EVERY SPOKEN WORD
150 min read · 30,001 words- 0:00 – 4:44
Why Hermès is timeless (and the hosts’ personal connection)
- BGBen Gilbert
So I don't know if you realize this, Hermès is reporting earnings in, like, two days.
- DRDavid Rosenthal
Yes!
- BGBen Gilbert
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] .
- DRDavid Rosenthal
Yeah. [laughing] Also, the Hermès annual reports are the most beautiful annual reports ever created in the history of the financialization of mankind.
- BGBen Gilbert
You might think you can't do all of your charts in orange, you need different colors, but you would be wrong.
- DRDavid Rosenthal
The illustrations, the themes, you can tell they care.
- BGBen Gilbert
You can tell. All right, let's do it.
- DRDavid Rosenthal
Let's do it.
- SPSpeaker
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?
- BGBen Gilbert
Welcome to season 14, episode two of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Ben, do you know what company was also founded in 1837, that we have discussed quite a bit on Acquired?
- BGBen Gilbert
Hmm. No, I do not, David.
- DRDavid Rosenthal
That would be the other iconic color luxury company, Tiffany.
- BGBen Gilbert
Oh, really?
- DRDavid Rosenthal
Also founded in 1837.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah. As foreshadowed on our holiday special episode a couple months ago.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yes, but not too much before 1837.
- BGBen Gilbert
All right, we're not going to, like, the sort of Egyptian invention of the handbag or anything like that?
- DRDavid Rosenthal
Boy, let me tell you, I was tempted. [laughing]
- BGBen Gilbert
I was tempted. [laughing]
- 4:44 – 8:29
Origins: Thierry Hermès, Napoleon’s Europe, and the birth of status-through-craft
- DRDavid Rosenthal
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.
- BGBen Gilbert
A century before the Porsches and Volkswagens of the world.
- DRDavid Rosenthal
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.
- BGBen Gilbert
So Hermès, is that a German name, a French name?
- DRDavid Rosenthal
Hermès is obviously not a German name.
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
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.
- BGBen Gilbert
We finally did it here on Acquired. Your AP European History class has now merged with business history. We're covering Napoleon.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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?
- DRDavid Rosenthal
Ooh.
- BGBen Gilbert
We have talked about them on Acquired.
- DRDavid Rosenthal
Obviously not Rockefeller, which is where my mind first went, because we talk a lot about his dad.
- BGBen Gilbert
Yep, Louis Vuitton himself.
- DRDavid Rosenthal
Ah, [laughs] he will also come up here in a minute.
- BGBen Gilbert
20 years younger than Thierry Hermès, but also an orphan.
- DRDavid Rosenthal
Wow, I didn't know he was also an orphan.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- 8:29 – 16:33
1837 Paris: The harness workshop, Haussmann’s boulevards, and Empress Eugénie as key influencer
- DRDavid Rosenthal
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?
- BGBen Gilbert
The nobility.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Wow!
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Turns out he was just really good at the craft.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
Fascinating.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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!
- BGBen Gilbert
These are like the disruption waves that enabled him to create a business.
- DRDavid Rosenthal
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.
- BGBen Gilbert
I remember Louis Vuitton's key client was the Empress Eugénie. Is Hermès the same client?
- DRDavid Rosenthal
Yes, the same client.
- BGBen Gilbert
Ah.
- DRDavid Rosenthal
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]
- BGBen Gilbert
Which is so funny, because that is still, in some ways, both of their legacy today.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right, it's sort of built for the upcoming world.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
But it would all be irrelevant [chuckles] if the brand didn't translate out of the horse era and into the car era.
- BGBen Gilbert
Right.
- 16:33 – 28:40
Second generation: saddlery, “Le Faubourg,” and early international ambition (Russia)
- DRDavid Rosenthal
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.
- BGBen Gilbert
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?"
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yeah, makes sense.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Ba-da-na! [chuckles]
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
The famous address.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
That is wild.
- DRDavid Rosenthal
Unreal. They have to staff up a whole new atelier with, like, 80 craftspeople to fulfill all the orders for the Tsar in Russia.
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
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.
- BGBen Gilbert
What's this bag look like?
- DRDavid Rosenthal
Well, this bag looks exactly like the Birkins and the Kellys today, except a lot bigger.
- BGBen Gilbert
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?
- DRDavid Rosenthal
Yeah, but it has the same trapezoid shape. It has the crossover belt-
- BGBen Gilbert
Ooh!
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
Fascinating.
- DRDavid Rosenthal
So this accessory that we're gonna add to the business, this becomes the spiritual heritage to the business today.
- BGBen Gilbert
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]
- 28:40 – 33:11
Accidental foundation of the modern bag: Haut à Courroies and the automobile transition
- BGBen Gilbert
Yep. Thank you, J.P. Morgan. Now, David, how was Hermès perfectly positioned for the age of the automobile with this new accessory?
- DRDavid Rosenthal
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?
- BGBen Gilbert
No, I have no idea.
- DRDavid Rosenthal
I, I can't believe you didn't find this!
- BGBen Gilbert
No.
- DRDavid Rosenthal
He meets with Henry Ford.
- BGBen Gilbert
No!
- DRDavid Rosenthal
He goes to Detroit, he sees the assembly lines, he sees the car, he sees the future.
- BGBen Gilbert
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]
- DRDavid Rosenthal
[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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah, he's quite the character, this guy. The other thing he finds in America is, I know you know this one-
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
The zipper.
- BGBen Gilbert
Yes. Or as it was originally called-
- DRDavid Rosenthal
The closeall.
- BGBen Gilbert
Yes, which really does not have the same ring to it. I'm glad we changed to zipper.
- DRDavid Rosenthal
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.
- BGBen Gilbert
I think like a military car?
- DRDavid Rosenthal
Yeah, where Emile first sees it. It's not at the Ford factory. I think it actually might have been in Canada on the-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
Really?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Totally.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yes, that's right.
- DRDavid Rosenthal
Just wild. I think they made the right decision not to make zippers the business and instead to stay focused on leather goods.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah, and a golf jacket, literally for use while playing golf, while playing sport. You know, what more modern activity to happen here?
- 33:11 – 40:52
Emile’s takeover and diversification: handbags, ready-to-wear, jewelry, watches, and travel retail
- BGBen Gilbert
Okay, so we're still in the third generation of the Hermès family. Two brothers are running it. What's next?
- DRDavid Rosenthal
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."
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right, which I could understand.
- DRDavid Rosenthal
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.
- BGBen Gilbert
So the business is now Emile's, and the business is now handbags.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
The product itself, yes.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- BGBen Gilbert
And by the way, by this point, they've put the zipper on a handbag.
- DRDavid Rosenthal
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."
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
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.
- BGBen Gilbert
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."
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Their mindset around additional stores at this point is it's for the same clientele in all the places that they travel.
- DRDavid Rosenthal
Yes, and the clientele was primarily French at this point in time.
- BGBen Gilbert
Yeah, or if not exclusively, other than the tsar, and yeah.
- DRDavid Rosenthal
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."
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yes. Now, I think some element of this certainly still exists. You had a nice time going into the Hermès store in Aix, right?
- BGBen Gilbert
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.
- 40:52 – 1:05:31
Robert Dumas introduces whimsy and art: scarves, the orange box, the logo, and windows as theater
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
And these are all son-in-laws?
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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]
- DRDavid Rosenthal
Beautiful, beautiful, elegant bag.
- BGBen Gilbert
So Sac à Dépêches. Hold onto that one, listeners.
- DRDavid Rosenthal
Yep. A little later in the 1930s, he introduces the Chaîne d'ancre bracelet, which is another iconic Hermes item in their jewelry métier.
- BGBen Gilbert
Wait, David, I can't let you get away with that. Métier, please enlighten listeners.
- DRDavid Rosenthal
[laughing]
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
I bet. Yeah, there's a levity here in the room now.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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-
- DRDavid Rosenthal
Well, they have to adapt to the market.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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]
- BGBen Gilbert
Yes. Okay, so what year are we that the bracelet is entering the market?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Oh, yes, I have numbers on this.
- DRDavid Rosenthal
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-
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
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?
- 1:05:31 – 1:22:06
Grace Kelly makes the Kelly; then stagnation: Hermès struggles in the 1970s fashion shift
- DRDavid Rosenthal
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-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
On the cover of LIFE Magazine.
- DRDavid Rosenthal
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]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
And I didn't find it on the cover.
- BGBen Gilbert
Oh, interesting. So maybe that's been sort of played up over time.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
As a high schooler. This is amazing. He buys the deli for $7,000 in seller financing from the owner, who is retiring.
- BGBen Gilbert
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.
- DRDavid Rosenthal
He literally made life-changing money from this deli. He buys his parents a beach house.
- BGBen Gilbert
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."
- DRDavid Rosenthal
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.
- BGBen Gilbert
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?
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
They've got the scarves.
- BGBen Gilbert
They've got the scarves. They have these small workshops where they make everything, but it's not working yet.
- 1:22:06 – 1:22:51
Jean‑Louis Dumas revival: ‘Not your mother’s’ Hermès, globalization, and the Birkin origin story
- DRDavid Rosenthal
Totally. Okay, Jean-Louis, the fifth generation. The brand, you know, the consultants are saying, "Hey, go be like Gucci." [chuckles]
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Oh, really?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Great.
- DRDavid Rosenthal
Okay, Jean-Louis comes in.
- BGBen Gilbert
What year is this?
- DRDavid Rosenthal
1978.
- BGBen Gilbert
Great.
- 1:22:51 – 2:11:52
Engineering scarcity: Veblen goods, repairability, and the craft economics of Birkin & Kelly
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
It's also incredibly beautiful. It's got a slight diagonal valence to it, as opposed to the normal straight-line stitching.
- BGBen Gilbert
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-
- DRDavid Rosenthal
On the other end of the thread. So one thread, two needles.
- BGBen Gilbert
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.
- DRDavid Rosenthal
There's tensile force going in both directions.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah, compare that to most products that you own.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
As much as possible from the same animal and matched exactly.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Ooh, hang on to this. I have a lot more to say when we get to the current generation about this.
- BGBen Gilbert
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?
- DRDavid Rosenthal
I have to admit, I have not read it cover to cover.
- BGBen Gilbert
You did more of the history, and I did more of this.
- DRDavid Rosenthal
But I've read large sections of it.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Partially in their defense, savoir-faire literally translates as know-how. It's kind of like a proper term in French.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep. That's the true genius of the current generation, is they have scaled that to seven thousand people.
- BGBen Gilbert
It's unbelievable.
- DRDavid Rosenthal
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.
- BGBen Gilbert
She runs April in Paris in San Francisco?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yeah, I think that's true.
- 2:11:52 – 2:43:27
Public listing creates vulnerability: Arnault’s stealth stake and the family’s H51 defense
- DRDavid Rosenthal
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.
- BGBen Gilbert
Mm-hmm.
- DRDavid Rosenthal
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.
- BGBen Gilbert
That's, like, eight, nine percent of what it is today.
- DRDavid Rosenthal
And when Bernard first starts buying in the early 2000s, it's below $10 billion.
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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."
- BGBen Gilbert
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.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Wow!
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
Oh, they had been coupled before?
- DRDavid Rosenthal
Well, yeah, he held both.
- BGBen Gilbert
I see.
- DRDavid Rosenthal
So Robert held both, you know, Emile was both, Thierry was certainly both.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right, he did that internship, his sort of five-year apprenticeship, but then he left, right?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Wow, so [chuckles] he is, uh, an expert in corporate structure-
- DRDavid Rosenthal
Yep
- BGBen Gilbert
... and he's an expert on this pretty interesting luxury market in the next 20 years, China.
- DRDavid Rosenthal
Yep, and America, too.
- BGBen Gilbert
Huh.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Right
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
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%.
- 2:43:27 – 2:56:43
Sixth generation: scaling handcraft at industrial demand without becoming a factory
- DRDavid Rosenthal
think have certainly fixed those problems but have really led Hermès, the business and the company, into a whole new era.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
On the surface, those are completely, like, oxymoronic terms. Those are completely diametrically opposed.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Totally. What was the stat that you said a little while ago, that there are 120,000 Birkins and Kellys produced every year?
- BGBen Gilbert
Yep, exactly.
- DRDavid Rosenthal
... 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."
- BGBen Gilbert
Right, you have a global brand now. Like, you need to figure out how to serve the demand for your brand.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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."
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Little maker with a workshop in San Francisco or a workshop in Paris, but, like, how are you even gonna find them?
- DRDavid Rosenthal
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!
- BGBen Gilbert
Right, their competitors have all outsourced production and embraced assembly lines.
- DRDavid Rosenthal
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."
- BGBen Gilbert
It's crazy.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Today, the average age of the Hermès artisan workforce is 30 years old, and 80% are women.
- BGBen Gilbert
It's wild.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... that pops up in the annual report, you know, 100 whatever times. [laughs]
- BGBen Gilbert
Let's name a school after it, too. [laughs]
- DRDavid Rosenthal
Yeah, yeah, yeah. They're, like, getting into, like, government policy here. They are preserving and growing this art form in France.
- BGBen Gilbert
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.
- 2:56:43 – 3:22:50
Modern tensions: Apple Watch partnership, accessible products, and ‘We are not a museum’
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
The Apple Watch partnership.
Episode duration: 4:11:09
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