Hermes rides high but equine spirit faces special mainland challenge

'We are not a brand, we are a signature.' So pronounced Christian Blanckaert, executive vice-president for international affairs at Hermes, on his recent to Hong Kong visit. 'We are committed to sell, but we are signing, not marketing. Sometimes a product does not sell, it doesn't matter, we are proud of them anyway,' he continued. 'Luckily most are successful. We would never market a product we did not like.' It's a novel approach to satisfying shareholders, but then the elite French luxury goods maker has not earned its place in the winners' enclosure by following the field. The Hermes trademark - a horse-drawn carriage - reflects its 1837 origins as a Paris saddler. The business evolved: saddlebags gave way to luggage, wallets, and handbags. Hermes accessories became synonymous with royalty and celebrities, and it was helped along in the 1950s by Princess Grace of Monaco, formerly actress Grace Kelly, who made famous the Hermes 'Kelly' bag. The company's reputation for impeccable craftsmanship, its enduring operation under family ownership and management, and jealous protection of the brand's mystique set Hermes apart from its competitors. Much credit for Hermes' success is due to Jean-Louis Dumas, chairman and chief executive, and a fifth-generation descendant of the company's founder. In the late 1970s he spearheaded the introduction of fresh designers, new lines and a seminal French advertising campaign featuring a young woman wearing a Hermes scarf. Explosive growth followed, with annual sales reaching US$700 million by 1996 from US$50 million in 1978, according to a 1997 Family Business Network (FBN) report. The company capitalised by expanding its global network of owned stores, as distinct from concessionaries, from 15 in 1978 to 98 in 1999 and 125 by 2003. Hermes made its first stock offering in June 1993. But the family retained more than 80 per cent of the equity. The shares were oversubscribed by a factor of 34. Members of the three owning families work at all levels, encouraging the special Hermes spirit, but only those deemed 'professionally competent' may join the firm, FBN noted in its report. Business expansion is financed by ploughing 15 per cent of profits back into the company annually, thereby avoiding bank debt - a family tradition. When it comes to profits, FBN noted, the dividend payment ratio is a function of the business requirement and not the shareholders' needs. The Hermes star is rising in Asia now, having posted 20 per cent year-on-year growth in the first half of last year. Asia Pacific outside Japan accounts for 16 per cent of sales, Japan 30 per cent. Now that European luxury brands have zoomed in on China, hardly a week passes without Louis Vuitton or Giorgio Armani announcing yet another flagship store in Shanghai or Beijing. But don't expect Hermes to join the stampede. In an apparent contradiction of its global expansion strategy, Hermes seems to have erected a great wall of conservatism when faced with the new mainland market. Although Mr Blanckaert concedes there is a strong demand for brands in China, he says it is simply too dangerous to rush in. 'You build a huge shop and the next day they tell you it will be an underground car park. China today can be a mirage.' Then there's that small niggling difficulty. 'China's self esteem and self confidence is increasing every day, as is its ability to compete with foreign products, to imitate them or - why not just say it - to counterfeit them,' he said. 'We are not attacked as much as the others. We change our products so often there is no time to copy them. The real answer to counterfeiting is innovation and manufacturing quicker than the counterfeiter.' Hermes takes a different approach to the brands that are racing into China, he stressed. With just six mainland shops, the company is taking its time. 'We are losing money in China because we are too small,' he explained. 'We're investing money in China, not making any just now.' Spending or losing too much money too quickly in China was not wise, he said. 'We're not invading the market and flooding it with advertising campaigns,' he noted, probably in reference to rival Louis Vuitton's spectacular handbag hoardings in Shanghai. 'We are touching the Chinese heart.' That may be so, but his rivals might shoot back that you only have to open a glossy magazine and models clad in little more than Hermes scarves and winsome smiles leap off the page. Hermes likes to keep in touch with its equine roots and Mr Blanckaert, as much prophet as profit-focused, allows his love of metaphor free rein. 'The horse is our soul, our guard and our angel and we enter into China with our horse, on a horse, as a horse.' he pronounces. 'Horses like us do not like to jump any given obstacle, we prefer to jump step by step and not to fall.' So with all this reticence, how will the Chinese get the Hermes message? 'Chinese tourists visiting foreign countries will see which companies are strongholds of legitimacy in the world of luxury. Entering into the Chinese market involves being legitimate worldwide,' he explained. 'We will do things in a French way but in a Chinese way too. We may look to them for inspiration. We are going to be Chinese in China.' He refused to be drawn on the company's target for the China market. Japan represents 30 per cent of sales, can China match that? 'I don't know. I'm not so sure. 'In China maybe we will have a big surprise, but we don't put a figure on our objectives. 'There is for Hermes a real potential as long as we approach the market in a real way. It will never be a huge business, but more of a long-term operation, a deep relationship. 'China is not a highway; China is a river, a very tumultuous river with many unexpected surprises and many dangers. China is a long river on which Hermes will float with plenty of time, plenty of confidence, plenty of awareness and plenty of energy. 'We try to build a good boat. The right boat. Our boat.'