Yahoo Finance Hermes to open new leather goods factories in France to meet demand for Birkin bags
Luxury goods maker Hermes International (RMS.PA) announced on Friday that it will open new leather goods factories in France to meet demand for its prized handbags as bottlenecks curb sales.
As items like the Birkin and Kelly bag have become harder to find in stores, the group plans to boost production capacity with new sites in the French towns of Louviers, Sormonne and Riom through 2024, in addition to a leatherworking school opened by the company in September.
Hermes reported lower revenue in its key leather goods division — the source of almost half of the group's revenue — as it failed to keep up with demand.
Revenues grew above 2019 levels in all regions except for France, as the absence of affluent tourists dented business.
The Birkin bag maker said sales grew by 11% in the fourth quarter of 2021. This was below analyst expectations, as self-imposed production caps meant the group could not keep up with demand for its prized handbags.
Sales at Hermes' leather goods and saddlery division, fell by 5.4% over the period due to capacity restraints.
Overall sales at the company rose to €2.38bn ($2.7bn, £1.9bn) in the three months to December.
Asia (except Japan) and America recorded the highest growths, compared to 2020 and 2019, and Europe returned to growth compared to 2019.
Annual recurring operating income increased to €3.53bn, up from €1.98bn the prior year. Analysts had expected income of €3.41bn. The recurring operating margin extended to a record 39%.
Shares in the fashion retailer sank over 5% in Paris on Friday.
The luxury goods sector has experienced a V-shaped recovery after the COVID pandemic hammered sales in 2020. Luxury brands, unlike other consumer brands face less restraint by shoppers amid soaring inflation due to affluent customers who are willing to pay higher prices for designer goods.
Hermes' slowdown in growth from previous quarters is in contrast with an acceleration at other luxury groups as LVMH Moët Hennessy Louis Vuitton (MC.PA) — the world's largest luxury label — and Gucci-owner Kering (KER.PA) posted better than expected results.
Higher manufacturing costs due to bottlenecks meant luxury brands raised product prices as demand continues to rise.
However, due to Hermes' hand-crafted production, the luxury maker is less exposed than competitors to increasing costs of energy and primary materials, executive chairman Axel Dumas said.
Dumas added Hermes increased product prices last month by 3.5% on average worldwide. That compares to an increase of 1.5% a year ago.
Hermes traditionally caps its annual volume growth in its leather goods production at 7% to 8%, preferring to have long waiting lists for its goods instead of accelerating production.
The group has no plans to change its policy, according to Dumas. The company recruits around 400 artisans per year, but not much more given the time it takes to train them, he said.
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"It takes 15 hours for an Hermes bag. Even if there's a lot of demand, I’m not going to start doing them in 13 hours to raise production," he told reporters.
Its Louis Vuitton brand, which brings in the majority of profit, raised its prices by around 7% earlier this week, citing higher manufacturing and transport costs.
Other top brands like Chanel, Balenciaga and Gucci have also increased prices.
