Hermes Invests in France as Macron, Le Pen Joust Over Jobs

  • Birkin bag maker invests in French output to meet Asian demand
  • Quarterly sales beat estimates as China rebound accelerates

What a Macron Victory in France Means for Markets

Hermes International SCA is hiring workers and investing in French production to meet surging demand for handbags in Asia, boosting the economy as presidential elections highlight the country’s struggle to create jobs.

The Paris-based luxury-goods company is expanding its network of domestic workshops that make bags like the Kelly and Birkin, it said Thursday in reporting quarterly sales that beat estimates. For Hermes, a “made in France” label is an intrinsic part of the appeal of its handbags, which are coveted in Asia and elsewhere as an emblem of French chic.

Birkin bags sit at a Hermes workshop in Montbron.

Photographer: Mehdi Fedouach/AFP via Getty Images

“This represents significant brand equity for them,” said Leopold Authie, analyst at Oddo & Cie. “France has know-how for certain luxury products that you can’t find elsewhere, just as Italy has shoes and Switzerland has watches.”

The move to boost employment comes as presidential runoff contenders Emmanuel Macron and Marine Le Pen debate how to revive employment in a country where the jobless rate remains stuck at 10 percent despite a nascent economic recovery. In the runup to the May 7 vote, the two finalists this week squared off over a Whirlpool Corp. factory near the northern city of Amiens, where workers are protesting plans to move production to Poland.

Hermes, which makes about 85 of its products in France, plans to increase leather-goods output by 8 percent and to hire 250 workers in the country this year. The company said it’s investing in a third workshop in the Franche-Comte region, bringing the total number of domestic leather production sites to 15.

Local Challenges

Making handbags in France is not without challenges, including the country’s 35-hour workweek and labor laws that add costly social charges to the payroll and make it difficult to dismiss workers.

“The average bag takes them 16 hours to make,” Chief Executive Officer Axel Dumas said on a call Thursday. “We work 35 hours in France, so you can imagine.”

It’s hard to bring on more than the 250 craftsmen and women the company plans to add this year, because training them requires taking another worker off the line to teach them, Dumas said. Overall, Hermes had 7,881 domestic employees in 2016, or about 60 percent of its total.

Rival LVMH experienced work stoppages at some Louis Vuitton production sites this month after unions called on workers to protest salary increases they deemed insufficient. Such disruptions have been rare for the luggage maker, which added 370 workers in its French plants in 2016.

Hermes last year achieved productivity increases of 15 percent, and it’s targeting 8 percent for 2017. The company needs those kind of gains to meet demand for its handbags, silk ties and other goods in Asia and elsewhere.

Favorable Comparisons

Sales of leather-goods and saddlery, which account for roughly half of Hermes’s revenue, jumped 15 percent in the first quarter. Revenue climbed 11 percent on a constant-currency basis, beating the 8.8 percent median estimate of eight analysts in a Bloomberg survey. Asia, minus Japan, led the way with a 16 percent gain.

France’s advantages as a production site were not matched in the company’s sales performance: revenue there climbed 4 percent, less than half the rate analysts estimated.

Overall, the results represent a marked uptick from a year ago, when flagging consumption in China and a terror-related downturn in European tourism saw the company report its slowest quarter in seven years. The luxury-goods industry has bounced back more broadly, with first-quarter results from LVMH and Kering surging past analyst estimates.

Berenberg analyst Zuzanna Pusz said the gains at Hermes underpin the industry’s recovery, even though the company cautioned that the growth rate could not be projected across the full year because of favorable comparisons in the first quarter.

“Hermes reported a very strong start to the year, pointing to the broader improvements in the luxury sector as well as a very solid underlying demand for its products,” Pusz said in a note.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE