Hermes - China Merchandising Strategy

Hermès: Analysis of China Distribution Strategy

Table of Contents:

Product Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hermès Brand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Presence in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Merchandising Strategy . . . . . . . . . . . . . . . . . . . . . . . .

Brand-Owned Distribution . . . . . . . . . . . . . . . . . . . . .

Retail Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Online Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Endogenous Growth Strategy . . . . . . . . . . . . . . . . . . .

Push / Pull Strategies . . . . . . . . . . . . . . . . . . . . . . . . . .

Future Investments . . . . . . . . . . . . . . . . . . . . . . . . . . .

Merchandising Proposal . . . . . . . . . . . . . . . . . . . . . . .

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Leather Goods

Fragrance EquestrianJewelry & Watches

Scarves & Ties

Tableware & Home

Prèt-a-Porter

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Product Categories

V. Pisipati | Hermès Brand Extension | Buying & Merchandising

Kelly and Birkin Bags are most popular

Bags are hadmade in France

Only 7,000 Birkins made per year

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Leather Goods


Equestrian: Prèt-a-Porter:

Men’s Collections

Women’s Collections

Outwear

Footwear

Hermès began as a harness fabricator for European nobility

China is the largest market for Hermès equestrian products

5V. Pisipati | Hermès Brand Extension | Buying & Merchandising

Scarves & Ties: Jewelry & Watches:

90 cm x 90 cm

65 grams

An Hermès scarf is sold every 25 seconds at a global store during Christmas

Gold

Silver

Diamonds

Leather


Tablewear & Home: Fragrance:

Hermès Puiforcat St. Louis is a separate store in some locations

Crystal glass manufactured by St. Louis

Since 1951, the company has created over 30 scents

Women’s and Men’s fragrance


Hermès distinguishes its products from competitors’ on six key dimensions

The company focuses on slow fashion, rather than new,temporary trends

About 50% of Hermès’s products are leather goods which include handbags, wallets, and purses.

The company continues to avoid mass production andprocess automation

Hermès goods are almost entirely handmade in France. To ensure attention to detail and uniqueness, only one craftsman will work on an item start to finish

Hermès currently has 328 stores worldwide, with revenues of $5.46B in 2014

The company is still 72% family owned, though LVMH recently acquired a 21% stake in the company

Asia is projected to constitute 66% of Hermès sales by 2025

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Hermès Brand Overview


Qingdao (1)

Dalian (1)

Suzhou (1)

Shenzhen (1)

Ningbo (1)Wuhan (1)

Nanjing (1)

Chengdu (1)

Kunming (1)

Hong Kong (7)

Beijing (5)

Hangzhou (2)

Macau (3)

Shanghai (4)

Guangzhou (2)

Harbin (1)

Shenyang (1)

Hermès opened its first store in Beijing in 1997, and has since expanded to 34 stores across 17 Chinese cities.

In just over 10 years, the Chinese market evolved from being non-existant into the largest customer base for Hermès.

Hermès plans to open one store per year from 2016 onwards, starting in Chongqing, Sichuan Province

Retail Stores: China / Shanghai

Hermès: 34 / 4

Louis Vuitton: 50 / 4

Gucci: 71 / 9

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Distribution in China


Presence in Shanghai

Xintiandi IFC

Hongqiao

Plaza 66


A store’s product mix is chosen by the local store director to best fit its customers

There is no central buyer at Hermès; each store retains buying autonomy

Store autonomy allows Hermès stores in China to choose products that are most likely to succeed with Chinese customers. If a product is unavailable at one store, it can be requested from another store in Shanghai

Out of over 300 global stores, no two Hermès stores carry the same product mix

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“Multi-Local” Buying & Merchandising


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Visual Merchandising: High-Luxury


Hermès customers buying leather goods can choose from a wide variety of colors and leathers to customize their individual product

Hermès will spend from several months up to four years creating an item

The customization strategy increases variation in production and lead times, but reduces the need to hold numerous SKUs in store inventory

Item customization is also a unique selling point of Hermès compared to Louis Vuitton and Gucci

Customized Merchandise


Luxury brands that own their own retail stores are better able to drive revenue and control the in-store product mix than brands who rely on wholesalers and franchisees

The brand has more control over its visual merchandising and buying strategy

Hermès owns nearly all of its retail outlets. It does not rely on wholesale distribution or franchise distribution, with few exceptions.

This degree of ownership allows Hermès to protect brand equity by preventing products from being inappropriately discounted and to continue rotating products rather than focusing on converting inventory into cash during periods of low turnover

Hermès only relies on wholesale distribution for fragrance, watches, and home goods, and is more susceptible to economic fluctuations in those categories

Hermès reports that its brand-owned stores out-perform its wholesale and franchised distribution channels, accounting for 80% of the brand’s revenue

Wholly-Owned Distribution


Post-Purchase Service:

Hermès China puts every customer on a VIP list, inviting them to special events and new launches

Customers can bring any damaged or aging Hermès products into the store to be reconditioned by a craftsman in either Paris or the nearest maison

VIP Customer Service:

Hermès China aims to “treat every customer as a VIP”

The China sales staff is trained to offer more brand and product education than in other markets, as Chinese customers ask many questions to learn about the brand and what makes its products unique

Chinese customers are willing to wait for waitlist leather goods just as in other global markets

Hermès only has a 10% turnover rate among sales staff, which enables it to maintain an engaged, experienced staff to interface with customers compared to other brands

Branded Retail Environment


Strengths:

Customers can experience the brand universe

Each Hermès store can choose its own product mix and merchandising strategy

Shanghai sales staff can provide product and brand education to customers

The Shanghai Maison offers an additional level of selection and exclusivity

Custom orders can be registered and dispatched to Paris from Shanghai storefronts

Hermès is in less Chinese cities than its competitors, increasing brand exclusivity

Weaknesses:

Less brand awareness than competitors who have expanded further into China

Hermès Puiforcat St Louis store is separate from the Hermès boutique in Plaza 66. Customers are often unaware the store exists

Potential to be too exclusive at the expense of significant revenues from Tier II and Tier III cities

Continued use of discounts will hurt brand equity in China

Retail Strategy


All stores in Shanghai are directly owned by Hermès

Hermès stores in Shanghai are designed to provide a complete sense of luxury, conveying a feeling of tradition and value of the brand to customers

The stores are located in prestigious locations

All stores are similar to one another in terms of their visual merchandising displays

Products are displayed in different sections for different product categories and collections

Sales staff is always available with an in-depth knowledge of Hermès

The sales staff are trained to be friendly and helpful, but not to push products on customers. They encourage customers to ask questions, and can provide significant detail about products and the brand

Retail Environment


Online Channel

Refined and simple design

Chinese-language version (unlike competitors)

Nearly all products that are available at the store are present online

Customers also have an option for online assistance during and after a purchase

Products are delivered directly to the customer’s home.


The Hermès online store looks refined and simple.

To cater to the Chinese customer,s Hermès has their online store in the Chinese language, which many other competitors have still not done.

All products that are available at the store are present online.

One may also find more variety online than in their local store, since stores all have unique product mixes

The website is easy to browse for the given product one intends to buy.

Different product lines are categorized clearly i.e. jewelry, watches, leather, fragrances, home, equestrian, and prèt-a-porter

Customers can make an account which manages their personal details and subscriptions to newsletters, tracks orders in progress, and customizes their next visit to Hermès.com based on their purchase and browsing habits.

Customers also have an option for online assistance during and after a purchase.

Products are delivered directly to the customer’s home.

Online Channel


Mobile Channel

Through a whimsical mobile application - “Silk Knots,” Hermès is displaying its iconic silk scarf collection in addition to the brand lifestyle, creating awareness among younger consumers.

“Silk Knots” uses videos and animated pictures to teach users the many ways in which a silk scarf can be tied.

Creating an interactive app engages consumers, and the educational component can establish a relationship.

The Silk Knots app demonstrates added value for Hermès’ signature scarves by providing ways to extend the product’s functional value.

The app educates Hermès customers about the true potential of the product, ensuring that shoppers achieve greater satisfaction from the product.


The Hermès family continues to maintain a majority share of the company

The growth strategy is much more conservative than its competitors, with no more than one new store in China per year

The brand believes in a scarcity strategy to sustain its high brand equity and positioning at the top of the luxury pyramid

The company would prefer to not be able to meet demand than to expand too widely, especially in the case of Kelly and Birkin bags

Hermès utilizes waitlists for its high-selling leather goods to increase scarcity and the unique value of its products

Hermès is able to restrain its growth and focus on existing retail operations as a direct result of being family-owned, unlike larger conglomerates like LVMH and Kering Group which must continue driving expansion to achieve targets set by shareholders

Endogenous Growth Strategy


150M Chinese residents travel abroad each year to go shopping (Hong Kong, Macau, and Paris)

Hermès has found that many of its customers purchase Hermès products when travelling outside of mainland China

The brand wants to shift the balance to 50% of purchases being made in mainland China by providing better curated product offerings and customer service / relationship management strategies for the local market

The typical Hermès customer does not display a change in behavior when faced with higher prices for Hermès products in different markets, which suggests they would be willing to purchase products within China if there are additional non-financial incentives to do so

Rebalancing Externalized Sales

Paris: 30%

International Hermès Purchases by Mainland Chinese Residents:

Hong Kong / Macau: 30%

Mainland China: 40%


Push / Pull Strategies:

Hermès uses a globsl pull-strategy. It does not tailor its advertising strategies or pricing to individual markets in an effort to remain consistent with its heritage and maintain brand perceptions of exclusivity and scarcity.

The brand’s goal is to create desire in an indirectmanner, rather than pushing advertisements andmarketing communications to potential consumers

Hermès believes that individuals who value quality and craftsmanship will purchase its products, without needing to be “sold” on its products

Hermès does not advertise its products, with the exception of fragrances

Rare Exceptions: Hermès held a discount sale for the first time in 2014, held at the Hyatt Regency in Hangzhou to clear unsold stock accumulated over the past two years. Most of the items available were men and women's clothes and shoes, which carried discounts of 20%-50%.


Pull Strategy

Product placement with taste-makers and style icons builds word-of-mouth advertising and indirect media coverage via blogs, magazines, and television.


Shang Xia is Hermès’s first Chinese brand - unique blend of Chinese design and Hermès’s craftsmanship.

“Building on 5,000 years of unique inheritance, and in the spirit of dialogue between tradition and modernity, SHANG XIA integrates the warmth, balance and harmony of Chinese grace into all its products.” – Shang Xia

Collections are comprised of furniture, fine decorative objects, and luxurious accessories and garments.

Shang Xia also creates an annual series of limited edition cultural objects designed to celebrate Chinese traditions and classic artisanal works.

The brand has a retail presence in China, Beijing, and Paris

Shang Xia represents a unique manner for the Hermès brand to access more Chinese customers, localizing its ideals of tradition, quality, and craftsmanship in a way that better relates to the Chinese market

Future Investments


Buy-out or force closure of franchised stores in China Tier I and Tier II cities to increase control over distribution network and merchandising strategy

Consider closing Plaza 66 boutique and relocating it to a higher-traffic area like the Kerry Centre or a stand-alone store on Huaihai Road

Close any stand-alone Hermès Home – Puiforcat stores, and merge them with existing Hermès boutiques in the next three to five years in order to increase brand awareness of tableware and furniture, and to gain control of the China distribution strategy for those product categories

Recommendations for Improvement


Open new Hermès boutiques in additional Tier II and Tier III cities where Louis Vuitton and Gucci already have a presence, as Tier II and Tier III cities now represent the majority of China’s GDP. Priority cities for expansion include Wuxi, Xiamen, and Xian.

Choose one Tier III city where Louis Vuitton and Gucci are not already present, and invest in a new boutique as a long-term market development opportunity (ex. Yizheng))

Expand Shang Xia brand into additional Tier I cities (Guangzhou, Macau, Hong Kong)


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Launch a market-specific push strategy for China, focusing on promoting French culture and lifestyle, such as “La Vie Parisienne” – French culture is currently very chic in China with opportunities for further commercialization

Sponsor at least one event per year – Hermès could partner with Shanghai institutions like Jialiang Equestrian Club and Nine Dragons Hill Polo Club

Hermès should provide Kelly and Birkin bags to select style icons in China to drive word-of-mouth marketing and indirect media buzz (pull strategies)



Hermès will launch a special edition of the Kelly bag in collaboration with Mexican-Chinese artist Liliana Ang

Liliana Ang is an emerging contemporary artist, specializing in surrealist and figurative mixed media work that explores themes of feminine identity and blended cultural heritage.

The content of Liliana Ang’s work will blend well with the Hermès brand of women’s leather goods which have become an iconic luxury piece in the context of defining one’s identity. As the brand continues globalizing, the idea of blended cultural heritage also resonates, especially as the brand targets the China market

The design series will also add a fresh perspective to the Hermès brand, helping broaden its positioning and appeal to a younger customer demographic without diluting brand value

Past worksby Liliana Ang:

Merchandising Proposal: Hermès “Identity” Collection


Product Samples:

The four special-edition handbags will feature dyed and woven leathers containing textures and prints inspired by the works of Liliana Ang

Each bag will be sold for ¥120,000

“Identity” Collection

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H H

H H


Monogram or Plain-Colors

Artistic Design

Exclusive

Mass-Market

Competitive Positioning: Hermès “Identity” Collection


Shenzhen (1)

Hong Kong (1)

Beijing (1)

Macau (1)

Shanghai (1)

Guangzhou (1)

Collection Launch in China

Hermès will introduce the collection only in one store in each of the Tier 1 Mainland Chinese cities where it is present. It will also place products into one store in Hong Kong and Macau.


• Within Shanghai, the Identity Collection will be available for sale at the Shanghai Maison

• This collection will not be available for custom order, it can only be ordered in the four variations offered by the brand

• The online channel will provide information about the collection’s concept, but items from this collection will not be for sale online

• 10 of each bag will be stocked in the Shanghai Maison, increasing its exclusivity and scarcity (Four variations, ten stocked units / store)

• The collection will be launched with a VIP cocktail reception and press conference – one in Shanghai, and one in Hong Kong

• The artist, Liliana Ang, and Chief Designer will be at each launch event and involved in all request from the media for interviews

Retail Strategy:


• Collection aesthetic may be too specific for Chinese customers and not translate into sufficient

• The distribution plan is based on the scarcity strategy used by Hermès. A risk is that the distribution of “Identity” is too narrow, at the expense of potential lost sales

• Customers may be unwilling to buy a non-customized handbag for the ¥120,000 price

• The store must generate significant buzz from this collection in order to justify the development costs of the items and prove valuable to the brand

• With greater artistic specificity, luxury products become narrower in their potential target consumer groups

• The long-term value of the “Identity” pieces sold will depend on the continued success and visibility of the artist

Risks and Threats


V. Pisipati | Hermès Brand Extension | Buying & Merchandising 35

Questions & Discussion

Burkitt, Laurie. "Hermès to Expand in China as Other Luxury Brands Pull Back." Asia Business News. The Wall Street Journal, 12 Sept. 2014. Web. 11 June 2015. <http://www.wsj.com/articles/Hermès-to-open-up-to-5-new-china-stores-by-end-2015-1410517415>.

Waldmeir, Patti. "Hermès Takes the Long View of Its Position in China." Luxury 360. Financial Times, 16 Sept. 2014. Web. 11 June 2015. <http://www.ft.com/intl/cms/s/0/349446fa-3cb5-11e4-871d-00144feabdc0.html>.

Le Fort, Clara. "In China, Hermès Paces Itself." Global Currents. The Business of Fashion, 17 Sept. 2014. Web. 11 June 2015. <http://www.businessoffashion.com/articles/global-currents/china-Hermès-paces>.

Hermès opens Shanghai maison (2014). Available: http://insideretail.asia/2014/09/14/Hermès-opens-shanghai-maison/. Last accessed 10/06/2015.

Hermès (2015). Available: http://www.Hermès.com/. Last accessed 09/06/2015.

Thierry Hermès. (2014). Available: http://www.fashionmodeldirectory.com/designers/thierry-Hermès/. Last accessed 08/06/2015.

Bender, Ruth. (6th Nov 2014). Hermès sales up 10.6% despite China demand sag. Available: http://www.marketwatch.com/story/Hermès-sales-up-106-despite-china-demand-sag-2014-11-06. Last accessed 08th July 2015.

Selected Hermès advertising. Available: http://www.adbrands.net/fr/Hermès_fr.htm. Last accessed 08th July 2015

(17 September 2012). Market Research:Hermès in China. Available: http://daxueconsulting.com/Hermès-in-china/. Last accessed 09th July 2015.

Maison Hermès, Shanghai. Available: http://maisonshanghai.Hermès.com/en. Last accessed 08th July 2015 .

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"Tier 1, 2 & 3 Cities in China, Which Comes First for Brands?" Markets. Luxury Society, 2 July 2013. Web. 4 June 2015. <http://luxurysociety.com/articles/2013/07/tier-1-2-3-cities-in-china-which-comes-first-for-brands>.

"Hermès Luxury Marketing Strategy: Don’t Give Way To Masstige." InsideFMM. Web. 11 June 2015. <http://insidefmm.com/2009/11/Hermès-marketing-never-discount-Hermès-birkin-kelly-handbags/>.

Adams, Susan. "Inside Hermès: Luxury's Secret Empire." Forbes Life. Forbes Magazine, 20 Aug. 2014. Web. 11 June 2015. <http://www.forbes.com/sites/susanadams/2014/08/20/inside-Hermès-luxury-secret-empire/>.

Sherman, Lauren. "How - And How Not -To Sell Luxury." Forbes. Forbes Magazine, 16 Apr. 2009. Web. 6 June 2015. <http://www.forbes.com/2009/04/16/luxury-strategy-marketing-opinions-book-review-vuitton-Hermès-fendi.html>.

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Works Cited


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Hermes - China Merchandising Strategy