If the euro is strong and the dollar weak, why does a Hermès tie cost more in Paris than in New York?
Walk into the Hermès boutique in Moscow's famous GUM department store on Red Square and expect to pay 5,760 rubles, or around $241, for one of their trademark, brightly colored silk ties. That same tie will cost €125 ($192) at the company's flagship store on Paris's Faubourg Saint-Honoré but only $160 before tax ($173.40 after) at their shop on Manhattan's Madison Avenue. It's the same tie. So why the difference in price?
Hermès (HRMS) is a French company and its prices are set in euros. Given the weak dollar and the strong ruble, the price should be higher in the U.S. and lower in Russia than in Europe. Yet the reverse is true.
Purchasing Power Parity
The company says that this variation is entirely due to exchange rate fluctuations. The company keeps prices in each currency relatively fixed, and they don't want to change the price of one of their best-known products as quickly as, say, a gas station might. But the problem is that price differentials between countries change when exchange rates change—in fact, the value of the euro against the dollar has increased 6% since this story was filed—meaning that the company ends up losing money in some countries but making more in others.
One of the key reasons for the price discrepancy is purchasing power parity, which is the economic theory that says that in an efficient market, identical goods must have identical prices regardless of the country or the currency—although it rarely works out like that. The Economist famously introduced its Big Mac index in 1986 as a way to illustrate PPP. However, there are many factors that determine the local cost of a Big Mac. Even if prices are roughly determined at McDonald's (MCD) head office in Oak Brook, Ill., the sandwich is made locally and its price reflects to a much greater degree how much meat and labor costs vary between, say, Amsterdam and Bangkok. In fact, the price of a Big Mac can vary within a national market too and will not cost the same in Ann Arbor as in Albany.
But an Hermès tie is very different from a Big Mac. First, all are made in France. Second, it is a product aimed squarely at the luxury consumer. Third, the Big Mac uses the dollar as its base currency. Last, the tie costs a lot more than a Big Mac, and the price differences between markets can be as high as $50.
Looser Ties to U.S.
While the price of an Hermès tie has increased nearly 10% in the U.S., from $145 in 2005 to $160 today, it still costs less in dollar terms than that same tie elsewhere. One of the reasons why tie prices in the U.S. remain relatively low, besides PPP, is that the U.S. remains far and away Hermès' largest market. If the company were to jack up prices of one of its biggest-selling items so that it was on a par with the euro price, not only would it risk losing many of its U.S. customers, but it would also discourage those shoppers from outside the U.S. looking to buy ties on a dollar discount.
But as the company continues its rapid expansion into new markets, it will become increasingly less dependent on the sagging greenback. It currently operates 268 stores and 39 other retail outlets around the world. Last year alone the company opened 13 new stores, four in China. It has a further 14 planned for 2008, including four more in China, where it is seeing sales double annually.
And the company believes there is still plenty of room for expansion. According to Robert Chavez, president and chief executive of Hermès North America, "Our current distribution is very, very limited. Even with our expansion plans, Hermès in the U.S. will still be one of the most limited in its distribution network among high-end, luxury companies. There are major, key markets where Hermès has no presence today that offer opportunity for growth and development."
So far the company has been adept at managing this growth. As Tommy Fazio, men's fashion director at Bergdorf Goodman, points out, "Hermès has been very, very cautious of their expansion. They are very particular about their locations, how they are merchandized, how they are presented." Bergdorf is the only department store in New York that sells Hermès products. In addition to the Madison Avenue shop, there is also a new store that opened in the Wall Street area in July, 2007.
Although the company does not break out individual revenues for tie sales, ties are the company's third most important category, after bags and scarves, and they're growing steadily. Other areas such as leather goods, tableware, and ready-to-wear are growing just as fast. In fact ties are among the most affordable items to be found in an Hermès store, where a Birkin bag starts at $7,500 and an English saddle at $5,400.
This kind of snob appeal pays off. On March 20, the company announced that its profits rose 7.5% in 2007. Net income also increased to €288 million ($449 million) from €268 milion in 2006, beating analysts' estimates.
An Enduring Status Symbol
Bergdorf's Fazio is seeing growth in sales of luxury ties, including Hermès; and Marshall Cohen, an analyst at Port Washington (N.Y.)-based retail marketing consultant NPD Group, believes Hermès shouldn't be worried that today's twentysomethings don't wear ties now. "As the older generation retires and stops wearing ties, that thirtysomething generation will come in and start wearing them" as they assume positions of responsibility.
Regardless of what it charges, Hermès understands that its well-heeled clientele are happy to keep buying its ties—and scarves and saddles and suits and handbags—for as long as they continue to perceive the brand as the sine qua non of luxury and status. But for those looking for a relative deal on pricey French neckties, as so many other visitors from Asia and Europe have already discovered, the U.S. is looking more like a discount mart all the time.
Click here to see how much prices for Hermès ties vary in 22 markets around the world, from New York to New Caledonia.