermes clients.

Ben Gilbert 49:40 Yeah, and so fast-forward all the way to 1988, when Axel Dumas has his very first internship with the company. This is crazy. Silk was 55% of the company's sales. Leather was only 9%. You compare that to today, it is a completely different story. Leather is 43%, and silk and textiles is 7%. So there was a run-- I mean, this was introduced when, David, the '30s?

David Rosenthal 50:09 1937.

Ben Gilbert 50:10 So 1937 through probably the 1990s, where these silk scarves were the Hermes franchise, and the reason this sort of took off is it almost became part of the French woman's uniform to have an Hermes scarf as a part of your outfit.

David Rosenthal 50:29 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, specifically Queen Elizabeth. [chuckles]

Ben Gilbert 50:42 Oh, I didn't realize that. Really?

David Rosenthal 50:44 Yeah. This is so iconic, Queen Elizabeth. She starts wearing them as headscarves in the 1940s, and, you know, I mean, Queen Elizabeth, she's Queen of England for what, like, 60, 70 years?

Ben Gilbert 50:54 Yeah.

David Rosenthal 50:55 And she's wearing these scarves, these, you know, whimsical, playful scarves on her head as the Queen of England.

Ben Gilbert 51:02 Fascinating. 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 Hermes scarves are made today. They are first sourcing the finest silk that they can find, which is now from their own owned farms in Brazil, so that's where the silk comes from. Only 20 new designs are created every year, and they retire old designs. There's sort of a Disney vault aspect to this.

David Rosenthal 51:40 They'll bring them out of the vault.

Ben Gilbert 51:42 Yes. The pipeline to get a new design into the customer's hands is two years. 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.

David Rosenthal 51:59 Yeah, there's no digital process here. It's not like you're going to customink.com and, like, ordering up some Hermes scarves.

Ben Gilbert 52:05 Right. Some of the design does seem like it involves computers now. Like, if you watch documentaries about the craftsmen at Hermes, which there's a couple of good ones we'll link to in the show notes, if you wanna just sort of watch Hermes craftspeople at work, they do seem to be translating designs off of a computer, but it's not like they're hitting Command P. That's not how this works. Every single color of the scarf is screen printed using its own mask or basically a stencil. So if your scarf has 20 colors, it has at least 20 masks that they then squeegee the ink over, and the precision is perfect.

David Rosenthal 52:44 This is like EUV lithography.

Ben Gilbert 52:45 Yes, I was looking at my wife's sort of twilly scarf, the little wrist or hair tie scarf that we got in Aix-en-Provence. I mean, I don't know how you do this by hand, and I don't know how you do it by hand 20 times over and over and over for every single layer. If you've ever been to an Hermes store, or you own one of these, you just can't believe that this is done by hand without any of the layers being out of alignment. '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, the masks are also hand-etched by a craftsperson. Their entire job is to know how to translate a design into all the different color layers, which they then hand etch. So the pipeline is designer, engraver, that's an engraver of each mask, colorist, weaver, printer, and then someone to do the finishing.

David Rosenthal 53:37 All of which are, like, extremely hard to replicate and involve both extreme craftsmanship and extreme taste. The competitive barriers to the Hermes scarf, I think they're way higher than the bags, honestly, even though the bags are a bigger business now.

Ben Gilbert 53:52 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 Hermes universe, then you're sort of in that universe [chuckles] for the rest of your career because that is where your trade is still practiced.

David Rosenthal 54:25 And I think also, you know, as a client, too, at least in scarves, like, if you enter the Hermes scarf universe-

Ben Gilbert 54:31 Oh, yeah

David Rosenthal 54:31 ... you're not buying any other scarves.

Ben Gilbert 54:33 Totally, and you really like all the lore. Part of what makes Hermes Hermes at this point is their callbacks to their own history. I mean, they have 187 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.

David Rosenthal 54:54 Yeah. I mean, I remember growing up, my mom is half British, I'm a quarter British, and, you know, to the Queen Elizabeth thing, Hermes scarves, you know, my mom's Hermes scarves were and are among her most treasured items.

Ben Gilbert 55:07 Yep.

David Rosenthal 55:08 So you'll note-... All of this that's happening, Robert, the innovations, these new products, the art, the whimsy, he's doing all this in the 1930s. This is the Great Depression era. This tells you about Hermès and Hermès' clients. They are unaffected. [laughing] They keep buying, and this carries through right to this day. I mean, I don't know that there is a more recession-insulated business than Hermès.

Ben Gilbert 55:39 You're exactly right. 12 months now after we did the LVMH 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. Hermès is the most insulated of all [chuckles] the luxury brands, where they have the sort of least cost-sensitive clients.

David Rosenthal 55:58 So after this, there's World War II, and famously, before the war, Hermès products came in cream-colored boxes. Robert was very meticulous about the packaging that his crafted items and his art would come in, and it was cream. It had to be cream. During the war, there's a shortage of packaging materials. They can't get cream. The only color that is available to them in the quantities that they need is orange. That was designed for, uh, patisseries, for bakeries.

Ben Gilbert 56:30 Oh, is that what the orange ones were used for?

David Rosenthal 56:32 That's why there was an excess of it, because-

Ben Gilbert 56:34 Ah

David Rosenthal 56:34 ... it was used for bakeries, and bakeries weren't baking as many croissants and pain au chocolat during the war, et cetera. So there's all this orange packing material. Robert embraces it, and the Hermès orange box is born. And this is crazy. I didn't know this till research. Hermès owns this color. You cannot get Hermès orange anywhere else. Pantone does not list it in their colors.

Ben Gilbert 56:59 It's interesting you say Hermès owns this color. So you are correct that Hermès has selected a non-Pantone color, but what Hermès tries to do is say, "Well, we own orange. We can't be nailed down by a Pantone-specific code. We own orange more broadly." 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.

David Rosenthal 57:26 Amazing.

Ben Gilbert 57:27 And so what they've done is they've actually leaned into this, where there is a classic Hermès 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 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 Hermès Feu, which is sort of the fire. They have Hermès Sanguine, which is sort of this red hot orange, like lava, or they have the Hermès Moutarde, 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, encapsulate the theme of a season. 'Cause 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.

David Rosenthal 58:37 Yeah, there's this sorta like, you know, meta-level or, like, corporate-level playfulness to this, too, of, "We own all the oranges."

Ben Gilbert 58:43 Totally. The Hermès 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 Hermès universe.

David Rosenthal 58:54 So a few other things that Robert adds over the years, he adds the men's silks métier, AKA ties. The legend behind that one is pretty great. Supposedly in Cannes, a number of gentlemen were refused entry to the casino and thus went to the neighboring Hermès shop, you know, next door and said, "Can you take some of your beautiful silk scarves and cut and tailor them into ties for us so that we can enter the casino?" [chuckles] I'm sure that's apocryphal but adds to the legend here.

Ben Gilbert 59:25 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 16 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.

David Rosenthal 59:44 Totally. After World War II, Robert decides that Hermès needs a logo, so taking inspiration from the 19th century painting, Le Duc à la Groom Attendant, which means hitched carriage waiting groom, the famous Hermès 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... You could imagine, like, you know, a galloping horse or something like that would be the appropriate logo.

Ben Gilbert 1:00:16 No, it's so genius.

David Rosenthal 1:00:17 No, it's the carriage.

Ben Gilbert 1:00:19 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.

David Rosenthal 1:00:41 And no longer exists.

Ben Gilbert 1:00:43 Yes.

David Rosenthal 1:00:44 Horses and the equestrian world still exists. It's obviously not what it once was, but it still exists. The carriage world is gone. It's just a dream these days, and that's what Robert is so good at, this dream. The other thing we have to talk about are the window displays. You referenced this a little bit earlier. So he hires, first, Annie Beaumel, and then she's soon joined by the legendary Leila Menchari. Specifically, these two women, they come from theater set design.... just to design the window displays at the Faubourg, at the flagship store on the Rue Faubourg Saint-Honoré. I mean, there are whole museum exhibits just dedicated to these window displays, and it's not like, you know, again, you walk by XYZ 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 LV, et cetera. These displays, it's a dream. There are probably some Hermès products in there, but it's like a museum exhibit. It's artwork.

Ben Gilbert 1:01:50 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 Hermès today, it's not about the product, it's about how you feel. So I think this is an interesting place to revisit this idea that we talked about on the LVMH episode of luxury versus premium, where premium means you pay more and you get more utility out of a given product. I pay for a bigger storage space on my iPhone, and I get, 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. It is either more pleasing to you intrinsically for the feeling, or it's an extrinsic signal, where you are signaling to others that you have the means to spend on this item, even though it doesn't provide more utility. It's a sort of despite rather than a because. But art, it does fall on this spectrum. Art is like luxury taken to its logical extreme. It has actually zero utility. A Birkin bag is a piece of art, but at least it also carries your stuff around. Luxury products are this interesting midpoint between extreme functionality, but also artwork. And so when you buy an Hermès 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 Hermès'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 other people know about this, too. And you're not necessarily trying to signal it to everyone, but you do wanna signal it to the right people who would appreciate it.

David Rosenthal 1:03:38 There's this genius aspect, too, to what Hermès is doing and what Robert's doing with the arts, like these window displays. The Luxury Strategy book talks a lot about this. When you're selling luxury items, they can't just be art. They need to have some utility to them.

Ben Gilbert 1:03:55 Yep.

David Rosenthal 1:03:56 You will never see any of these brands, Hermès included, become art galleries. They're not selling paintings, but it's critical for luxury brands to have a connection to the arts. I think he realized this before anybody, of, like, the windows in our stores are these portals 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, but it's connected to this dream.

Ben Gilbert 1:04:32 Yes. You're taking a piece of that dream with you, and it's almost a daily reminder of the dream that you're now participating in. The key insight is that by adopting art as a critical piece of the bundle that is your product, it enables you, as the seller, to completely switch tracks, to disconnect from any evaluation of value.

David Rosenthal 1:05:00 Right, or features.

Ben Gilbert 1:05:02 Exactly. You're out of the feeds and speeds world. You are not being comped against, "Well, this other purse is much cheaper and serves the same function." Now, we have bundled in the function of the object and an unevaluatable-

David Rosenthal 1:05:19 Priceless feeling.

Ben Gilbert 1:05:21 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.

David Rosenthal 1:05:31 Yeah, totally. So speaking of dreams, we're now in the 1950s, in the post-World War II era. The most amazing, unbelievable, fantastical dream of the 1950s happens to Hermès in real life, and that dream is Princess Grace Kelly. [chuckles] So I sort of mentioned a little while back that one of the first things that Robert did when he came into the business was redesign the handbag and christen it the Sac à Dépêches. Well, it becomes 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 the scarves, it's the dream, it's all this stuff, and leather is part of it, but a smaller part. Well, in 1956, Princess Grace Kelly of Monaco, this is a girl from Philadelphia-

Ben Gilbert 1:06:31 [chuckles]

David Rosenthal 1:06:31 ... an American girl [chuckles] who goes on to become a movie star, who then goes on to become Princess Grace of Monaco. I can't imagine a bigger dream for any woman or any person in the 1950s. She is photographed using the Sac à Dépêches in LIFE Magazine.

Ben Gilbert 1:06:54 On the cover of LIFE Magazine.

David Rosenthal 1:06:56 So the legend is that it was on the cover of LIFE Magazine, but I googled a lot of 1956 covers of LIFE Magazine. [laughing]

Ben Gilbert 1:07:04 [laughing]

David Rosenthal 1:07:04 And I didn't find it on the cover.

Ben Gilbert 1:07:06 Oh, interesting. So maybe that's been sort of played up over time.

David Rosenthal 1:07:09 This might have become part of the lore. Regardless, big picture, in LIFE Magazine, she is clutching her beloved...... Sac à Dépêches to her midsection.

Ben Gilbert 1:07:20 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.

David Rosenthal 1:07:25 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 dreamlike thing you could imagine, and it's in black and white. And the reason that she is clutching this fairly large bag, unbeknownst to the world at the time, is she's trying to hide her pregnancy from the paparazzi. She's pregnant with her first daughter, and this photo just becomes iconic. Everybody wants to be Grace Kelly. Everybody wants to have this bag. And one of the last things that Robert does right before he retires in 1977 is he officially changes the product name of the Sac à Dépêches to the Kelly bag, and this is the birth of... I don't even know what to call it. The Kelly and the Birkin are ends of ones, but these leather good products that transcend everything, that are, like, so truly N of 1. There's no other way to describe them.

Ben Gilbert 1:08:26 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 101. But before we get to that, this is the perfect time for another story about ServiceNow. ServiceNow is one of our big partners here on season 14 and is really an incredible company.

David Rosenthal 1:08:48 Yep. ServiceNow digitally transforms your enterprise, helping you automate processes, improve service delivery, and increase overall operational efficiency all in one platform. Over 85% of the Fortune 500 runs on them, and today they are the 76th largest company in the world by market cap. That's wild! They're coming up on Hermès here.

Ben Gilbert 1:09:09 Yeah, and that story is really the story of their CEO, Bill McDermott. When he took over in 2019, the idea that this just 15-year-old company would be bigger than Nike or Pfizer soon was insane. ServiceNow was the leader in enterprise IT automation, but what Bill has done since, like we talk about all the time on the show, is evolve that product into a true solution for the entire enterprise.

David Rosenthal 1:09:35 Yep, it's just like our NVIDIA series. Moving from product to solution makes you an essential partner for your customers, which lets you build real enterprise value, and Bill is the best in the world at this.

Ben Gilbert 1:09:46 Bill's story is great. He started his career at age 17 in a very different business. He bought his local corner deli in working-class Long Island.

David Rosenthal 1:09:55 As a high schooler. This is amazing. He buys the deli for $7,000 in seller financing from the owner, who is retiring.

Ben Gilbert 1:10:02 And Bill realized that the kids like him, who hung out at the store, they weren't coming there for the product. Sure, they wanted food, but it wasn't about the sandwiches. It was about hanging out with your friends. That was the solution. Now, this was the 1970s. Bill starts installing arcade cabinets, Pac-Man, Space Invaders, everything we talked about on our Atari and Nintendo episodes. And guess what? Kids spend way more time there, and Bill makes way more profits than just selling sandwiches.

David Rosenthal 1:10:30 He literally made life-changing money from this deli. He buys his parents a beach house.

Ben Gilbert 1:10:35 So after college, Bill joins the tech world in sales, rises through the ranks at Xerox, and eventually becomes CEO of SAP. But he's always bringing that mindset: "Why are my customers really here?" So when he joins ServiceNow in 2019, he takes them from, "Oh, you can make my IT function better," to, "You can digitally transform my entire company."

David Rosenthal 1:10:57 And the company's performance since then has been incredible. I mean, honestly, it's like Hermès over the past couple years. Revenue has doubled, earnings have nearly 10X'd since 2019, and Bill and ServiceNow have entered the conversation with the NVIDIAs, the Microsofts, as the most important technology partners for enterprises around the globe.

Ben Gilbert 1:11:17 So if you wanna learn more about the ServiceNow platform and see how it can transform your business, go over to servicenow.com/acquired or click the link in the show notes, and when you get in touch, just tell them Ben and David sent you. Okay, David, so LIFE Magazine, the Kelly bag, it's out, so this thing must sell like hotcakes, right?

David Rosenthal 1:11:38 Well, [exhales] yes and no. Certainly, this plays right into this whole dream thing that we've been talking about and burnishes Hermès' already incredible brand and image. I mean, my God, Princess Grace Kelly of Monaco is carrying this bag, not just carrying this bag, but it's her favorite bag, the closest thing to her body. But we're still in the '50s here, so, like, yes, it becomes incredibly popular. Yes, I'm pretty sure it becomes Hermès' biggest-selling bag. But the market isn't quite there yet in the way that it is today with the Birkins and the Kellys. The global rich isn't that big of a population, and, like, yeah, I'm sure they're all buying Kellys, but Robert probably knows all of these clients personally at this point. We're not anywhere near the scale that we're talking about today.

Ben Gilbert 1:12:34 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. It's a $900 handbag in the '50s, which today is 10 to $12,000, approximately the price of a Kelly bag today. So it comes out as this thing that is completely ridiculous and inaccessible price-wise, so the people who are buying it are the Grace Kellys of the world, and there's not really this stratified class below that that's got this huge amount of purchasing power.

David Rosenthal 1:13:11 Right. The number of people who could spend the equivalent of $12,000 on a bag back then was just much, much, much smaller than it is today.

Ben Gilbert 1:13:20 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 right away.

David Rosenthal 1:13:33 And in fact, actually, sadly, kinda quite the opposite happens. So as we head through the '60s and into the 1970s, and the end of Robert's tenure and his generation as the head of Hermès, the company kinda starts to fall on hard times.

Ben Gilbert 1:13:50 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 911 because they couldn't justify any of the other products, and the whole company was a freaking mess. Hermès is not quite in those dire of straits, but, I mean, they have the ingredients of Hermès that we know today. They've got the Kelly bag, they've got the orange box, they've adopted the logo.

David Rosenthal 1:14:12 They've got the scarves.

Ben Gilbert 1:14:13 They've got the scarves. They have these small workshops where they make everything, but it's not working yet.

David Rosenthal 1:14:21 And it's particularly not working because, like we just talked about, that market was not that big yet. And as we enter the 1970s, something really funny happens: the next generation rejects that dream. This is, you know, y- you and me, our parents' generation, the hippies, the 1970s, this is democratization. Little girls don't wanna be Grace Kelly anymore.

Ben Gilbert 1:14:50 Hmm.

David Rosenthal 1:14:51 They wanna be like Stevie Nicks [chuckles] or, you know, something like that.

Ben Gilbert 1:14:54 Hmm.

David Rosenthal 1:14:55 And the dream of Hermès that was once so elegant and so desired by so many people, but inaccessible, is kinda now like, eh, 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, really start to come up, and we talked about this on the LVMH episode, but they're connected to fashion. You know, it's first Dior, and then it's Yves Saint Laurent. You know, this is the Mondrian dress from Yves Saint Laurent. This is, you know, the revolution. It's Gucci, it's Chanel in the '80s, when Karl Lagerfeld takes over, and what they're selling is very, very, very different than what Hermès is selling.

Ben Gilbert 1:15:42 This is an important distinction between Hermès and all the brands you just named. They come from the world of couture and of fashion and of cutting-edge, in-your-face, risky art, and Hermès comes from... I mean, mind you, by this point, they're already 120 years old, 130 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 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? 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.

David Rosenthal 1:16:38 Right, and those brands are getting born or reborn right there in the 1970s. [chuckles]

Ben Gilbert 1:16:44 Yes, and David, this is probably a good time to share who we chatted with in preparation from this episode and his observation about Hermès.

David Rosenthal 1:16:52 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 grows, we got to talk with Domenico De Sole, who was CEO of Gucci during the fight with Bernard Arnault that we chronicled. Really, I think that was the best part of our LVMH episode.

Ben Gilbert 1:17:11 Absolutely. When, uh, Domenico De Sole and Tom Ford and that team rejected Bernard's takeover and managed to not become a part of LVMH, and obviously, then Domenico and Tom Ford left to start Tom Ford after that.

David Rosenthal 1:17:26 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 in his perspective, and I think the perspective of many folks that are coming out of this '70s, '80s era of luxury, that's what's interesting, that's what's fresh.

Ben Gilbert 1:17:45 Risk on, baby.

David Rosenthal 1:17:46 Risk on, yeah.

Ben Gilbert 1:17:47 Let's figure out how to break some glass in what we're doing.

David Rosenthal 1:17:51 Grace Kelly is not breaking any glass.

Ben Gilbert 1:17:53 Right. That, uh, Domenico helped us understand about Hermès is they have been so protective of their brand and this unbelievable steward. They're so careful at how they've chosen to deploy the brand. They make sure that the mystique is always there. They don't violate the promise. They never cut corners. They have been above board in their brand promise and keeping that promise with customers for over 100 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. In the world of fashion, it's butting heads.

David Rosenthal 1:18:29 Yeah, it's antithetical to fashion.

Ben Gilbert 1:18:31 Yes, exactly.

David Rosenthal 1:18:33 So all this culminates towards the end of the 1970s, as Robert is nearing the end of his tenure at Hermès and the end of his life. Sadly, there's a moment, this is, like, probably 1977 or so, 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-

Ben Gilbert 1:18:56 [laughs]

David Rosenthal 1:18:56 ... at the Faubourg, 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."

Ben Gilbert 1:19:05 Unbelievable.

David Rosenthal 1:19:06 That was the accepted wisdom at the time. I don't know if it was McKinsey or, you know, who was saying that.

Ben Gilbert 1:19:12 Well, today I will tell you that Hermès has a corporate policy of no consultants, and now I know where that came from.

David Rosenthal 1:19:19 I mean, this is enshrined in the luxury strategy as anti-law of marketing number 19, do not hire consultants.

Ben Gilbert 1:19:28 ... Wow! So the recommendation was to come in and destroy everything that makes you special and follow the playbook that everyone else is running?

David Rosenthal 1:19:35 Yeah. I mean, it's working for them, and it's not working for Hermès.

Ben Gilbert 1:19:38 It's crazy.

David Rosenthal 1:19:39 And this is when the next generation transition happens to Robert's 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 Hermès, you know, the most unassailable thing in the world right now, but finds itself at a moment where it can be assailed. There's a generational transfer happening. You would think this is, like, the downward spiral, this is the dropping of the baton, and the next generation always rallies.

Ben Gilbert 1:20:15 And isn't it amazing? You would think the best person out there to brilliantly come up with both the business strategy and the creative element is probably not your direct descendant.

David Rosenthal 1:20:28 Right, probably not your nepotistic family member.

Ben Gilbert 1:20:31 That's not the best search process to run, and yet 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, to have a sixth sense for where you sit in the marketplace versus competitors and what people may want out of your brand next. It's all the intangibles that come from growing up in the business make you able to be the right person to transform it.

David Rosenthal 1:21:12 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, 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 Hermès, and his mother, who was head of production at the dinner table growing up. You can't not absorb that. I think that's the flip side of nepotism, right? Which makes it such a challenging topic. On the one hand, obviously limiting the universe of talent. On the other hand, how do you replicate those dinner table conversations?

Ben Gilbert 1:21:58 You know, it's funny, I called it a sixth sense. I think the right way to describe it is actually a je ne sais quoi about what you sort of absorb from those.

David Rosenthal 1:22:06 Totally. Okay, Jean-Louis, the fifth generation. The brand, you know, the consultants are saying, "Hey, go be like Gucci." [chuckles]

Ben Gilbert 1:22:14 Shut down your shop, where they still today make Birkin and Kelly bags by hand, one artisan at a time, in the most famous address in all of luxury and fashion. Not so.

David Rosenthal 1:22:26 Well, I do have to correct you there. That is not specifically true. It's certainly spiritually true. I believe now the only products that are made in the Faubourg are saddles.

Ben Gilbert 1:22:36 Oh, really?

David Rosenthal 1:22:36 I think everything else is made in Pantin, which is a 20-minute drive away. It's not like they outsource production. [laughing] Anyway, we'll get to that.

Ben Gilbert 1:22:45 Great.

David Rosenthal 1:22:46 Okay, Jean-Louis comes in.

Ben Gilbert 1:22:48 What year is this?

David Rosenthal 1:22:49 1978.

Ben Gilbert 1:22:50 Great.

David Rosenthal 1:22:51 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.

Ben Gilbert 1:22:59 We've talked too many times without 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 Hermès 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 or, until recently, only be done by hand, but it is a far more effective, high-quality, and durable form of stitching relative to the typical 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.

David Rosenthal 1:23:40 It's also incredibly beautiful. It's got a slight diagonal valence to it, as opposed to the normal straight-line stitching.

Ben Gilbert 1:23:48 Yes. So how does it work? 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, you don't prick all the way through. You just poke a little hole with your pricking iron or awl partway 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 thread and the leather, you know what kind of craftsmanship went into that. If it almost looks like the stitch vanishes into the leather, and you're like, "Is there even a hole there?" It's hard to even see how this was done, that is a saddle stitch. So you take your pricking iron or your awl, you poke the hole, or the partial hole, so there's a lot of muscle memory involved in this. You then pass one needle through, going, call it from the right to the left side, and then you have a second needle-

David Rosenthal 1:25:07 On the other end of the thread. So one thread, two needles.

Ben Gilbert 1:25:09 Yes, that you pass through the other direction. And so what you've done, as you pull both of them through, is created this incredibly strong sort of interlocking mechanism.

David Rosenthal 1:25:22 There's tensile force going in both directions.

Ben Gilbert 1:25:25 Yes. If it gets ripped, you're not at risk of the whole thing pulling out and your saddle or your bag falling apart. 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.

David Rosenthal 1:25:46 Yeah, compare that to most products that you own.

Ben Gilbert 1:25:49 Yes, this literally provides high utility if you're in an equestrian jumping competition, or if your bag needs to hold something that really needs a lot of protection and can't fall through. It's almost like it started with real necessary utility, because something life-threatening could happen. Now, it's just massively overkill for everything that is saddle stitch, but you appreciate the craft behind it. There are very few people who are in a life or death circumstance that are dependent on their stitch holding true.

David Rosenthal 1:26:20 I'm gonna channel my inner Pierre-Alexis here, the current artistic director of, of Hermès. I think it still has relevance if you want your object to be permanent. If you want an object that you own to represent something wholly different and antithetical to, let's call it the Amazonification or the Walmartification of items these days, you want it to be made like this.

Ben Gilbert 1:26:49 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 to this interesting idea: Is handmade stuff better? Well, not necessarily, and Axel even says this in an interview. He says, in 2019, "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 element of, 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 thread and the leather. It's a pretty special process. And 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 Birkin in a little bit, but similar story, is made by one craftsman. So one craftsman starts with thirty-six unique pieces of high-quality leather.

David Rosenthal 1:27:59 As much as possible from the same animal and matched exactly.

Ben Gilbert 1:28:03 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 that takes these thirty-six cuts and stitches it together. It takes twenty hours, and 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.

David Rosenthal 1:28:37 Oh, I think it's even more than that. It's two years of training to become a Hermès artisan, period. I don't think you're allowed to touch the Birkins and the Kellys [chuckles] when you start day one on the job. I believe you need at least another three years, if not more, before you're allowed to touch the Birkins and the Kellys.

Ben Gilbert 1:28:55 Fascinating. So this knowledge is passed from generation to generation, and Hermès refers to this as the savoir-faire, or the know-how, or the expertise about the materials and the exceptional technique that's transmitted from one craftsperson to another.

David Rosenthal 1:29:13 Ooh, hang on to this. I have a lot more to say when we get to the current generation about this.

Ben Gilbert 1:29:17 Do you know, David, and I'll stop after this, but I thought this was pretty funny... Have you read the annual report, the six-hundred-page document that they release once a year?

David Rosenthal 1:29:27 I have to admit, I have not read it cover to cover.

Ben Gilbert 1:29:30 You did more of the history, and I did more of this.

David Rosenthal 1:29:32 But I've read large sections of it.

Ben Gilbert 1:29:34 I was reading it. I found myself laughing at how often savoir-faire was used in the prose. Every other paragraph, they just sort of throw in a savoir-faire. One hundred and thirty-three times, savoir-faire is referenced in the Hermès registration document.

David Rosenthal 1:29:49 Partially in their defense, savoir-faire literally translates as know-how. It's kind of like a proper term in French.

Ben Gilbert 1:29:57 Yeah, fair. 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.

David Rosenthal 1:30:15 Yep. That's the true genius of the current generation, is they have scaled that to seven thousand people.

Ben Gilbert 1:30:21 It's unbelievable.

David Rosenthal 1:30:22 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. This is amazing. She was an artisan at Hermès in Paris. She was hired right at the start of Jean-Louis' tenure. She worked in the atelier at the Faubourg. When Jean-Louis' son, Pierre-Alexis, current artistic director, came to train after school as a teenager, he sat next to Beatrice, and I got to chat with her about this.

Ben Gilbert 1:30:55 She runs April in Paris in San Francisco?

David Rosenthal 1:30:57 So she moved to San Francisco when Hermès opened the San Francisco store here, and I asked her, I was like: "Oh, you transitioned to the front of the house?" And she was like, "No, no, no. I was the person for the West Coast who repaired everything for North American West Coast clients. There was one person in New York, and I was in San Francisco, and we came from the Faubourg, and, you know, a few of these people go around the world." And one of the things about Hermès, and actually Jean-Louis, who say that this, like, the true essence of luxury and the true essence of Hermès is everything they make can be repaired. And so if you buy an item from Hermès, no matter what it is, they will repair it.

Ben Gilbert 1:31:32 Yeah, I think that's true.

David Rosenthal 1:31:33 Even if it's a hundred years old, you bring it in, they will repair it.

Ben Gilbert 1:31:36 ... Yeah, that's true. They have 15, this is flashing forward to today, 15 dedicated repair shops worldwide, and they mend 120,000 pieces a year.

David Rosenthal 1:31:46 Wow! Amazing.

Ben Gilbert 1:31:48 Yeah.

David Rosenthal 1:31:49 So I asked Beatrice when I was talking to her, "What was this like? You know, what was special?" And she said, "Look, you have to understand, when I was training as a young person and decided I wanted to go into this field, Hermès was absolutely the greatest company that anyone could hope to work for. It wasn't even close. There was no comparison."

Ben Gilbert 1:32:10 What years?

David Rosenthal 1:32:10 This was in the late '80s, early '90s. She said, "Look, I decided that either I was gonna get a job at Hermès 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-

Ben Gilbert 1:32:29 Yeah

David Rosenthal 1:32:29 ... that did this."

Ben Gilbert 1:32:30 Right.

David Rosenthal 1:32:30 "Everything we talked about in the 1970s, all these other brands, they all went in this complete other direction. The consultants were telling Hermès to go in that direction, too, but they're the last one standing that did all of this by hand in the tradition handed down through hundreds of years. If that's important to you, there's no place else. You can't ply your trade doing that anywhere else." I asked her then, I was like, "Okay, well, as for the products and to the clients, to the customers, why does that make a difference?" 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. That means something, and there's nobody else, certainly at Hermès' scale, that does that." You know, she ended up leaving Hermès and starting her own boutique here in San Francisco, April in Paris, and she actually also runs her own leather school here in San Francisco, too, to train artisans. You can get custom stuff, small boutique stuff. You know, Beatrice is a worldwide master. You can get that from her, but the idea that a $200 billion company at scale would be doing this, [chuckles] like, there's nobody else.

Ben Gilbert 1:33:45 Yeah, it's nuts. It's completely insane. And the people who don't work for Hermès, 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 Hermès would make in that traditional sort of pre-war, early 20th century fashion, there aren't that many other artisans out there. Hermès employs 7,000 of them. I don't know how many other ones there are, 1,000, 2,000? And it's not like Hermès has cornered the market. They're hiring more people and training them as fast as they can. They're trying to preserve this market that otherwise would have entirely been zero. It's a pretty crazy thing that they've managed to scale, even to the scale that they're at.

David Rosenthal 1:34:31 The other thing Beatrice said, you know, to bring it back to Jean-Louis, "He is a legend. He really cared." The idea that he would follow the consultants, like, it was just so-

Ben Gilbert 1:34:42 [laughs]

David Rosenthal 1:34:42 ... completely anathema to him. He's the artistic director and CEO of the company. She ran into him in the elevator in the Faubourg right after she started. He looks at her and said, "You're Beatrice Amblard. Welcome to Hermès." [chuckles] You know, he knew everybody by name. And then when she ended up leaving in 1997 to open her own store, he called her, and he was, like, 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. And then shortly after, the San Francisco Chronicle did an article about her. He found the article, read it in France, cut it out, and mailed it to her, and with a note of congratulations handwritten.

Ben Gilbert 1:35:26 And it doesn't cost him anything to do that because, I mean, on the one hand, you just say they're being a kind person and gave so much to your house for so long.

David Rosenthal 1:35:34 On the other hand, this is the CEO of Hermès.

Ben Gilbert 1:35:36 Right. And I think it's important to realize these individual craftsmen are entirely non-competitive with Hermès. It's a completely different value proposition to the customer. When you're buying Hermès today, you don't start from a place of, "You know, I think I want some of the very best sewn leather goods I can find. Let me evaluate the whole landscape of people who could deliver that for me, and then I'll decide which maker to go with." Either, A, you're doing that, and you are a person who knows about a bunch of individual leather craftsmen, which is rare, or, B, you actually just wanna buy something from Hermès, 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 Hermès or you're a different type of customer.

David Rosenthal 1:36:35 Yep. Okay, so Jean-Louis story. How did he turn this thing around [chuckles] and save Hermès from the consultants? Well, like we said, he'd apprenticed just like every other generation, but unlike any other generation, or I guess maybe sort of like Emil back in the day, going and meeting Henry Ford, he comes to America, and specifically, he came to America to follow his wife, Rena, who became a world-famous architect. Rena was interning with I. M. Pei in New York.

Ben Gilbert 1:37:06 Really?

David Rosenthal 1:37:07 And Rena Dumas would go on to design all the stores that they opened up all around the world-

Ben Gilbert 1:37:13 Oh

David Rosenthal 1:37:14 ... and design the atelier in Pantin when they expand production.

Ben Gilbert 1:37:18 I. M. Pei, famous from a number of things, including previous Acquired episode with Michael Ovitz, designed the CAA building in Los Angeles, designed the Louvre Pyramid.

David Rosenthal 1:37:29 I was gonna say, think about-

Ben Gilbert 1:37:31 [laughs]

David Rosenthal 1:37:31 ... like the connections here in France and Paris.

Ben Gilbert 1:37:33 Yeah, which, by the way, everyone in Paris thought the pyramid was hideously ugly when it first... Relative to this 1700s building around it, and over time, now it's become this, like, iconic triangle, pyramid, beautiful signature of the city.

David Rosenthal 1:37:47 Yeah. Jean-Louis, when he's in America, he works for Bloomingdale's.... Bloomingdale's! My God, of all places.

Ben Gilbert 1:37:55 Well, there was a heyday of department stores. In fact, if you go way back, do you know how Hermès entered the United States?

David Rosenthal 1:38:03 In partnership with Neiman Marcus.

Ben Gilbert 1:38:04 Yes, 1930s. Good. Wow, so you did find that.

David Rosenthal 1:38:09 It's hard to stump me.

Ben Gilbert 1:38:10 Yeah. [laughs]

David Rosenthal 1:38:11 But you do it sometimes.

Ben Gilbert 1:38:12 Okay, so Bloomingdale's.

David Rosenthal 1:38:14 So from that experience, you know, being in America, being in this much more mainstream, [chuckles] you know, audience, he comes to understand what these other brands are doing, you know, what the consultants are suggesting. But he takes that back, and what he says, like, "Look, the way forward is we are gonna figure out how to make Hermès 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 these young people, particularly these young women." [chuckles] You know, the moms don't wanna be like their moms, they wanna be like their daughters.

Ben Gilbert 1:38:56 And it's a tall order to figure out how to revitalize, rejuvenate, make Hermès relevant for this new era, with this new audience-

David Rosenthal 1:39:04 With the same products. This is key.

Ben Gilbert 1:39:07 Right. Keeping the same products and not violating everything that Hermès currently stands for. We talked about this on LVMH, the Not Your Mother's Tiffany campaign. It's almost like, how do you not insult your current customer base by adapting for the next one?

David Rosenthal 1:39:24 This is such a tight needle to thread, to use a pun here. They need to run the Y- Not Your Mother's Tiffany campaign without actually running the Not Your Mother's-

Ben Gilbert 1:39:33 [laughs]

David Rosenthal 1:39:33 ... Tiffany campaign.

Ben Gilbert 1:39:34 Right.

David Rosenthal 1:39:35 So, well, the first thing, in 1979, the first year he takes over, he launches a new ad campaign in Paris with young Parisian women wearing the iconic Hermès 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 wanna be like Queen Elizabeth wearing the scarves.

Ben Gilbert 1:39:56 [laughs]

David Rosenthal 1:39:57 Young women wearing the scarves, not how you would typically wear a scarf. Different parts all over their body. It's the Hermès version of Not Your Mother's Tiffany. And most importantly, they're wearing these scarves with jeans. Grace Kelly-

Ben Gilbert 1:40:13 Mm

David Rosenthal 1:40:14 ... would never wear jeans. I don't know if she ever did wear jeans, but she sure as hell wouldn't be photographed wearing jeans.

Ben Gilbert 1:40:19 Fascinating.

David Rosenthal 1:40:20 These ads are the scarves that Queen Elizabeth is wearing with jeans, [chuckles] and in fun, interesting ways, playful ways to wear the scarves, but they're still the same scarves.

Ben Gilbert 1:40:34 Fascinating.

David Rosenthal 1:40:35 And this is like a revolution. I mean, the rest of the family is really upset about it, but he pushes it through. You know, and you can still see echoes of this to this day. Like, a big part of Hermès fashion, and probably the biggest part of, I think, the scarf fashion these days, is tying the scarves on your bags, on your accessories-

Ben Gilbert 1:40:55 Yeah

David Rosenthal 1:40:55 ... on various parts of your body. You know, not wearing them like your mother wore them.

Ben Gilbert 1:41:00 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.

David Rosenthal 1:41:17 Ah, that's super cool.

Ben Gilbert 1:41:19 Yeah.

David Rosenthal 1:41:19 Uh, but I think this is brilliant, because this is allowing Hermès to exist and be relevant alongside fashion without actually getting into fashion themselves.

Ben Gilbert 1:41:34 Mm.

David Rosenthal 1:41:34 The scarves, and then ultimately the bags, can be the accessories to your jeans, 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.

Ben Gilbert 1:41:53 And it's pretty interesting, if you can figure out how to coexist alongside cool, fashionable, new, cutting-edge things, then 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 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...

David Rosenthal 1:42:30 "I'm classic."

Ben Gilbert 1:42:31 "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 Hermès has very high price point products that stay approximately that price forever.

David Rosenthal 1:42:45 Yep. So Jean-Louis has a quote about this, which is very French. He says, "The young customers came to us more than we went to them. People saw again, but with a new eye, the beauty of materials worked by fine hands. They came. We followed." You know, that's the most French way of ever saying this, but, like-

Ben Gilbert 1:43:04 [laughs]

David Rosenthal 1:43:04 ... this is what we're talking about. He got their client base, and often the young people's parents, who wanted to be more like the young people here, to see with new eyes the same things.

Ben Gilbert 1:43:17 Yep.

David Rosenthal 1:43:18 Total genius.

Ben Gilbert 1:43:19 Yep, for sure. Okay, so that's brilliant.

David Rosenthal 1:43:22 So that's on the product side, and kind of doing this jujitsu to reposition the products in Hermès. The other thing that he did, which was huge, was he had the very same realization that Henri Racamier had at Louis Vuitton, and we foreshadowed this earlier. What Racamier figured out at Louis Vuitton in the 1970s was the market now, the global wealthy, the global elite, the global rich, is so much bigger now [chuckles] than it was in the 1950s. The number of people with wealth on the order of Grace Kelly and Prince Rainier 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-... is just so, so, so much larger than it used to be.

Ben Gilbert 1:44:11 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 '90s and 2000s. 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, and then set up shop and say, "Hey, France's whole heritage is now available to you to adopt as part of your persona."

David Rosenthal 1:44:45 Yeah, and this is super key, and I think to this day is a huge part of the defensibility of Hermès and Louis Vuitton, too. No matter where you live in the world, and no matter what your cultural background is, when you attain this status, there's still something about this connection to French and European nobility that you cannot buy from a brand from any other country.

Ben Gilbert 1:45:09 It's super fascinating that French 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.

David Rosenthal 1:45:28 Yep. So all of this stew comes together in 1984 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, an 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 1980s, where he's seated next to the French and British actress, Jane Birkin.

Ben Gilbert 1:46:03 The it girl of the time.

David Rosenthal 1:46:05 Now, here's what's really interesting. I bet 95-plus percent of people listening to this right now have no idea who Jane Birkin was.

Ben Gilbert 1:46:14 Which is so funny because in interviews with her as the Birkin bag was blowing up or at least getting a lot of attention, an interviewer joked that she was 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?"

David Rosenthal 1:46:31 Yeah, right. [laughs]

Ben Gilbert 1:46:32 But totally 95%, if not more, of the listeners to this podcast will have no idea who Jane Birkin is before this episode.

David Rosenthal 1:46:39 But you definitely know the Birkin bag.

Ben Gilbert 1:46:41 Yep, or at least you know of the Birkin bag. I'd bet seven out of 10, maybe eight out of 10 people listening to this couldn't spot it, but if you say a Birkin bag, you sort of know that it's, like, a unattainably expensive, high-status, hard-to-get handbag.

David Rosenthal 1:46:57 Well, certainly, if you follow the Hermès stock, you know what a Birkin bag is-

Ben Gilbert 1:47:01 [laughs]

David Rosenthal 1:47:01 ... even if you probably couldn't pick it out of a crowd.

Ben Gilbert 1:47:04 Yes.

David Rosenthal 1:47:04 But anyway, this is the culmination of everything we've been talking about. Who is Jane Birkin? She was British. She was born in England, but she moved to France and became a French citizen, and she became, 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 Hermès, like, Hermès doesn't do celebrity advertising. I think it's so important that even though neither of them were French, they became so deeply European in what they represented.

Ben Gilbert 1:47:43 Yeah, that's a great way to put it.

David Rosenthal 1:47:45 And for Jane Birkin, she was this next generation. She was an actress both in film and theater. She was a singer. She was incredibly beautiful. She was the it girl but in a very, very different way than Grace Kelly. She wore jeans, and in particular, she had a trademark accessory fitting with the, uh, you know, 1970s-

Ben Gilbert 1:48:10 Oh, the basket?

David Rosenthal 1:48:11 Yep, counterculture, you know, back-to-the-land-type ethos. She carried a wicker basket with her everywhere that she went.

Ben Gilbert 1:48:19 Which it has an ethos to it but doesn't lend itself well to overhead bins.

David Rosenthal 1:48:24 No, it does not. So as the two of them, Jean-Louis, CEO and artistic director of Hermès, and Jane Birkin, French cultural icon, are boarding this flight to London, they're seated next to each other, and Jane is struggling to get her fixed-handle wicker basket up into the overhead compartment. And at this point, Jane had become a mother and had kids, and she had, you know, kid stuff in her basket.

Ben Gilbert 1:48:51 She had baby bottles that were, like, spilling out.

David Rosenthal 1:48:54 Totally. I mean, I carry a lot of kid stuff these days. Like, you need a lot of stuff with the kids.

Ben Gilbert 1:48:58 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-

David Rosenthal 1:49:05 Baby forward, yes, and again, on the one hand, this is sort of esoteric Birkin lore. On the other hand, I think this is super important to Jean-Louis. Like, imagine the older generation of Hermès embracing this.

Ben Gilbert 1:49:18 You know what we should do? We should come out with a $15,000 diaper bag. [laughs]

David Rosenthal 1:49:21 Right. Right, right. [laughs] So they sit down, they start talking on the flight, and Jean-Louis introduces himself, and it's like, "I notice you're struggling with your wicker basket there, Miss Birkin."

Ben Gilbert 1:49:32 And she doesn't know who he is at first. It's the funniest thing.

David Rosenthal 1:49:35 Right, right, right.

Ben Gilbert 1:49:36 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 Hermès doesn't make that," or she made some comment, and he goes, "I am Hermès."

David Rosenthal 1:49:46 Yeah. The legend, now, who knows if this is true, is that she said, "Well, when Hermès makes a diaper bag, you know, I'll, I'll use that one." [laughs]

Ben Gilbert 1:49:53 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.

David Rosenthal 1:50:06 Yep, 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 voila, the Birkin is born. Larger than the Kelly, but smaller than the old original Hermès bag. It's a tote bag, and it has two handles, unlike the Kelly, which has one handle, and so with two handles, you can put it over your shoulder. You know, it's this sort of ... It feels weird to say more casual version of the Kelly, given that it's, you know, the Birkin bag, but it is. It's the more casual, modern version of the Kelly.

Ben Gilbert 1:50:42 And the Kelly has cleaner lines and this sort of beautiful, almost mid-century trapezoidal shape, whereas the Birkin, everything about it kinda screams function.

David Rosenthal 1:50:52 So here's what's interesting. They release the product in 1984, and it is not an immediate success. I think part of this is that the Hermès kind of brand transformation, modernization was probably still underway. When you watch interviews with particular Pierre-Alexis, he'll talk about this. He's like, "Any other company would've given up on this product." But it takes about five years before the Birkin bag becomes the Birkin bag, and, like, the time is right. We're in the 1980s, the go-go years. You know, this is the, the years that are shaping Bernard Arnault here.

Ben Gilbert 1:51:28 There's tons of American wealth being created. People are looking to be a little bit flashier. Now, granted, Hermès is the least flashy of the luxury labels you could adopt, but people know the brand.

David Rosenthal 1:51:40 Yeah, I mean, it takes five years for it to become any modicum of success for Hermès, and then, like a lot of these things, this just kind of slow burn starts that grows and grows and grows and grows.

Ben Gilbert 1:51:54 And there's a real lore around it that it's hard to get, and it's just like with a kid. If you tell them 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. 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 wanna show us you're an even more important customer, please do, by all means, and I'll see what I can do.

David Rosenthal 1:52:34 [laughs] Ben, you would make a great Hermès SA.

Ben Gilbert 1:52:37 [laughs] I don't think so. I actually had a wonderful Hermès associate that I worked with in the Aix-en-Provence store, and it was crazy. I mean, we bought basically the most entry-level Hermès products that you can buy in one of their stores. I think perfumes are sold in department stores, and makeup. There are some more accessible things, but in terms of the durable goods, 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 with the associate who helped us through the whole process, spending as much time with me as they spent with someone coming in to pick up their Birkin bag. It was a crazy ... probably the best customer service I've ever received in any retail establishment anywhere. So no, I don't think I would be a good [laughs] Hermès-

David Rosenthal 1:53:30 [laughs]

Ben Gilbert 1:53:31 ... sales associate relative to, uh, where the bar has been set.

David Rosenthal 1:53:34 It's funny. You know, my experience was different. Of course, I had to go do some research for this episode.

Ben Gilbert 1:53:40 You drove down to the Palo Alto store, right?

David Rosenthal 1:53:42 Yes, I went to the Palo Alto store. I had to be down there anyway for some meetings, and 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-

Ben Gilbert 1:53:58 Oh

David Rosenthal 1:53:58 ... is coming up. But I walked in the store with the intention of buying what I ultimately did buy, which is-

Ben Gilbert 1:54:05 Apple Watch band. I thought that's what that was.

David Rosenthal 1:54:06 An Apple Watch band. Yep, 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, a higher level SA, but when I expressed that I was there to buy a, an Apple Watch band-

Ben Gilbert 1:54:27 Oh, interesting.

David Rosenthal 1:54:28 Yeah. I don't know if that was just the day in the store-

Ben Gilbert 1:54:31 Yeah, yeah, yeah

David Rosenthal 1:54:31 ... or if that's part of the policy.

Ben Gilbert 1:54:33 I have to imagine it's a little bit different experience in the French countryside as compared to-

David Rosenthal 1:54:37 The Stanford Shopping Center. [laughs]

Ben Gilbert 1:54:38 Yeah, I could see that. But back to the Birkin bag. By 2001, it becomes so widely known that 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 and the City episode, and Samantha figures out that there's a way to jump the ... I think they use the number five, five-year waitlist.

David Rosenthal 1:55:07 Well, the scene where she walks in to try and buy it is just iconic, where the sales associate is, you know, responding to her like, "It's $12,000," or whatever. Like, "Oh, I know. There's a waiting list. Of course!"

Ben Gilbert 1:55:18 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 waitlist. 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 Birkin 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 good luck ever getting a Birkin bag, and, you know, the crazy stories about the most expensive one ever selling for $500,000 on the secondary market, and Victoria Beckham having a collection of over 100, 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 investment.

David Rosenthal 1:56:09 A way of summing up what you're saying is, the hard thing about buying a Birkin is not coming up with the money. [laughs]

Ben Gilbert 1:56:15 And which is crazy, right? It's a starting at $12,000 handbag, and what you're saying is that's actually not the constraint.

David Rosenthal 1:56:22 Yep, 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 Birkin bag, you could immediately sell it for a lot more than what you paid for it.

Ben Gilbert 1:56:34 And your Hermès SA will not be very happy that you did that, because the point of buying one is to own one and use one, and appreciate the craft and the work and the beauty that went into this product. And Hermès 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 people who appreciate the Hermès dream for the rest of their life.

David Rosenthal 1:56:57 Yeah, that would be the last Birkin bag that you ever buy. [chuckles] Every bag, I think maybe even every item-

Ben Gilbert 1:57:04 Yes

David Rosenthal 1:57:04 ... that Hermès makes, has what Hermès calls a blind stamp on it, and this is a series of symbols and numbers.

Ben Gilbert 1:57:12 There's one on my belt right now.

David Rosenthal 1:57:14 Yep, there's some on my watch band right now, that are stamped into the leather that uniquely identify that item, the year it was made, and the craftsperson who made it.

Ben Gilbert 1:57:26 And there are some very cool stories of people who are transitioning from a craftsperson 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, craziest, full circle Hermès moment for any Hermès craftsperson to see, "This thing that I made, that I really wanted to be durable and stand up in the world, how did it actually perform?" And to get it back 10, 20 years later and see it, has gotta be crazy cool.

David Rosenthal 1:57:59 Yes.

Ben Gilbert 1:58:00 So today, everything we're talking about here, the Birkin bag, the Kelly bag, these 10 to $100,000 retail handbags, depending on the type of exotic leather and everything, and the scarcity, are referred to as a category of Veblen goods. And so this is essentially the opposite of everything you learned in Econ 101.

David Rosenthal 1:58:22 As is everything about this company.

Ben Gilbert 1:58:25 Yes. So normally, price is where supply meets demand, so as the price of a good increases, demand for it would go down. A Veblen good is the opposite. As price increases, people actually want it more, 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. Birkin bags sell below the market clearing price.

David Rosenthal 1:58:53 Yes.

Ben Gilbert 1:58:54 That is another defiance of microeconomics. Normally, things should be priced exactly at the intersection of supply meeting demand.

David Rosenthal 1:59:02 I was just laughing as you were talking about Veblen goods there, and I whipped out my copy of The Luxury Strategy and flipped to anti-law of marketing number 13: raise your prices as time goes on in order to increase demand.

Ben Gilbert 1:59:17 So interesting. But one way to look at this is, oh, it's lost revenue. Their prices aren't high enough, because they can only make so many of them, and they're selling them below the price people are willing to pay, so there's money left on the table. But another way to look at it is that it's an investment in the brand. So there's a very good Substack writer, 310 Value, that we'll link to in the show notes, who observed, "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 Hermès, and creates demand for Hermès's other products as customers buy Hermès's other goods to build a relationship with the company in hopes of being allocated a bag at the below-market retail price."

David Rosenthal 2:00:04 Yes. This is the same dynamic with, I think, a very different set of motivations, as we talked about on the Nike episode. I very firmly believe that Nike could sell many of their shoes for two, three, four, or five times the price that they do, and they'll show up on GOAT or StockX all the time, regularly at higher prices than Nike releases them for. I believe that the reason that they do this is to maintain goodwill with their customer base and maintain Nike's image as a brand that is accessible to everyone. Hermès is doing the opposite. They want this to happen in order to maintain the image of Hermès, and specifically the Birkins and the Kellys, as a brand and a product that is not accessible to everyone. [chuckles]

Ben Gilbert 2:01:02 Yes. And it's not as simple as, well, they just keep raising the prices to make people keep wanting them more. You read that in The Luxury Strategy, and many luxury brands do that. In fact, Chanel has done it in record amounts the last couple of years with the, I think it's called the Chanel Classic Flap Medium or something like that. But that's had this crazy appreciation over the last few years, where Chanel is just raising the price. Hermès doesn't do that.

David Rosenthal 2:01:30 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 across the entire line, 7% per year for the last 10 years.

Ben Gilbert 2:01:44 So it's, like, 5% above, 4 or 5% above inflation?

David Rosenthal 2:01:48 Yeah, which is more, but not an egregious amount.

Ben Gilbert 2:01:50 Right. There was a study that found that the Birkin 30, which is one of the sizes in Togo leather, didn't even equal the rate of inflation in the US. I'm trying to figure out what the motivation here is, because it's a tremendous restraint. There's no cash grab happening, and maybe it's because what bad things would happen to Hermès if they decided, "You know what? Birkins are 20 now, not 12."

David Rosenthal 2:02:17 Right. They're already viewed as the most expensive handbags in the world, so what harm done to go from 12 to 20?

Ben Gilbert 2:02:26 Right, and they sell a lot of them, so, like, that actually would be a lot of profit dollars.

David Rosenthal 2:02:31 Right.... and for somebody who's gonna spend $12,000 on a handbag, are that many more of those people gonna be price sensitive at that swing from 12 to 20? Like, probably not.

Ben Gilbert 2:02:44 Right. The Wall Street Journal estimated in 2020 that there's about 120,000 of the combined Birkin and Kelly created each year, so 120,000 bags a year. I mean, if you decide that you wanna make another 8,000 of pure profit on each bag, that is tempting, and I think it actually says a lot about Hermès's obsession with conservatism, that they don't meaningfully increase the price. Like, the Kelly is not far above its original 1950s price, inflation adjusted. I think the Birkin bag, the retail price was around $2,000 when it launched in 1984, so call it maybe $6,000 inflation adjusted. So, you know, you're looking at maybe twice the price that it launched at 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 Hermès raise the prices? They're already getting the benefit either way of the sort of trickle-down of people participating in the Hermès ecosystem to hopefully get the call one day. So why not make it even more expensive when you do get the call?

David Rosenthal 2:03:54 Interesting. All right, let's come back to that later in the episode.

Ben Gilbert 2:03:57 Yeah. Okay, so 1984, Birkin release doesn't sell well for the first five years, then it becomes this cultural touchstone and gains steam every year after that.

David Rosenthal 2:04:06 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, because it takes time to build the lore-

Ben Gilbert 2:04:15 Yes

David Rosenthal 2:04:15 ... and aura around this bag. You can't just drop a new product and have it become like this immediately in this category.

Ben Gilbert 2:04:25 Correct.

David Rosenthal 2:04:26 You're never gonna have, like, an iPhone of luxury handbags. [chuckles]

Ben Gilbert 2:04:30 Correct. It has to be like a Taylor Swift concert in order to [chuckles] instantly... Yeah, I actually think it's a reasonable comp, though. Like, her concert was a extremely scarce, brand-new product priced at an extreme premium that did sell right away because the product had so much of the brand in it. Like, you knew exactly what you were gonna get from going to the Taylor concert 'cause you're extremely familiar with the brand, but it's not necessarily well understood that the Birkin equals Hermès in the way that the Eras Tour equals Taylor Swift.

David Rosenthal 2:05:04 Totally. It's also that the product was the Eras Tour. The product was not Midnights. 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. But it was like, "No, I'm gonna go to Taylor's concert and hear all of Taylor."

Ben Gilbert 2:05:24 All the amazing Hermès scarves from over the years released out of the vault.

David Rosenthal 2:05:28 Yes. [laughing] The Disney+ of Taylor Swift.

Ben Gilbert 2:05:33 [laughing]

David Rosenthal 2:05:33 All right, all right, a different episode here.

Ben Gilbert 2:05:35 Yeah.

David Rosenthal 2:05:35 [laughing] Okay, back to Jean-Louis. So this is how he does it. He does two incredible things to save the company. One, he repositions the brand. 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's Tiffany," and the culmination of that is the Birkin bag and everything that that represents. And then two, the internationalization and discovering and running the same playbook that Racamier ran at Louis Vuitton. By the end of Jean-Louis' tenure in 2006, so couple years after the famous Sex and the City episode, Hermès has gone from well less than $100 million when he took over, the consultants were saying, you know, "Outsource, shut it down," essentially. By the end of the decade of the '80s, he was just under half a billion dollars in revenue, and then in 2006, he's taken it to $2 billion in annual revenue, from, you know, nice family business to, like, this is a real, real thing.

Ben Gilbert 2:06:39 So one more time on those numbers?

David Rosenthal 2:06:41 So I don't know the exact revenue figure when he took over, but let's call it $50 million in annual revenue, we know it was well less than 100, to 2 billion when he retires in 2006.

Ben Gilbert 2:06:53 So 40X in 30 years?

David Rosenthal 2:06:55 Yeah, 40X in under 30 years.

Ben Gilbert 2:06:58 Wow!

David Rosenthal 2:06:59 Pretty good. Pretty transformative for the family business. Well, [exhales] along the way, as the company clearly becomes more and more valuable... You know, remember, he is the family member who's running it, but we're now on the fifth generation of the family. We're starting to bleed into the sixth generation of the family. There are now over 80 family members out there, eight zero, many of whom are involved in the business, but many of whom aren't. And now this business that they all own is doing $2 billion a year [chuckles] in revenue at very, very high margins. There starts to be some demand for liquidity here.

Ben Gilbert 2:07:43 Right. Every single one of those family members' most valuable asset in their entire net worth is their privately held Hermès stock that nobody can really put a price tag on. 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 90% of my net worth actually were something that I could access." And an even split, that's $25 million a person. I'm pretty sure it's the most valuable thing that any of them owns.

David Rosenthal 2:08:13 Right. So in 1993, Jean-Louis lists Hermès on the Paris Stock Exchange. Collectively, when the dust settles, the family has sold 19% of Hermès to the public. They still own 81%. Now, the public float grows a little bit over the years as more family members sell, more generational transfer happens, but-... you know, more or less still, you know, 70%-plus family-owned and controlled. It would really take some sort of absolute financial genius to, like, come in and even consider, "You know, we own over 70% of this business. We're unassailable. Who on Earth could possibly make a run at our company?"

Ben Gilbert 2:08:59 It would take a real wolf, I'll tell you.

David Rosenthal 2:09:01 [laughing] 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. This is Hermès's finest moment that we're about to talk about here, through it all.

Ben Gilbert 2:09:16 And it's interesting, it's not their product.

David Rosenthal 2:09:17 No. Has nothing to do with the product.

Ben Gilbert 2:09:19 Yeah.

David Rosenthal 2:09:20 Yes, the fight with Bernard Arnault.

Ben Gilbert 2:09:24 Yes, but before that, now is a great time to share some new news about our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts, so frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring. Vanta takes these otherwise time-consuming and incredibly resource-draining efforts for your organization and makes them fast and simple.

David Rosenthal 2:09:51 Yes, and the big news that they announced last week is they now have over 7,000 customers just five years after launch. Vanta is the perfect example of a quote we talk about all the time here on Acquired, Jeff Bezos, his idea that a company should only focus on what makes your beer actually taste better, i.e., spend your time and resources only on what's actually gonna move the needle for your product and customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling your revenue because customers and partners demand it, but yet it adds zero flavor to your actual beer or your product.

Ben Gilbert 2:10:31 Yes, Vanta takes care of all of that for you. No more spreadsheets, fragmented tools, manual reviews to cobble together your security and compliance requirements. It is a one single software pane of glass that connects you to all of your services via APIs and eliminates countless hours of work for your organization. They even launched a bunch of AI capabilities in the last year to make this even simpler and more powerful than before. They now integrate over 300 external tools and even enable customers to build private integrations with their internal systems.

David Rosenthal 2:11:02 And critically, your security reviews are now real-time instead of static, which you can monitor and share with your customers and partners. Vanta's platform helps you continuously monitor compliance alongside reporting and tracking risk. Plus, you can save countless hours by completing security questionnaires with Vanta AI.

Ben Gilbert 2:11:19 Yep, Vanta scales all the way from seed-stage startups to large enterprises. So if your company is ready to automate and streamline security reviews like 7,000 other customers, go back to making your beer taste better and head to vanta.com/acquired, and just tell them that Ben and David sent you. And thanks to our friend Kristina, Vanta's CEO, all Acquired listeners get $1,000 of free credit at vanta.com/acquired. David Rosenthal, let us return to Bernard Arnault. It's been 12 months.

David Rosenthal 2:11:49 It's been too long.

Ben Gilbert 2:11:50 I've been wanting to hear the other side of this story.

David Rosenthal 2:11:52 I know, I know. Okay, so for anybody who's listened to our LVMH episode, as we talked about earlier, the climax of the story is Bernard's fight with Gucci in that episode, and Gucci is the one that gets away. Bernard isn't able to buy it. Right after the Gucci fight ends in the early 2000s, the same story plays out with Hermès, I think really in an even more dramatic fashion.

Ben Gilbert 2:12:20 Mm-hmm.

David Rosenthal 2:12:21 So in 2001, right after he lost Gucci, Bernard quietly buys an initial stake in Hermès of 4.9%. Now, 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 Hermès families couldn't see coming, that only Bernard could engineer. He continues buying for the next 10 years using equity swap derivatives. So it looks like other entities are buying these shares on the open markets, but LVMH have the rights to exercise options to go actually take those shares. Now, this is really hard to remember. I had to triple-check these numbers. At this point in time, Hermès's market cap is below $20 billion.

Ben Gilbert 2:13:13 That's, like, eight, nine percent of what it is today.

David Rosenthal 2:13:15 And when Bernard first starts buying in the early 2000s, it's below $10 billion.

Ben Gilbert 2:13:21 Whoa!

David Rosenthal 2:13:22 Uh, but you could say lots of things about Bernard, and genius should be top of your list, but he is one of the best investors of all time. I mean, to identify Hermès at this point in time, and as we will see, he makes a incredible amount of money on these trades. You know, today, Hermès is a $230 billion market cap company, and he starts buying at below 10.

Ben Gilbert 2:13:43 Which is interesting. You say he spotted Hermès. It wasn't hard to spot. The interesting thing is not that he realized it was the crown jewel of luxury, it was that he realized that the crown jewel of luxury could be worth 20 to 30 times as much as it was already worth.

David Rosenthal 2:13:57 So he starts buying Hermès shares, and Axel, I think, jokes about this in an interview. He's like: "Look, Bernard isn't buying your shares just 'cause he wants to make an investment or he wants to have some fun. Like, obviously, he wants to own Hermès."

Ben Gilbert 2:14:12 And by the way, when David and I are referencing these Axel interviews, it's one interview. He's made a random appearance here and there, but he has done one long-form, on-stage interview, and it is fantastic.

David Rosenthal 2:14:24 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 value here. I mean, for God's sakes, a Sex and the City episode was just dedicated to the Birkin. There's a lot of value to be unlocked here, shall we say, in owning Hermès.... But it's not just that. I hope on our LVMH episode, this is some of the nuance that we painted about Bernard. He's not just a corporate raider. He actually is an operator, and he is one of, if not the best, luxury operator out there. So he sees two things in Hermès 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, 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' son, Pierre-Alexis, takes over as artistic director. Pierre-Alexis went to America for college. He went to Brown University. Interesting, in an interview, I found this, he initially wanted to study computer science-

Ben Gilbert 2:15:38 Wow!

David Rosenthal 2:15:38 ... at Brown, but he switched to art history. Very fitting, and he comes in, and he joins Hermès right after graduation in 1992, so he's being groomed. But Jean-Louis wants to separate out the artistic director role and the CEO role.

Ben Gilbert 2:15:54 Oh, they had been coupled before?

David Rosenthal 2:15:56 Well, yeah, he held both.

Ben Gilbert 2:15:57 I see.

David Rosenthal 2:15:57 So Robert held both, you know, Emile was both, Thierry was certainly both.

Ben Gilbert 2:16:03 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.

David Rosenthal 2:16:08 Yes, until this generation, it was one person. There was no separation at all. So Pierre-Alexis is clearly the artistic heir. There's not a clear CEO heir, and in fact, Jean-Louis' choice, Axel, who ultimately does become CEO, he's not in the business yet.

Ben Gilbert 2:16:31 Right, he did that internship, his sort of five-year apprenticeship, but then he left, right?

David Rosenthal 2:16:36 Yes. So the story is that Axel really wanted to go work in China, and so he goes into investment banking after undergrad. He goes to Science Po. Now, remember, Jean-Louis was his uncle, but his mother, who actually was not a family member, was the managing director for production for Hermès. Axel has this sort of, you know, dinner table training 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 BNP Paribas.

Ben Gilbert 2:17:10 Wow, so [chuckles] he is, uh, an expert in corporate structure-

David Rosenthal 2:17:14 Yep

Ben Gilbert 2:17:15 ... and he's an expert on this pretty interesting luxury market in the next 20 years, China.

David Rosenthal 2:17:21 Yep, and America, too.

Ben Gilbert 2:17:23 Huh.

David Rosenthal 2:17:24 But he doesn't join the business until 2003, when Jean-Louis taps him, and again, on the one hand, as we've talked about, this is a nepotistic business. On the other hand, they're not gonna just give him the CEO-

Ben Gilbert 2:17:36 Right

David Rosenthal 2:17:36 ... title right away. He needs to come pay his dues. He starts in the finance department in 2003, and then in 2006, when Jean-Louis retires, Axel takes over running the jewelry métiers as CEO of jewelry.

Ben Gilbert 2:17:51 Which, listeners, you should know, jewelry is not an important part of the Hermès business. It's one of the 16 métiers. They don't even break it out in earnings. It probably rolls up under other Hermès sectors because I don't think it's under watches, and I don't think it's under ready-to-wear accessories. All of other is 12%, so I'm gonna guess this thing is, like, 1 to 3%.

David Rosenthal 2:18:13 So he does that for two years, and then in 2008, he goes and takes over the leather goods and saddlery business, so the big one.

Ben Gilbert 2:18:21 Which that's 43% of the business, and I think at the time it was closer to 50%.

David Rosenthal 2:18:25 Yes. So Bernard sees, okay, we've got a generational transfer opening here, and in fact, when Jean-Louis retires in 2006, he promotes his sort of COO right-hand person, Patrick Thomas, to be the first non-family member CEO running the business side of the house alongside Pierre-Alexis on the artistic side.

Ben Gilbert 2:18:49 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, 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.

David Rosenthal 2:19:05 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 lackadaisical-ness of the family here 'cause it's certainly not that, but maybe sort of ignorance or naiveté that, hey, you're now a public company, [chuckles] and there are people like Bernard Arnault out there. You can't just be like, "Oh, yeah, we're gonna do public company CEO transition in this way and take our time." You can, but you're opening the door for-

Ben Gilbert 2:19:38 Right, you're vulnerable

David Rosenthal 2:19:39 ... the Arnaults of the world. So that's one thing that Bernard sees. The other, and, you know, I really think this is a testament to his vision, despite all of the strength within Hermès and everything that Jean-Louis did, they actually are showing some cracks, and this, we had to kind of piece together a little bit, and talking to folks in the industry helped us out here. But look, there's no questioning Hermès' financial results and sort of on the surface brand value at this point in time, in the 2000s, early 2010s. But there are a few things that are just kind of starting to slip as they scale, and I think actually, the best story that illustrates this is one that the family members themselves do not tell, but that you'll hear out there in the lore about Hermès, which is that in, uh, I believe it was in Japan, they had a product, a bag-

Ben Gilbert 2:20:36 Oh, yeah, this is so interesting, listeners. If you listen to other coverage of Hermès, you will hear this story.

David Rosenthal 2:20:41 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 2000s, early 2010s, and Hermès 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, $150 canvas tote bag, beach bag. And this obviously gets the attention of management and the company that this is happening, and they decide that they are going to, in true Hermès 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 management. They sort of announce this, and it is met with a standing ovation from the family. This is upholding what Hermès is, which is, "We don't sell beach bags." [chuckles]

Ben Gilbert 2:21:36 The family and the board is so aligned that no one even asked a question about this. They just stood and gave applause. And 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?" 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.

David Rosenthal 2:22:06 They love telling these legendary Hermès stories.

Ben Gilbert 2:22:09 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 bandied about?

David Rosenthal 2:22:28 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?"

Ben Gilbert 2:22:37 Exactly. A canvas beach bag in Japan?

David Rosenthal 2:22:42 For $150?

Ben Gilbert 2:22:43 And they're making enough of it that it's flying off the shelves? What company is this?

David Rosenthal 2:22:49 How on earth did this happen? The story here is not a heroic one of, "We destroyed the supply." This is a tragic one.

Ben Gilbert 2:22:58 It's almost like when I was sitting there watching Wonder Woman '84, and I was just so appalled at what I was watching, that on this meta level, it occurred to me, like, the story here isn't the plot of this movie. The story here is, how do you have such a process failure at Warner Brothers, where this thing was let out the door? That is a failure of creative leadership, and that is what you have going on with a $150 canvas tote bag after 175 years of successful Hermès brand stewardship.

David Rosenthal 2:23:32 Right, and building up the Birkin, the Kelly. I mean, for God's sakes, the scarves sell for, like, $500. [chuckles]

Ben Gilbert 2:23:38 Yeah.

David Rosenthal 2:23:38 So okay, that, I think, is the most visceral illustration of this. Two other things that I saw in the research, and I think Bernard probably saw here, too. Towards the end of Jean-Louis' tenure, he and Hermès started buying and investing in other companies. But why is Hermès doing this?

Ben Gilbert 2:23:59 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," and they were trying to create the constellation of weak brands.

David Rosenthal 2:24:14 The best Hermès could ever hope for by doing this is they're gonna be a subscale... Like, they're not even gonna be Richemont or Kering.

Ben Gilbert 2:24:22 Now, one argument, you know, boot maker John Lobb and all these other companies that they either bought in whole or in part, it became important for them to own their key supplier relationships.

David Rosenthal 2:24:33 Yes. Those, I think, were probably strategic acquisitions.

Ben Gilbert 2:24:36 Yeah, especially in watches, where they actually fairly recently took a 25% 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.

David Rosenthal 2:24:50 Yeah, did you find the biggest disaster? This is kinda in your wheelhouse.

Ben Gilbert 2:24:54 Ooh, I don't know.

David Rosenthal 2:24:55 I was wondering if I could stump you with this. They bought, I believe, a 30, 35% stake. They were the largest shareholder in a German company that makes what is really a piece of technology, an old piece of technology, but not something that should be a luxury brand. This is very much in the performance end of the spectrum. They became the largest shareholders in Leica, the camera company.

Ben Gilbert 2:25:20 Really?

David Rosenthal 2:25:21 Yeah.

Ben Gilbert 2:25:22 Huh.

David Rosenthal 2:25:22 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 Hermès leather on the Leica cameras.

Ben Gilbert 2:25:32 Yeah. If they made a Hermès edition Leica camera with a-

David Rosenthal 2:25:37 They did?

Ben Gilbert 2:25:37 I should probably look into that. [chuckles]

David Rosenthal 2:25:39 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.

Ben Gilbert 2:25:53 It reminds me of when The New York Times did all of this with all the TV stations in the '90s, too. It's almost like every company that ever thinks it's a good idea to start buying up other brands is wrong.

David Rosenthal 2:26:03 Yeah, unless that is the core strategy of what you are doing, like LVMH.

Ben Gilbert 2:26:08 Yes.

David Rosenthal 2:26:08 Yeah. The third thing that they do, they incubate and create a new luxury brand and company in China called Shang Xia. I believe I'm pronouncing that right. In 2009 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 to Hermès, they're going to lend the Hermès brand to this new brand that is gonna have Hermès principles, but take traditional Chinese craftsmanship, of which there's a long, multi-thousand-year history.

Ben Gilbert 2:26:44 Yep. I actually like the strategy. Well-

David Rosenthal 2:26:48 ... 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-

Ben Gilbert 2:26:57 Mm

David Rosenthal 2:26:57 ... and when you are buying luxury. And this is a great experiment to run, sure, but the reality is that for probably most countries in the world, when you're talking about spending $20,000 on a piece of leather, [laughs] you know-

Ben Gilbert 2:27:13 [laughs]

David Rosenthal 2:27:13 ... you want that to be from Hermès, and you want that to be from France.

Ben Gilbert 2:27:17 Right.

David Rosenthal 2:27:17 And I think this is especially true in China.

Ben Gilbert 2:27:20 Yeah, that's such a good point. It's funny, I have a playbook theme called Selling a Sense of Place to Those Outside It. The numbers behind this are crazy. Today, 76% of their production is in France, and 85% is sold outside of France.

David Rosenthal 2:27:33 Yep.

Ben Gilbert 2:27:34 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 that is lusted after everywhere in the world. Why on earth would you throw that away when that really is the essence of your core asset?

David Rosenthal 2:28:03 Right. Now, easy for us to armchair quarterback here, like, obviously it didn't work. They end up selling it off, actually pretty recently, to the, uh, Agnelli family from Italy, which is the family behind Fiat. Now, look, certainly that one, the Leica thing, it's the combination of all these, and the beach bag incident, Bernard sees all this. Here's what he says in the press at the time, "I would never diminish the quality of Hermès. Hermès 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.

Ben Gilbert 2:28:39 Yeah.

David Rosenthal 2:28:40 The family obviously circles the wagons [laughs] and, like, mounts their, uh... You know, like, they're like the Rebel Alliance here, you know, mounting their defense against the Empire.

Ben Gilbert 2:28:48 Which I think is quite impressive.

David Rosenthal 2:28:50 Absolutely.

Ben Gilbert 2:28:51 The fact that they were able to link arms like this and say, in the face of someone trying to make you and all your relatives collectively a multibillionaire in liquid cash, it's kind of incredible to link arms and manage to rebuff it.

David Rosenthal 2:29:07 Totally. We'll tell the story here, and it's amazing, but I think this is, like, a really important point that I wanna land is, I don't think Arnault was wrong. I think he had a point, and I think the company at the time didn't get it.

Ben Gilbert 2:29:19 Hmm.

David Rosenthal 2:29:20 They certainly do now. [laughs]

Ben Gilbert 2:29:22 [laughs]

David Rosenthal 2:29:22 So, okay, what's the story? What happens? Finally, in October of 2010, Arnault, he's patient.

Ben Gilbert 2:29:29 He spent nine years?

David Rosenthal 2:29:31 Nine-plus years, yeah, that he's just building this stake, being patient. In October 2010, LVMH exercises its options on the equity swaps that it owns and announces that it now controls 14.2% of Hermès shares. And Bernard, at the time, he says, "I had to do it because other luxury groups were also talking about making a run at Hermès-

Ben Gilbert 2:29:58 Mm

David Rosenthal 2:29:58 ... and I didn't want this crown jewel of France to be owned, heaven forbid- [laughs]

Ben Gilbert 2:30:01 [laughs]

David Rosenthal 2:30:01 ... maybe by a non-French, you know, organization." A quote here, "I could not sit by and allow a competitor or another investor to take a stake in Hermès." [laughs] Oh, he's good. He's so good.

Ben Gilbert 2:30:13 I love it.

David Rosenthal 2:30:14 In response to this is the famous, or infamous if you will, quote from Patrick Thomas, the then CEO of Hermès, which we're not gonna say the full thing here on air, you can go Google it, but the 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 Hermès being the beautiful woman here, "you don't start in the fashion that Bernard does," and he doesn't use those words. This is hilarious. This is amazing. That makes, of course, a huge splash in the French and international press. The drama here is delicious. Karl Lagerfeld is asked his thoughts on what's going on here, and Lagerfeld, of course, he's a legend. He's the longtime creative director of Chanel. He comments publicly, "Well, if you don't want to be taken over, don't put your business on the public market."

Ben Gilbert 2:31:06 Which, hey, uh, game recognize game. That's a great point.

David Rosenthal 2:31:09 He's got a point.

Ben Gilbert 2:31:10 If you want liquidity, I mean, this is the trade-off you make.

David Rosenthal 2:31:13 Now, 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...

Ben Gilbert 2:31:29 By LVMH.

David Rosenthal 2:31:30 LVMH.

Ben Gilbert 2:31:31 He's on payroll.

David Rosenthal 2:31:32 He's on payroll. This continues on for months in the public markets and in the press. By December of 2011, the LVMH stake has grown to 22.6%. Now, the family owns 73% of the company at this point, so Bernard now owns almost the entire public float of Hermès.

Ben Gilbert 2:31:58 There's what? Like 3.5% of Hermès that's publicly floated he doesn't own?

David Rosenthal 2:32:02 Yeah. Hermès is, like, in danger of being delisted from the stock exchange.

Ben Gilbert 2:32:06 Crazy.

David Rosenthal 2:32:06 Now, this is what's so brilliant. You might ask, "Why does this matter? The family owns 73%, Bernard can't do anything." Price is a function of supply and demand, so as Bernard is shrinking the float of this company, the shares that are available for trade on the public markets, well, what happens to the stock price?

Ben Gilbert 2:32:27 Skyrocket.

David Rosenthal 2:32:28 It goes through the roof. So now you've got 80 family members, and they already thought they were really wealthy. [laughs]

Ben Gilbert 2:32:36 [laughs]

David Rosenthal 2:32:36 And they already wanted liquidity, and now Bernard's coming to them, and this is his strategy, is just go pick off individual family members one by one, keep increasing his stake, and saying, like, "Yeah, I'll pay you the market price," which is now incredibly inflated for this company. "Great, happy to pay you many hundreds of millions of dollars."

Ben Gilbert 2:32:56 Crazy.

David Rosenthal 2:32:57 ... So what happens? You know, this is why I think this really was the family and the company's finest moment. 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 LVMH and everybody else in the industry is doing everything they can to convince family members to sell.

Ben Gilbert 2:33:22 Right, and all it takes is one weak link, or probably a few weak links, 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-

David Rosenthal 2:33:34 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 wanna be the last one?" It's kind of like a crowded theater, you know, running for the exits.

Ben Gilbert 2:33:47 Right.

David Rosenthal 2:33:47 At the time, you're thinking about, like, "Holy crap!"

Ben Gilbert 2:33:51 This is the best it's ever gonna get.

David Rosenthal 2:33:52 I may never see another opportunity to get liquid at this price, ever. And the minute that other family members start selling, well-

Ben Gilbert 2:34:00 It goes down

David Rosenthal 2:34:00 ... supply and demand, the price goes down.

Ben Gilbert 2:34:02 Right. I cannot be the last, and I-- it would kind of suck to be the second or the third.

David Rosenthal 2:34:07 Right. So in 2011, the family comes together, and over 50 of the 80 family members collectively contribute 50.2% of the equity in the company into a new cooperative vehicle that's called H51, as in 51% of Hermès, as in this vehicle will have majority control of the company. When they contribute their equity into this vehicle, they contractually agree that that equity will be locked up and cannot be sold for at least 20 years. So they're basically saying to Bernard, "No matter what you do, you could pick off anybody else after this for a minimum of 20 years, with potential to extend beyond that. You will never, never, never, you or anybody else, have control-

Ben Gilbert 2:35:00 So badass

David Rosenthal 2:35:01 ... of Hermès." So badass.

Ben Gilbert 2:35:02 Dude, you and I should contribute-- we should make an A51, even though it's completely unnecessary. It just feels right for Acquired, you know. Like, I think you and I can each maintain 24.5% stakes, but A51 really should [laughing] ...

David Rosenthal 2:35:17 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 Karl Lagerfeld's advice.

Ben Gilbert 2:35:24 [laughing]

David Rosenthal 2:35:24 We don't need to incur the legal fees around doing this. [laughing] That vehicle was and is still headed by one of the family members, Julie Guerrand, who was an investment banker at Rothschild. So she leaves, and full time becomes head of the defense, I assume alongside Axel, who obviously comes from the banking world, too.

Ben Gilbert 2:35:46 It's so interesting. I wonder if you actually can structure articles of incorporation to say, "Under no circumstances can this entity sell what it owns," 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 how airtight can you really make something and how irreversible?

David Rosenthal 2:36:18 I don't believe these documents are public, but my understanding from comments that family members and Axel make about them, and spoiler alert, recently, they've renewed the term of this for another 10 years, so it's into the mid-2040s.

Ben Gilbert 2:36:33 They're like, "Bernard, you will be dead when this expires." [laughing] That's exactly what that is.

David Rosenthal 2:36:38 But I believe it's pretty ironclad that these shares cannot be sold.

Ben Gilbert 2:36:42 Wow!

David Rosenthal 2:36:43 So in addition to that, two of the Puech brothers, Bertrand and Nicolas-- Nicolas is the one that there's the gardener drama about right now.

Ben Gilbert 2:36:54 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 Nicolas Puech is going to give half of his stake in Hermès, which represents something like a little under 3%, to his gardener, or, like, his ex-gardener, who's now, like, 51. Nobody knows his name.

David Rosenthal 2:37:14 Nicolas does not have children or heirs or other heirs.

Ben Gilbert 2:37:17 Right. So there's a press story right now that just shy of 3% of Hermès could be given to the family gardener.

David Rosenthal 2:37:24 Anyway, the two Puech brothers, they do not contribute their shares to H51, but they give H51 a right of first refusal on their shares.

Ben Gilbert 2:37:35 Hmm.

David Rosenthal 2:37:36 So they could sell their shares, but at whatever price they agree to, the rest of the family has a ROFR on purchasing them.

Ben Gilbert 2:37:42 Oh, interesting.

David Rosenthal 2:37:43 So that's another probably 10 to 15% of Hermès right there.

Ben Gilbert 2:37:48 Whoa! Okay, that's significant. I wonder how this gardener thing's gonna play out.

David Rosenthal 2:37:52 Yeah, right? And those shares would be, I believe, subject to that ROFR, assuming that that has stayed in place. Anyway, this is really just an incredible coordination. Yes, it's a family. They're all family, but there's 80 people here.

Ben Gilbert 2:38:07 The fact that they actually rebuffed this offer and that Bernard sold down his stake is crazy.

David Rosenthal 2:38:13 Well, let's get into what happens with Bernard's stake. [laughing]

Ben Gilbert 2:38:16 [laughing]

David Rosenthal 2:38:16 Because famously, as Domenico de Sole said in the press at the end of the Gucci affair, "Even when he loses, he still wins," and Bernard still wins here. So this effectively ends the takeover bid when H51 is put in place. But meanwhile, there are all sorts of lawsuits going on, particularly around how LVMH amassed this stake in secret with the equity swaps.

Ben Gilbert 2:38:42 It was basically illegal, right?

David Rosenthal 2:38:44 Well, in 2014, the French court rules that this was illegal. LVMH has to pay a fine, I believe, like a $10, $15 million fine for having done this.

Ben Gilbert 2:38:53 Pennies.

David Rosenthal 2:38:54 Yeah, right. As we'll see, it's truly pennies, and they also mandate that LVMH needs to distribute out that Hermès stake to its own shareholders. LVMH can no longer hold the stake. Well, who's the largest shareholder in LVMH? It's Groupe Arnault, which is Bernard Arnault's family office, so they get-... 8% of Hermès personally into his family office entity, which, this is the brilliance of Bernard, they take that value, which is, call it on the order of $5 billion [laughing] . And remember, when they started buying, the whole company was trading at a market cap below $10 billion.

Ben Gilbert 2:39:39 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.

David Rosenthal 2:39:48 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 financial instruments that he used to do it was he IPO'd a 25% stake in Dior. He already owned Dior, that he had gotten out of bankruptcy from Bouygues.

Ben Gilbert 2:40:15 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 Dior, LVMH, Groupe Arnault, 'cause he was technically the majority owner of each of them.

David Rosenthal 2:40:39 Yes, but he and LVMH didn't own this 25% minority stake in Dior. He takes the Hermès shares and does a share swap, so swaps that value directly with the 25% of Dior that he doesn't own to bring that first into Groupe Arnault, his family office, and then he trades that into LVMH. So LVMH now finally, as a result of this, is able to take 100% control of Dior, and in exchange for Groupe Arnault trading this asset into Dior, Bernard's ownership of LVMH goes from 36% up to 46%. So he gets an extra 10% of LVMH, and here's the most incredible aspect of this: not a single dollar in tax is paid on all of this-

Ben Gilbert 2:41:33 Oh, my God

David Rosenthal 2:41:33 ... because it's all share swaps. Basically, Bernard just gets 10% more of his own company [chuckles] as a result of this.

Ben Gilbert 2:41:41 Which would then go on to appreciate-

David Rosenthal 2:41:43 Call it four or five hundred percent over the next five, six years.

Ben Gilbert 2:41:46 5X'd since 2017?

David Rosenthal 2:41:49 Yeah.

Ben Gilbert 2:41:50 Wow! Even when he loses, he wins.

David Rosenthal 2:41:54 Unbelievable. Now, this is a situation where everybody wins. I don't think there are any losers here, and the Hermès families absolutely are not losers, and you could even say they sort of have the last laugh here. Because, yes, Bernard gets to benefit from, you know, an extra four to 5X appreciation in LVMH's market cap here. From, let's call it the real beginning of when LVMH publicly announces their stake in Hermès, so 2010, Hermès' market cap is up 16X.

Ben Gilbert 2:42:30 It's crazy, and the reason why no one's a loser here and everyone's a winner is because Hermès truly is the crown jewel. It is such an unassailable, exceptional business. The last 12 months, it did 14 billion in revenue, 5.7 billion in operating income. They have a 71% gross margin and a 44% operating margin. It's a software business that doesn't need any R&D. [chuckles]

David Rosenthal 2:42:57 Tech companies go like, I don't know what Hermès color to call it, but some color with envy over this. But there is one more chapter of the story that we have to tell, because that wouldn't have just happened. It wasn't just the Bernard affair in and of itself that led to this 16X market cap increase. He was right, like I was saying earlier. There were, I think, some real problems in the business, and that is the story of the sixth generation of Pierre-Alexis and Axel, who I

David Rosenthal 2:43:27 think have certainly fixed those problems but have really led Hermès, the business and the company, into a whole new era.

Ben Gilbert 2:43:36 Yes, that is absolutely right. There is a quote that I wanna start with for the Axel Dumas era, which is 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 and Michael Porter. Strategy is accepting that you are doing something better than the other, and the other is doing something better than you. You have to pick your fight. I'm always a little bit disappointed when I see someone on my team say that we do everything at the same time. Great, that doesn't happen in real life. You have to pick your fight," and Hermès picks their fights better than anyone.

David Rosenthal 2:44:24 And what they've done over the last 10 years since the Bernard fight is that they have figured out how to scale handcrafted artisanal production.

Ben Gilbert 2:44:42 Yes.

David Rosenthal 2:44:43 On the surface, those are completely, like, oxymoronic terms. Those are completely diametrically opposed.

Ben Gilbert 2:44:49 This is a dead art in the world, and Hermès manages to crank out hundreds of thousands of products that otherwise 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.

David Rosenthal 2:45:09 Totally. What was the stat that you said a little while ago, that there are 120,000 Birkins and Kellys produced every year?

Ben Gilbert 2:45:17 Yep, exactly.

David Rosenthal 2:45:18 ... Yeah, if they were still making these things on the third floor at the Faubourg, [laughing] 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."

Ben Gilbert 2:45:35 Right, you have a global brand now. Like, you need to figure out how to serve the demand for your brand.

David Rosenthal 2:45:40 Yep. So the Patrick Thomas quote that I wanna start with is so great: "The luxury industry is built on a paradox. The more desirable a brand becomes, the more it sells, but the more it sells, the less desirable it becomes." We've been talking about this whole episode, but then he continues, "I believe Hermès's vision provides a solution to this dilemma," and this is what the current generation has found, the solution. So today, I think we referenced this earlier in the episode, Hermès employs 7,000 master craftspeople, artisans. Most of the story that we've been telling thus far, you know, until 1992, all of the craftspeople in the company, more or less, were working in the Faubourg, in this one relatively small building on the Rue Faubourg de Saint-Honoré in Paris. In 1992, they moved production to Pantin in the suburbs of Paris. That building is amazing, but only houses about 250, 300 craftspeople, and actually, still to this day, Axel talks about this a lot, any one of their production sites does not have more than 250 to 300 craftspeople.

Ben Gilbert 2:46:56 Yes, they believe that every single person should know each other by name, and they think that 250 to 300 is the natural limit on that, and Axel even says, "If you have more than 300, it is not a workshop, it's a factory."

David Rosenthal 2:47:09 Yep, and they are not in the business of factories. At the same time, he and the company have stated as an explicit goal that they will ramp up production capacity by 7% every year. Well, as the company gets larger and larger, today, that means adding 500 artisans every year.

Ben Gilbert 2:47:29 Crazy, and when Axel started at the company all the way back in the '80s, there were 250 craftsmen, period, and they hired two per year, two craftsmen per year in the late '80s.

David Rosenthal 2:47:40 Right. Now, here's the issue, though. How on earth are you gonna do this? Like you were saying, this is a dead art. Nobody else does this.

Ben Gilbert 2:47:48 Little maker with a workshop in San Francisco or a workshop in Paris, but, like, how are you even gonna find them?

David Rosenthal 2:47:55 Right, and those people, you know, the Beatrices here in San Francisco, they're entrepreneurs. They're not gonna go back to joining Hermès 'cause they all came from Hermès in the first place. How are you gonna hire 500 a year? It's not like they can go hire from their competitors. They're not doing this!

Ben Gilbert 2:48:09 Right, their competitors have all outsourced production and embraced assembly lines.

David Rosenthal 2:48:12 So they do the only thing that you can do. They build the pipeline of training [laughs] master craftspeople and artisans entirely themselves. They build schools. They build training centers. They go to parts of France that are in rural areas that have high unemployment. They go to those areas, and they open trade schools, and they say, "We're gonna train you." They have 100% graduation rates. They're like, "We're not gonna give up on you. We're gonna make sure you learn this trade, that you graduate. You may not come work for Hermès when you graduate, but we're gonna give you this skill, and then we're gonna offer you a job as a master craftsman."

Ben Gilbert 2:48:54 It's crazy.

David Rosenthal 2:48:55 It's unbelievable. So back in the... You know, even through 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.

Ben Gilbert 2:49:08 Yep.

David Rosenthal 2:49:09 Today, the average age of the Hermès artisan workforce is 30 years old, and 80% are women.

Ben Gilbert 2:49:17 It's wild.

David Rosenthal 2:49:17 It's a wholesale transformation, and they are training them. They actually just opened, in 2021, their first official French governmentally sanctioned degree-granting program, the Ecole Hermès de Savoir-Faire. This is the savoir-faire-

Ben Gilbert 2:49:35 Yep

David Rosenthal 2:49:35 ... that pops up in the annual report, you know, 100 whatever times. [laughs]

Ben Gilbert 2:49:39 Let's name a school after it, too. [laughs]

David Rosenthal 2:49:40 Yeah, yeah, yeah. They're, like, getting into, like, government policy here. They are preserving and growing this art form in France.

Ben Gilbert 2:49:49 Yeah, they're not France's largest export because they have a very constrained way that they can create the products, but they may be France's finest export. So it behooves the French government to try to figure out how to make this last another 100 years.

David Rosenthal 2:50:03 Yep, so today, there are 31 Hermès ateliers, you know, artisan manufacturing facilities, all throughout the country, each with no more than, you know, 250, 300 people in it.

Ben Gilbert 2:50:16 Right, it's the cloud computing idea of scaling horizontally.

David Rosenthal 2:50:19 Totally! This is AWS. This is the point I'm getting to.

Ben Gilbert 2:50:22 Right, they're building data centers.

David Rosenthal 2:50:24 They were Amazon, and they added AWS, and they are adding two to four of those every year.

Ben Gilbert 2:50:31 So funny you had that thought, too.

David Rosenthal 2:50:32 Totally.

Ben Gilbert 2:50:33 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, made end to end by one artisan-

David Rosenthal 2:50:45 Yep

Ben Gilbert 2:50:45 ... trained in the traditional early 20th century way.

David Rosenthal 2:50:49 Well, speaking of cloud computing, we wanna share a fun thing that our friends at NVIDIA have given us. For anyone considering attending GTC this year, Acquired listeners get a 20% discount. This is their big annual conference that Ben and I have watched over a dozen keynotes from to prep for our NVIDIA series.

Ben Gilbert 2:51:06 Yep.... It'll be March 18th to 21st, 2024, at the San Jose Convention Center, and it is the first time back in person in five years, which is crazy. It's the most important AI conference in the world, and Jensen will be speaking to 10,000 people live in person.

David Rosenthal 2:51:22 Wow! There are also researchers speaking from OpenAI, Meta, Google, DeepMind, Microsoft, Forge, Genentech, Disney, [chuckles] National Labs, and more. It's crazy. They will have a whole bunch of futuristic vehicles, robots on display.

Ben Gilbert 2:51:37 Yep. If you wanna check it out, click the link in the show notes and enter the code ACQUIRED at checkout, A-C-Q-U-I-R-E-D, to give you 20% off your ticket, and thanks to our friends at NVIDIA. Now, back to Hermès.

David Rosenthal 2:51:49 So this is an insane idea, that leather goods, which is 43% of the business, Hermès did, what, 11.6 billion euros in revenue last year. They're on track to probably do, call it, 14 billion in euros.

Ben Gilbert 2:52:06 Yep, last 12 months is 14 billion.

David Rosenthal 2:52:08 Yeah, that six billion of that is gonna be [chuckles] hand-crafted items, where one artisan makes one item at a time, and they're sold around the world. Like, 6 billion euros worth of that every year, growing at 15, 20% a year? Yeah, wild.

Ben Gilbert 2:52:26 This is a really important thing to understand the company. They firmly believe that only 250 to 300 craftsmen can work in a building, so that's one. Two, it takes two-plus years for someone to 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 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 Hermès, 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, 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 endpoint. They can only hire 300, 400, 500 craftsmen a year. They can only do this other stuff. Good luck getting a Birkin bag. I mean, it's just one of these things where you can say they're artificially constraining supply all you want-

David Rosenthal 2:53:43 As long as they do things this way, this is the max-

Ben Gilbert 2:53:47 Right

David Rosenthal 2:53:47 ... throughput.

Ben Gilbert 2:53:48 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 as just as high a quality product, and every craftsman is, you know, twice as effective," or something like that. But until they fold on one of these constraints that they've decided are stakes in the ground, the result is the scarcity. That's not the goal. That's the result.

David Rosenthal 2:54:11 You know, the Amazon comparison is so apt here. Hermès has this incredible, unassailable flywheel, but it operates in the exact opposite way of an Amazon flywheel. It's not about maximizing the cycles. It's slowing, it's minimizing. It's a intentionally rate-limited flywheel, and it all works together. [chuckles]

Ben Gilbert 2:54:31 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. 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, "Well, yeah, all that handcrafted mumbo jumbo only exists because that's how you justify the, uh, brand pricing and availability [chuckles] that they've put in place," but I think it all works in concert.

David Rosenthal 2:55:08 Totally. I mean, like, we've told that 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, and if a machine made it in an assembly line, it does not?"

Ben Gilbert 2:55:24 Right. Maybe, but sure, in an assembly line with crappy ingredients, blah, blah, blah, sure, but can craftsmen use better tools? Yes. And will Hermès continue to embrace tools that make craftsmen more efficient? At some point, did they use sharper knives than were previously available in the past? They totally did, and so will they use things that make the needle go a little faster? Maybe.

David Rosenthal 2:55:48 Totally. Let's take a step back here. [laughing] We gotta consider the exact opposite case study of this, which is 100% 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." [chuckles] Louis Vuitton, which, as we've talked about, has the same caliber of heritage and history as Hermès-

Ben Gilbert 2:56:08 Yes. It could have Hermès' gravity if it wanted to, but instead, you can buy a checkerboard cotton sweatshirt with 120 LV's on it.

David Rosenthal 2:56:18 Right. They are having the same level of success, [chuckles] the same margins. It's working like a charm.

Ben Gilbert 2:56:25 But it's less durable.

David Rosenthal 2:56:27 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 is the time to come back to, this thing that I'm wearing on my wrist.

Ben Gilbert 2:56:43 Hmm.

David Rosenthal 2:56:44 The Apple Watch