Hermès (Audio)

In luxury, there’s Hermès… and there’s everyone else. Stewarded by one French family over six generations, Hermès sells the absolute pinnacle of the French luxury dream. Loyal clients will wait *years* simply for the opportunity to buy one of the company’s flagship Birkin or Kelly bags. Unlike every other luxury brand, Hermès: - Doesn’t increase supply to meet demand (hence the waitlists) - Doesn’t loudly brand their products (IYKYK) - Doesn’t do celebrity endorsements (stars buy their bags just like everyone else) - Doesn’t even have a marketing department! (they barely advertise at all) And yet everyone knows who they are and what they represent. But, despite all their iconoclasm, this is not a company that’s stood still for six generations. Unbeknownst to most, Hermès has completely reinvented itself at least three times in its 187-year history. Including most recently (and most dramatically) by the family’s current leaders, who responded to LVMH and Bernard Arnault’s 2010 takeover attempt by pursuing a radical strategy — scaling hand craftsmanship. And in the process they turned the company from a sleepy, ~$10B family enterprise into a $200B market cap European giant. Tune in for one incredible story! *Visuals for:* - Haut a Courroies, the “high-belted bag” to carry saddles and boots: https://images1.bonhams.com/image?src=Images/live/2014-06/02/94558567-11-1.jpg - Chaine d'ancre, “Chain of anchors”: https://assets.hermes.com/is/image/hermesproduct/chaine-d-ancre-bracelet-very-large-model--101995B%2000-worn-2-0-0-800-800_g.jpg - Jeu des Omnibus et Dames blanches, “White ladies at play”: https://i.pinimg.com/originals/61/ac/84/61ac84114c03ee8f818d84a7e5684a80.jpg - Screen printing each color on a scarf individually: http://3.bp.blogspot.com/-QjlwKL9D4MU/UHLsucReiJI/AAAAAAAABXA/s_45ULViyQo/s1600/IMG_1615. JPG - The Hermès oranges: https://blog.fashionphile.com/hermes-oranges/ - Sac à Dépêches (today: the Kelly Bag): https://www.hermes.com/us/en/content/106196-kelly/ - Grace Kelly photo in LIFE Magazine: https://i.huffpost.com/gen/1457564/thumbs/o-GRACE-KELLY-BAG-570.jpg?8 - Steps to sew a saddle stitch: https://2.bp.blogspot.com/-aaLc5iBboXo/V7yawv5AlsI/AAAAAAAAHuc/fTrGbwc-1Gc9FYwBVpTLMCF-r-T7cFj0ACLcB/s1600/Beginning%2Bwith%2Bthreads%2Bover%2Ban%2Bedge.jpg - The Birkin Bag: https://www.hermes.com/us/en/content/106191-birkin/ - Pettit h: https://www.hermes.com/us/en/category/petit-h/#%7C *Links:* - The saddle stitch (video): https://youtu.be/g6HOhqaVXW0?si=rdX6cEfgMQpWo31g - Inside the Saddlery at the Faubourg: https://www.thedashingrider.com/hermes-inside-the-saddlery/ - Hermès 2022 Annual Report: https://assets-finance.hermes.com/s3fs-public/node/pdf_file/2023-05/1684143348/hermes-urd-2022-en_01.pdf - Axel Dumas Interview: https://www.youtube.com/watch?v=Htlh8IpER5g - All episode sources: https://www.acquired.fm/episodes/hermes#sources *Carve Outs:* - Anker GaN Prime 100W charger: https://www.amazon.com/Anker-Charger-Compact-MacBook-Pixelbook/dp/B0C4DGBHY2 - Matter: https://hq.getmatter.com - Perplexity: https://www.perplexity.ai - The Score Takes Care of Itself: https://www.amazon.com/Score-Takes-Care-Itself-Philosophy/dp/1591843472 *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  So I don't know if you realize this, Hermes is reporting earnings in like two days.

• 0:05David Rosenthal?

  Yes.

• 0:05Ben Gilbert?

  And at first I was like, we should probably not do this episode because their annual report comes out in two days. What if we're not current? And then I realized this is Hermes. The short term is of no consequence.

• 0:16David Rosenthal?

  Yeah.

• 0:18David Rosenthal?

  Also, the Hermes annual reports are the most beautiful annual reports ever created in the history of the financialization of mankind.

• 0:28Ben Gilbert?

  You might think you can't do all of your charts in orange. You need different colors, but you would be wrong.

• 0:33David Rosenthal?

  The illustrations, the themes, you can tell they care.

• 0:37Ben Gilbert?

  You can tell. All right, let's do it.

• 0:40David Rosenthal?

  Let's do it.

• 0:57Ben Gilbert?

  Welcome to season 14, episode two of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 1:05David Rosenthal?

  I'm David Rosenthal.

• 1:07Ben Gilbert?

  And we are your hosts. Today, we tell the story of a handbag company that won't sell you a handbag, a traditional saddle maker that makes very little of their revenue from saddles, a company that somehow has grown to be worth over $200 billion despite rejecting manufacturing efficiencies and economies of scale, a company so obsessed with craft and a reputation for quality that they have stayed independent while every other luxury brand has merged into conglomerates. That's right, listeners. Today, we tell the oldest story we have ever told here on Acquired, older than Standard Oil or The New York Times.

• 1:45Ben Gilbert?

  This company dates back to 1837 in Paris, France, the crown jewel of the luxury industry, Hermes.

• 1:54David Rosenthal?

  Ben, do you know what company was also founded in 1837 that we have discussed quite a bit on Acquired?

• 2:02Ben Gilbert?

  Hmm. No, I do not, David.

• 2:05David Rosenthal?

  That would be the other iconic color luxury company, Tiffany.

• 2:10Ben Gilbert?

  Oh, really?

• 2:11David Rosenthal?

  Also founded in 1837.

• 2:13Ben Gilbert?

  Ah, Chuck T. Well, this episode, listeners, has been probably just under 12 months in the making. LVMH was just after one year ago, and it was in that episode that I feel like I got a real penchant for everything that Hermes stood for. You know, after 187 years, still under family control, they're on their sixth generation of family leadership at the helm. I don't know, David, everything Hermes does is just so focused and intentional and pure. As much as they sort of get lumped together with brands owned by LVMH, they are in many ways the anti-LVMH.

• 2:49David Rosenthal?

  Oh, we've got a great discussion of that later in the episode. I used to think that, and I no longer think that. But after our LVMH episode, I mean, you were so inspired by learning about Hermes, you went out and you bought your first luxury object, right? And it was not a LVMH brand.

• 3:05Ben Gilbert?

  Yes, that is true. My wife and I were on our honeymoon, listeners, after LVMH, so last summer, and we were in Exon Provence, and we walked by an Hermes store, and I thought this would be a great time to go in and get each other something as a honeymoon gift. So my wife got a little twilly scarf, and I got an Hermes belt, and it's the only luxury item I own of any luxury brand, traditional luxury brand.

• 3:28David Rosenthal?

  Yeah, as foreshadowed on our holiday special episode a couple of months ago.

• 3:32Ben Gilbert?

  Yep. Well, listeners, if you want to know every time an episode drops, you can sign up at acquired.fm/email. You'll get hints at what the next episode will be and follow-up facts from previous episodes when we learn new information. Come discuss this episode with us at acquired.fm/slash/Slack. Come check out our second show, ACQ2, where we interview founders, investors, and experts, often as follow-ups to these episodes. So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David, I feel like we're starting before 1837.

• 4:07David Rosenthal?

  Yes, but not too much before 1837.

• 4:10Ben Gilbert?

  All right. We're not going to like the sort of Egyptian invention of a handbag or anything like that.

• 4:16David Rosenthal?

  Boy, let me tell you, I was tempted. I was tempted. Well, if you read The Luxury Strategy, which is a great book that we've referenced many times on Acquired, they start back 50,000 years ago. We start in 1801, not in Paris, not even in France, you know, as we've been talking about, the land of beauty, luxury, enlightenment, where Hermes, of course, was founded and is still based today. And uniquely, Hermes still does 85% of their production by hand by master craftspeople in France, as we will talk a lot about. But instead, we start in the land of hardness and precision, of engineering, of exactitude, the future land of the Porsches of the world. That is

• 5:01David Rosenthal?

  right, Germany.

• 5:03Ben Gilbert?

  A century before the Porsches and Volkswagens of the world.

• 5:06David Rosenthal?

  Yes. Where Thierry Hermès was born in the town of Crefield, which is just outside of Dusseldorf, where he's the sixth child of a family of innkeepers.

• 5:18Ben Gilbert?

  So Hermes, is that a German name, a French name?

• 5:22David Rosenthal?

  Hermes is obviously not a German name. I mean, even I know that. Thierry's father was French and his mother was German. And shortly after Thierry is born, he was born in 1801, something pretty major happens in France and then throughout continental Europe that will become very, very important to our story here. And that is that Napoleon comes to power in France. I mean, this is the era we're talking about here, like Napoleon.

• 5:51Ben Gilbert?

  We finally did it here on Acquired. Your AP European History class has now merged with Business History. We're covering Napoleon.

• 5:59David Rosenthal?

  He is critical to what is about to happen here. So in the aftermath of the French Revolution, Napoleon essentially stages a coup, declares himself emperor, first of France, and then he basically begins conquering all of continental Europe, including Germany. Now, this Napoleonic conquest was, at the same time, both the very best thing that could happen to young Thierry, I mean, it leads directly to Hermes, but also the very worst, and truly worst, you did all this conquering, this glory of France that we're going to talk about becomes important to Hermes, that's the result of wars. So Thierry's entire family, his parents, his mom, his dad, all five of his siblings, they are all

• 6:42David Rosenthal?

  killed, either directly in Napoleonic wars, or by disease and famine as a result of this. I mean, absolutely terrible. And the result is that Thierry, by the time he's 20 years old, he's an orphan. He is the last Hermes left.

• 6:57Ben Gilbert?

  So David, 1821, you know, pretty rough time out in the world. Do you know who was born in this year, 1821, and was also an orphan?

• 7:07David Rosenthal?

  Oh.

• 7:08Ben Gilbert?

  We have talked about them unacquired.

• 7:10David Rosenthal?

  Obviously not Rockefeller, which is where my mind first went, because we talk a lot about his dad.

• 7:15Ben Gilbert?

  Yep. Louis Vuitton himself.

• 7:18David Rosenthal?

  Ah, he will also come up here in a minute.

• 7:21Ben Gilbert?

  20 years younger than Thierry Hermes, but also an orphan.

• 7:25David Rosenthal?

  Wow, I didn't know he was also an orphan.

• 7:27Ben Gilbert?

  Yep.

• 7:28David Rosenthal?

  Wow, it's just crazy. Two orphans, one of whom was German, go on to found the two most important, most French, most luxurious brands, and really communicators of status in the modern world. That's wild.

• 7:43Ben Gilbert?

  Yeah, especially crazy considering they both came from nothing. These people who would create the monikers of the elite, of what would go on to be the symbols of wealth and nobility, came from nothing and were orphans, and at their greatest aspirations were craftspeople for the elite. They were almost servants.

• 8:04David Rosenthal?

  Yes. So in 1821, Thierry leaves Creffield, leaves Germany. He abandons his original kind of destiny as an innkeeper, and he moves to France, not to Paris, but to Normandy in the north. And there he becomes an apprentice under a master craftsman, learning the art of équipage craftsmanship. Now, équipage is the business of outfitting horse-drawn carriages. And who were the customers of horse-drawn carriages? Ben, like you're talking about?

• 8:39Ben Gilbert?

  The nobility.

• 8:40David Rosenthal?

  The nobility. You know, horses were extremely important to the world back then. The horse was the car. It was the Ford F-150. It was the Toyota Camry. It was also the Rolls Royce that drew the carriage. And only the Rolls Royces were the carriages. So when Thierry moves to Normandy and takes up as an apprentice, he apprentices for 16 years.

• 9:04Ben Gilbert?

  Wow.

• 9:05David Rosenthal?

  And it's not until 1837 that he finally moves to Paris as now a master craftsman and opens up his own shop in Paris on the Rue Bas de Rempart in the 9th Aire en Dismal, which that whole street today no longer exists. And there he establishes himself as really quite an exceptional harness maker for horse-drawn carriages. Now, it's kind of unclear to me at this point if he's using the famous saddle stitch, which becomes so important to Hermès. And the reason it's unclear to me is because he's not making saddles. Saddles are what other people are making. It's not that the nobility don't ride horses.

• 9:48David Rosenthal?

  They do, but they ride horses like the elite today drive a Ferrari. It's not something they do every day.

• 9:55Ben Gilbert?

  Right. Their daily driver is a Bentley because someone else is driving them and they have a Ferrari for when they occasionally want to drive a Ferrari. They'll climb in a saddle occasionally, but mostly they're in the carriage.

• 10:05David Rosenthal?

  Yep. So when Thierry arrives in Paris in 1837, he pretty quickly starts becoming known as really the best harness maker and carriage outfitter in Paris, serving the nobility, which is pretty impressive. I mean, here he's this immigrant from Germany, apprentice in Normandy. He shows up in Paris and all of a sudden he's making the best stuff out there.

• 10:28Ben Gilbert?

  Turns out he was just really good at the craft.

• 10:31David Rosenthal?

  And he had exceptionally good timing. We spoke about Napoleon a little bit earlier. When Thierry finally comes to Paris, at this point, Napoleon I has been defeated, the Battle of Waterloo, that was 1815. France has now seesawed through like a whole bunch of different republics and the monarchy comes back and you know, it's crazy French history stuff. But shortly after Thierry returns, Napoleon's nephew, Napoleon III, stages another coup and reestablishes the empire in France. And this is super important, Ben, to what you were talking about earlier about, hey, this guy's an orphan. Louis Vuitton

• 11:13David Rosenthal?

  was an orphan. How did they become so important? When Napoleon III comes to power in France, he does two things. One, he completely modernizes the city. So if people have heard of the Baron Osman, who kind of rebuilt Paris, that happens at this time under Napoleon III. They transform Paris from a medieval city with super tight streets. Like if you go up to Montmartre, those streets around there, that is old Paris. But what you think of the Eiffel Tower, the museums, the Grand Boulevards, the Champs-Élysées, that's happening right at this time. And the Baron Osman,

• 11:55David Rosenthal?

  he's kind of like Robert Moses was in New York in the mid 20th century, remaking New York. He is given full latitude and direction by Napoleon III to burn Paris to the ground and remake this city as a modern city. Fascinating. And this is super important for Thierry and Hermès for two reasons. One, in the old medieval streets in Paris, not that many people were going up and down them. Not that many people were going to see the nobility in their carriages, in all their finery. Now you've got the Champs-Élysées, the Grand Boulevards, everything about the sort of gallantry of Paris that we know today. It's all on display now. So this becomes really important for showing off, for signifying your wealth, your status.

• 12:42David Rosenthal?

  The other kind of related thing here that happens with Napoleon and Napoleon III is that status is no longer just about what you were born into. In the old system, the nobility, the royalty, it was like, look, you're born noble or you're not. And it's kind of independent of how much money you have, or what you do, or what influence you have. Under Napoleon, he brought in this modern idea that you could shift your class. I mean, he was essentially a nobody and he became the emperor of Europe. That'll completely upset the mindset of people.

• 13:17Ben Gilbert?

  Yep.

• 13:17David Rosenthal?

  So, all this is happening. This is the best thing that could ever happen to Thierry. He's the best artisan, most exclusive crafter of carriageware, of équipage. The city is being transformed so that this can all be displayed prominently. Social stratifications are becoming more blurry. People can spend money for the first time to buy status. Great for business.

• 13:45Ben Gilbert?

  These are like the disruption waves that enabled him to create a business.

• 13:50David Rosenthal?

  Yes. Before all this, before this era, there's no way that this evolves into Hermès, or honestly, that Louis Vuitton and what he's doing with luggage and with trunks, there's no way that that evolves into Louis Vuitton. So, speaking of, both Hermès and Vuitton have one really important client, a key influencer, so to speak, that they both land at this time.

• 14:16Ben Gilbert?

  I remember Louis Vuitton's key client was the Empress Eugenie. Is Hermès the same client?

• 14:21David Rosenthal?

  Yes, the same client. So Napoleon III's wife, the Empress Eugenie, becomes a client of both of these men for her carriages, in the case of Hermès, and for her luggage and for her trunks. And actually, I think also for her packing. Like, I think Louis Vuitton was the royal laitier, I believe, and he packed the trunks. He was the luggage guy, Hermès was the carriage guy.

• 14:47Ben Gilbert?

  Which is so funny, because that is still, in some ways, both of their legacy today.

• 14:52David Rosenthal?

  Yes, absolutely. Eugenie and everything going on at this time makes Louis Vuitton and makes Thierry Hermès.

• 15:00David Rosenthal?

  But it's interesting, right? Vuitton and luggage, that is inherently of the world that's coming, the modern world. The train, that exists at this point in time, steam engines are a thing. And then the car is about to come and Louis Vuitton and trunks and luggage, it all translates directly.

• 15:19Ben Gilbert?

  Right. It's sort of built for the upcoming world.

• 15:21David Rosenthal?

  Yes. Not the case with Hermès. And actually today, I think this is one of the biggest strengths of Hermès. And they still, you know, the Akestran theme, the horse is so much of their brand. They talk about it so much in their products, the saddle stitching. It's calling back to that other era, like that pre-modern era where the horse was primary.

• 15:48Ben Gilbert?

  Right. Hermès is deeply rooted in French history, in Parisian history, and really a key part of how France as a nation has the identity that it has today.

• 16:00David Rosenthal?

  But it would all be irrelevant if the brand didn't translate out of the horse era and into the car era.

• 16:07Ben Gilbert?

  Right.

• 16:08David Rosenthal?

  Which was not Thierry Hermès is doing, nor was it his son's doing. So Thierry dies in 1878 and his son, Charles Emile, takes over. Now, he apprenticed coming up in the shop in exactly the same way that Thierry apprenticed. He just apprenticed for his dad. So by the time he takes over, he's been working in the shop as a craftsman for 20 years. And by the way, this sort of family tradition and way of business continues to this day. So Axel Dumas and Pierre-Alexis Dumas, who are the two descendants of Hermès, the sixth generation that are running the company today.

• 16:53David Rosenthal?

  Axel is the CEO and Pierre-Alexis is the artistic director. They apprenticed in the business when they were teenagers. For five years after school, they went to the atelier, they learned the saddle stitch, they made bags, they made items with their hands. Now, obviously, they also sort of learned the business from their parents, but they're not learning the business the way that the RNO children are learning the business at LVMH as executives. They're learning with their hands as craftspeople how to make this stuff, which is wild. Axel is the CEO of a $200 billion plus company.

• 17:27Ben Gilbert?

  It's crazy. And to bring it back to the late 1800s, I think the point you're making here is when Charles Emile was apprenticing, there was no other example of what this company could become. So he thought, why don't I carry it on in exactly the same manner, Thierry, that you did. And so there's not this grand ambition to innovate and change with the times. It's, well, how do I learn exactly your craft, exactly the way you do it, and then continue that?

• 17:56David Rosenthal?

  Right. The business and the craft are intimately intertwined. They cannot be separated. And this is a playbook theme I want to pull all the way forward, but it's so critical to understand about Hermès and what really in my mind differentiates it from LVMH. LVMH, as we talked about on that episode, has world-class, best-in-the-world business executives who partner with world-class, best-in-the-world creatives. At Hermès, these are not different people. Now, obviously, there is a different CEO and artistic director that are both members of the same family and who are cousins. But in spirit, they're

• 18:36David Rosenthal?

  cut from the same cloth and they apprentice as creative craftspeople. And they collectively, and the family, is in charge as much of the creative side of the house as they are of the business side.

• 18:49Ben Gilbert?

  Yeah, makes sense.

• 18:51David Rosenthal?

  So, back to Charles Emile and the second generation. He finally adds saddlery to the business. That's his big expansion. He adds saddles.

• 18:59Ben Gilbert?

  Ba na na.

• 19:00David Rosenthal?

  Ba na na. Which, you know, again, like, as Paris is modernizing, as you can now buy your way into status, for the first time in Paris, you can be seen riding in addition to characters. And the ideal of what it is to be a noble person or a noble person of status has changed. It's no longer just, oh, I'm a leisurely courtier. It's like, no, I'm Baron Osmot. I am doing things for the state, for the country. I'm doing big things. It's kind of like- American in its way, and the Rockefellers.

• 19:33Ben Gilbert?

  Right. You're not just famous for being famous. You are famous because you've achieved something, or you're in the act of achieving something, or you hold a high office in which you were elected or appointed to get a specific goal done. You're on the move. You've got stuff to do and you know, you've got to get there.

• 19:48David Rosenthal?

  Exactly. And you need a saddle for that. So Charles Emile, he adds saddles. And in 1880, he moves the workshop in the store to Vancat Rue du Fauxbourg Saint Honoré, 24 Rue du Fauxbourg Saint Honoré in the 8e arrondissement of Paris.

• 20:04Ben Gilbert?

  The famous address.

• 20:06David Rosenthal?

  The building that is today known as Le Fauxbourg by everybody in the Hermès universe. And this street and this location is one of the most iconic streets in the world, buildings in the world, headquarters in the world.

• 20:19Ben Gilbert?

  It was stunning to walk it last summer when I was there. You can feel the presence of Hermès and all the other brands that are there.

• 20:27David Rosenthal?

  Yeah, the Rue du Fauxbourg Saint Honoré is where the French presidential residence is. It's where the British Embassy is. It's where French Vogue is today, probably because Hermès is there and because all of the other luxury flagships are there. So Charles Emile runs the business for 25 years. He adds saddles, he moves the company to the Fauxbourg. And then in 1902, he retires. And his two sons, Adolphe and Emile, who have apprenticed in the business just like him, just like every generation will do for many generations to come. They take over and they change the name of the company to Hermès Frères, Hermès Brothers, because the two brothers are now running the company.

• 21:11Ben Gilbert?

  And they're going to do this forever together and they're going to be thick as thieves. And you know, they are of one mind on how this company should go.

• 21:18David Rosenthal?

  They've been apprenticed together. They're going to be like Axel and Pierre-Alexie today. Well, of the two brothers, I think it is fair to say that Emil, who I believe is the younger brother, is the sort of much more ambitious and much more adventurous one. There's this great story that in the late 1890s, so before his father, Charles Emil retires, the young Emil sets off to conquer Russia for Hermes. He literally like gets on a train with a notebook and a suitcase filled with miniature versions of the saddles and the harnesses that Hermes makes. And he just finds his way into the Tsar of Russia's court and lands him as a customer.

• 21:59Ben Gilbert?

  That is wild.

• 22:00David Rosenthal?

  Unreal. They have to staff up a whole new atelier with like 80 craftspeople to fulfill all the orders for the Tsar in Russia.

• 22:07Ben Gilbert?

  Whoa.

• 22:08David Rosenthal?

  Yeah. So this is Emil. He's going places. And right as he and Adolphe are taking over, kind of at the end of Charles Emil's tenure, they decide to introduce a new product. Now, they're not thinking that this is going to be a big thing at the time, but some of their customers, again, now that they've added saddles, once they get off the horse, they want something to carry the saddle and maybe their riding boots with them while the horse is in the stables at wherever they're going. So they say, great, we can help you with this. And they introduce the haute aqua bag, which translates as the high belted bag to carry saddles and boots for their clients.

• 22:50David Rosenthal?

  Now, like I'm saying here, this was intended to be an accessory to the main business of équipage and saddles, the equestrian business. It's not really practical for anything else. I don't know why anybody else would want a big tote bag that could carry your boots.

• 23:05Ben Gilbert?

  What's this bag look like?

• 23:07David Rosenthal?

  Well, this bag looks exactly like the Birkins and the Kelly's today, except a lot bigger.

• 23:11Ben Gilbert?

  Interesting, because you're putting a whole saddle in it, like you're desaddling your horse and then you're putting that in this bag.

• 23:18David Rosenthal?

  Yep, but it has the same trapezoid shape. It has the crossover belt, the otakourwa. That means the high belted bag. It has the belt. It has the turnstile lock closure for the belt at the top of the bag.

• 23:32Ben Gilbert?

  Fascinating.

• 23:33David Rosenthal?

  So this accessory that we're going to add to the business. This becomes the spiritual heritage to the business today.

• 23:41Ben Gilbert?

  That's crazy. It's like if Apple eventually transitioned to being not the Vision Pro company, but the Vision Pro carrying case company.

• 23:49David Rosenthal?

  Yes, yes, yes. Oh, did you get the carry case, by the way?

• 23:52Ben Gilbert?

  No, I'm not going to spend another $200 on that.

• 23:55David Rosenthal?

  That thing looks like a balloon. It's enormous.

• 23:58Ben Gilbert?

  Yes, and it takes up your whole backpack.

• 24:00David Rosenthal?

  So this bag, this accessory that would become the Kelly and then the Bergen, they introduce it just at the right time. It's 1902, kind of as Charles Azimov is retiring. And this idea of this bag that you would put stuff in, because you wouldn't bring a bag on a train. You know, if you're of this class, you need a trunk. You need a flat pack trunk that Louis Vuitton is going to make for you. And none of these three men could have seen it at the time. But this accessory to the real business of saddles and horses and harnesses was going to become the perfect transition to move Hermes into the age of the automobile.

• 24:42Ben Gilbert?

  All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 25:01David Rosenthal?

  Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 25:22Ben Gilbert?

  Right, and that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes and cuts the time that you'd spend on vendor assessments in half.

• 25:44David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 26:02Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. Now, David, how was Hermes perfectly positioned for the age of the automobile with this new accessory?

• 26:37David Rosenthal?

  So this is wild. I suspect you probably also found this in research, but when I did, my mind melted. So during World War I in 1916, Emile becomes an officer in the French military and the military sends him to the United States to learn about kind of US industrial and military production. You know, he's sort of a leading industrialist in France at this time, shall we say. And one of the people that he gets sent to meet with is, do you know about this, Ben?

• 27:11Ben Gilbert?

  No, I have no idea.

• 27:12David Rosenthal?

  I can't believe you didn't find this.

• 27:13Ben Gilbert?

  No.

• 27:14David Rosenthal?

  He meets with Henry Ford.

• 27:17Ben Gilbert?

  No.

• 27:18David Rosenthal?

  Goes to Detroit. He sees the assembly lines. He sees the car. He sees the future.

• 27:24Ben Gilbert?

  He sees the assembly lines and then he like had blinders on. He's like, oh, pay no attention to the manufacturing efficiencies they've got going on over there.

• 27:32David Rosenthal?

  This is what's so funny. No, he's like, this is unbelievable. And to the, you know, manufacturing efficiencies point, he actually does take some elements of the assembly lines and brings them back to Hermes. It's not like they're anti-efficiency. They're pro-efficiency, but in the context of being a craft, you know, non-mechanized, human, master craftsman-built object. So he actually does take some of the production ideas from Henry Ford. But more importantly, he's looking at this place and he's like, my God. There is a Model T rolling off the assembly line every three minutes. Ford, at this point, is producing half a million cars per year.

• 28:16David Rosenthal?

  Everybody knew about the automobile, but this is a different era. This is kind of the same time as when we talked about our Novo Nordisk episode about the start of that company, where like, news didn't reach Europe. This wasn't a global world. And so Emil getting this window, like, literally seeing the assembly lines in Detroit, he's like, whoa. Once this war is over, the world is going to change forever.

• 28:43Ben Gilbert?

  Okay, so Emil both figures out how to open business in Russia and goes to America, meets with Henry Ford, understands the automobile is going to change the world.

• 28:51David Rosenthal?

  Yeah, he's quite the character, this guy. The other thing he finds in America is, I know you know this one.

• 28:56Ben Gilbert?

  Yeah.

• 28:57David Rosenthal?

  The zipper.

• 28:58Ben Gilbert?

  Yes. Or, as it was originally called.

• 29:01David Rosenthal?

  The close all.

• 29:02Ben Gilbert?

  Yes, which really does not have the same ring to it. I'm glad we changed to zipper.

• 29:06David Rosenthal?

  I couldn't believe this. The zipper was a late 1800s, early 1900s invention in America. And it was primarily used for industrial use cases. In this case, it was zippering closed the hood of a car.

• 29:20Ben Gilbert?

  I think like a military car.

• 29:21David Rosenthal?

  Yeah, where Emil first sees it. It's not at the Ford factory. I think it actually might have been in Canada on the kind of later leg of his journey where he sees it on the car. It was also used for opening and closing boots. And that is how the name zipper came to be. I think it was the B.F. Goodrich Company.

• 29:37Ben Gilbert?

  Really?

• 29:38David Rosenthal?

  Yeah, I believe they made a brand of boot with this close all function and they called it the zipper. And that's where the zipper came from. Regardless, enterprising young Emil, he tracks down the inventor of the zipper, like the holder of the patent in America. He obtains an exclusive license for two years in France. This literally is like the Novo Nordisk episode.

• 29:59Ben Gilbert?

  Totally.

• 30:00David Rosenthal?

  Brings it back to France and makes the first zippard products. He makes the first zippard jacket ever created anywhere in the world. It is a leather golf jacket for the British Duke of Windsor, the heir to the throne. Just amazing. For years in France, the zipper would be called the Hermes Fastener in France.

• 30:20Ben Gilbert?

  Yes, that's right.

• 30:22David Rosenthal?

  Just a while. I think they made the right decision not to make zippers the business and instead to stay focused on leather kids.

• 30:31Ben Gilbert?

  It does show their penchant for innovation, the idea that we can push the envelope forward in functionality and what people would be willing to wear. I mean, this guy's a duke and he's wearing a zippard jacket. I'd imagine that drew some eyes at first.

• 30:45David Rosenthal?

  Yeah, and a golf jacket, literally for use while playing golf, while playing sport. You know, what more modern activity to happen here?

• 30:52Ben Gilbert?

  Yep.

• 30:53David Rosenthal?

  Regardless, though, the big thing for Hermes that he brings back is, oh, my God, the car is coming.

• 30:58Ben Gilbert?

  Okay, so we're still in the third generation of the Hermes family. Two brothers are running it. What's next?

• 31:06David Rosenthal?

  When Emil comes back and he's running around making zipper jackets, he's collaborating with car companies, leads to a rift between the two brothers. Adolph, the older brother, he's much more conservative. He wants to remain in the horse market. He's kind of depressed about the car coming. He's like, hey, I just want to remain a niche leather worker and I'm not really cool with everything you're doing here.

• 31:33Ben Gilbert?

  This is literally like he wants faster horses of the analogy of like, if you would ask people what they want, they'd say a faster horse. Like, he's stuck in horserand.

• 31:41David Rosenthal?

  Right. Now, I don't know if it was that he had his head in the sand or more just like he didn't want to go build a big company.

• 31:47Ben Gilbert?

  Right. Which I could understand.

• 31:49David Rosenthal?

  Totally. I could totally understand that. Either way, in 1919, Emil buys him out and says, I believe in my ability to lead this company, making this transition into the automobile era. And legend has it that he goes to the craftsman in the atelier above the shop in the faux bourg and says, you know, okay, what are we going to do? What can we make with our hands here in this atelier that will interest our clients today? And I think this is still kind of legend around Hermes of like, what can we make with our hands that will interest our clients today? And the obvious answer at the time is a version of

• 32:32David Rosenthal?

  the Otakorua bag, you know, it's bags for these cars. And if you want the most exquisite bags, the most exquisite things to show in your automobiles that you're buying.

• 32:45David Rosenthal?

  Who better than Hermès and finely handcrafted leather bags and accessories that you can outfit your car in the same way you could outfit your horse?

• 32:55Ben Gilbert?

  So the business is now Emile's and the business is now Handbags.

• 32:59David Rosenthal?

  And once again, to timing and insight here, kind of like Thierry in the original case, what the automobile does, and it's not just automobiles, it's also improvements to trains and improvements to ships. The global rich, the global elite, they start traveling a lot more. You know, we're now in the 1920s, the roaring 20s. This is what F. Scott Fitzgerald is writing about, the visible symbols of wealth. It's when you're home, it's in your car and the bags and the accessories you're using with your car, but you're also out traveling a lot more. You're rubbing shoulders with elite all around the world. The American elite are going to France, they're going to Europe, vice versa.

• 33:43David Rosenthal?

  People are starting to travel around the world. People are traveling to Asia, people are traveling to the Middle East, people are traveling to South America. Emile's going right along with all these people and your luggage, your bags, that's what you bring with you, that's what you show.

• 33:58Ben Gilbert?

  Yeah. And importantly, it's not just that you're trying to show a label, which is a little bit different than the modern version of luxury. It's that you're trying to have something really nicely crafted. When you show up somewhere, someone should just look at your luggage and go, wow, that is beautiful. Hermès is not yet a recognized brand, so merely slapping Hermès on it won't do the trick. The way to wow the people that you want to wow is through the raw craftsmanship.

• 34:27David Rosenthal?

  The product itself, yes.

• 34:29Ben Gilbert?

  Yep.

• 34:30David Rosenthal?

  So in 1922, Emile's wife famously complains that the large bag they've been making, the Otakorwa, the saddlebag, it's too large to fit through car doors. So she asked for a smaller version. And this launches the handbag business in 1925.

• 34:50Ben Gilbert?

  And by the way, by this point, they've put the zipper on a handbag.

• 34:53David Rosenthal?

  Yes, exactly. And speaking of the zipper, in 1925, they had ready to wear clothes, like the legacy of the golf jacket here. The legend has it that they added clothes because a longtime client came in and said, I am fed up with seeing my horse better dressed than me. Which, you know, who knows if that's true, but it's a nice story. But they really go into this. In this modern world where the global wealthy, the global elite are traveling, they're seeing each other. What outward signifiers can they supply them? Clothes, 1927, they had jewelry. 1928, they had watches.

• 35:28Ben Gilbert?

  And something interesting that is different than the Hermes you know today. The way that they're adding all of these things, they're finding craftspeople who are experts at particular crafts. Exactly what you're talking about, David, a watchmaker. They're finding a watchmaker and they're saying, can we work with you on designing something uniquely Hermes? But you're the crafts person. We're not trying to build this competency in-house.

• 35:52David Rosenthal?

  Right. It's not right to say that they're licensing products. You know, it is a collaboration, but they are selling products in their stores that are not made end to end by Hermes employed craftsmen.

• 36:07Ben Gilbert?

  Right. And it's interesting because they're sort of toeing this line between first and foremost, being a craftsman themselves and being a manufacturer and being a designer, but also kind of being a retailer where they're just bringing in other branded goods and selling it in their shop.

• 36:25David Rosenthal?

  Yes. And I think all this is being figured out real time. These ideas of retailers versus brands. It was a much fuzzier line then than it was today. So what does Hermes do? What does Emile do? They start opening up stores outside of Paris. And where are they going to go? They're going to go to the travel destinations where their clients are going. So the first store is in the Côte d'Azur in the south of France. And then they start opening up more stores around the world. You know, again, not necessarily in like the Londons or the Rome's or the New Yorks of the world. They're opening them up in the travel destinations.

• 37:06Ben Gilbert?

  Their mindset around additional stores at this point is it's for the same clientele in all the places that they travel.

• 37:13David Rosenthal?

  Yes. And the clientele was primarily French at this point in time.

• 37:17Ben Gilbert?

  Yeah, or if not exclusively, other than the czar and yeah.

• 37:21David Rosenthal?

  I suspect, though, that it was strategic of like, our French clients are going to go to these places. They're going to rub shoulders with the Americans, with the British. And then we're going to have a store there so that those Americans, those British, you know, elite, they can go purchase our products there, too.

• 37:38Ben Gilbert?

  Right. This, by the way, is a different retail strategy than what they have today. Today, management sort of insists that the idea is that each store is for the local clientele. And we will only expand into an area if we feel that we can serve the local clientele that lives there well. And that's sort of a recognition of the maturation of their business. The rich people are going to go find an Hermes store somewhere. It's easy for them to travel somewhere, buy it on vacation. But if we're going to open new stores, we should open it in places where there is a thriving new upper class who can buy the goods locally there in their city.

• 38:15David Rosenthal?

  Yes. Now, I think some element of this certainly still exists. You had a nice time going into the Hermes store in Ex, right?

• 38:24Ben Gilbert?

  Yes, for sure. But it plays well for me as someone who is on vacation and shopping to believe that I'm shopping in a store that is for the locals. It's less fun to be shopping somewhere that is very clearly created for you as a tourist.

• 38:39David Rosenthal?

  Yeah, I think they very brilliantly walk this line. And the products that the shops carry are very different. And we'll get into that later in the episode, too. But back to this era. So I think we've laid the groundwork of a few critical components of Hermes so far. First and most importantly, the craftsmanship. These things are handmade by artisans with their hands. And the family and the people who own the company are the chief artisans. That goes all the way back to Thierry. We've talked about the connection to the legacy of French nobility, but not really French nobility. It's sort of like status, but accessible status for the first time in the world and the modernization of the world.

• 39:22David Rosenthal?

  We've talked now here about the true modernization of the company and the transition to the automobile era. What we haven't talked about yet, and what Hermes at this point certainly is not, is this element of like whimsy and art that is really, really critical, I think, to the company.

• 39:43Ben Gilbert?

  Yes. If you've ever been in an Hermes store, you can feel a warmth that doesn't exist in other luxury stores. If you're in a destination with a lot of luxury shops, you'll walk past a lot of bright lights and mirrors and punch you in the face reds and black and white, and you just feel like there's a lot going on. And then you arrive at Hermes, and it feels warm, and it feels soft, and it feels welcoming, and it feels whimsical. And there's this almost dreamlike color palette that they use, starting with a base of orange and having this explosive rainbow of fun, but in some ways, it all feels natural

• 40:28Ben Gilbert?

  and from the earth and just whimsy. I think that you nailed it, David, whimsical.

• 40:33David Rosenthal?

  And this, I think, is really a very different thread than the original kind of leather craftsmanship. And it is a critical one in the kind of weaving of the Hermes business. And this thread comes from the next generation of the family, specifically Robert Dumas. So Emil had four children, but they were all daughters. And tragically, one died young. But the other three grew up and they got married. And back in this day, women weren't going to take over the business, unfortunately.

• 41:08Ben Gilbert?

  Right. Same story as the New York Times. There was a whole generation of daughters. Well, none of the Ochs daughters get the business. And so it goes over to the son-in-law, the Sulzberger, and now it's the Sulzberger-Ochs family that owns the business in the same way that Hermes is the Hermes-Dumas family. The son-in-law tends to do well in this early 20th century period of passing it down from, unfortunately, father, not to daughter, but father to son-in-law.

• 41:34David Rosenthal?

  And in this case, when you read about the Hermès family fortune today, it's the Dumas family that are obviously the CEO and the artistic director that you hear about visibly. But really, I think all the sons-in-laws and all of their descendants become active in the business. So there's Robert Dumas, there's Jean-René Guerin, and there's Francis Poet.

• 41:55Ben Gilbert?

  And these are all son-in-laws.

• 41:56David Rosenthal?

  And these are all son-in-laws. And those are the three family names that you still hear about to this day of the Hermès family. But back to Robert Dumas and the fourth generation. He brings this whimsy and real art into the business.

• 42:09Ben Gilbert?

  And the way Hermès describes it today, when you read their annual report, is they talk about their trademark humor and imaginative flair. And despite the fact that they really are tied to this old French elite, they really don't take themselves too seriously in all their products, especially the entry-level ones. I mean, the Birkin is the Birkin. Yeah, they'll do some special editions here and there, but there's a weight to that product line. But there's an overall playfulness that's exuded from the brand that comes from this era of leadership.

• 42:39David Rosenthal?

  Totally. And this comes from Robert. So one of the first things he does when he joins the business is he redesigns the kind of smaller Otakawa bag, the handbag line, into what he calls the Sac à des Pêches in 1935.

• 42:54Ben Gilbert?

  Really great name. It's got a ring to it. I feel like that's going to go be a viral hit and appear on Sex and the City and...

• 43:01David Rosenthal?

  Beautiful, beautiful, elegant bag.

• 43:03Ben Gilbert?

  So Sac à des Pêches. Hold on to that one, listeners.

• 43:07David Rosenthal?

  Yep. A little later in the 1930s, he introduces the Shen Dangre bracelet, which is another iconic Hermès item in their jewelry métier.

• 43:16Ben Gilbert?

  Wait, David, I can't let you get away with that. Metier. Please enlighten listeners. I know Hermès sprinkles around French words in all their literature, and it just expects Americans to deal with it. If it's italicized, it's French, and you can go look up what it means yourself. Here on Acquired, David, tell us about a metier.

• 43:34David Rosenthal?

  A metier is like a, uh, someone's work, but in like the craftsman sense. A metier is like a trade. It's like a craft profession. And this is what Hermès calls their divisions. I feel gross even just saying the word divisions. There are 16 of them today, and jewelry, of course, is one of the metiers. Oh, I feel so much better saying metier.

• 43:57Ben Gilbert?

  I bet, yeah. There's a levity here in the room now.

• 43:59David Rosenthal?

  So shendanka in French means chain of anchors, anchor chain. And these are anchors like boat anchors. And the way that this bracelet comes about is Robert is walking along the beach in Normandy one day, and he's just inspired by the scene of these boat anchors on this foggy beach. And so he makes a little sketch in his notebook and then he plays with it. And then he decides he's going to turn this into a bracelet.

• 44:25Ben Gilbert?

  Love it. And so an important thing to know here is when you're buying Hermes products, they're really not pushing the brand. There is not an iconic recognizable Hermes H or horse and carriage logo or bright color that you're supposed to identify. This is really the origin of quiet luxury where Hermes is hand crafting the highest quality product they can make. A single artisan is the person making the good. And when you receive it, you really are just aware that it's the highest quality thing made by a single person with their blood, sweat, tears, love, a piece of them left inside.

• 45:08Ben Gilbert?

  And it's super different than luxury today because it is just not branded. And Hermes hadn't even really developed the iconography yet that would become Hermes's version of slightly louder luxury. Over the years, if you sort of look at products now, the belts have an H. They incorporate horse motifs into designs on their ready to wear clothing. But that really wasn't a thing yet in this era. Hermes is on the lighter side of branding their goods today, but it's still.

• 45:39David Rosenthal?

  Well, they have to adapt to the market.

• 45:40Ben Gilbert?

  The customers want some way to let people know that they're wearing an Hermes item, even if it's lower key than other luxury brands. So Hermes builds that for them.

• 45:50David Rosenthal?

  The family talks about this a lot. The words they use is this is not a museum. There is this artistic element to what we do, but we are not a museum. We are a business and we have clients and we are here to serve our clients. There is this push-pull here.

• 46:08Ben Gilbert?

  Yes. Okay. So what year are we that the bracelet is entering the market?

• 46:12David Rosenthal?

  So that was in kind of the mid 30s. So then in 1937, Robert introduces the other key pillar of Hermes products. That is less talked about today relative to the bags and the leather goods. But for many, many decades was the bigger business.

• 46:29Ben Gilbert?

  Oh, yes. I have numbers on this.

• 46:31David Rosenthal?

  So silk scarves, the Hermes classic silk scarves. And this is the embodiment of this art and whimsy that we're talking about. The silks that they use are the finest silks in the world. It takes 300 silk moth cocoons per scarf, as they will readily tell you to produce these things. But the designs on them, the artwork on them are whimsical, like we said. So the first design, the Jeux des Omnibus et Dames Blanches, where the sort of white ladies at play, I guess you could translate that, is based on a woodblock engraving that Robert does. I mean, this is like what an artist this guy is like.

• 47:10David Rosenthal?

  He's about to become CEO of Hermes, but he's making woodblock engravings and then making silk scarves out of them. That's the first design that they put out there. And quickly they become a huge, huge phenomenon with Hermes clients.

• 47:27Ben Gilbert?

  Yeah. And so fast forward all the way to 1988, when Axel Dumas has his very first internship with the company. This is crazy. Silk was 55% of the company's sales. Leather was only 9%. You compare that to today, it is a completely different story. Leather is 43% and silk and textiles is 7%. So there was a run. I mean, this was introduced when, David, the 30s?

• 47:56David Rosenthal?

  1937.

• 47:57Ben Gilbert?

  So 1937 through probably the 1990s, where these silk scarves were the Hermes franchise. And the reason this sort of took off is it almost became part of the French woman's uniform to have an Hermes scarf as a part of your outfit.

• 48:16David Rosenthal?

  Well, it's funny you say the Frenchwoman's uniform. Yes, that is entirely true. But the woman who really popularizes them around the globe is a British woman, specifically Queen Elizabeth.

• 48:29Ben Gilbert?

  Oh, I didn't realize that, really?

• 48:31David Rosenthal?

  Yeah, this is so iconic Queen Elizabeth. She starts wearing them as headscarves in the 1940s. And, you know, I mean, Queen Elizabeth, she's Queen of England for what, like 60, 70 years?

• 48:41Ben Gilbert?

  Yeah.

• 48:42David Rosenthal?

  And she's wearing these scarves, these, you know, whimsical playful scarves on her head as the Queen of England.

• 48:49Ben Gilbert?

  Fascinating. So this is a good time to talk about how these silk scarves are made. And I was gonna do this later when we talk about their modern day production process. But it turns out that their modern day production process is not that different than it used to be. So here is how Hermes scarves are made today. They are first sourcing the finest silk that they can find, which is now from their own owned farms in Brazil. So that's where the silk comes from. Only 20 new designs are created every year and they retire old designs. There's sort of a Disney Vault aspect to this.

• 49:27David Rosenthal?

  They'll bring them out of the vault.

• 49:29Ben Gilbert?

  Yes. The pipeline to get a new design into the customer's hands is two years. Now, you might be asking yourself like, come on, why is this taking two years? That's a ridiculous thing. Here is the process. They screen print every single scarf by hand.

• 49:47David Rosenthal?

  Yeah, there's no digital process here. It's not like you're going to customink.com and like ordering up some Hermes scarves.

• 49:52Ben Gilbert?

  Right. Some of the design does seem like it involves computers now. Like if you watch documentaries about the craftsmen at Hermes, which there's a couple of good ones we'll link to in the show notes. If you want to just sort of watch Hermes craftsmen at work. They do seem to be translating designs off of a computer, but it's not like they're hitting Command P. That's not how this works. Every single color of the scarf is screen printed using its own mask or basically a stencil. So if your scarf has 20 colors, it has at least 20 masks that they then squeegee the ink over and the precision is perfect.

• 50:31David Rosenthal?

  This is like EUV lithography.

• 50:33Ben Gilbert?

  Yes, I was looking at my wife's sort of twilly scarf, the little wrist or hair tie scarf that we got at Exxon Provence. I mean, I don't know how you do this by hand, and I don't know how you do it by hand 20 times over and over and over for every single layer. If you've ever been to an Hermes store or you own one of these, you just can't believe that this is done by hand without any of the layers being out of alignment. Because if any of them are out of alignment, you ruin the whole thing and you have to start over. And so if that's not enough, the masks are also hand etched by a crafts person. Their entire job is to know how to translate a design into all the different color layers, which they then hand etch.

• 51:13Ben Gilbert?

  So the pipeline is designer, engraver, that's an engraver of each mask, colorist, weaver, printer, and then someone to do the finishing.

• 51:24David Rosenthal?

  All of which are like extremely hard to replicate and involve both extreme craftsmanship and extreme taste. The competitive barriers to the Hermes scarf, I think they're way higher than the bags, honestly, even though the bags are bigger business now.

• 51:40Ben Gilbert?

  And the skills are completely non-transferable. This process doesn't really exist, certainly not at scale at any other company. Actually, I was talking to my wife about this. She brought up the idea that it's kind of like Disney Imagineers, or almost like Pixar employees, where you specialize in this one crazy little piece of the production process that no other company has your same production process. And the attention to detail is so staggering that once you enter the Hermes universe, then you're sort of in that universe for the rest of your career, because that is where your trade is still practiced.

• 52:12David Rosenthal?

  And I think also, you know, as a client, too, at least in scarves, like if you entered the Hermes scarf universe, you're not buying any other scarves.

• 52:20Ben Gilbert?

  Totally. And you really like all the lore. Part of what makes Hermes Hermes at this point is their callbacks to their own history. I mean, they have 187 years of history to call upon, and they do so over and over and over again, and they remix, and they name things after stores that used to exist at certain addresses. It's a universe.

• 52:42David Rosenthal?

  Yeah. I mean, I remember growing up, and my mom is half-British, I'm a quarter-British, and to the Queen Elizabeth thing, Hermes scarves, my mom's Hermes scarves were and are among her most treasured items.

• 52:54Ben Gilbert?

  Yep.

• 52:55David Rosenthal?

  So you'll note- All of this that's happening, Robert, the innovations, these new products, the art, the whimsy, he's doing all this in the 1930s. This is the Great Depression era. This tells you about Hermès and Hermès clients. They are unaffected. They keep buying. And this carries through right to this day. I mean, I don't know that there is a more recession insulated business than Hermès.

• 53:26Ben Gilbert?

  You're exactly right. 12 months now after we did the LVMH episode, we're finally on the tail end of the sort of pandemic bubble of luxury and we're seeing a lot of these brands take a hit. Hermès is the most insulated of all the luxury brands where they have the sort of least cost sensitive clients.

• 53:45David Rosenthal?

  So after this, there's World War II. And famously, before the war, Hermès products came in cream colored boxes. Robert was very meticulous about the packaging that his crafted items and his art would come in. And it was cream, it had to be cream. During the war, there's a shortage of packaging materials. They can't get cream. The only color that is available to them in the quantities that they need is orange. That was designed for petiteries, for bakeries.

• 54:17Ben Gilbert?

  Oh, is that what the orange ones were used for?

• 54:19David Rosenthal?

  That's why there was an excess of it because it was used for bakeries and bakeries weren't baking as many croissants and pain au chocolat during the war, et cetera. So there's all this orange packing material. Robert embraces it and the Hermès orange box is born. And this is crazy. I didn't know this till research. Hermès owns this color. You cannot get Hermès orange anywhere else. Pantone does not list it in their colors.

• 54:46Ben Gilbert?

  It's interesting you say Hermès owns this color. So you are correct that Hermès has selected a non Pantone color. But what Hermes tries to do is say, well, we own orange. We can't be nailed down by a Pantone specific code. We own orange more broadly. And they've actually gone head to head with the EU. And this has gone to court where it's been determined that, no, you can't own orange. You can't just own all the oranges.

• 55:14David Rosenthal?

  Amazing.

• 55:14Ben Gilbert?

  And so what they've done is they've actually leaned into this where there is a classic Hermes orange, but it presents differently on each of the leathers. You know, they have 10 different leathers or something like that that they work with. When they dye those leathers, it presents a little bit differently. And so they sort of have this, sure, there's a digital perfect representation of the color of classic orange, but there's this whole spectrum of the way that it shows up on leather. And they've sort of even further kind of winked at all of us by creating five or six other oranges. They have Hermes Fieu, which is sort of the fire.

• 55:55Ben Gilbert?

  They have Hermes Sanguine, which is sort of this red hot orange, like lava. Or they have the Hermes Moutard, which is sort of their mustard. And each of these is a little bit of, I think it's to continue to assert that we own the whole spectrum of oranges, but it's definitely to be able to stay current, stay present, encapsulate the theme of a season, because every year they sort of pick a theme. And so they play with their oranges a little bit to evoke the whimsy that they want from this year's theme.

• 56:24David Rosenthal?

  Yeah, there's this sort of like, you know, meta level or like corporate level playfulness to this too of, we own all the oranges.

• 56:30Ben Gilbert?

  Totally. The Hermes oranges are almost like, to continue the Disney analogy, it's almost like the people that go to the park and look for the hidden mickeys. It's a way to even more deeply participate in the Hermes universe.

• 56:41David Rosenthal?

  So a few other things that Robert adds over the years. He adds the men's silks metier, AKA ties. The legend behind that one is pretty great. Supposedly in Cannes, a number of gentlemen were refused entry to the casino and thus went to the neighboring Hermes shop, you know, next door and said, can you take some of your beautiful silk scarves and cut and tailor them into ties for us so that we can enter the casino? I'm sure that's apocryphal, but adds to the legend here.

• 57:12Ben Gilbert?

  And they are these patterns, you know, they're just as intricate as the scarves. There's less storytelling that happens in the tie. The scarves tend to be something you could frame and put on the wall and look at in 16 different ways and the story behind it. But it's still, I mean, when you look at it, you kind of can't believe that it was hand screen printed.

• 57:31David Rosenthal?

  Totally. After World War II, Robert decides that Hermes needs a logo. So taking inspiration from the 19th century painting, le duc at la groome à la tente, which means hitched carriage waiting groom. The famous Hermes logo is born. The logo is the callback to the carriage. It's the nobility, you know? I find it really interesting, especially at that point in time that Robert decided, you could imagine like, you know, a galloping horse or something like that would be the appropriate logo.

• 58:03Ben Gilbert?

  No, it's so genius.

• 58:04David Rosenthal?

  No, it's the carriage.

• 58:06Ben Gilbert?

  Yes, it's to intentionally ground the brand in history, in something that they were a part of that is only theirs because nobody else starting today is going to have that as a part of their history. They're leaning into the thing that makes them unique, special, the almost like defensible, durable asset that they have is that they participated in that era that has a nostalgia about it.

• 58:28David Rosenthal?

  And no longer exists.

• 58:31Ben Gilbert?

  Yes.

• 58:31David Rosenthal?

  Horses in the Acastrium world still exists. It's obviously not what it once was, but it still exists. The carriage world is gone. It's just a dream these days, and that's what Robert is so good at, this dream. The other thing we have to talk about are the window displays. You referenced this a little bit earlier. So he hires first Annie Beaumel and then she's soon joined by the legendary Leila Manchari. Specifically, these two women, they come from theater set design just to design the window displays at the Phoeborg at the flagship store on the roof of Borges Center on the right. I mean, there are whole museum exhibits just dedicated to these window displays.

• 59:16David Rosenthal?

  And it's not like, you know, again, you walk by. XYZ other store, even the most prestigious brands. And it's like, the products are there. You know, here's the products. Here's the brand you're buying. Here's the LV, et cetera. These displays, it's a dream. There are probably some Hermes products in there, but it's like a museum exhibit. It's artwork.

• 59:37Ben Gilbert?

  Yes, and art is exactly the right way to put it. There is no utility to these displays. And these displays, much like any advertising that you see of Hermes today, it's not about the product. It's about how you feel. So I think this is an interesting place to revisit this idea that we talked about on the LVMH episode of luxury versus premium, where premium means you pay more and you get more utility out of a given product. I pay for a bigger storage space on my iPhone and I get, you know, more utility out of that. I can store more photos. Luxury means you pay more, literally, because it doesn't create more utility. It is either more pleasing to you intrinsically

• 1:00:20Ben Gilbert?

  for the feeling, or it's an extrinsic signal, where you are signaling to others that you have the means to spend on this item, even though it doesn't provide more utility. It's a sort of despite, rather than a because. But art, it does fall on this spectrum. Art is like luxury taken to its logical extreme. It has actually zero utility. A Birkin bag is a piece of art, but at least it also carries your stuff around. Luxury products are this interesting midpoint between extreme functionality, but also artwork. And so when you buy an Hermes product, you aren't just buying the product. You're buying a piece of art, a piece of their heritage, a feeling that connects you to the maker

• 1:01:04Ben Gilbert?

  and the place it was created. You're trying to buy a piece of Hermes's heritage and reputation and hoping to adopt it as a part of you, as a part of your identity. And you are seeking, whether it's conscious or not, to let other people know about this too. And you're not necessarily trying to signal it to everyone, but you do want to signal it to the right people who would appreciate it.

• 1:01:25David Rosenthal?

  There's this genius aspect too to what Hermes is doing and what Robert's doing with the arts, like these window displays. The Luxury Strategy book talks a lot about this. When you're selling luxury items, they can't just be art. They need to have some utility to them.

• 1:01:42Ben Gilbert?

  Yep.

• 1:01:43David Rosenthal?

  You will never see any of these brands, Hermes included, become art galleries. They're not selling paintings, but it's critical for luxury brands to have a connection to the arts. I think he realized this before anybody of like, the windows in our stores are these portals into this world of dream and art. And you'll come in and you'll buy a scarf that you'll wear, you'll buy a bag that you'll use, maybe you'll buy a tie, maybe you'll buy a wallet, or homewares, or furniture, or any of the other things over time that they sell. And that will have utility, but it's connected to this dream.

• 1:02:19Ben Gilbert?

  Yes. You're taking a piece of that dream with you, and it's almost a daily reminder of the dream that you're now participating in. The key insight is that by adopting art as a critical piece of the bundle that is your product, it enables you as the seller to completely switch tracks, to disconnect from any evaluation of value.

• 1:02:48David Rosenthal?

  Right. Or features.

• 1:02:49Ben Gilbert?

  Exactly. You're out of the feeds and speeds world. You are not being comped against, well, this other purse is much cheaper and serves the same function. Now, we have bundled in the function of the object and an unevaluatable.

• 1:03:07David Rosenthal?

  Priceless feeling.

• 1:03:08Ben Gilbert?

  A priceless feeling. And so now, we can sell the goods for whatever we want, because it's impossible to know the value of that second component that we've bundled in.

• 1:03:18David Rosenthal?

  Yeah, totally. So, speaking of dreams, we're now in the 1950s, in the post-World War II era. The most amazing, unbelievable, fantastical dream of the 1950s happens to Hermes in real life. And that dream is Princess Grace Kelly.

• 1:03:44David Rosenthal?

  So I sort of mentioned a little while back that one of the first things that Robert did when he came into the business was redesign the handbag and christen it the Sac à de Pêche. Well, it becomes popular, but like we're talking about leather goods, handbags, you know, important, but that kind of was the previous generation of the business. Now, under Robert, it's the scarves, it's the dream, it's all this stuff, and leather's part of it, but a smaller part. Well, in 1956, Princess Grace Kelly of Monaco, this is a girl from Philadelphia, an American girl, who goes on to become a movie star, who then goes on to become Princess Grace of Monaco.

• 1:04:28David Rosenthal?

  I can't imagine a bigger dream for any woman or any person in the 1950s. She is photographed using the Sac à de Pêche in Life magazine.

• 1:04:41Ben Gilbert?

  On the cover of Life magazine.

• 1:04:43David Rosenthal?

  So the legend is that it was on the cover of Life magazine, but I Googled a lot of 1956 covers of Life magazine, and I didn't find it on the cover.

• 1:04:53Ben Gilbert?

  Oh, interesting. So maybe that's been sort of played up over time.

• 1:04:56David Rosenthal?

  This might have become part of the lore. Regardless, big picture in Life magazine, she is clutching her beloved Sac à de Pêche to her midsection.

• 1:05:07Ben Gilbert?

  And it's almost like as she's exiting a building and it's, it almost seems like it's like a paparazzi type photo.

• 1:05:12David Rosenthal?

  It is, it's a paparazzi photo, and her husband, Prince Raniere of Monaco, is holding the door behind her. It's like the most dreamlike thing you could imagine, and it's in black and white. And the reason that she is clutching this fairly large bag, unbeknownst to the world at the time, is she's trying to hide her pregnancy from the paparazzi. She's pregnant with her first daughter. And this photo just becomes iconic. Everybody wants to be Grace Kelly. Everybody wants to have this bag. And one of the last things that Robert does right before he retires in 1977 is he officially changes the product name of the Sac à de Pêche to the Kelly Bag.

• 1:05:57David Rosenthal?

  And this is the birth of, I don't even know what to call it. The Kelly and the Birkin are ends of ones, but these leather good products that transcend everything, that are like so truly end of one, there's no other way to describe them.

• 1:06:13Ben Gilbert?

  And there is so much to say about these bags and how they're crafted and the lore around them and the supply and demand and the econ 101. But before we get to that. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 1:06:40David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 1:06:54Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 1:07:04David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 1:07:21Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:07:38David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:07:54Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:08:03David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:08:14Ben Gilbert?

  Okay, David. So Life Magazine, the Kelly Bag, it's out. So this thing must sell like hotcakes, right?

• 1:08:23David Rosenthal?

  Well, yes and no. Certainly, this plays right into this whole dream thing that we've been talking about and burnishes Hermes's already incredible brand and image. I mean, my God, Princess Grace Kelly of Monaco is carrying this bag, not just carrying this bag, but it's her favorite bag, the closest thing to her body. But we're still in the 50s here. So like, yes, it becomes incredibly popular. Yes, I'm pretty sure it becomes Hermes's biggest selling bag. But the market isn't quite there yet in the way that it is today with the Birkins and the Kellys. The global rich isn't that big of a population.

• 1:09:09David Rosenthal?

  And like, yeah, I'm sure they're all buying Kellys. But Robert probably knows all of these clients personally at this point. We're not anywhere near the scale that we're talking about today.

• 1:09:18Ben Gilbert?

  And to your point, I keep saying it's launched. It's not really launched. They just rebrand to the Kelly Bag. But when the Kelly Bag is formally launched, it's really expensive. It's a $900 handbag in the 50s, which today is $10,000 to $12,000, approximately the price of a Kelly Bag today. So it comes out as this thing that is completely ridiculous and inaccessible price-wise. So the people who are buying it are the Grace Kellys of the world, and there's not really this stratified class below that that's got this huge amount of purchasing power.

• 1:09:56David Rosenthal?

  Right. The number of people who could spend the equivalent of $12,000 on a bag back then was just much, much, much smaller than it is today.

• 1:10:05Ben Gilbert?

  Yep, exactly. So, no, handbags do not immediately become a huge part of the business, or I should say, the dominant, whatever it is today, six or seven times larger than silk, part of the business right away.

• 1:10:18David Rosenthal?

  And in fact, Actually, sadly, kind of quite the opposite happens. So as we head through the 60s and into the 1970s and the end of Robert's tenure and his generation as the head of Hermes, the company kind of starts to fall on hard times.

• 1:10:35Ben Gilbert?

  Which is crazy to say, right? I remember this moment in the Porsche episode. You're like, no, come on. Porsche skinny down the entire lineup to only making the 911 because they couldn't justify any of the other products and the whole company was a frickin' mess. Hermes is not quite in those dire of straits, but I mean, they have the ingredients of Hermes that we knew today. They've got the Kelly bag. They've got the orange box. They've adopted the logo.

• 1:10:57David Rosenthal?

  They've got the scarves.

• 1:10:58Ben Gilbert?

  They've got the scarves. They have these small workshops where they make everything, but it's not working yet.

• 1:11:06David Rosenthal?

  And it's particularly not working because like we just talked about, that market was not that big yet. And as we enter the 1970s, something really funny happens. The next generation rejects that dream. This is, you know, you and me, our parents' generation, the hippies, the 1970s. This is democratization. Little girls don't want to be Grace Kelly anymore.

• 1:11:34Ben Gilbert?

  Hmm.

• 1:11:35David Rosenthal?

  They want to be like Stevie Nicks or, you know, something like that.

• 1:11:39Ben Gilbert?

  Hmm.

• 1:11:40David Rosenthal?

  And the dream of Hermes that was once so elegant and so desired by so many people, but inaccessible is kind of now like, eh, you know, it's certainly still got its audience, but it's not as universal. This is when so many of the other, what we now think of as luxury brands really start to come up. And we talked about this on the LVMH episode, but they're connected to fashion. You know, it's first Dior and then it's Yves Saint Laurent. You know, this is the Mondrian dress from Yves Saint Laurent. This is, you know, the revolution. It's Gucci. It's Chanel in the eighties when Karl Lagerfeld takes over.

• 1:12:20David Rosenthal?

  And what they're selling is very, very, very different than what Hermes is selling.

• 1:12:26Ben Gilbert?

  This is an important distinction between Hermes and all the brands you just named. They come from the world of couture and of fashion and of cutting edge, in your face, risky art.

• 1:12:42Ben Gilbert?

  And Hermès comes from, I mean, mind you, by this point, they're already 120 years old, 130 years old. They come from the world of leather and horses and durable goods that stand the test of time and frankly, styles that stand the test of time. It's not how creative and crazy can we be? It's, they talk about it as responsible growth. What's the smallest amount that we can move from our current compass in order to do what our clientele wants while staying true to our roots? It's a rejection of risk and an almost embrace of history. So it's super different than most other luxury brands, which as you point out, come from fashion.

• 1:13:23David Rosenthal?

  Right. And those brands are getting born or reborn right there in the 1970s.

• 1:13:29Ben Gilbert?

  Yes. And David, this is probably a good time to share who we chatted with in preparation from this episode and his observation about Hermès.

• 1:13:37David Rosenthal?

  Yes. This was super cool. And you know, one of the things that for me and for both of us just kind of blows our mind as acquired, grows. We got to talk with Domenico De Sole, who was CEO of Gucci during the fight with Bernard Arnault that we chronicled. Really, I think that was the best part of our LVMH episode.

• 1:13:56Ben Gilbert?

  Absolutely. When Domenico De Sole and Tom Ford and that team rejected Bernard's takeover and managed to not become a part of LVMH. And obviously then Domenico and Tom Ford left to start Tom Ford after that.

• 1:14:11David Rosenthal?

  But it was super cool. And we talked to Domenico. He comes from that world, even you know, with the heritage of Gucci. He and Tom, it was fashion first. And in his perspective, and I think the perspective of many folks that are coming out of this 70s, 80s era of luxury, that's what's interesting. That's what's fresh.

• 1:14:29Ben Gilbert?

  Risk on, baby.

• 1:14:31David Rosenthal?

  Risk on. Yeah.

• 1:14:32Ben Gilbert?

  Let's figure out how to break some glass in what we're doing.

• 1:14:36David Rosenthal?

  Grace Kelly is not breaking any glass.

• 1:14:38Ben Gilbert?

  Right. That Domenico helped us understand about Hermes is they have been so protective of their brand and this unbelievable steward, they're so careful at how they've chosen to deploy the brand. They make sure that the mystique is always there. They don't violate the promise. They never cut corners. They have been above board in their brand promise and keeping that promise with customers for over 100 years. And that is a strength and a weakness. It's a strength as long as you learn how to employ it as a strength. In the world of fashion, it's butting heads.

• 1:15:14David Rosenthal?

  Yeah, it's antithetical to fashion.

• 1:15:16Ben Gilbert?

  Yes, exactly.

• 1:15:18David Rosenthal?

  So all this culminates towards the end of the 1970s as Robert is nearing the end of his tenure at Hermes and the end of his life. Sadly, there's a moment, this is like probably 1977 or so, where they bring in consultants and the consultants recommend like, hey, you guys should probably do what Gucci is doing and you should probably close the atelier above the shop at the Phoeborg and you should probably outsource production and you should probably increase your number of products and your SKUs and have lower prices and have them be more accessible.

• 1:15:50Ben Gilbert?

  Unbelievable.

• 1:15:51David Rosenthal?

  That was the accepted wisdom at the time. I don't know if it was McKinsey or, you know, who was saying that.

• 1:15:57Ben Gilbert?

  Well, today I will tell you that Hermes has a corporate policy of no consultants. And now I know where that came from.

• 1:16:04David Rosenthal?

  I mean, this is enshrined in the luxury strategy as anti-law of marketing number 19, do not hire consultants.

• 1:16:13Ben Gilbert?

  Wow. So the recommendation was to come in and destroy everything that makes you special and follow the playbook that everyone else is running.

• 1:16:20David Rosenthal?

  Yeah. I mean, it's working for them and it's not working for Hermes.

• 1:16:23Ben Gilbert?

  It's crazy.

• 1:16:24David Rosenthal?

  And this is when the next generation transition happens to Robert's son, Jean-Louis Dumas. I kind of can't believe it with this family. Every time they come in at a generational transfer and the company and the brand is under existential threat, even though we think of Hermes, you know, the most unassailable thing in the world right now, but finds itself at a moment where it can be assailed. There's a generational transfer happening. You would think this is like the downward spiral. This is the dropping of the baton. And the next generation always rallies.

• 1:17:00Ben Gilbert?

  And isn't it amazing, you would think the best person out there to brilliantly come up with both the business strategy and the creative element is probably not your direct descendant.

• 1:17:13David Rosenthal?

  Right, probably not your nepotistic family member.

• 1:17:16Ben Gilbert?

  That's not the best search process to run, and yet it works. There's something about the, I don't think it's like this magical bloodline. I think it is a deep understanding of the tradition of the business, of exactly what type of sort of chutzpah the team has to rally and take on, having the political clout to find the right people and empower them to make the change, to have a sixth sense for where you sit in the marketplace versus competitors and what people may want out of your brand next. It's all the intangibles that come from growing up in the business make you able to be the right person to transform it.

• 1:17:57David Rosenthal?

  I really do think that there is an element too of the successive generations, they apprentice in the atelier, it's like with their hands. I think there is an element of that. And they also apprentice, especially these days, on the business side too. You know, Axel talks all the time about dinner table conversations between his uncle, Jean-Louis, who we're about to talk about now, who is the fifth generation CEO of Hermes, and his mother, who was head of production at the dinner table growing up. You can't not absorb that. I think that's the flip side of nepotism, right? Which makes it such a challenging topic. On the one hand, obviously limiting the universe of talent. On the other hand, how do you replicate those dinner table conversations?

• 1:18:43Ben Gilbert?

  You know, it's funny, I called it a sixth sense. I think the right way to describe it is actually a je ne sais quoi about what you sort of absorb from those.

• 1:18:50David Rosenthal?

  Totally. Okay, Jean-Louis, the fifth generation.

• 1:18:55David Rosenthal?

  The brand, you know, the consultants are saying, hey, go be like Gucci.

• 1:18:59Ben Gilbert?

  Shut down your shop where they still today make Birkin and Kelly bags by hand, one artisan at a time, in the most famous address in all of luxury and fashion, Nutsso.

• 1:19:11David Rosenthal?

  Well, I do have to correct you there. That is not specifically true. It's certainly spiritually true. I believe now the only products that are made in the Faubourg are saddles.

• 1:19:21Ben Gilbert?

  Oh, really?

• 1:19:21David Rosenthal?

  I think everything else is made in Pentan, which is a 20 minute drive away. It's not like they outsource production. Anyway, we'll get to that.

• 1:19:30Ben Gilbert?

  Great.

• 1:19:31David Rosenthal?

  Okay. Jean-Louis comes in.

• 1:19:33Ben Gilbert?

  What year is this?

• 1:19:34David Rosenthal?

  1978.

• 1:19:35Ben Gilbert?

  Great.

• 1:19:36David Rosenthal?

  He, like all the generations before and after him, he's come up, he's apprenticed in the business, he knows how to do the saddle stitch. It's in his hands, it's in his soul.

• 1:19:44Ben Gilbert?

  We've talked too many times without actually talking about the saddle stitch. It's time to actually talk about saddle stitching. So listeners, you might be wondering, why do they keep saying this? What does it mean? Saddle stitching is an amazing technique that Hermes uses for every single bag that they make. It can either, I can't tell if this is true or not, it can either only be done by hand, or until recently, only be done by hand, but it is a far more effective, high quality and durable form of stitching relative to the typical machine sewn stitching that you're thinking about right now, where the same thread goes through one needle and it goes up, down, up, down, up, down, up, down.

• 1:20:25David Rosenthal?

  It's also incredibly beautiful. It's got a slight diagonal valence to it as opposed to the normal straight line stitching.

• 1:20:33Ben Gilbert?

  Yes. So how does it work? So there's something called a horse that goes between your legs and the horse holds two pieces of leather together. The whole point of the saddle stitch is to sew two pieces of leather together. So. You first punch little holes in the leather using likely a pricking iron as your method of doing this. And if you're good, you don't prick all the way through, you just poke a little hole with your pricking iron or awl partway through. So that way, you don't poke too big of a hole. You only end up pushing exactly a hole the size of your needle and thread through. And you can always tell if you're looking at something and it's stitched and there's these big freaking holes and then there's this thin

• 1:21:18Ben Gilbert?

  thread that's moving through and there's space between the thread and the leather, you know what kind of craftsmanship went into that. If it almost looks like the stitch vanishes into the leather and you're like, is there even a hole there? It's hard to even see how this was done. That is a saddle stitch. So you take your pricking iron or your awl, you poke the hole or the partial hole. So there's a lot of muscle memory involved in this. You then pass one needle through going, call it from the right to the left side. And then you have a second needle- On the other end of the thread. So one thread, two needles. Yes. That you pass through the other direction. And so what you've done as you

• 1:21:59Ben Gilbert?

  pull both of them through is created this incredibly strong sort of interlocking mechanism. There's tensile force going in both directions. Yes. If it gets ripped, you're not at risk of the whole thing pulling out and your saddle or your bag falling apart. You just lose that one stitch and that one stitch can be repaired. And so the only way for you to unravel something that is saddle stitched together is to individually go through and cut every single stitch. Yeah. Compare that to most products that you own. Yes. This literally provides high utility if you're in an accestrian jumping competition, or if your bag needs to hold something that really needs a lot of protection

• 1:22:44Ben Gilbert?

  and can't fall through. It's almost like it started with real necessary utility because something life threatening could happen. Now it's just massively overkill for everything that is saddle stitch, but you appreciate the craft behind it. There are very few people who are in a life or death circumstance that are dependent on their stitch holding true. I'm going to channel my inner Pierre Alexey here, the current artistic director of, of Hermes.

• 1:23:10David Rosenthal?

  I think it still has relevance if you want your object to be permanent. If you want an object that you own to represent something wholly different and antithetical to, let's call it the Amazonification or the Walmartification of items these days, you want it to be made like this.

• 1:23:34Ben Gilbert?

  Yep. And something that made this really special for hundreds of years, if not still, is that it had to be done by hand. So if you want something of this quality, this gets this interesting idea. Is handmade stuff better? Well, not necessarily. And XL even says this in an interview. He says in 2019, "Today, hand stitching is the highest quality. So machines are a non-negotiable. When the quality of a machine stitching gets better than hand stitching, we will do it. We are not a museum." And David, this is where you're getting your "we are not a museum" quote from. But it really gets to this element of why are handcrafted goods desirable? Well, in this case, it literally creates something higher quality, more durable, certainly more aesthetically pleasing, since when done well,

• 1:24:18Ben Gilbert?

  you know, you can't see that hole in between the thread and the leather. It's a pretty special process. And for everyone who's sort of wondering, okay, but what does the rest of creating one of these bags look like? Start to finish, a Kelly bag, and we'll talk about Birkin in a little bit, but similar story, is made by one craftsman. So one craftsman starts with 36 unique pieces of high-quality leather.

• 1:24:44David Rosenthal?

  As much as possible from the same animal and matched exactly.

• 1:24:48Ben Gilbert?

  Yes, exactly. And so it's not sourced from all these different places all over the world and one person's responsible for the bottoms and someone else is responsible for the straps. It is one craftsman that takes these 36 cuts and stitches it together. It takes 20 hours, and this is over the course of a few weeks to create this. So one person assembling it all, putting the fasteners on it, stitching it. This takes two years to learn how to do before you are allowed to create one for the first time.

• 1:25:22David Rosenthal?

  Oh, I think it's even more than that. It's two years of training to become a Hermes artisan, period. I don't think you're allowed to touch the Birkins and the Kellys when you start day one on the job. I believe you need at least another three years, if not more, before you're allowed to touch the Birkins and the Kellys.

• 1:25:40Ben Gilbert?

  Fascinating. So this knowledge is passed from generation to generation. And Hermes refers to this as the savoir faire, or the know-how, or the expertise about the materials and the exceptional technique that's transmitted from one crafts person to another.

• 1:25:57David Rosenthal?

  Ooh, hang on to this. I have a lot more to say when we get to the current generation about this.

• 1:26:02Ben Gilbert?

  Do you know, David, and I'll stop after this, but I thought this was pretty funny. Have you read the annual report, the 600-page document that they release once a year?

• 1:26:11David Rosenthal?

  I have to admit, I have not read it cover to cover.

• 1:26:14Ben Gilbert?

  You did more of the history and I did more of this.

• 1:26:17David Rosenthal?

  But I've read large sections of it.

• 1:26:19Ben Gilbert?

  I was reading it. I found myself laughing at how often savoir faire was used in the prose. Every other paragraph, they just sort of throw in a savoir faire. 133 times savoir faire is referenced in the Hermes registration document.

• 1:26:34David Rosenthal?

  Partially in their defense, savoir faire literally translates as know-how. It's kind of like a proper term in French.

• 1:26:42Ben Gilbert?

  Yeah, fair. But I think the takeaway is real, that this knowledge is transmitted from one generation to the other, in the very same way that it was from father to son, all the way back at the founding of the company. And that is how they scale production. I will put a pin in that and come back to it later.

• 1:26:59David Rosenthal?

  Yep. That's the true genius of the current generation, is they have scaled that to 7,000 people.

• 1:27:05Ben Gilbert?

  It's unbelievable.

• 1:27:06David Rosenthal?

  Unbelievable. I was going to talk about this towards the end of the Jean-Louis era, but I want to say it now because I think it's perfect. I got to talk to a woman named Beatrice Amblard, who lives here in San Francisco. This is amazing. She was an artisan at Hermes in Paris. She was hired right at the start of Jean-Louis's tenure. She worked in the atelier at the Fauxbourg when Jean-Louis's son, Pierre-Luxie Kern, artistic director, came to train after school as a teenager. He sat next to Beatrice. And I got to chat with her about this.

• 1:27:40Ben Gilbert?

  She runs April in Paris in San Francisco?

• 1:27:42David Rosenthal?

  So she moved to San Francisco when Hermes opened the San Francisco store here. And I asked her, I was like, oh, you transitioned to the front of the house. And she was like, no, no, no. I was the person for the West Coast who repaired everything for North American West Coast clients. There was one person in New York and I was in San Francisco and we came from the Phoeborg. And you know, a few of these people go around the world. And one of the things about Hermes, and actually Jean Louis would say that this like the true essence of luxury and the true essence of Hermes is everything they make can be repaired. And so if you buy an item from Hermes, no matter what it is, they will repair it.

• 1:28:17Ben Gilbert?

  Yeah, I think that's true.

• 1:28:18David Rosenthal?

  Even if it's 100 years old, you bring it in, they will repair it.

• 1:28:21Ben Gilbert?

  Yeah, that's true. They have 15, this is flashing forward today, 15 dedicated repair shops worldwide, and they mend 120,000 pieces a year.

• 1:28:31David Rosenthal?

  Wow, amazing.

• 1:28:33Ben Gilbert?

  Yeah.

• 1:28:33David Rosenthal?

  So I asked Beatrice, when I was talking to her, what was this like? You know, what was special? And she said, look, you have to understand, when I was training as a young person and decided I wanted to go into this field, Hermes was absolutely the greatest company that anyone could hope to work for. It wasn't even close. There was no comparison.

• 1:28:54Ben Gilbert?

  What years?

• 1:28:55David Rosenthal?

  This was in the late 80s, early 90s. She said, look, I decided that either I was going to get a job at Hermes or I was going to leave this industry and go do something else. It is in that high of esteem. And I said, oh, well, why? And she said, look, by the time we're at this era, nobody else was left.

• 1:29:13Ben Gilbert?

  Yeah, right.

• 1:29:15David Rosenthal?

  Everything we talked about in the 1970s, all these other brands, they all went in this complete other direction. The consultants were telling Hermes to go in that direction too. But they're the last one standing that did all of this by hand in the tradition handed down through hundreds of years. If that's important to you, there's no place else. You can't ply your trade doing that anywhere else. I asked her then, I was like, okay, well. As for the products and to the clients, to the customers, why does that make a difference? And what she said is what you'll hear the family talk about all the time. She said, look, it's about soul. This product has a soul. Somebody made that thing with their bare hands.

• 1:29:59David Rosenthal?

  That means something. And there's nobody else, certainly at Hermes's scale, that does that. You know, she ended up leaving Hermes and starting her own boutique here in San Francisco, April in Paris. And she actually also runs her own leather school here in San Francisco, too, to train artisans. You can get custom stuff, small boutique stuff. You know, Beatrice is a worldwide master. You can get that from her. But the idea that a $200 billion company at scale would be doing this, like, there's nobody else.

• 1:30:30Ben Gilbert?

  Yeah, it's nuts. It's completely insane. And the people who don't work for Hermes, your options are in the dozens. If you go as a customer and you want something like a saddle-stitched bag or wallet or something like Hermes would make in that traditional sort of pre-war, early 20th century fashion, there aren't that many other artisans out there. Hermes employs 7,000 of them. I don't know how many other ones there are, 1,000, 2,000? And it's not like Hermes has cornered the market. They're hiring more people and training them as fast as they can. They're trying to preserve this market that otherwise would have entirely been zero. It's a pretty crazy thing that they've managed to scale, even to the scale that they're at.

• 1:31:16David Rosenthal?

  The other thing Beatrice said, you know, to bring it back to Jean-Louis, he is a legend. He really cared. The idea that he would follow the consultants, like, it was just so completely anathema to him. He's the artistic director and CEO of the company. She ran into him in the elevator in the Phoeborg right after she started. He looks at her and said, You're Beatrice Amblard. Welcome to Hermès. You know, she knew everybody by name. And then when she ended up leaving in 1997 to open her own store, he called her and he was like genuinely shocked. Nobody ever leaves. Like, what are you gonna do? And she explained that, well, she wanted to be entrepreneurial, start her own thing.

• 1:32:00David Rosenthal?

  And then shortly after, the San Francisco Chronicle did an article about her. He found the article, read it in France, cut it out and mailed it to her. And with a note of congratulations handwritten.

• 1:32:11Ben Gilbert?

  And it doesn't cost him anything to do that because, I mean, on the one hand, you just say they're being a kind person and gave so much to your house for so long.

• 1:32:19David Rosenthal?

  On the other hand, this is the CEO of Hermès.

• 1:32:21Ben Gilbert?

  Right. And I think it's important to realize these individual craftsmen are entirely non-competitive with Hermès. It's a completely different value proposition to the customer. When you're buying Hermès today, you don't start from a place of, you know, I think I want some of the very best sewn leather goods I can find. Let me evaluate the whole landscape of people who could deliver that for me. And then I'll decide which maker to go with. Either A, you're doing that and you are a person who knows about a bunch of individual leather craftsmen, which is rare. Or B, you actually just want to buy something from Hermès

• 1:33:04Ben Gilbert?

  and there's not any evaluation going on. And maybe there is between big luxury brands, but probably not. The value proposition is not you have a need for a leather good and you can bake off all the competitors. It's you either want something from Hermès or you're a different type of customer.

• 1:33:20David Rosenthal?

  Yep. Okay. So Jean-Louis's story. How did he turn this thing around and save Hermès from the consultants? Well, like we said, he'd apprenticed, just like every other generation. But unlike any other generation, or I guess maybe sort of like Emil back in the day going and meeting Henry Ford. He comes to America and specifically he came to America to follow his wife Rena, who became a world famous architect. Rena was interning with I M Pay in New York.

• 1:33:51Ben Gilbert?

  Really?

• 1:33:52David Rosenthal?

  And Rena Dumas would go on to design all the stores that they opened up all around the world.

• 1:33:58Ben Gilbert?

  Oh.

• 1:33:59David Rosenthal?

  And design the atelier in Penten when they expand production.

• 1:34:03Ben Gilbert?

  I M Pay, famous from a number of things, including previous acquired episode with Michael Ovitz, designed the C A A building in Los Angeles, designed the Louvre Pyramid.

• 1:34:14David Rosenthal?

  I was gonna say, think about like the connections here in France and Paris.

• 1:34:18Ben Gilbert?

  Yeah. Which, by the way, everyone in Paris thought the pyramid was hideously ugly when it first, relative to this 1700s building around it. And over time, now it's become this like iconic triangle pyramid, beautiful signature of the city.

• 1:34:31David Rosenthal?

  Yeah. Jean Louis, when he's in America, he works for Bloomingdale's. Bloomingdale's? My God, of all places.

• 1:34:40Ben Gilbert?

  Well, there was a heyday of department stores. In fact, if you go way back, do you know how Hermès entered the United States?

• 1:34:47David Rosenthal?

  In partnership with Neiman Marcus.

• 1:34:49Ben Gilbert?

  Yes, 1930s. Good. Wow. So you did find that.

• 1:34:54David Rosenthal?

  It's hard to stump me.

• 1:34:54Ben Gilbert?

  Yeah.

• 1:34:56David Rosenthal?

  But you do it sometimes.

• 1:34:57Ben Gilbert?

  Okay, so Bloomingdale's.

• 1:34:59David Rosenthal?

  So from that experience, being in America, being in this much more mainstream, you know, audience, he comes to understand what these other brands are doing, you know, what the consultants are suggesting. But he takes that back and what he says like, look, the way forward is we are going to figure out how to make Hermès relevant. We're not going to throw away everything we've done. We're going to keep our tradition. We're going to keep our craftsmanship. We're going to keep our market position. But our clients want to be like these young people, particularly these young women. You know, the moms don't want to be like their moms. They want to be like their daughters.

• 1:35:40Ben Gilbert?

  And it's a tall order to figure out how to revitalize, rejuvenate, make Hermes relevant for this new era with this new audience.

• 1:35:49David Rosenthal?

  With the same products. This is key.

• 1:35:51Ben Gilbert?

  Right. Keeping the same products and not violating everything that Hermes currently stands for. We talked about this on LVMH, the Not Your Mother's Tiffany campaign. It's almost like, how do you not insult your current customer base by adapting for the next one?

• 1:36:08David Rosenthal?

  This is such a tight needle to thread, to use a pun here. They need to run the Not Your Mother's Tiffany campaign without actually running the Not Your Mother's Tiffany campaign.

• 1:36:19Ben Gilbert?

  Right.

• 1:36:19David Rosenthal?

  So, well, the first thing, in 1979, the first year he takes over, he launches a new ad campaign in Paris with young Parisian women wearing the iconic Hermes scarves, which remember, like, that's the main part of the business at this point in time. But it's, you know, all these old people who want to be like Queen Elizabeth wearing the scarves. Young women wearing the scarves, not how you would typically wear a scarf. Different parts all over their body. It's the Hermes version of Not Your Mother's Tiffany. And most importantly, they're wearing these scarves with jeans. Grace Kelly would never wear jeans. I don't know if she ever did wear jeans, but she sure as hell wouldn't be photographed wearing jeans.

• 1:37:03Ben Gilbert?

  Fascinating.

• 1:37:05David Rosenthal?

  These ads are the scarves that Queen Elizabeth is wearing with jeans and in fun, interesting ways, playful ways to wear the scarves. But they're still the same scarves.

• 1:37:19Ben Gilbert?

  Fascinating.

• 1:37:20David Rosenthal?

  And this is like a revolution. I mean, the rest of the family is really upset about it, but he pushes it through. You know, and you can still see echoes of this to this day. Like, a big part of Hermes fashion and probably the biggest part of, I think, the scarf fashion these days is tying the scarves on your bags, on your accessories, on various parts of your body, you know, not wearing them. Like your mother wore them.

• 1:37:45Ben Gilbert?

  And this is how they've adapted for the digital era, too. They've come out with like five or six different apps to try to figure out like, how do we engage people in the mobile era? And one of the ideas that they had was this app that basically gives you suggestions and all the different ways you could tie a scarf.

• 1:38:02David Rosenthal?

  Ah, that's super cool.

• 1:38:03Ben Gilbert?

  Yeah.

• 1:38:04David Rosenthal?

  But I think this is brilliant because this is allowing Hermes to exist and be relevant alongside fashion without actually getting into fashion themselves. The scarves and then ultimately the bags can be the accessories to your jeans, to your fashion, to your, you know, we're past the era of bell bottoms, but like the spiritual equivalent of bell bottoms here. And they can say something about you, but they're still the same products that they always were.

• 1:38:38Ben Gilbert?

  And it's pretty interesting if you can figure out how to coexist alongside cool, fashionable, new, cutting edge things. Then you sort of deserve a place in someone's lineup where they say, well, I both am embracing a current trend, but I'm also respectful of the past. I also found my own way to weave this high class, high status thing into the rest of my image. And I think that especially at their price points, they're serving someone who wants to raise one hand and say, I look cool, and raise the other hand and say,

• 1:39:15David Rosenthal?

  I'm classic.

• 1:39:16Ben Gilbert?

  Well, I'm classic and I have the money to spend on things that are very price anchored. Everyone knows what a Kelly bag costs. And like, it's gone up a little bit, but Hermes has very high price point products that stay approximately that price forever.

• 1:39:30David Rosenthal?

  Yep. So Jean Louis has a quote about this, which is very French. He says, "The young customers came to us more than we went to them. People saw again, but with a new eye. The beauty of materials worked by fine hands. They came, we followed." That's the most French way of ever saying this, but like this is what we're talking about. He got their client base and often the young people's parents, who wanted to be more like the young people here, to see with new eyes the same things.

• 1:40:02Ben Gilbert?

  Yep.

• 1:40:02David Rosenthal?

  Total genius.

• 1:40:04Ben Gilbert?

  Yep, for sure. Okay, so that's brilliant.

• 1:40:07David Rosenthal?

  So that's on the product side and kind of doing this jujitsu to reposition the products in Hermès. The other thing that he did, which was huge, was he had the very same realization that Henri Rackamay had at Louis Vuitton, and we foreshadowed this earlier. What Rackamay figured out at Louis Vuitton in the 1970s was the market now, the global wealthy, the global elite, the global rich, is so much bigger now than it was in the 1950s. The number of people with wealth on the order of Grace Kelly and Prince Rene of Monaco, or even a few rungs below them, but the number of people who can be in our client base around

• 1:40:52David Rosenthal?

  the world is just so, so, so much larger than it used to be.

• 1:40:56Ben Gilbert?

  And it's happening in this country by country way, which is perfect for a brand like this. Like, they can go to America, and then they will observe the rise of Japan, and then they'll go to Japan in the 90s and 2000s. Then they'll observe the rising upper middle class of China. So they'll go there. And present day, they can really position themselves as sort of the second mover, where they can sort of watch, see when this wealth class exists somewhere, and then set up shop and say, hey, France's whole heritage is now available to you to adopt as part of your persona.

• 1:41:29David Rosenthal?

  Yeah, and this is super key. And I think, to this day, is a huge part of the defensibility of Hermès, and Louis Vuitton too. No matter where you live in the world, and no matter what your cultural background is, when you attain this status, there's still something about this connection to French and European nobility that you cannot buy from a brand from any other country.

• 1:41:54Ben Gilbert?

  It's super fascinating that French nobility, fashion, and heritage is universally revered everywhere. And Italian is too. Like, I would say European generally, but French specifically has an ability to do this in any geography as it develops.

• 1:42:13David Rosenthal?

  Yep. So, all of this stew comes together in 1984 with Jean Louis's greatest achievement. And unlike the Kelly bag, which, again, was an accident. Like, yes, it was his father, Robert, and incredible genius, and then repositioning and renaming the bag, the Kelly bag. Jean Louis, this is literally whole cloth conceived of by him on a flight from Paris to London in the early 1980s, where he's seated next to the French and British actress, Jane Birkin.

• 1:42:48Ben Gilbert?

  The it girl of the time.

• 1:42:50David Rosenthal?

  Now, here's what's really interesting. I bet 95% plus of people listening to this right now have no idea who Jane Birkin was.

• 1:42:59Ben Gilbert?

  Which is so funny, because in interviews with her, as the Birkin bag was blowing up, or at least getting a lot of attention, an interviewer joked that she was going to be more famous for the bag than for her acting career and her modeling and all that. And she sort of laughed and said, wouldn't that be something?

• 1:43:16David Rosenthal?

  Yeah, right.

• 1:43:17Ben Gilbert?

  But totally 95%, if not more, of the listeners to this podcast will have no idea who Jane Birkin is before this episode.

• 1:43:24David Rosenthal?

  But you definitely know the Birkin bag.

• 1:43:26Ben Gilbert?

  Yep. Or at least you know of the Birkin bag. I'd bet seven out of 10, maybe eight out of 10 people listening to this couldn't spot it. But if you say a Birkin bag, you sort of know that it's like a unattainably expensive, high status, hard to get handbag.

• 1:43:42David Rosenthal?

  Well, certainly if you follow the Hermes stock, you know what a Birkin bag is, even if you probably couldn't pick it out of a crowd.

• 1:43:48Ben Gilbert?

  Yes.

• 1:43:49David Rosenthal?

  But anyway, this is the culmination of everything we've been talking about. Who is Jane Birkin? She was British. She was born in England, but she moved to France and became a French citizen. And she became like a French cultural icon. I mean, again, the tide of France is so important here, too. And we didn't talk about this with Grace Kelly either. Grace Kelly was an American from Philadelphia, but she became the princess of Monaco. These two women, these two personas that are embodied in Hermes, like Hermes doesn't do celebrity advertising. I think it's so important that even though neither of them were French, they became so deeply European in what they represented.

• 1:44:28Ben Gilbert?

  Yeah, that's a great way to put it.

• 1:44:30David Rosenthal?

  And for Jane Birkin, she was this next generation. She was an actress, both in film and theater. She was a singer. She was incredibly beautiful. She was the it girl, but in a very, very different way than Grace Kelly. She wore jeans. And in particular, she had a trademark accessory fitting with the, you know, 1970s.

• 1:44:54Ben Gilbert?

  Oh, the basket?

• 1:44:55David Rosenthal?

  Yep. Counter culture, you know, back to the land type ethos. She carried a wicker basket with her everywhere that she went.

• 1:45:04Ben Gilbert?

  Which has an ethos to it, but doesn't lend itself well to overhead bins.

• 1:45:08David Rosenthal?

  No, it does not. So as the two of them, Jean-Louis, CEO and artistic director of Hermès, and Jane Birkin, French cultural icon, are boarding this flight to London. They're seated next to each other and Jane is struggling to get her fixed handle wicker basket up into the overhead compartment. And at this point, Jane had become a mother and had kids and she had, you know, kid stuff in her basket.

• 1:45:36Ben Gilbert?

  She had baby bottles that were like spilling out.

• 1:45:38David Rosenthal?

  Totally. I mean, I carry a lot of kid stuff these days. Like you need a lot of stuff with the kids.

• 1:45:43Ben Gilbert?

  By the way, how crazy is it that the Kelly bag was to hide a pregnancy and the Birkin bag was designed to carry baby bottles and?

• 1:45:50David Rosenthal?

  Baby forward. Yes. And again, on the one hand, this is sort of esoteric Birkin lore. On the other hand, I think this is super important to Jean-Louis. Like imagine the older generation Hermès embracing this.

• 1:46:03Ben Gilbert?

  You know what we should do? We should come out with a $15,000 diaper bag.

• 1:46:06David Rosenthal?

  Right, right, right.

• 1:46:09David Rosenthal?

  So they sit down, they start talking on the flight and Jean-Louis introduces himself and it's like, I noticed you're struggling with your wicker basket there, Miss Birkin.

• 1:46:17Ben Gilbert?

  And she doesn't know who he is at first. It's the funniest thing.

• 1:46:19David Rosenthal?

  Right, right, right.

• 1:46:20Ben Gilbert?

  And she says something like, well, yeah, wouldn't that be great if there was a bigger bag that actually closed and, you know, but Hermès doesn't make that. Or she made some comment and he goes, I am Hermès.

• 1:46:31David Rosenthal?

  Yeah. The legend, now who knows if this is true, is that she said, well, when Hermès makes a diaper bag, you know, I'll, I'll use that one.

• 1:46:38Ben Gilbert?

  And specifically for her, she sort of fancies herself someone that has a lot of stuff and wants to bring all my stuff with me. So I just need a big bag and it needs to close easily. Fashion be damned, I just need a huge freaking tote.

• 1:46:51David Rosenthal?

  Yep. And as they get to talking, they're talking about the Kelly and she's like, look, you know, Kelly's the Kelly, right? But I can't wear it over my shoulder. So Jean-Louis starts sketching out designs on the plane and. Voila, the Birkin is born. Larger than the Kelly, but smaller than the old, original Hermès bag. It's a tote bag and it has two handles, unlike the Kelly, which has one handle. And so with two handles, you can put it over your shoulder. You know, it's the sort of, it feels weird to say more casual version of the Kelly, given that it's, you know, the Birkin bag, but it is, it's the more casual, modern version of the Kelly.

• 1:47:26Ben Gilbert?

  And the Kelly has cleaner lines and this sort of beautiful, almost mid-century trapezoidal shape. Whereas the Birkin, everything about it kind of screams function.

• 1:47:36David Rosenthal?

  So here's what's interesting. They release the product in 1984, and it is not an immediate success. I think part of this is that the Hermès kind of brand transformation, modernization was probably still underway. When you watch interviews with particular Pierre Alexey, he'll talk about this, he's like, any other company would have given up on this product. But it takes about five years before the Birkin bag becomes the Birkin bag. And like, the time is right. We're in the 1980s, the go-go years. You know, this is the, the years that are shaping Bernard Arnault here.

• 1:48:13Ben Gilbert?

  There's tons of American wealth being created. People are looking to be a little bit flashier. Now granted, Hermès is the least flashy of the luxury labels you could adopt, but people know the brand.

• 1:48:25David Rosenthal?

  Yeah, I mean, it takes five years for it to become any monicum of success for Hermès. And then, like a lot of these things, this just kind of slow burn starts that grows and grows and grows and grows.

• 1:48:39Ben Gilbert?

  And there's a real lore around it that it's hard to get. And it's just like with a kid. If you tell them they can't have something, they want it a lot more. And if you tell your very fancy clientele that you would love to be able to get something for them, but there's just not enough. And we don't have it today, but gosh, if you are a great customer of ours and we maintain a relationship with you, let me write down your number. I feel like we may just have something for you soon. Could be a few years, but I'll reach out as soon as we have something. You're an important customer of ours. And if you want to show us you're an even more important customer, please do, by all means, and I'll see what I can do.

• 1:49:20David Rosenthal?

  Ben, you would make a great Hermes SA.

• 1:49:23Ben Gilbert?

  I don't think so. I actually had a wonderful Hermes associate that I worked with in the Exxon Provence store. And it was crazy. I mean, we bought basically the most entry level Hermes products that you can buy in one of their stores. I think perfumes are sold in department stores and makeup. There's some more accessible things, but in terms of the durable goods, started at the bottom, you know, had a delightful time and decided to buy something. And I think we spent an hour and a half and I had the most wonderful service and built a almost friendship with the associate who helped us through the whole process, spending as much time with me as they spent with someone coming in to pick up their Birkin bag. It was a crazy, probably

• 1:50:07Ben Gilbert?

  that best customer service I've ever received in any retail establishment anywhere. So, no, I don't think I would be a good Hermes sales associate relative to where the bar has been set.

• 1:50:19David Rosenthal?

  It's funny, you know, my experience was different. Of course, I had to go do some research for this episode.

• 1:50:25Ben Gilbert?

  You drove down to the Palo Alto store, right?

• 1:50:27David Rosenthal?

  Yes, I went to the Palo Alto store. I had to be down there anyway for some meetings. And the sales associate who ultimately helped me is equally wonderful woman, had a great experience. Her name is Susan. I'm going back to see her tomorrow as Valentine's Day and Jenny's birthday is coming up. But I walked in the store with the intention of buying what I ultimately did buy, which is-

• 1:50:49Ben Gilbert?

  Apple Watch band. I thought that's what that was.

• 1:50:51David Rosenthal?

  An Apple Watch band. Yep. And well, we'll get to the Apple partnership in a little bit, but I was passed around between a few different people in the store until ultimately Susan helped me out and she was great. And I think she actually might be a higher level SA. But when I expressed that I was there to buy an Apple Watch band-

• 1:51:12Ben Gilbert?

  Oh, interesting.

• 1:51:13David Rosenthal?

  Yeah. I don't know if that was just the day in the store or if that was part of the policy.

• 1:51:18Ben Gilbert?

  I have to imagine it's a little bit different experience in the French countryside as compared to-

• 1:51:22David Rosenthal?

  The Stanford Shopping Center.

• 1:51:23Ben Gilbert?

  Yeah, I could see that. But back to the Birkin bag, by 2001, it becomes so widely known that there is a waiting list, a sort of almost secret, shrouded in mystery waiting list to get one of these things, that it is the main storyline of a Sex and the City episode. And Samantha figures out that there's a way to jump the, I think they use the number five, five-year waitlist.

• 1:51:52David Rosenthal?

  Well, the scene where she walks in to try and buy it is just iconic, where the sales associate is responding to her like, it's $12,000 or whatever. Like, oh, I know, there's a waiting list, of course.

• 1:52:03Ben Gilbert?

  And she name drops one of her clients, her celebrity clients, in order to say it's actually for them to try to move up the waitlist. You know, calamity ensues, they actually figure out that it's for her, not the client. I actually haven't watched the episode, but this is a cultural touchstone for the Birkin going from something that is sort of whispered about in handbag circles and well-known by the wealthy elite to something that is now a very well-known phenomenon, which is good luck ever getting a Birkin bag. And, you know, the crazy stories about the most expensive one ever selling for $500,000 on the secondary market and Victoria Beckham having a collection of over 100. And, you know, it's crazy.

• 1:52:46Ben Gilbert?

  You know, it has become the Patek Philippe Nautilus of handbags. And people look at it almost as an investment.

• 1:52:54David Rosenthal?

  A way of summing up what you're saying is the hard thing about buying a Birkin is not coming up with the money.

• 1:53:00Ben Gilbert?

  And which is crazy, right? It's starting at $12,000 handbag. And what you're saying is that's actually not the constraint.

• 1:53:06David Rosenthal?

  Yep. But also what you're talking about, you know, with echoes of our Nike episode here, the minute that you are in possession of a Birkin bag, you could immediately sell it for a lot more than what you paid for it.

• 1:53:18Ben Gilbert?

  And your Hermes essay will not be very happy that you did that. Because the point of buying one is to own one and use one and appreciate the craft and the work and the beauty that went into this product. And Hermes is not trying to sell it to people that are going to flip it. They're trying to sell it to valued customers who will be people who appreciate the Hermes dream for the rest of their life.

• 1:53:42David Rosenthal?

  Yeah, that would be the last Birkin bag that you ever buy. Every bag, I think maybe even every item

• 1:53:49Ben Gilbert?

  Yes.

• 1:53:49David Rosenthal?

  that Hermes makes has what Hermes calls a blind stamp on it. And this is a series of symbols and numbers.

• 1:53:57Ben Gilbert?

  There's one on my belt right now.

• 1:53:59David Rosenthal?

  Yep, there's some on my watch band right now that are stamped into the leather that uniquely identify that item, the year it was made, and the crafts person who made it.

• 1:54:11Ben Gilbert?

  And there are some very cool stories of people who are transitioning from a crafts person who makes goods to repairs them later in their career and who receive an item back for repair where they were the original creator of that handbag. And that is the coolest, craziest, full circle Hermes moment for any Hermes crafts person to see. This thing that I made that I really wanted to be durable and stand up in the world, how did it actually perform? And to get it back 10, 20 years later and see it has got to be crazy cool.

• 1:54:44David Rosenthal?

  Yes.

• 1:54:45Ben Gilbert?

  So today, everything we're talking about here, the Birkin bag, the Kelly bag, these $10,000 to $100,000 retail handbags, depending on the type of exotic leather and everything, and the scarcity are referred to as a category of Veblen goods. And so this is essentially the opposite of everything you learned in Econ 101.

• 1:55:07David Rosenthal?

  As is everything about this company.

• 1:55:09Ben Gilbert?

  Yes. So normally, price is where supply meets demand. So as the price of a good increases, demand for it would go down. A Veblen good is the opposite. As price increases, people actually want it more. So price ends up being a signal that the item is desirable and thus it stimulates demand. Now, interestingly, David, this is exactly what you were talking about before. Birkin bags sell below the market clearing price.

• 1:55:38David Rosenthal?

  Yes.

• 1:55:39Ben Gilbert?

  That is another defiance of microeconomics. Normally, things should be priced exactly at the intersection of supply and demand.

• 1:55:47David Rosenthal?

  I was just laughing as you were talking about Veblen goods there and I whipped out my copy of The Luxury Strategy and flipped to anti-love marketing number 13, "Raise your prices as time goes on in order to increase demand."

• 1:56:01Ben Gilbert?

  So interesting. But one way to look at this is, oh, it's lost revenue. Their prices aren't high enough because they can only make so many of them, and they're selling them below the price people are willing to pay. So there's money left on the table. But another way to look at it is that it's an investment in the brand. So there's a very good Substack writer, 310 Value, that we'll link to in the show notes, who observed, "The supply-demand mismatch creates scarcity in these two bags, and that scarcity likely creates more demand for the bags, elevates the overall status of Hermès, and creates demand for Hermès's other products as customers buy Hermès's other goods to build a relationship with the company

• 1:56:43Ben Gilbert?

  in hopes of being allocated a bag at the below-market retail price."

• 1:56:49David Rosenthal?

  Yes. This is the same dynamic with, I think, a very different set of motivations, as we talked about on the Nike episode. I very firmly believe that Nike could sell many of their shoes for two, three, four, or five times the price that they do. And they'll show up on GOAT or StockX all the time regularly at higher prices than Nike releases them for. I believe that the reason that they do this is to maintain goodwill with their customer base and maintain Nike's image as a brand that is accessible to everyone. Hermès is doing the opposite.

• 1:57:33David Rosenthal?

  They want this to happen in order to maintain the image of Hermès, and specifically the Birkins and the Kelly's, as a brand and a product that is not accessible to everyone.

• 1:57:47Ben Gilbert?

  Yes. And it's not as simple as, well, they just keep raising the prices to make people keep wanting them more. You read that in The Luxury Strategy, and many luxury brands do that. In fact, Chanel has done it in record amounts the last couple of years with the, I think it's called the Chanel Classic Flap Medium or something like that. But that's had this crazy appreciation over the last few years, where Chanel is just raising the price. Hermes doesn't do that.

• 1:58:14David Rosenthal?

  We'll talk about this more later in the episode, but by my very back of the envelope calculations, they are raising their prices on average across the entire line, 7% per year for the last 10 years.

• 1:58:28Ben Gilbert?

  So it's like 5% above, 4% or 5% above inflation.

• 1:58:32David Rosenthal?

  Yeah, which is more, but not an egregious amount.

• 1:58:35Ben Gilbert?

  Right. There was a study that found that the Birkin 30, which is one of the sizes in Togo leather, didn't even equal the rate of inflation in the US. I'm trying to figure out what the motivation here is because it's a tremendous restraint. There's no cash grab happening. And maybe it's because what bad things would happen to Hermes if they decided, you know what, Birkins are 20 now, not 12.

• 1:59:01David Rosenthal?

  Right. They're already viewed as the most expensive handbags in the world. So what harm done to go from 12 to 20?

• 1:59:11Ben Gilbert?

  Right. And they sell a lot of them. So like, that actually would be a lot of profit dollars.

• 1:59:16David Rosenthal?

  Right. And for somebody who's going to spend $12,000 on a handbag, are that many more of those people going to be price sensitive at that swing from 12 to 20? Like, probably not.

• 1:59:29Ben Gilbert?

  Right. The Wall Street Journal estimated in 2020 that there's about 120,000 of the combined Birkin and Kelly created each year. So 120,000 bags a year, I mean, if you decide that you want to make another 8,000 of pure profit on each bag, that is tempting. And I think it actually says a lot about Hermes's obsession with conservatism, that they don't meaningfully increase the price. Like, the Kelly is not far above its original 1950s price, inflation adjusted. I think the Birkin bag, the retail price was around $2,000 when it launched in 1984. So call it maybe $6,000 inflation adjusted. So, you

• 2:00:12Ben Gilbert?

  know, you're looking at maybe twice the price that it launched at on an inflation adjusted basis. So I guess the point I'm making here is, I think we should keep in the back of our mind the rest of the episode, this question of, why doesn't Hermes raise the prices? They're already getting The benefit either way of the sort of trickle down of people participating in the Hermès ecosystem to hopefully get the call one day. So why not make it even more expensive when you do get the call?

• 2:00:39David Rosenthal?

  Interesting. All right, let's come back to that later in the episode.

• 2:00:42Ben Gilbert?

  Yeah. Okay, so 1984 Birkin release doesn't sell well for the first five years. Then it becomes this cultural touchstone and gains steam every year after that.

• 2:00:50David Rosenthal?

  And I was just thinking about that as we were chatting here. This makes sense to me that it wouldn't be a hit right away because it takes time to build the lore.

• 2:01:00Ben Gilbert?

  Yes.

• 2:01:00David Rosenthal?

  And aura around this bag. You can't just drop a new product and have it become like this immediately in this category.

• 2:01:10Ben Gilbert?

  Correct.

• 2:01:11David Rosenthal?

  You're never going to have like an iPhone of luxury handbags.

• 2:01:14Ben Gilbert?

  Correct. It has to be like a Taylor Swift concert in order to instantly. I actually think it's a reasonable comp though. Like her concert was a extremely scarce, brand new product priced at an extreme premium that did sell right away because the product had so much of the brand in it. Like you knew exactly what you were going to get from going to the Taylor concert because you're extremely familiar with the brand. But it's not necessarily well understood that the Birkin equals Hermès in the way that the Eras Tour equals Taylor Swift.

• 2:01:49David Rosenthal?

  Totally. It's also that the product was the Eras Tour. The product was not Midnight's. If it were like, oh, I'm going to go to Taylor's concert and listen to her play all the songs on the new album. Of course, a lot of people would still go. But it was like, no, I'm going to go to Taylor's concert and hear all of Taylor.

• 2:02:08Ben Gilbert?

  All the amazing Hermès scarves from over the years released out of the vault.

• 2:02:13David Rosenthal?

  Yes. The Disney plus of Taylor. All right, all right. Different episode here.

• 2:02:21David Rosenthal?

  Okay, back to Jean Louis. So this is how he does it. He does two incredible things to save the company. One, he repositions the brand. I mean, this is just like, I can't believe he pulled this off. He pulls off Not Your Mother's Tiffany without saying Not Your Mother's Tiffany. And the culmination of that is the Birkin bag and everything that that represents. And then two, the internationalization and discovering and running the same playbook that Racham Yeh ran at Louis Vuitton. By the end of Jean Louis' tenure in 2006, so a couple of years after the famous Sex in the City episode, Hermès has gone from well less than a hundred million dollars when he took over, the consultants were saying, you know, outsource,

• 2:03:04David Rosenthal?

  shut it down essentially. By the end of the decade of the 80s, he was just under half a billion dollars in revenue. And then in 2006, he's taken it to $2 billion in annual revenue. From, you know, nice family business to like, this is a real, real thing. So one more time on those numbers? So I don't know the exact revenue figure when he took over, but let's call it $50 million in annual revenue. We know it was well less than 100 to 2 billion when he retires in 2006. So 40x in 30 years? Yeah, 40x in under 30 years. Wow. Pretty good. Pretty transformative for the

• 2:03:46David Rosenthal?

  family business. Well, along the way, as the company clearly becomes more and more valuable, you know, remember, he is the family member who's running it. But we're now in the fifth generation of the family. We're starting to bleed into the sixth generation of the family. There are now over 80 family members out there, eight zero, many of whom are involved in the business, but many of whom aren't. And now this business that they all own is doing $2 billion a year in revenue at very, very high margins. There starts to be some demand for liquidity here.

• 2:04:27Ben Gilbert?

  Right. Every single one of those family members, most valuable asset in their entire net worth is their privately held Hermes stock that nobody can really put a price tag on. But it's just sort of sitting there in everyone's mind of like, it sure would be easier to live my life if I knew that this 90% of my net worth actually were something that I could access. And an even split, that's $25 million a person. I'm pretty sure it's the most valuable thing that any of them owns.

• 2:04:58David Rosenthal?

  Right. So in 1993, Jean-Louis lists Hermes on the Paris Stock Exchange. Collectively, when the dust settles, the family has sold 19% of Hermes to the public. They still own 81%. Now, the public float grows a little bit over the years as more family members sell, more generational transfer happens. But you know, more or less still, you know, 70% plus family owned and controlled. It would really take some sort of absolute financial genius to like, come in and even consider, you know, we own over 70% of this business.

• 2:05:37David Rosenthal?

  We're unassailable. Who on earth could possibly make a run at our company?

• 2:05:44Ben Gilbert?

  It would take a real wolf, I'll tell you.

• 2:05:48David Rosenthal?

  Which brings us to, you know, this has been so fun. I've had so much fun with this episode. All this history, I just revel in the French connection and everything. This is Hermes's finest moment that we're about to talk about here, through it all.

• 2:06:00Ben Gilbert?

  And it's interesting, it's not their product.

• 2:06:02David Rosenthal?

  No, has nothing to do with the product.

• 2:06:04Ben Gilbert?

  Yeah.

• 2:06:05David Rosenthal?

  Yes. The fight with Bernard Arnault.

• 2:06:09Ben Gilbert?

  Yes. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 2:06:23David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:06:40Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 2:06:55David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:07:19Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:07:38David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:08:08Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you.

• 2:08:33Ben Gilbert?

  David Rosenthal, let us return to Bernard Arnault. It's been 12 months.

• 2:08:39David Rosenthal?

  It's been too long.

• 2:08:40Ben Gilbert?

  I've been wanting to hear the other side of this story.

• 2:08:42David Rosenthal?

  I know, I know. Okay, so for anybody who's listened to our LVMH episode, as we talked about earlier, the climax of the story is Bernard's fight with Gucci in that episode. And Gucci is the one that gets away Bernard isn't able to buy it. Right after the Gucci fight ends in the early 2000s, the same story plays out with Hermes, I think really in an even more dramatic fashion. So in 2001, right after he lost Gucci, Bernard quietly buys an initial stake in Hermes of 4.9%. Now, I believe that was just under the threshold that they would have to disclose it under French securities regulations.

• 2:09:27David Rosenthal?

  And then here's what they do that the Hermes families couldn't see coming, that only Bernard could engineer. He continues buying for the next 10 years using equity swap derivatives. So it looks like other entities are buying these shares on the open markets, but LVMH have the rights to exercise options to go actually take those shares. Now, this is really hard to remember. I had to triple check these numbers. At this point in time, Hermes's market cap is below 20 billion.

• 2:10:02Ben Gilbert?

  That's like 8%, 9% of what it is today.

• 2:10:05David Rosenthal?

  And when Bernard first starts buying in the early 2000s, it's below 10 billion.

• 2:10:10Ben Gilbert?

  Whoa.

• 2:10:12David Rosenthal?

  But you could say lots of things about Bernard and genius should be top of your list. But he is one of the best investors of all time. I mean, to identify Hermes at this point in time, and as we will see, he makes an incredible amount of money on these trades. You know, today Hermes is a $230 billion market cap company, and he starts buying at below 10.

• 2:10:33Ben Gilbert?

  Which is interesting. You say he spotted Hermes. It wasn't hard to spot. The interesting thing is not that he realized it was the crown jewel of luxury. It was that he realized that the crown jewel of luxury could be worth 20 to 30 times as much as it was already worth.

• 2:10:47David Rosenthal?

  So he starts buying Hermes shares and Axel, I think, jokes about this in an interview. He's like, look, Bernard isn't buying your shares just because he wants to make an investment or he wants to have some fun. Like, obviously, he wants to own Hermes.

• 2:11:01Ben Gilbert?

  And by the way, when David and I are referencing these Excel interviews, it's one interview. He's made a random appearance here and there, but he has done one long form onstage interview, and it is fantastic.

• 2:11:13David Rosenthal?

  Yes, that's great. We'll link to it in the sources. You should go watch it. So why is Bernard doing this? Obviously, on the one hand, he sees the value here. I mean, for God's sakes, Sex and the City episode was just dedicated to the Birkin. There's a lot of value to be unlocked here, shall we say, in owning Hermes. But it's not just that. I hope on our LVMH episode, this is some of the nuance that we painted about Bernard. He's not just a corporate raider. He actually is an operator, and he is one of, if not the best, luxury operator out there. So he sees two things

• 2:11:55David Rosenthal?

  in Hermes that maybe aren't as obvious to the rest of the world and that he thinks actually are going to create an opportunity for him. One, generational transfer is about to happen. Jean-Louis can't live forever, and it's not immediately clear who the next successor is going to be. So Jean-Louis's son, Pierre Alexi, takes over as artistic director. Pierre Alexi went to America for college. He went to Brown University. Interesting interview, I found this. He initially wanted to study computer science at Brown, but he switched to art history. Very fitting. And he comes in and he joins Hermes right after graduation in 1992. So he's being groomed.

• 2:12:38David Rosenthal?

  Jean-Louis wants to separate out the artistic director role and the CEO role.

• 2:12:44Ben Gilbert?

  Oh, they had been coupled before.

• 2:12:45David Rosenthal?

  Well, yeah, he held both. So Robert held both. You know, Emile was both. Thierry was certainly both.

• 2:12:52Ben Gilbert?

  Right. So that really illustrates the point you were making earlier, that the creative and the business sides of the house are one side of the house.

• 2:12:58David Rosenthal?

  Yes. Until this generation, it was one person. There was no separation at all. So Pierre Alexi is clearly the artistic heir. There's not a clear CEO heir. And in fact, Jean-Louis's choice, Axel, who ultimately does become CEO, he's not in the business yet.

• 2:13:20Ben Gilbert?

  Right. He did that internship, his sort of five-year apprenticeship, but then he left, right?

• 2:13:25David Rosenthal?

  Yes. So the story is that Axel really wanted to go work in China. And so he goes into investment banking after undergrad. He goes to Sciences Po. Now, and remember, Jean-Louis was his uncle, but his mother, who actually was not a family member, was the managing director for production for Hermes. Axel has this sort of, you know, dinner table trading in addition to the apprenticeship craftsman trading. But he goes off into the investment banking world. He works first in China and then in New York for Banpay Paris-Bass.

• 2:13:59Ben Gilbert?

  Wow. So he is an expert in corporate structure.

• 2:14:04David Rosenthal?

  Yep.

• 2:14:04Ben Gilbert?

  And he's an expert on this pretty interesting luxury market in the next 20 years, China.

• 2:14:10David Rosenthal?

  Yep. And America, too.

• 2:14:12Ben Gilbert?

  Huh.

• 2:14:13David Rosenthal?

  But he doesn't join the business until 2003, when Jean-Louis taps him. And again, on the one hand, as we've talked about, this is an epistatic business. On the other hand, they're not going to just give him the CEO.

• 2:14:25Ben Gilbert?

  Right.

• 2:14:26David Rosenthal?

  Title right away. He needs to come pay his dues. He starts in the finance department in 2003. And then in 2006, when Jean-Louis retires, Axel takes over running the jewelry métier as CEO of jewelry.

• 2:14:40Ben Gilbert?

  Which listeners, you should know jewelry is not an important part of the Hermes business. It's one of the 16 métiers. They don't even break it out in earnings. It probably rolls up under other Hermes sectors, because I don't think it's under watches and I don't think it's under ready-to-wear accessories. All of other is 12%. So I'm going to guess this thing is like 1 to 3%.

• 2:15:02David Rosenthal?

  So he does that for two years. And then in 2008, He goes and takes over the leather goods and salary business. So the big one.

• 2:15:10Ben Gilbert?

  Which that's 43% of the business. And I think at the time was closer to 50%.

• 2:15:15David Rosenthal?

  Yes. So Bernard sees, okay, we've got a generational transfer opening here. And in fact, when Jean Louis retires in 2006, he promotes his sort of COO, right-hand person, Patrick Thomas, to be the first non-family member CEO running the business side of the house alongside Pierre Alexi on the artistic side.

• 2:15:38Ben Gilbert?

  And at least in retrospect, they try to make this seem like not a big deal that a non-family member took over as CEO. They sort of bill it as, well, they needed someone to look after the business in the interim period before the family was sort of ready to have the next heir.

• 2:15:54David Rosenthal?

  I think there's as much chance as not that that was right. But at a minimum, I think this shows the sort of ignorance. You know, I don't want to say lackadaisicalness of the family here because it's certainly not that, but maybe sort of ignorance or naivete that, hey, you're now a public company and there are people like Bernard Arnault out there. You can't just be like, oh yeah, we're going to do public company CEO transition in this way and take our time. You can, but you're opening the door for

• 2:16:28Ben Gilbert?

  Right, you're vulnerable.

• 2:16:29David Rosenthal?

  The Arnaults of the world. So that's one thing that Bernard sees. The other, and I really think this is a testament to his vision. Despite all of the strength within Hermes and everything that Jean Louis did, they actually are showing some cracks. And this, we had to kind of piece together a little bit. And talking to folks in the industry helped us out here. But look, there's no questioning Hermes's financial results and sort of on the surface, brand value at this point in time, in the 2000s, early 2010s.

• 2:17:04David Rosenthal?

  But there are a few things that are just kind of starting to slip as they scale. And I think actually, the best story that illustrates this is one that the family members themselves do not tell, but that you'll hear out there in the lore about Hermes, which is that in, I believe it was in Japan, they had a product, a bag.

• 2:17:25Ben Gilbert?

  Oh, yeah. This is so interesting, listeners. If you listen to other coverage of Hermes, you will hear this story.

• 2:17:30David Rosenthal?

  And you never hear it from the perspective that we're about to tell it. Okay, so here's how the story goes. It's, call it the late 2000s, early 2010s. And Hermes is selling a canvas beach bag in Japan, and it is flying off the shelves, selling like hotcakes. It's like a equivalent of, call it $150 canvas tote bag beach bag. And this obviously gets the attention of management at the company that this is happening. And they decide that they are going to, in true Hermes fashion, because it is selling so well, they are going to not only stop selling the product, they're going to take all their supply of it and destroy it. And they come into a board meeting, you know,

• 2:18:14David Rosenthal?

  with all the family members and management. They sort of announce this, and it is met with a standing ovation from the family. This is upholding what Hermes is, which is we don't sell beach bags.

• 2:18:26Ben Gilbert?

  The family and the board is so aligned that no one even asked a question about this. They just stood and gave applause. And here's how this went on a meta level, listeners. I heard this story. David heard this story. And David texted me at one point and was like, isn't this an odd story? And I was like, what do you mean? And we sort of realized, oh, this is not ever told by any of the family members or company executives anywhere. It's just sort of out there. And the company is not secretive.

• 2:18:55David Rosenthal?

  They love telling these legendary Hermes stories.

• 2:18:58Ben Gilbert?

  Yeah. And they've got a 600-page document they release once every year that clearly lays out their entire strategy. They produce documentaries, interviewing their artisans, showing videos of their factories. So it rings a little bit odd. It's like, okay, why are they not telling this story, given how often it's bandied about?

• 2:19:18David Rosenthal?

  So then you think about it a little bit, and you're like, wait a minute. Why the F? Did this happen in the first place?

• 2:19:27Ben Gilbert?

  Exactly. A canvas beach bag in Japan?

• 2:19:31David Rosenthal?

  For $150?

• 2:19:33Ben Gilbert?

  And they're making enough of it that it's flying off the shelves? What company is this?

• 2:19:38David Rosenthal?

  How on earth did this happen? The story here is not a heroic one of we destroyed the supply. This is a tragic one.

• 2:19:47Ben Gilbert?

  It's almost like when I was sitting there watching Wonder Woman 84 and I was just so appalled at what I was watching that on this meta level, it occurred to me like the story here isn't the plot of this movie. The story here is how do you have such a process failure at Warner Brothers where this thing was let out the door? That is a failure of creative leadership. And that is what you have going on with a $150 canvas tote bag after 175 years of successful Hermès brand stewardship.

• 2:20:21David Rosenthal?

  Right. And building up the Birkin, the Kelly. I mean, for God's sakes, the scarves sell for like $500.

• 2:20:28Ben Gilbert?

  Yeah.

• 2:20:28David Rosenthal?

  So, okay, that I think is the most visceral illustration of this. Two other things that I saw in the research, and I think Bernard probably saw here too. Towards the end of Jean-Louis's tenure, he and Hermès started buying and investing in other companies. But why is Hermès doing this?

• 2:20:49Ben Gilbert?

  Right. This is like the weird stuff going on at Nike when they were buying, you know, Converse was the good example, but Starter. And it was almost like they didn't realize, oh, we should be concentrating our firepower behind our one hero brand. They were trying to create the constellation of weak brands.

• 2:21:04David Rosenthal?

  The best Hermès could ever hope for by doing this is they're going to be a subscale, like they're not even going to be Richmond or Carrington.

• 2:21:11Ben Gilbert?

  Now, one argument, you know, bootmaker John Lob and all these other companies that they either bought in whole or in part, it became important for them to own their key supplier relationships.

• 2:21:23David Rosenthal?

  Yes, those I think were probably strategic acquisitions.

• 2:21:26Ben Gilbert?

  Yeah, especially in watches where they actually fairly recently took up 25% position in the company that makes the movements to make sure that they have enough supply coming to them. But that wasn't all of what they were doing. They were also buying other brands.

• 2:21:40David Rosenthal?

  Yeah. Did you find the biggest disaster? This is kind of in your wheelhouse.

• 2:21:43Ben Gilbert?

  Ooh, I don't know.

• 2:21:45David Rosenthal?

  I was wondering if I could stump you with this. They bought, I believe, a 30, 35% stake. They were the largest shareholder in a German company that makes what is really a piece of technology, an old piece of technology, but not something that should be a luxury brand. This is very much in the performance end of the spectrum. They became the largest shareholders in Leica, the camera company.

• 2:22:09Ben Gilbert?

  Really?

• 2:22:10David Rosenthal?

  Yeah.

• 2:22:11Ben Gilbert?

  Huh.

• 2:22:12David Rosenthal?

  Which, you know, I mean, sort of the motivation is like, oh, you know, they're beautiful and they're like luxurious cameras and they have leather on them and we can put Hermès leather on the Leica cameras.

• 2:22:21Ben Gilbert?

  Yeah. If they made a Hermès edition Leica camera with a

• 2:22:26David Rosenthal?

  They did.

• 2:22:27Ben Gilbert?

  I should probably look into that.

• 2:22:29David Rosenthal?

  But, okay, you're talking about a very narrow target market here and it's just, you know, it's a technology product. I mean, we'll get into this with Apple in a minute, but it didn't go well. Let's put it that way. They ended up divesting the stake.

• 2:22:42Ben Gilbert?

  It reminds me of when the New York Times did all of this with all the TV stations in the 90s, too. It's almost like every company that ever thinks it's a good idea to start buying up other brands is wrong.

• 2:22:53David Rosenthal?

  Yeah. Unless that is the core strategy of what you are doing, like LVMH.

• 2:22:57Ben Gilbert?

  Yes.

• 2:22:58David Rosenthal?

  Yeah. The third thing that they do, they incubate and create a new luxury brand and company in China called Shangxia. I believe I'm pronouncing that right. In 2009 is when they launch it. It literally means up, down, or like past, present. And the idea is that, the Chinese market is so big and so important, Hermès, they're going to lend the Hermès brand to this new brand that is going to have Hermès principles, but take traditional Chinese craftsmanship, of which there's a long, multi-thousand-year history.

• 2:23:34Ben Gilbert?

  Yep. I actually like the strategy. Well.

• 2:23:38David Rosenthal?

  Yeah, I mean, it sounds good on paper, right? But here's the problem, like we were talking about earlier. Nothing compares to French culture as an export and when you're buying luxury. And this is a great experiment to run, sure. But the reality is that for probably most countries in the world, when you're talking about spending $20,000 on a piece of leather, you know, you want that to be from Hermes and you want that to be from France.

• 2:24:06Ben Gilbert?

  Right.

• 2:24:07David Rosenthal?

  And I think this is especially true in China.

• 2:24:09Ben Gilbert?

  Yeah, that's such a good point. It's funny, I have a playbook theme called selling a sense of place to those outside it. The numbers behind this are crazy. Today, 76% of their production is in France and 85% is sold outside of France.

• 2:24:23David Rosenthal?

  Yep.

• 2:24:23Ben Gilbert?

  First of all, 76% of production in France is kind of incredible. The fact that they do this with all these different workshops that are sort of scattered around the country. But yeah, the incredible French history that is encapsulated by the brand and the French nobility and the French sense of place, it really is just an intangible connection to the culture that is lusted after everywhere in the world. Why on earth would you throw that away when that really is the essence of your core asset?

• 2:24:53David Rosenthal?

  Right. Now, easy for us to armchair quarterback here, like obviously it didn't work. They end up selling it off, actually pretty recently, to the Anielli family from Italy, which is the family behind Fiat. Now, look, certainly that one, the like a thing, it's the combination of all these, and the beach bag incident, Bernard sees all this. Here's what he says in the press at the time. "I would never diminish the quality of Hermes. Hermes can be an even rarer and greater quality business if they ever wanted to work with us." And I think he's genuine about that.

• 2:25:29Ben Gilbert?

  Yeah.

• 2:25:29David Rosenthal?

  The family obviously circles the wagons and like mounts their, you know, like they're like the rebel alliance here, you know, mounting their defense against the empire.

• 2:25:37Ben Gilbert?

  Which I think is quite impressive.

• 2:25:39David Rosenthal?

  Absolutely.

• 2:25:40Ben Gilbert?

  The fact that they were able to link arms like this and say, in the face of someone trying to make you and all your relatives collectively a multi-billionaire in liquid cash, it's kind of incredible to link arms and manage to rebuff it.

• 2:25:56David Rosenthal?

  Totally. We'll tell the story here and it's amazing. But I think this is like a really important point that I want to land is I don't think. Arnaud was wrong. I think he had a point and I think the company at the time didn't get it.

• 2:26:09Ben Gilbert?

  Hmm.

• 2:26:10David Rosenthal?

  They certainly do now. So, okay, what's the story? What happens? Finally, in October of 2010, Arnaud is patient.

• 2:26:18Ben Gilbert?

  He spent nine years?

• 2:26:20David Rosenthal?

  Nine plus years, yeah, that he's just building this stake, being patient. In October 2010, LVMH exercises its options on the equity swaps that it owns and announces that it now controls 14.2% of Hermes shares. And Bernard at the time, he says, "I had to do it because other luxury groups were also talking about making a run at Hermes and I didn't want this crown jewel of France to be owned, heaven forbid, maybe by a non-French, you know, organization." Quote here, "I could not sit by and allow a competitor or another investor to take a stake in Hermes."

• 2:27:02David Rosenthal?

  He's good. He's so good.

• 2:27:03Ben Gilbert?

  I love it.

• 2:27:04David Rosenthal?

  In response to this is the famous or infamous, if you will, quote from Patrick Thomas, the then CEO of Hermes, which we're not going to say the full thing here on air. You can go Google it, but the response, and this is an official press conference, with investor relations people, he says, "If you want to seduce a beautiful woman," obviously Hermes being the beautiful woman here, "you don't start in the fashion that Bernard is," and he doesn't use those words. This is hilarious. This is amazing. That makes, of course, a huge splash in the French and international press. The drama here is delicious. Karl Lagerfeld is asked his thoughts on what's going on here. Lagerfeld, of course, he's a legend. He's the longtime creative director of Chanel.

• 2:27:49David Rosenthal?

  He comments publicly, "Well, if you don't want to be taken over, don't put your business on the public market."

• 2:27:55Ben Gilbert?

  Which, hey, game recognize game. That's a great point.

• 2:27:58David Rosenthal?

  He's got a point.

• 2:27:59Ben Gilbert?

  If you want liquidity, I mean, this is the trade off you make.

• 2:28:03David Rosenthal?

  Now, of course Lagerfeld, yes, famously is the creative director of Chanel, but he wasn't exclusively the creative director of Chanel. Who is he also working for at this point in time? He is also, I believe, the menswear creative director for Fendi, which is owned by?

• 2:28:18Ben Gilbert?

  By LVMH.

• 2:28:20David Rosenthal?

  LVMH.

• 2:28:21Ben Gilbert?

  He's on payroll.

• 2:28:22David Rosenthal?

  He's on payroll. This continues on for months in the public markets and in the press. By December of 2011, the LVMH stake has grown to 22.6%. Now, the family owns 73% of the company at this point. So Bernard now owns almost the entire public float of Hermes.

• 2:28:48Ben Gilbert?

  There's what, like 3.5% of Hermes that's publicly floated he doesn't own?

• 2:28:51David Rosenthal?

  Yeah, Hermes is like in danger of being delisted from the stock exchange.

• 2:28:55Ben Gilbert?

  Crazy.

• 2:28:56David Rosenthal?

  Now, this is what's so brilliant. You might ask, why does this matter? The family owns 73%, Bernard can't do anything. Price is a function of supply and demand. So as Bernard is shrinking the float of this company, the shares that are available for trade on the public markets, well, what happens to the stock price?

• 2:29:17Ben Gilbert?

  Skyrocket.

• 2:29:18David Rosenthal?

  It goes through the roof. So now you've got 80 family members and they already thought they were really wealthy. And they already wanted liquidity. And now Bernard's coming to them. And this is a strategy is just go pick off individual family members one by one. Keep increasing his stake and saying like, yeah, I'll pay you the market price, which is now incredibly inflated for this company. Great, happy to pay you many hundreds of millions of dollars.

• 2:29:46Ben Gilbert?

  Crazy.

• 2:29:47David Rosenthal?

  So what happens? You know, this is why I think this really was the family and the company's finest moment. That temptation, I mean, must have been extreme. And that's just the externally identifiable motivations. You know, I'm sure Bernard and other people at LVMH and everybody else in the industry is doing everything they can to convince family members to sell.

• 2:30:12Ben Gilbert?

  Right, and all it takes is one weak link or probably a few weak links because the ownership is so divided into tiny chunks by this point. You know, six generations in, it's pretty peanut buttered around, but still.

• 2:30:24David Rosenthal?

  I think also just from a psychological perspective, a couple dominoes fall here. And then as a family member, you start looking around and being like, do I want to be the last one? It's kind of like a crowded theater, you know, running for the exits.

• 2:30:36Ben Gilbert?

  Right.

• 2:30:37David Rosenthal?

  At the time, you're thinking about like, holy crap.

• 2:30:40Ben Gilbert?

  This is the best it's ever gonna get.

• 2:30:42David Rosenthal?

  I may never see another opportunity to get liquid at this price, ever. And the minute that other family members start selling.

• 2:30:49Ben Gilbert?

  It goes down.

• 2:30:50David Rosenthal?

  Supply and demand, the price goes down.

• 2:30:52Ben Gilbert?

  Right. I cannot be the last and it would kind of suck to be the second or the third.

• 2:30:56David Rosenthal?

  Right. So in 2011, the family comes together and over 50 of the 80 family members collectively contribute 50.2% of the equity in the company into a new cooperative vehicle that's called H51, as in 51%.

• 2:31:17Ben Gilbert?

  Of Hermes.

• 2:31:18David Rosenthal?

  As in, this vehicle will have majority control of the company. When they contribute their equity into this vehicle, they contractually agree that that equity will be locked up and cannot be sold for at least 20 years. So they're basically saying to Bernard, no matter what you do, you could pick off anybody else after this for a minimum of 20 years with potential to extend beyond that. You will never, never, never, you or anybody else have control of Hermes. So badass.

• 2:31:52Ben Gilbert?

  Dude, you and I should contribute. We should make an A51, even though it's completely unnecessary. It just feels right for acquired, you know? Like, I think you and I can each maintain 24 and a half percent stakes, but A51 really should.

• 2:32:06David Rosenthal?

  I love it. I love it. Well, hey, you know, we haven't floated our business on the public markets yet, so we're taking Karl Lagerfeld's advice. We don't need to incur the legal fees around doing this. That vehicle was and is still headed by one of the family members, Julie Garan, who was an investment banker at Rothschild. So she leaves and full time becomes head of the defense, I assume alongside XL, who obviously comes from the banking world too.

• 2:32:35Ben Gilbert?

  It's so interesting. I wonder if you actually can. Structure, articles of incorporation to say, under no circumstances can this entity sell what it owns. Because normally what you would do is say, like, it requires a vote of unanimous from the board of directors, blah, blah, blah. But that leaves you vulnerable to the board of directors getting lobbied and convinced. And so I wonder exactly, I mean, this is not a public document, so we can't really know. But I wonder, how airtight can you really make something and how irreversible?

• 2:33:08David Rosenthal?

  I don't believe these documents are public, but my understanding from comments that family members in Excel make about them, and spoiler alert, recently they've renewed the term of this for another 10 years. So it's into the mid 2040s.

• 2:33:23Ben Gilbert?

  They're like, Bernard, you will be dead when this expires. That's exactly what that is.

• 2:33:28David Rosenthal?

  But I believe it's pretty ironclad that these shares cannot be sold.

• 2:33:31Ben Gilbert?

  Wow.

• 2:33:32David Rosenthal?

  So in addition to that, two of the Puesh brothers, Bertrand and Nicholas, Nicholas is the one that there's the gardener drama about right now.

• 2:33:43Ben Gilbert?

  Which we should say, listeners, in case you don't know, there's a lot of stories floating around in the press right now that Nicholas Puesh is going to give half of his stake in Hermes, which represents something like a little under 3% to his gardener, or like his ex gardener, who's now like 51, nobody knows his name.

• 2:34:04David Rosenthal?

  Nicholas does not have children or heirs, or other heirs.

• 2:34:07Ben Gilbert?

  Right. So there's a press story right now that just shy of 3% of Hermes could be given to the family gardener.

• 2:34:14David Rosenthal?

  Anyway, the two Puesh brothers, they do not contribute their shares to H51, but they give H51 a right of first refusal on their shares. So they could sell their shares, but at whatever price they agree to, the rest of the family has a rofer on purchasing them.

• 2:34:32Ben Gilbert?

  Oh, interesting.

• 2:34:33David Rosenthal?

  So that's another probably 10 to 15% of Hermes right there.

• 2:34:38Ben Gilbert?

  Whoa, okay, that's significant. I wonder how this gardener thing's going to play out.

• 2:34:42David Rosenthal?

  Yeah, right. And those shares would be, I believe, subject to that rofer, assuming that that has stayed in place. Anyway, this is really just an incredible. Coordination. Yes, it's a family. They're all family, but there's 80 people here.

• 2:34:56Ben Gilbert?

  The fact that they actually rebuffed this offer and that Bernard sold down his stake is crazy.

• 2:35:02David Rosenthal?

  Well, let's get into what happens with Bernard's stake because famously, as Domenico Di Sole said in the press at the end of the Gucci affair, even when he loses, he still wins. And Bernard still wins here. So this effectively ends the takeover bid when H51 is put in place. But meanwhile, there are all sorts of lawsuits going on, particularly around how LVMH amassed this stake in secret with the equity swaps.

• 2:35:31Ben Gilbert?

  It was basically illegal, right?

• 2:35:33David Rosenthal?

  Well, in 2014, the French court rules that this was illegal. LVMH has to pay a fine, I believe like a $10, $15 million fine for having done this.

• 2:35:43Ben Gilbert?

  Pennies.

• 2:35:44David Rosenthal?

  Yeah, right. As we'll see, it's truly pennies. And they also mandate that LVMH needs to distribute out that Hermès stake to its own shareholders. LVMH can no longer hold the stake. Well, who's the largest shareholder in LVMH? It's Group Arnault, which is Bernard Arnault's family office. So they get 8% of Hermès personally into his family office entity. Which, this is the brilliance of Bernard, they take that value, which is, call it on the order of $5 billion.

• 2:36:22David Rosenthal?

  And remember, when they started buying, the whole company was trading at a market cap below $10 billion.

• 2:36:28Ben Gilbert?

  So massively appreciated stock. They basically created value out of nowhere here. This billions of dollars landing in Bernard's personal bank account. He has created that money out of nowhere.

• 2:36:38David Rosenthal?

  He has unlocked shareholder value for sure, even in the absence of a change of control transaction. So. Back when Bernard was engineering his takeover of LVMH, one of the financial instruments that he used to do it was he IPO'd a 25% stake in Dior. He already owned Dior that he had gotten out of bankruptcy from Busek.

• 2:37:04Ben Gilbert?

  That's right. He had this Russian doll structure where he owned a slim majority of an entity that owned a slim majority of an entity that owned a slim majority. And so he was able to generate a bunch of liquid cash from all the minority shares that he sold off, but he still got to control Dior, LVMH, Group Arnaud, because he was technically the majority owner of each of them.

• 2:37:29David Rosenthal?

  Yes, but he and LVMH didn't own this 25% minority stake in Dior. He takes the Hermès shares and does a share swap. So swaps that value directly with the 25% of Dior that he doesn't own to bring that first into Group Arnaud, his family office, and then he trades that into LVMH. So LVMH now finally, as a result of this, is able to take 100% control of Dior. And in exchange for Group Arnaud trading this asset into Dior, Bernard's ownership of LVMH goes from 36% up to 46%.

• 2:38:14David Rosenthal?

  So he gets an extra 10% of LVMH. And here's the most incredible aspect of this. Not a single dollar in tax is paid on all of this.

• 2:38:23Ben Gilbert?

  Oh, my God.

• 2:38:23David Rosenthal?

  Because it's all share swaps. Basically Bernard just gets 10% more of his own company as a result of this.

• 2:38:30Ben Gilbert?

  Which would then go on to appreciate?

• 2:38:32David Rosenthal?

  Call it 400 or 500% over the next five, six years.

• 2:38:36Ben Gilbert?

  5Xed since 2017?

• 2:38:38David Rosenthal?

  Yeah.

• 2:38:39Ben Gilbert?

  Wow. Even when he loses, he wins.

• 2:38:43David Rosenthal?

  Unbelievable. Now, this is a situation where everybody wins. I don't think there are any losers here. And Hermès families absolutely are not losers. And you could even say they sort of had the last laugh here. Because yes, Bernard gets to benefit from, you know, an extra four to 5X appreciation in LVMH's market cap here. From, let's call it the real beginning of when LVMH publicly announces their stake in Hermes. So 2010, Hermes' market cap is up 16x.

• 2:39:19Ben Gilbert?

  It's crazy. And the reason why no one's a loser here and everyone's a winner is because Hermes truly is the crown jewel. It is such an unassailable, exceptional business. The last 12 months, it did 14 billion in revenue, 5.7 billion in operating income. They have a 71% gross margin and a 44% operating margin. It's a software business that doesn't need any R and D.

• 2:39:46David Rosenthal?

  Tech companies go like, I don't know what Hermes color to call it, but some color with envy over this. But there is one more chapter of the story that we have to tell because that wouldn't have just happened. It wasn't just the Bernard affair in and of itself that led to this 16x market cap increase. He was right. Like I was saying earlier, there were, I think, some real problems in the business. And that is the story of the sixth generation of Pierre Alexi and XL, who I think have certainly fixed those problems, but have really led Hermes, the business and the company into a whole new era.

• 2:40:25Ben Gilbert?

  Yes, that is absolutely right. There is a quote that I want to start with for the XL Dumas era, which is possibly the best articulation that I've ever heard of business strategy anywhere. And he did it in the interview that we were talking about. So he says, "Every decision that we make has got some reverse effect," which I think is like a French translation for trade off. So every decision we make has got some trade off. There's something I really like about strategy and Michael Porter. Strategy is accepting that you are doing something better than the other and the other is doing something better than you. You have to pick your fight. I'm always a little bit disappointed when I see someone on my team say that we do everything at the same time. Great. That doesn't

• 2:41:08Ben Gilbert?

  happen in real life. You have to pick your fight. And Hermes picks their fights better than anyone.

• 2:41:15David Rosenthal?

  What they've done over the last 10 years since the Bernard fight is that they have figured out how to scale handcrafted artisanal production.

• 2:41:32Ben Gilbert?

  Yes.

• 2:41:33David Rosenthal?

  On the surface, those are completely like oxymoronic terms. Those are completely diametrically opposed.

• 2:41:39Ben Gilbert?

  This is a dead art in the world and Hermès manages to crank out hundreds of thousands of products that otherwise would only be created by individual makers with no infrastructure and no brand and it'd be really hard to discover them. And frankly, they would all just go out of business. Most of them go out of business anyway.

• 2:41:59David Rosenthal?

  Totally. What was the stat that you said a little while ago? That there are 120,000 Birkins and Kelly's produced every year?

• 2:42:07Ben Gilbert?

  Yep, exactly.

• 2:42:08David Rosenthal?

  Yeah. If they were still making these things on the third floor at the Fauxborg, no way, no way. And this was kind of the problem and what the consultants were saying at the start of Jean-Louis's tenure of like, hey, you need to outsource production. You need to scale production. You need to make this more accessible.

• 2:42:24Ben Gilbert?

  Right. You have a global brand now. Like you need to figure out how to serve the demand for your brand.

• 2:42:29David Rosenthal?

  Yep. So the Patrick Thomas quote that I want to start with is so great. "The luxury industry is built on a paradox. The more desirable a brand becomes, the more it sells. But the more it sells, the less desirable it becomes." We've been talking about this whole episode, but then it continues. "I believe Hermès's vision provides a solution to this dilemma." And this is what the current generation has found, the solution. So today, I think we referenced this earlier in the episode. Hermès employs 7,000 master craftspeople artisans.

• 2:43:10David Rosenthal?

  Most of the story that we've been telling thus far, you know, until 1992, all of the craftspeople in the company, more or less, were working in the Fauxborg, in this one relatively small building on the Rue Fauxborg de Saint-Honoré in Paris. In 1992, they moved production to Pantene in the suburbs of Paris. That building is amazing, but only houses about 250, 300 craftspeople. And actually, still to this day, Axel talks about this a lot. Any one of their production sites does not have more than 250 to 300 craftspeople.

• 2:43:45Ben Gilbert?

  Yes, they believe that every single person should know each other by name. And they think that 250 to 300 is the natural limit on that. And Axel even says, if you have more than 300, it is not a workshop, it's a factory.

• 2:43:58David Rosenthal?

  Yep, and they are not in the business of factories. At the same time, he and the company have stated as an explicit goal that they will ramp up production capacity by 7% every year. Well, as the company gets larger and larger, today, that means adding 500 artisans every year.

• 2:44:19Ben Gilbert?

  Crazy. And when Axel started at the company, all the way back in the 80s, there were 250 craftsmen, period, and they hired two per year, two craftsmen per year in the late 80s.

• 2:44:30David Rosenthal?

  Right. Now, here's the issue, though. How on earth are you going to do this? Like you were saying, this is a dead art. Nobody else does this.

• 2:44:37Ben Gilbert?

  Little maker with a workshop in San Francisco or a workshop in Paris. But like, how are you even going to find them?

• 2:44:44David Rosenthal?

  Right. And those people, you know, the Beatrices here in San Francisco, they're entrepreneurs. They're not going to go back to joining Hermes because they all came from Hermes in the first place. How are you going to hire 500 a year? It's not like they can go hire from their competitors. They're not doing this.

• 2:44:58Ben Gilbert?

  Right, their competitors have all outsourced production and embraced assembly lines.

• 2:45:02David Rosenthal?

  So they do the only thing that you can do. They build the pipeline of training master craftspeople and artisans entirely themselves. They build schools, they build training centers. They go to parts of France that are in rural areas, that have high unemployment. They go to those areas and they open trade schools and they say, we're going to train you. They have 100% graduation rates. They're like, we're not going to give up on you. We're going to make sure you learn this trade, that you graduate. You may not come work for Hermes when you graduate, but we're going to give you this skill and then we're going to offer you a job as a master craftsman.

• 2:45:43Ben Gilbert?

  It's crazy.

• 2:45:44David Rosenthal?

  It's unbelievable. So back in the, you know, even through the Jean Louis era, the fifth generation.

• 2:45:52David Rosenthal?

  Beatrice was the anomaly as a woman. These were all like old men that were doing this stuff.

• 2:45:58Ben Gilbert?

  Yep.

• 2:45:58David Rosenthal?

  Today, the average age of the Hermès artisan workforce is 30 years old and 80% are women.

• 2:46:06Ben Gilbert?

  It's wild.

• 2:46:07David Rosenthal?

  It's a wholesale transformation and they are training them. They actually just opened in 2021 their first official French governmentally sanctioned degree granting program, the Eco Hermès de Savoir Fair. This is the Savoir Fair that pops up in the annual report, you know, 100 whatever times.

• 2:46:28Ben Gilbert?

  Let's name a school after it, too.

• 2:46:30David Rosenthal?

  Yeah, yeah, yeah. They're like getting into like government policy here. They are preserving and growing this art form in France.

• 2:46:39Ben Gilbert?

  Yeah, they're not France's largest export because they have a very constrained way that they can create the products, but they may be France's finest export. So it behooves the French government to try to figure out how to make this last another 100 years.

• 2:46:52David Rosenthal?

  Yep. So today there are 31 Hermès ateliers, you know, artisan manufacturing facilities all throughout the country, each with no more than, you know, 250, 300 people in it.

• 2:47:05Ben Gilbert?

  Right. It's the cloud competing idea of scaling horizontally.

• 2:47:08David Rosenthal?

  Totally. This is AWS. This is the point I'm getting to.

• 2:47:12Ben Gilbert?

  Right. They're building data centers.

• 2:47:13David Rosenthal?

  They were Amazon and they added AWS and they are adding two to four of those every year.

• 2:47:20Ben Gilbert?

  So funny. You had that thought, too.

• 2:47:22David Rosenthal?

  Totally.

• 2:47:23Ben Gilbert?

  And it's all people. I mean, it's all sticking to the thing that got them here, which is every product, or at least every leather goods product, every handbag made end to end by one artisan.

• 2:47:34David Rosenthal?

  Yep.

• 2:47:35Ben Gilbert?

  Trained in the traditional early 20th century way.

• 2:47:38David Rosenthal?

  So this is an insane idea that leather goods, which is 43% of the business, Hermès did what 11.6 billion euros in revenue last year. They're on track to probably do, call it 14 billion in euros.

• 2:47:55Ben Gilbert?

  Yep. Last 12 months is 14 billion.

• 2:47:57David Rosenthal?

  Yeah, that 6 billion of that is going to be handcrafted items where one artisan makes one item at a time and they're sold around the world, like 6 billion euros worth of that every year, growing at 15, 20% a year. Yeah, wild.

• 2:48:16Ben Gilbert?

  This is a really important thing to understand the company. They firmly believe that only 250 to 300 craftsmen can work in a building. So that's one. Two, it takes two plus years for someone to learn the craft and apprentice. And three, that every one of these things must be created by one individual by hand. And if you believe all those three things for sure, then it forces a very specific constraint on your business and you must work backward from that. You can only train so fast, you can only produce so fast, which then of course means that it affects your products and it affects the availability and it affects the price, which of course means that it affects the customer set. So there's a way to view Hermes, which is they want the very highest end customer with zero

• 2:49:01Ben Gilbert?

  price sensitivity and they do whatever they need to serve that master. But I think there's another very real way to look at it, which is how the company describes themselves that starts with the constraints of the craft. And when you hold true to that ethos at its most extreme, you end up with the company's brand and posture that you have today as the only logical endpoint. They can only hire 300, 400, 500 craftsmen a year. They can only do this other stuff. Good luck getting a Birkin bag. I mean, it's just one of these things where you can say they're artificially constraining supply all you want.

• 2:49:33David Rosenthal?

  As long as they do things this way, this is the max throughput.

• 2:49:37Ben Gilbert?

  And so they would have to change something. They would have to say, hey, there's some new fancy saddle stitching machine that it turns out makes us just as high a quality product and every craftsman is, you know, twice as effective or something like that. But until they fold on one of these constraints that they've decided are stakes in the ground, the result is the scarcity. That's not the goal, that's the result.

• 2:50:00David Rosenthal?

  You know, the Amazon comparison is so apt here. Hermes has this incredible unassailable flywheel, but it operates in the exact opposite way of an Amazon flywheel. It's not about maximizing the cycles. It's slowing, it's minimizing. It's a intentionally rate limited flywheel and it all works together.

• 2:50:20Ben Gilbert?

  At the end of the day, it is probably true that neither one is the starting place and neither one is the ending place. And the two things that I'm referring to here are the method of craftsmanship and the price and scarcity. They just work harmoniously together. One is not driving the other. It is that they both want the brand posture that they have and they want the constraints that they have. And so it works together perfectly. But a cynical person could be like, well, yeah, all that handcrafted mumbo jumbo only exists because that's how you justify the brand pricing and availability that they've put in place. But I think it all works in concert.

• 2:50:58David Rosenthal?

  Totally. I mean, like we've told the whole episode and I'm thinking back to what Beatrice told me when I asked her, why? If a master crafts person made this thing by hand, it has a soul. And if a machine made it in an assembly line, it does not.

• 2:51:13Ben Gilbert?

  Right, maybe, but sure. In an assembly line with crappy ingredients, blah, blah, blah, sure. But can craftsmen use better tools? Yes. And will Hermes continue to embrace tools that make craftsmen more efficient? At some point, did they use sharper knives than were previously available in the past? They totally did. And so will they use things that make the needle go a little faster? Maybe.

• 2:51:37David Rosenthal?

  Totally. Let's take a step back here. We got to consider the exact opposite case study of this, which is 100% happening to great success, which in a lot of ways is the same thing that the consultants told Jean Louis back in the day. Look at the rest of the industry. Louis Vuitton, which as we talked about, has the same caliber of heritage and history as Hermes.

• 2:51:57Ben Gilbert?

  Yes. It could have Hermes's gravity if it wanted to, but instead you can buy a checkerboard cotton sweatshirt with 120 LVs on it.

• 2:52:08David Rosenthal?

  Right. They are having the same level of success, the same margins. It's working like a charm.

• 2:52:14Ben Gilbert?

  But it's less durable.

• 2:52:16David Rosenthal?

  Well, I think that's sort of the question. Is it less durable? Or is it just these are different markets or different strategies? Now here's the crux of it that we've also been teasing on the episode that I think now's the time to come back to. This thing that I'm wearing on my wrist.

• 2:52:33Ben Gilbert?

  Hmm.

• 2:52:34David Rosenthal?

  The Apple Watch partnership.

• 2:52:35Ben Gilbert?

  Out of left field, very surprising, very odd for the brand to do this.

• 2:52:40David Rosenthal?

  I have a lot of complicated feelings about the thing on my wrist, including primarily that I love it.

• 2:52:47David Rosenthal?

  Okay, here's the story. 2015, Apple launches the Apple Watch. Supposedly, the story goes that Johnny Ive, and the watch, I think, was really Johnny's kind of like pet project as his last hurrah before leaving Apple. He had all these quotes at the time of the Swiss watch industry better watch out, we're coming for the, you know, et cetera, et cetera.

• 2:53:06Ben Gilbert?

  Which was true. I mean, different market, but it's by far the best selling watch in the world.

• 2:53:11David Rosenthal?

  Yes, but is far from been the death knell of the Swiss watch industry.

• 2:53:15Ben Gilbert?

  Right, yeah. The Swiss watch industry has done just fine since the Apple Watch came out, on the high end.

• 2:53:21David Rosenthal?

  Yes. Mark Newsom was consulting for Apple specifically on the watch. And Johnny asked Mark to introduce him to Piero Lexi and XL and to Hermès. Apple was looking for a luxury fashion brand. Remember there was the Apple Watch Edition in the beginning? That was like the gold Apple Watch and all that.

• 2:53:42Ben Gilbert?

  Oh, man. $10,000 for something that was going to be obsolete in a year. It's crazy.

• 2:53:47David Rosenthal?

  Yeah, that clearly didn't work.

• 2:53:49Ben Gilbert?

  But it's beautiful.

• 2:53:50David Rosenthal?

  Yeah, totally beautiful, but they needed a luxury brand. They needed a brand that was not deeply in bed with the traditional Swiss watch industry, which some of these luxury groups are.

• 2:54:01Ben Gilbert?

  Oh, it's funny. I hadn't actually made that connection, that that's why it's Hermès and not...

• 2:54:06David Rosenthal?

  Well, I think there's two reasons. That's one reason. The other reason is they needed a brand that was going to appeal to pretty much everybody.

• 2:54:13Ben Gilbert?

  Yeah.

• 2:54:14David Rosenthal?

  For everything we've talked about with Louis Vuitton and how successful that's been, it's polarizing.

• 2:54:21Ben Gilbert?

  Totally. And Apple also needed to go to the very top of whatever they were going to grab. Like, that's the thing about Hermès is whatever they make...

• 2:54:28David Rosenthal?

  Nobody is ever going to say that Hermès makes crap.

• 2:54:31Ben Gilbert?

  Right. They make the most fully realized version of whatever they're making. If they have an idea, they want to release the best possible, most extreme, exquisite version of that thing. And that's very Apple. I mean, Apple has to make compromises for the scale that they're at. But if Apple had partnered with someone that was more opinionated, let's say they were better in some ways, but worse than others. It kind of doesn't play for Apple's brand. They need to partner with someone unassailable.

• 2:55:02David Rosenthal?

  Axel and Pierre-Luxie talk about this all the time when they're asked about, oh, XYZ flashy celebrity, you know, is carrying a brick and bag, blah, blah, blah. They say like, look, we don't judge. We never judge here at Hermes. Our clients are our clients, whether it's Grace Kelly or, you know, Kim Kardashian.

• 2:55:17Ben Gilbert?

  Yep.

• 2:55:18David Rosenthal?

  And that's what Apple needed. So Axel has a great quote on this. He says, "We had an incredible talk with Jonathan Ive, and there was a lot of mutual admiration and common values. From that, we said, wouldn't it be nice to have something combining our craftsmanship, our vision? It was about trying to make a contemporary elegant object. It was not a master plan of global domination."

• 2:55:41David Rosenthal?

  Okay, this thing on my wrist is exactly what Axel is saying there. It is a contemporary elegant object that is beautiful leather. The reason I bought it is for my life and modern life, this thing is on my wrist 23 hours a day. I sleep with it.

• 2:55:59Ben Gilbert?

  A hundred percent. I love the Hermes Slim to Hermes watch. I like, looked at that thing, I don't know, five times during research, lusting after it, and ultimately closed the browser tab, being like, I wear an Apple watch all day, every day. There's just no world where like, it actually makes sense for me to own a different watch.

• 2:56:17David Rosenthal?

  Right. I mean, even more than my phone, this thing is part of me. When I was looking to do research for this episode and buy a bit of the Hermes dream, I couldn't imagine anything more appropriate to be closer to me than literally it's on my wrist 23 hours a day.

• 2:56:33Ben Gilbert?

  Right.

• 2:56:34David Rosenthal?

  At the same time, I find it absolutely terrifying from the perspective of what it means for Hermes and the Hermes future. Not because I think that Apple and technology is going to take over the world, but I think there's some serious problems with this product along the lines of the issues that Bernard identified in the company when he was making his run. Let's start with the price. I bought the deployment buckle version of the strap because I thought it looked amazing. It is the most expensive version of the band that Hermès sells as such, and it cost $540.

• 2:57:09Ben Gilbert?

  Which is expensive for an Apple Watch band, but it's sort of like in the ballpark of Apple accessories, or it's at least maybe twice as much as normal Apple accessories.

• 2:57:20David Rosenthal?

  This is among the cheapest leather products that Hermès sells. As a comparison, if you want to go buy a Hermès luggage tag, $640. Let's move out of leather goods for a second. If you want to go buy an Hermès sweatshirt, over $2,000. If you want to buy an Hermès piece of furniture, and they make incredibly beautiful furniture, $40,000 minimum. $540 for this thing, it's not priced right for an Hermès product.

• 2:57:53Ben Gilbert?

  Yeah.

• 2:57:53David Rosenthal?

  It's too low.

• 2:57:54Ben Gilbert?

  It's somehow bridging the gap between an Apple product and an Hermès product.

• 2:57:58David Rosenthal?

  Yes. And maybe that's because it's also sold in Apple stores, et cetera, et cetera. But related to that, you start to think about that, like, wait, why is the price so low? Nowhere on the exquisite orange packaging and box that this thing came in, nowhere on it, nor on the product page on the website, does it say that it was handmade.

• 2:58:19Ben Gilbert?

  So Hermès's belts, and I believe they're Apple Watches, and there are other things are machine sewn.

• 2:58:26David Rosenthal?

  And this, to me, is like, wow. You know, would I have spent $2,000 on a handmade Apple Watch Hermès band? Maybe, maybe not. Like, I don't know. Whether I would have is irrelevant. Hermès should be selling $2,000 handmade Apple Watch bands.

• 2:58:46Ben Gilbert?

  Even if people aren't buying them, that's sort of the question. I agree with you, because what I think this does is it defies how I think of Hermès, which is whatever they're going to do, they're going to do it at that logical extreme. They're not going to compromise. They're not going to figure out how to address a lower market. They're going to sell the same expensive scarf that they sold their grandma to you, but they're going to have a different way to advertise it. And this is weird.

• 2:59:12David Rosenthal?

  It's weird.

• 2:59:13Ben Gilbert?

  It's a compromise. I think the same thing about their belts, by the way. I think the same thing about anything that is machine sewn, so it can be mass-produced and have availability in every store. Like, it feels like, uh, they don't promise that everything they make is hand-sewn, but it feels like a mild violation of the brand promise.

• 2:59:32David Rosenthal?

  Right, yeah. So, I don't know. On the one hand, I love it. I don't want any other Apple watch strap. It is an Hermès product. It's beautiful. On the other hand, yeah, it feels like a profanity.

• 2:59:45Ben Gilbert?

  You're right. It does feel like a profanity. I mean, Apple is the, you know, most valuable brand in the world, but the most common brand in the world. And for Hermès to associate with such a common brand feels odd.

• 2:59:59David Rosenthal?

  Yeah.

• 2:59:59Ben Gilbert?

  Apple is the definition of mass market at this point.

• 3:00:02David Rosenthal?

  Well, I think that is certainly part of it. The thing that is really just kind of head-scratching to me about it is, why do they not sell these things for four times as much and make them by hand?

• 3:00:13Ben Gilbert?

  Yeah.

• 3:00:14David Rosenthal?

  What are they getting out of selling a machine-made strap for $540?

• 3:00:20Ben Gilbert?

  Maybe you're now an Hermès customer, and over the next 50 years, you're on a journey with them.

• 3:00:26David Rosenthal?

  I think that's true. I mean, I'm going back tomorrow.

• 3:00:28Ben Gilbert?

  What are you getting tomorrow?

• 3:00:31David Rosenthal?

  I don't want to spoil Jenny's birthday Valentine's surprise. I'm actually getting two things, but we'll talk about this on a future episode.

• 3:00:37Ben Gilbert?

  Okay, sounds good. The cliffhanger.

• 3:00:40David Rosenthal?

  Cliffhanger. So, just to put some numbers and finish out the story, by 2018, revenue has grown from, call it, three and a half, four billion euros when Axel took over in 2013. By 2018, that's six billion euros. 2019, it's seven billion. It dips a bit during 2020 with the pandemic, but then nine billion in 2021. Last year, 11.6. And like we said, on track for, call it, 14 billion euros in 2023. This is an absolutely resounding success. As we've said, what Axel and Pierre Alexi and this generation of the family has done, like all the generations before them, has been nothing short of amazing.

• 3:01:23Ben Gilbert?

  Remarkable.

• 3:01:24David Rosenthal?

  Starting with the defense against Bernard. Incredible. I don't want to fully judge or leave a negative mark on the company solely because of the Apple Watch thing, but I just got to say, you know, we've seen with a few times here in these generations that the seeds of the next challenge are sown in the current generation. And I wonder if this is it here.

• 3:01:45Ben Gilbert?

  Our mess has always thrived by figuring out how to be above it all and it be counter positioned to the rest of luxury. It's an open question, I think, of whether the Apple partnership helps that or hurts that.

• 3:01:56David Rosenthal?

  Yep. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 3:02:04Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 3:02:14David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 3:02:35Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 3:02:47David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 3:02:58Ben Gilbert?

  Okay, a few more stats on the business today before we move into analysis. That sound good to you, David?

• 3:03:03David Rosenthal?

  Great.

• 3:03:04Ben Gilbert?

  Great. Well, I thought one fascinating thing was Excel saying that with the 4.3 billion in net income that they do, they always split it roughly the same way. One third to the dividend, one third gets reinvested in CapEx, and one third in cash. And what's pretty interesting is they have a reasonably low reinvestment rate. They're dividending out a lot of cash, and they're holding on to a lot of cash, two thirds of it. And so what's obvious there in the numbers that we've talked about in a more subjective way is they have a limited ability to actually reinvest in the business. It's much like Costco. They're constrained by factors other than capital. You give them more money, they can't do anything with it, which I just find fascinating. They can only train the

• 3:03:49Ben Gilbert?

  craftspeople so fast. And frankly, at some point, they'll saturate the market, too. If they're going to address the whole world, They're going to have to change what they sell. And the Apple Watch may be the first little version of that. They grew, what, 20, 25% last year? They can't keep growing at 25% without changing what Hermes stands for. And so even if they could train these craftspeople as fast as possible, they have another governor, which is scarcity, product image, price. At some point, they'll bump up against the walls of that. And no additional craftspeople and no additional money can help them grow anymore.

• 3:04:27David Rosenthal?

  That's such a good point. And that's the counterpoint to my impassioned concern a minute ago. Okay, great. David, everything you were just saying, that translates to Hermes is a museum. And Hermes is not a museum.

• 3:04:41Ben Gilbert?

  Right.

• 3:04:41David Rosenthal?

  And it has to meet its clients where they are. And like I said, I wear this thing 23 hours a day. I couldn't imagine buying any other product from them.

• 3:04:48Ben Gilbert?

  And I'm sure there are some members of the family that want to walk around with their nose in the air and be a museum and say Hermes is pure. And I want to go my whole life and then die with Hermes remaining pure. And there's other members of the family that are like, can we serve customers and grow this business? My God. And that Apple Watch represents the second faction.

• 3:05:05David Rosenthal?

  Yep, totally.

• 3:05:07Ben Gilbert?

  Next, their cash position. They've got $10 billion in cash, and that is after materially increasing the dividend for the first time in a decade. They've recently just started divvending out more cash, which again is emblematic of the same idea of money is not our constraint, which is pretty new for the business. That's a decade or two old problem that never existed over the first 170 years. And so that's kind of an interesting thing to know about a business is it was always run under the constraint of even if we see growth opportunities, we don't have enough cash to pursue all of them. Now they actually do. And so it's interesting to see how management sort of responds in this opportunity for abundance that they have and figures out how to treat. Certain elements of the business is a scarce resource, even though they don't have to.

• 3:05:52David Rosenthal?

  Yeah. Now, certainly, there is an element to, to the dividend that is part of making the family shareholding lock up an easier pill to swallow.

• 3:06:01Ben Gilbert?

  Yes, quite palatable. The segments of the business, leather goods and saddlery is 43%. That's the big guy. We didn't talk about this much on the episode, but ready to wear and accessories is 27%. That's a big chunk. That's the second largest chunk of the business is clothing, effectively. And I sort of have an open question of whether they should be in clothing. Isn't it kind of antithetical? I mean, certainly, it's odd to see them in the fashion world and they do these runway shows and they do couture, but it feels weird. It somehow feels antithetical in some way.

• 3:06:34David Rosenthal?

  Yeah, they're not a fashion brand, and yet they participate in it.

• 3:06:38Ben Gilbert?

  Yep. Next largest segment after that is silk and textiles. So remarkable how small the scarf business has become of their overall mix, given that it used to be, what, close to half the business. After that is perfume and beauty at 4% and watches at 4%. And then there's a couple of categories of others, which I think it's really interesting to look at perfume and beauty as another glimpse of what's to come. They make $100 bottles of perfume and they sell them at department stores.

• 3:07:07David Rosenthal?

  Yep. And they launched beauty in 2020 with lipstick.

• 3:07:12Ben Gilbert?

  Yep. Which I think is very China focused. It's very interesting to me that they are trying to appeal, especially to a younger demographic with a lot of their recent perfumes and selling in department stores. Again, it feels antithetical to Hermes as this sort of pure brand, but on the other hand, it's a continuation of the Apple Watch strategy even further.

• 3:07:34David Rosenthal?

  Yep. There's one more elephant in the room to me that we haven't addressed via the story, which is that the business is a global business for sure, but really today, this business is an Asia business.

• 3:07:50Ben Gilbert?

  Yeah. So here's some stats. In 2006, France was already down to 19% of sales. I mean, it started at 100% of sales. So that's why I say down to 19%. 2006, this is a while ago, or almost 20 years ago. At that point in time, Japan represented 27% of sales. So there's all this talk about China and luxury today. Japan was that in the early 2000s. So crazy, right? Japan was one and a half times France in terms of sales for Hermes. Well, today, France is down to just 9% of sales. So let's flashback to 2006 again. So we talked about Japan being at 27% of sales.

• 3:08:30Ben Gilbert?

  Asia Pacific outside of Japan was only 17%.

• 3:08:36David Rosenthal?

  Oh, wow.

• 3:08:37Ben Gilbert?

  Japan was almost one and a half times as large as rest of Asia. Well, today, rest of Asia is 48%. Half of Hermes's business is Asia excluding Japan.

• 3:08:49David Rosenthal?

  AKA China.

• 3:08:51Ben Gilbert?

  Exactly. That's crazy. And I think Russia accounted for a decent amount of that.

• 3:08:57David Rosenthal?

  Hmm, interesting. The Japan story actually, I think, is still significant. Japan today is what, like 10% of revenue?

• 3:09:06Ben Gilbert?

  Yeah, Japan's larger than France. It's 9% in France, 10% in Japan.

• 3:09:10David Rosenthal?

  Right. So I actually looked into that. I was like, huh, yeah, the rest of Asia, you know, again, AKA China is 48% of the business. But on a per capita basis, Japan buys twice as much Hermes as China.

• 3:09:23Ben Gilbert?

  Hmm, that's interesting.

• 3:09:24David Rosenthal?

  Still, Japan is, I believe, around a 10th of the size of China and is 10% of Hermes sales versus 48% for rest of Asia.

• 3:09:34Ben Gilbert?

  Huh.

• 3:09:35David Rosenthal?

  For a small country, kind of like France, it's still very, very significant for the business.

• 3:09:39Ben Gilbert?

  Yeah. I will say that you listen to management commentary. Hermes is very excited about China's middle class, and they have done a really good job skewing younger there. 80% of clients in China are below 40.

• 3:09:53David Rosenthal?

  Wow. And, you know, again, this is. A huge, unique success for Hermes. China's been big for the whole luxury industry over the last decade plus. But the past few years, particularly the last two years, China has been real tough for the luxury industry. And yet Hermes is still growing there.

• 3:10:15Ben Gilbert?

  Yep. Employee count, so they have 21,000 total employees. 7,000 are artisans. 62% of employees work in France. So they really have stayed French. They've not outsourced. They have 54 production sites in France or what they call workshops. And they manufacture 76% of the objects that they sell in their stores in their own exclusive workshops. So they do still have these partnerships with other companies that they own part of or just have a partnership with or a distribution deal with. Usually what it means is it's sold as an Hermes product, but it's made by another manufacturer. And over the years, they've done this with shoes and umbrellas and leather jackets and raincoats and silverware and gloves.

• 3:10:59Ben Gilbert?

  Like they've had all these independent craftsmen that they sort of contracted with who have these really small shops, really small operations. Don't have the brand reach that Hermes does, but they make Hermes products that are actually made by those people. So it's interesting. I think they are sort of decreasing that. When I give the number that at this point, 76% of objects are made in its own exclusive workshops. But it is more correct than not to think about Hermes as they control everything from design to production to brand to retail today.

• 3:11:32David Rosenthal?

  Yep. And I think a lot of those, like there's a silversmith and a tableware manufacturer that they own large stakes into. So it's like a related party.

• 3:11:43Ben Gilbert?

  Yep, exactly. They have over 300 stores in 45 countries. David, as I mentioned earlier, in 2020, the Wall Street Journal estimated that about 120,000 Birkin and Kelly bags were made in that year. That's about 25 to 30% of total revenue coming from just those two bags, which again, you can't buy. And also you can't even see.

• 3:12:08David Rosenthal?

  Yeah, they're not on display in the stores.

• 3:12:10Ben Gilbert?

  I went to a few Hermes stores over the last year. A, because I love the brand. B, because I was thinking we might do this episode at some point. I saw zero Birkin or Kelly bags even on display. This is the thing that they generate all their buzz about and make 30% of their revenue from, and you can't see it in a store.

• 3:12:28David Rosenthal?

  Yep.

• 3:12:28Ben Gilbert?

  Crazy.

• 3:12:30David Rosenthal?

  Totally crazy.

• 3:12:31Ben Gilbert?

  I mean, if you just do some napkin math, at 25 hours per bag, that's 1,500 craftsmen just making Birkins and Kelly's all day long.

• 3:12:39David Rosenthal?

  Sounds about right.

• 3:12:40Ben Gilbert?

  They have 16 metiers, and one in particular that I want to talk about is Petite H. This is one of my favorite Hermès things, period. So it started in 2010. It's a very interesting idea. For other leather brands, you typically see them trying to use the second best leather cut in some of their bags. But at Hermès, they'll never do that. There's no bag that's ever produced with any imperfections or any part of the leather that they think is any lesser than the best. So what do they do with all that leftover material? Well, for years, they were just storing it. And this is everything from the leathers to the felts to the silks, all this extra

• 3:13:22Ben Gilbert?

  material where they were just like, there's a tiny little bit that's usable, but not enough to actually make another bag to our standards. So into the closet it goes. And in 2010, they launched Petite H. And what they basically do is they collaborate with other artists for tiny little goods that can be cut from the scraps that are super whimsical, super fun. Think luggage tags that are cute little animals, but it's just enough of a shape to know that it's a bull or a bear or a cat. And you look at it and you're like, oh, that's really clever. And what they call it is creation in reverse. You start designing with the materials, not the end product in mind. And it's kind of the opposite of everything else that Hermès has ever done, which is

• 3:14:04Ben Gilbert?

  think about what's the perfect good we can create to solve this problem for our customer? This was like, no, we've got a bunch of scraps. What's fun stuff we can do? And that is that whimsy coming through.

• 3:14:15David Rosenthal?

  Yes.

• 3:14:16Ben Gilbert?

  One thing that I want to say about the luxury bubble cooling is that earlier I sort of chalked it up to, well, Hermes has the most exclusive brand posture, so they have the least price sensitive customers, so they're gonna feel the pullback less than everyone else. And that is true, but there are other parts of it, too. Hermes's obsession with responsible growth, limiting production, and slower price appreciation also plays into the desirability and the durability of their goods. If they were out there cranking the prices of Birkin bags, you might think less of them.

• 3:14:53David Rosenthal?

  Yep.

• 3:14:54Ben Gilbert?

  If they were out there trying to produce more of them to meet demand, you'd certainly think less of them. If they were outsourcing production anyway. So it's how they conduct business that has caused them to sort of be in a better position than the rest of the luxury industry right now in this pullback.

• 3:15:09David Rosenthal?

  Yeah, I'm glad you reminded me to bring this up. When we were talking earlier about the question of the secondary market and why are they leaving pricing power on the table?

• 3:15:18Ben Gilbert?

  Or essentially, there's consumer surplus in economic terms.

• 3:15:22David Rosenthal?

  Right. And I said, I think they increased prices across the product range by about 7% per year. So where I got that from is if you look at the compounded annual revenue growth rate of Hermes for the last 10 years, you know, the sixth generation era, it's 15%. Revenue's grown 15% compounded annually since XL took over in 2013. They've increased production 7% per year. That's their stated goal. So if you say like, okay, of the 15% revenue growth, take out the 7% production growth, that leaves 7% to 8% of, that's gotta be attributable to price increases.

• 3:16:00Ben Gilbert?

  Huh.

• 3:16:00David Rosenthal?

  Which I think this is the answer. Now, is it the right strategy? Probably it is the right strategy if you're thinking about, hey, this is a generational business. We're on the sixth generation. We want to ensure it's around for the 12th generation. Yes, we're leaving consumer surplus on the table here because we don't want to be seen as that brand that, you know, is like $100,000 handbags, even though they are $100,000 handbags.

• 3:16:25Ben Gilbert?

  Right. Yeah, there's a fine line.

• 3:16:27David Rosenthal?

  There's a gauche-ness to it.

• 3:16:28Ben Gilbert?

  Right, exactly. They need to have a price that's high enough to signal this is something really, really special and we are more unique than every other luxury brand who's trying to make similar products and have similar positioning. But also, it's not so expensive that it's gauche. And I think the latter part, it's not actually about the dollar amount, it's about the price difference. Because if it's three times as much as it was a decade ago, it's harder to trust the intrinsic value of the good if it's fluctuating all over the place.

• 3:17:01David Rosenthal?

  There probably is an element of like, I want to say almost defense that they can fall back upon of, well, yes, we sell these things for $12,000, $20,000, whatever, but the moment you take possession, you can turn around and sell it for more.

• 3:17:14Ben Gilbert?

  Oh, this is an intentional strategy over at Rolex. They increase prices a certain amount per year and they want to show a track record of that so that if you buy one, you can rest assured that it's going to increase in value over time and that it's a good investment. Because, counterintuitively, by increasing the price more than the rate of inflation every year, or especially more than the rate of 5% to 7% stock market return, it spurs people to buy that otherwise wouldn't have bought because they feel more safe making the purchase.

• 3:17:46David Rosenthal?

  This concept landed for me during our Porsche episode, working with Doug DiMiro. There's a class of almost every car that you would ever buy, you know, the old adage is true that the day you drive it off the lot, it's worth, you know, 20% less than it was the day when you bought it.

• 3:18:02Ben Gilbert?

  Yep.

• 3:18:03David Rosenthal?

  For, I don't know what the right word is, luxury cars, collector's cars, you know, rare cars, et cetera. The opposite is true. These are investment vehicles. If you buy a Carrera GT. You're going to spend a million dollars for it, but you can also be confident that you're not going to lose money on that purchase.

• 3:18:25Ben Gilbert?

  Right.

• 3:18:25David Rosenthal?

  It's an investment.

• 3:18:26Ben Gilbert?

  Right. Then there's a business unit that we didn't talk about yet called Hermes Horizons.

• 3:18:32David Rosenthal?

  Yes, which is not a official MTA, right?

• 3:18:34Ben Gilbert?

  It is not a MTA. They break it out under other products. They have four categories of other products. There's Internet of Things, which is Apple Watch. There's tanneries and precious leathers. There's metal parts, which is a J3L subsidiary that I think literally makes the clasps and stuff like that.

• 3:18:50David Rosenthal?

  My deployment buckle.

• 3:18:51Ben Gilbert?

  Yes. And then there's Hermes Horizons.

• 3:18:54David Rosenthal?

  This is so great.

• 3:18:55Ben Gilbert?

  Hermes Horizons is perfectly named. What it basically says is-

• 3:18:59David Rosenthal?

  If you have a private jet-

• 3:19:01Ben Gilbert?

  Yes.

• 3:19:01David Rosenthal?

  And you want it outfitted with Hermes seats.

• 3:19:04Ben Gilbert?

  And we don't make seats.

• 3:19:05David Rosenthal?

  We've got the division for you.

• 3:19:06Ben Gilbert?

  We will make you seats.

• 3:19:08David Rosenthal?

  Yes.

• 3:19:10David Rosenthal?

  There's an amazing quote from an article, probably 10, 15 years old. The person who was running this division said something like, "We get a lot of clients who come in here and they want a big H on whatever it is they want us to make. And we have to have a discussion with those clients, that if that's what you want, we are not the place for you."

• 3:19:34Ben Gilbert?

  Yes.

• 3:19:35David Rosenthal?

  So great. Maybe one day be Hermes Horizons customers.

• 3:19:39Ben Gilbert?

  Maybe. We'll see.

• 3:19:41David Rosenthal?

  All right. Well, let's transition officially to analysis and start with power, as we always do. Hamilton-Helmier's seven powers.

• 3:19:49Ben Gilbert?

  And listeners, this is the question of what enables a given business to achieve persistent differential returns or to be more profitable than their closest competitor on a sustainable basis. And the seven that Hamilton has identified are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And the question we asked David on the LVMH episode was, "For luxury brands, is there anything else other than branding power?" Because the definition of branding power is if I present you two identical objects and one of them is branded and one of them is unbranded, it is literally quantified as the premium that you are willing to pay me for the brand.

• 3:20:34Ben Gilbert?

  Now, in Hermes's case, it may not actually be branded, but you might still know it is Hermes and be willing to pay more for it.

• 3:20:40David Rosenthal?

  Yeah. If you know, you know.

• 3:20:42Ben Gilbert?

  Yes. Again, we're drawing a lot of attention to quiet luxury here. Hermes is not as quiet luxury as they once were. So I think it's safe to say it would have an H or a horse or woven H into the fabric or something like that if presented to you here. But obviously, there's a tremendous amount of branding power.

• 3:21:01David Rosenthal?

  Now, on the LVMH episode, we talked a lot about, and I think this truly was maybe the most brilliant thing that Bernard Arnault did was he realized when nobody else did that there were scale economies in luxury to a group of luxury brands. There's the opposite of scale economies to an individual luxury brand. But at the group level, there is power, and specifically scale economies, power that does not exist at the brand level. Clearly, none of that is happening here.

• 3:21:34Ben Gilbert?

  Yep. Okay, I have two cases to make for non-brand powers that come into play.

• 3:21:39David Rosenthal?

  Oh, okay, great.

• 3:21:40Ben Gilbert?

  Cornered resource.

• 3:21:41David Rosenthal?

  Yes, agree.

• 3:21:43Ben Gilbert?

  They literally have all the craftsmen.

• 3:21:44David Rosenthal?

  I agree.

• 3:21:45Ben Gilbert?

  Except for the ones that are opening their own independent shop, and those ones don't have brand power. An Hermes craftsman can make a wallet. An independent craftsman can make a wallet. You're going to pay a lot more for the Hermes one. In fact, you're never even going to be aware that the independent craftsman exists. If someone else wanted to go compete with Hermes, it'd be hard because they don't have the brand, they don't have the history. But also, you literally can't find any more craftsmen, so you'd have to train them yourselves.

• 3:22:06David Rosenthal?

  Well, and I think even the other luxury brands out there, most of them probably do have some craftsmen.

• 3:22:11Ben Gilbert?

  Yes.

• 3:22:12David Rosenthal?

  Some stuff that's done by hand, some components of some products done by hand. But nobody does what Hermes does, and Hermes does all the craftsmen. So cornered resource, for sure.

• 3:22:21Ben Gilbert?

  Yep. The other one that is a little bit squishier, are they counter positioned to other luxury brands by basically saying, hey, we don't have to serve as many customers as you, so we actually can handcraft each item individually?

• 3:22:35David Rosenthal?

  Hmm.

• 3:22:37Ben Gilbert?

  Louis Vuitton has no ability to switch gears and say, oh, it's important to compete on the vector of handcrafted.

• 3:22:43David Rosenthal?

  Right, there are a lot of t-shirts out there.

• 3:22:44Ben Gilbert?

  Right. They have to serve too many customers, but Hermes doesn't.

• 3:22:49David Rosenthal?

  Right.

• 3:22:50Ben Gilbert?

  It's kind of flimsy counter positioning.

• 3:22:52David Rosenthal?

  Uh, no, I like that, actually. It's rare to have counter positioning at scale. As Hamilton would put it, counter positioning is usually a takeoff phase power.

• 3:23:02Ben Gilbert?

  Yep.

• 3:23:03David Rosenthal?

  I think there's an element of that. You could dissect how much of that particular element is actually part of the Hermes brand versus counter positioning in and of itself, but I buy it. I think at the end of the day, though, I mean, we spent however long this episode will be when it ships, recounting the myth of the brand here, like, brand is the power.

• 3:23:22Ben Gilbert?

  Yep, brand is the power.

• 3:23:24David Rosenthal?

  Yes.

• 3:23:24Ben Gilbert?

  Okay. Playbook. I called David earlier this week and I said, we have a problem. There's this really good part of the LVMH episode and we're going to need to repeat it point for point on the Hermes episode. And that is why handbags are just the best freaking product to sell ever as a business. And David planted the seed with me. Perhaps it's actually going to be a pretty different point once we really tell the whole story. And David, you are right. So the point that was made on the LVMH episode are handbags are the best product ever because they're super easy to sell versus clothing. They don't require you trying anything on or sizing. You look at it, if you like it, you buy it, done. Much better than a fashion product.

• 3:24:09Ben Gilbert?

  They're easier to create and produce than perfumes, which is another common luxury category. The profit margin is astounding. For most luxury brands, the profit is between 10 and 12 times the cost to make them. At Louis Vuitton, it's something like 13 times. So there's this ease of creation. There's high volume, according to annual consumer surveys that Coach does. The average American woman purchased two new handbags in 2000 and by 2004, that number was more than four. So it's this high volume product. And at Louis Vuitton's immense four-floor global store in Tokyo, 40% of all sales are made in the first room, which sells only monogrammed handbags, wallets and other leather goods. Basically, none of these are true for Hermes.

• 3:24:53Ben Gilbert?

  The business is not high volume or not nearly as high volume as they could be. In fact, they don't even show you handbags in their stores. So certainly not in that first room.

• 3:25:02David Rosenthal?

  It's amazing, you know, at least in the Palo Alto Hermes, which is what I've most recently been in. You walk in and you would think this is a homewares company.

• 3:25:11Ben Gilbert?

  Yes.

• 3:25:12David Rosenthal?

  There's a lot of tableware and there's a lot of furniture.

• 3:25:15Ben Gilbert?

  And there's clothing, there's ready to wear.

• 3:25:17David Rosenthal?

  And there's clothing and there's some leather goods, there's scarves, but you would really think, wow, I'm in the most expensive Ikea ever.

• 3:25:28Ben Gilbert?

  Such a funny way to describe it. In terms of trying on the handbags, when you do get your moment in the sun and you have your 90 minute appointment and your glass of champagne, and you have the opportunity to buy one of the two or three Birkin bags that they have in store.

• 3:25:42David Rosenthal?

  You can't say no, you have already accepted.

• 3:25:45Ben Gilbert?

  Right, and it doesn't have the benefit of saving square footage, the way that, you know, I mentioned, oh, you don't need to try on handbags. There's nothing to impede your velocity. Hermes is impeding your velocity and they're taking up square footage with these private rooms for you to go and spend time in. So they don't take advantage of that benefit either. I mean, the only thing that it has in common are these goods are sold at a phenomenal margin, just like Louis Vuitton. But I sort of came around to this idea that actually we're not making any of the same points at all. They managed to sell the same exact product category totally different. And they've constructed an entirely different business model around the same products.

• 3:26:24David Rosenthal?

  Yes, I think that's really the story. Yes, there are other brands, there's Chanel, there's Gucci, there's Cecilia. I don't want to say that those luxury brands and those handbag brands are not incredible. They are, but there's Hermes and there's Louis Vuitton. And they're both connected all the way back to Empress Hugenie and France and the nobility and all of that. And it's so interesting that they have such different strategies and they are the two pedicals.

• 3:26:52Ben Gilbert?

  Right. This is a good moment to bring up this idea that Hermes likes to espouse that they have no marketing department.

• 3:27:02David Rosenthal?

  Yes, this is a whimsical element of Hermes that I kind of love.

• 3:27:05Ben Gilbert?

  Yes. So they make the point that everyone at the company is responsible for marketing, which is wonderful. What a great comment. But there's some truth to it. There's obviously a lot of PR and events and stuff that they do, but it's worth looking at some of the numbers. They spend 23% of their revenue on sales and marketing costs. But just a small fraction of that is actually on marketing, or what they call communication. It's just 4.5% of their revenue. And if you compare that to LVMH, which spends over 1/3 of their revenue on sales and marketing combined, so that's 23% for sales and marketing at Hermes compared to 33% at LVMH. I mean, that's a huge difference. When you compare apples

• 3:27:48Ben Gilbert?

  to apples just on marketing, LVMH says they spend 12% of total sales on advertising and promotion. Hermes spends 4.5% on communication. I think that is actually apples to apples.

• 3:28:01David Rosenthal?

  Yeah, that's the media spend of Hermes, I believe.

• 3:28:05Ben Gilbert?

  It's still not right, though.

• 3:28:06David Rosenthal?

  Oh.

• 3:28:07Ben Gilbert?

  It's all marketing, that 4.5% versus 12%. But remember, you pointed out to me earlier before recording, 2/3 of Hermes's communication is actually events. So if you look at the remaining 3rd, it might be as low as 1.5% of their sales are actually spent on media buys for marketing, compared to LVMH's 12%.

• 3:28:30David Rosenthal?

  Yeah. This is really cool. I saw a very large splashy media buy from Hermes very recently, and I was shocked when I saw it because I didn't expect it. But then, now, doing all the research, understanding the strategy, it makes total sense to me. It was at the ballet here in San Francisco, at SFB, at the program for Mere Mortals, which was, as I talked about on the Nova Nordisk episode, we went to see it opening night, just incredible, incredible piece, you know, allegory for Pandora's Box and AI and ballet in the modern world here in San Francisco. The back of the program was a full-page Hermes ad. And I was like, whoa, I think I texted you a picture. I was like, Hermes is buying?

• 3:29:12Ben Gilbert?

  Right.

• 3:29:13David Rosenthal?

  Full-page marketing ads? But no, no, no. This is in the program at the ballet. This is not on the back of Vogue. There's a difference.

• 3:29:20Ben Gilbert?

  Right, this is in some ways event spend.

• 3:29:22David Rosenthal?

  Yes, it's much closer to that.

• 3:29:24Ben Gilbert?

  They also go really hard when they're gonna spend money. They don't blanket the world. They decide these concentrated ways that they want to do something really unique and special. And that's how they spend their media buys.

• 3:29:36David Rosenthal?

  Also their event spend. You might say like, wait, how do they spend twice as much on events as they do on media? You haven't read about Hermès events.

• 3:29:44Ben Gilbert?

  Yeah.

• 3:29:44David Rosenthal?

  Even just the pure marketing events, like a store launch or product launch, they'll spend a million dollars on a party.

• 3:29:50Ben Gilbert?

  Right. Another place that they save a lot of money is that they don't do celebrity endorsements, unlike virtually every other luxury brand. And this gets back to control, control, control. Hermès is the master of its own image. And in these other companies, celebrities do dumb stuff all the time. And it reflects on the company. You have to change your spokesperson. I mean, you look at Kanye, you have to just decide to stick with them and tough it out. And Nike has done this a number of times to sort of say like, we think we're gonna come out the other side and we think they're gonna get through this. Hermès, no, we control our own image. No one else reflects on us.

• 3:30:30Ben Gilbert?

  And who needs celebrity endorsers when you make your products so desirable and so expensive that the celebrities will just buy them anyway? And they want to be seen in it. So there are celebrities running around who get paid to endorse other brands who will pay full price to wear Hermès out and about.

• 3:30:49David Rosenthal?

  It's part of the status is getting the ability to buy one, getting the appointment with your SA, spending the money. That's part of the status.

• 3:30:56Ben Gilbert?

  Not only is it revenue generating and cost saving, but it's also more powerful than a paid endorsement because it's authentic. It is what the celebrity is choosing to do with their dollars.

• 3:31:07David Rosenthal?

  Yep. I'm pretty sure that Grace Kelly bought her Sacca Depeche.

• 3:31:10Ben Gilbert?

  Unbelievable. At the end of the day, the Hermes brand really has a tremendous amount of word of mouth from people who are big fans of it. And the brand is built through the lore around the products. And they just don't need to do that much media because they have a community. They have slowly, organically built this, at this point, large number of people around the world that aspire to buy Hermes. And honestly, they just don't need to do that much marketing.

• 3:31:43David Rosenthal?

  This is going to sound absurd on the surface, but I think it's true. That audience is incredibly diverse. That audience is lots of customers in the Middle East.

• 3:31:54Ben Gilbert?

  Yep.

• 3:31:55David Rosenthal?

  That audience is 40-plus percent China. That audience is still French people with the preface "de" in their names, i.e. you know, Old Nobility. That audience is the wealthiest people in America. That audience is Cardi B and Megan Thee Stallion.

• 3:32:12Ben Gilbert?

  As we talked about earlier, somehow, there's something about the French heritage that everyone else is willing to, status-wise, look up to and want to participate in.

• 3:32:23David Rosenthal?

  Yep. I don't think we want to go down this rabbit hole, but there is a whole TikTok and Instagram culture of Hermes sales associate appointments and Birkin appointments and reveals and all that. And like, you know, it's huge. There are millions and millions of people that watch this.

• 3:32:38Ben Gilbert?

  Yep. Okay, one thing that we did not talk about is how they merchandise the stores. And this is another thing that sets Hermes apart from other brands. They have a pull model versus a push model, for all you software engineers out there. Basically, they embrace this idea that every store is for the local clientele and that store managers know their clients the best. So therefore, store managers should get to pick what is in each store. And headquarters does not dictate what every store stocks, which is super different than every other brand. You open retail stores in order to just get your product out. That's the point, is distribution. Whatever salespeople we hire to work at those stores, they're going to sell.

• 3:33:22Ben Gilbert?

  The same iPhones and iPads that we have everywhere else at every other store. That is not Hermès. So at Podium every year, which is this event that they have every six months where they show off all the new references. Here's all the new designs for all the new products. Each store manager gets a budget and they have the freedom to buy, quote unquote, buy, basically stock and get allocations of whatever they want at their store, under the constraint that you can't ask for 120,000 Birkin bags at your one store.

• 3:33:48David Rosenthal?

  I believe there's also a regulation that every store needs to carry at least one item from each métier.

• 3:33:54Ben Gilbert?

  Oh, that's cool. I didn't realize that. I like that.

• 3:33:56David Rosenthal?

  But yeah, this operates like a retail buying event. It's bizarre, but awesome.

• 3:34:01Ben Gilbert?

  Even though they're wholly owned, they get the benefit of not being wholly owned, you know?

• 3:34:06David Rosenthal?

  Right, the market signals.

• 3:34:07Ben Gilbert?

  The cool thing about a retailer that's decoupled from the manufacturer is that the retailer can kind of stock whatever cool stuff they want, you know, as long as the metiers are all producing a diverse set of references, then you actually do get this diversity of different things that are stocked at that store for that region. So it leads to this cool thing that no two stores are identical. It's kind of fun to see what this Hermès shop has versus that Hermès shop whenever you travel.

• 3:34:35David Rosenthal?

  It's like a Costco treasure hunt element to it.

• 3:34:38Ben Gilbert?

  Yes, exactly. I will tell you, I was in the Exxon Provence store and someone came in and said, I want to buy this particular item. And the store manager said, well, we don't have it. And they have a policy against anyone sort of calling ahead to know what's where. And he was asking, well, can you call the other store that I think was in Marseille or something like that and see if they have it there? And she said, no, we don't do that. You can go there and you can find out. And I think this person was trying to like buy something and flip it. And so they were sort of on to that. He was also trying to take pictures of things in the store and they said, you can't do that, sir. Like you can't take photos of what we have in stock because they don't want people standing up websites to say, tip, go buy this here because you can flip it online for that much.

• 3:35:21David Rosenthal?

  But I love it.

• 3:35:22Ben Gilbert?

  They have pretty tight controls around that.

• 3:35:24David Rosenthal?

  I love it. Luxury strategy, anti-love marketing number six, dominate the client.

• 3:35:29Ben Gilbert?

  Dominate the client. Yep. Their e-commerce strategy is just pretty funny. It's not like you can go online and buy a Birkin bag, but there's not even a product detail page with like a sold out button. There's just this educational page about what Birkin bags are all about and how neat the designs are and what the category is.

• 3:35:47David Rosenthal?

  But there's no buy button.

• 3:35:48Ben Gilbert?

  It's also for a different audience. Interestingly, 70% of buyers online, for all the stuff that you can buy online, were new to Hermès. So that's a great strategy for them for e-commerce. You say, look, the special things are the special things. But for people who we want to come experience the brand for the first time, great, we've got a website for you. And I think you can sort of tell that internally they're torn, since that's not the full Hermès experience. Like you don't get the experiential part of being in the store, but they also do a lot of volume through it and it's a way to reach a new audience and it's kind of an expectation at this point.

• 3:36:24David Rosenthal?

  This is a really uniquely Hermès thing and is related to their airport strategy too. Oh yeah, and I experienced this too. When I went to Palo Alto, I just walked into the store. I was pretty intimidated as a first time buyer and you don't have a, an SA, a sales associate relationship. It can feel very intimidating, like especially knowing what I know about the company and the brand, you know, the weight of history, like walking into this store. It's not like walking into an Ikea. You know, this is very intentional, the e-commerce strategy and then the airport strategy is, hey, nobody feels intimidated in an airport. Obviously you don't have to have an appointment to walk into the airport Hermès store.

• 3:37:06David Rosenthal?

  It's a way to get first time buyers into the fold, establish the relationship with them, get them more comfortable in this buying experience, which is wholly unique to Hermès.

• 3:37:16Ben Gilbert?

  Yep. In some ways it seems wholly un-Hermès, but in other ways, kind of like the Apple Watch thing that they do or the perfume, they are looking for ways to be more approachable.

• 3:37:26David Rosenthal?

  Right.

• 3:37:27Ben Gilbert?

  Another one worth mentioning is employee turnover. So the employees, especially the craftsmen, basically stay forever. As we've been saying, there's really no other game in town. And if Hermes wasn't there, these people probably wouldn't have been trained to be craftsmen in the first place. So what does that look like numerically? There is 6% annual turnover and only 4.5% leave of their own desire. 4.5% of their entire workforce every year leaves of their own desire.

• 3:37:57David Rosenthal?

  So that translates to a longer than 20-year average tenure. This is like Costco level employment retention.

• 3:38:04Ben Gilbert?

  It's funny you say that. So Costco is 7% a year, but Costco cheats a little bit in that the stat is after the first year, whereas Hermes's attrition of 6% includes the first year.

• 3:38:17David Rosenthal?

  Wow.

• 3:38:18Ben Gilbert?

  Yeah. So just compare this with all industries in the US. That's a 3.4% monthly turnover. So in the United States, across all industries, and thanks to Jeremy Diamond and the Slack for pointing this out, 1/3 of the entire workforce churns, on average, every year. So when you're trying to figure out, geez, is 6% good? 6% is unbelievable because the benchmark is 33%.

• 3:38:44David Rosenthal?

  Especially in the context of, think about the two areas that are the bulk of Hermes's employees. It's craftsperson.

• 3:38:53Ben Gilbert?

  Yep.

• 3:38:54David Rosenthal?

  And sales associates.

• 3:38:55Ben Gilbert?

  Which, if you are to use different language, is manufacturing and retail, which are super high churn categories.

• 3:39:01David Rosenthal?

  Right. That's the point I'm making.

• 3:39:03Ben Gilbert?

  I mean, even software developers churn at 15% to 20% per year, and that's just the voluntary numbers. This is much better than software engineers who get paid hundreds of thousands of dollars to have a very cushy job. So finally, let's go real apples to apples. Let's compare this to LVMH. Well, LVMH's total turnover in 2022 was 24% versus Hermes's 6%. So Hermes may be obsessed with this whole savoir faire and transmission of craft in their annual report, but it is totally real. I mean, the entire thing works because of the knowledge and craft of their people.

• 3:39:39David Rosenthal?

  And I mean, they have incredible YouTube videos and documentaries they put out, like you referenced, you go see these people and like, you really get the feel like factories, you know, they're not factories. These ateliers are something truly unique.

• 3:39:54Ben Gilbert?

  Yeah. And they're only getting more obsessed with control. I mean, controlling everything end to end. Hermes used to have 56% of retail locations that were company owned. This is back in 2003, so 20 years ago, a little over half were company owned. That's now 74%. So they're getting rid of what they refer to as the concessionaires, which are essentially franchised stores and closing them in favor of the wholly owned businesses. So this is, again, they're just trying to figure out, how do we control more of our production of our everything soup to nuts? They described this strategy as having three pillars. And this is like three pillars for their entire business. This is like the strategy at the top of the annual report.

• 3:40:35Ben Gilbert?

  Creation, craftsmanship, and exclusive distribution network. And that's probably the way to sum up Hermes. All right, so to close playbook, I just have one more, which is really this idea of what is the job to be done by Hermes? And I had this great conversation with Derek Guy. He's sort of colloquially known on Twitter as the menswear guy. Die workwear is his handle. And he has some amazing threads. They're very worth reading about if you're interested in ironing pants or why suits don't fit the way they used to. But he pointed out this really interesting thing to me, which is the value propositions of Hermes are essentially a bundle.

• 3:41:17Ben Gilbert?

  And that bundle is exclusivity, service, craftsmanship, shopping experience, and a great brand. And you basically can't get that bundle anywhere else. That doesn't have competitors.

• 3:41:34David Rosenthal?

  Yeah, you can get individual elements of that bundle elsewhere.

• 3:41:38Ben Gilbert?

  Absolutely.

• 3:41:39David Rosenthal?

  But by nature, given what this is in the luxury industry, you can't assemble this experience, the Hermes experience, out of separate components.

• 3:41:51Ben Gilbert?

  And it used to exist in sort of a pre-war, early 20th century era. You could, but Hermes was the only one that sort of chose to keep doing things the old way. And scale and everyone else kind of went out of business or changed their methodology to scale. So for example, Louis Vuitton has the branding, they have exclusivity, but the craftsmanship isn't there. They don't make things in that early 20th century way. Supreme can offer you exclusivity and brand, but again, there's no real craftsmanship there. And then you've got all these individual artisans, a crafts person in a little workshop somewhere in Paris, making the highest quality Hermes quality things, but there's no brand. Would you buy that? Would you pay even half the price for that? I think a lot of people

• 3:42:34Ben Gilbert?

  who are buying Hermes are buying it because they're Hermes and they want the brand.

• 3:42:38David Rosenthal?

  Right.

• 3:42:39Ben Gilbert?

  And there's other things that are missing from that, too. There's no shopping experience. Service is unknown because you don't know how long that maker is going to be around. You know for a fact that 50 years from now, you can get your Hermes things serviced. So there's some great makers like Chester Mox or April in Paris, or I heard great things about Mila Gito. These are like exceptional craftsmen hand making items in the same way, but it's a different bundle of value propositions.

• 3:43:06David Rosenthal?

  Yeah, completely different product.

• 3:43:08Ben Gilbert?

  To me, what sums up the analysis is that the magic of what Hermes has done is managed to scale the old way with the complete bundle.

• 3:43:18David Rosenthal?

  Yeah, totally agree. Nothing more to add.

• 3:43:21Ben Gilbert?

  Thanks, Charlie.

• 3:43:22David Rosenthal?

  All right. So we do value creation, value capture, and then we've got a new way to wrap up episodes here.

• 3:43:29Ben Gilbert?

  Yes. Well, this section was originally created by us five years ago or something to basically assess of the value created in the world, how much does the company actually capture of it? So canonically Craigslist creates a ton of value. Wikipedia creates a ton of value, captures very little of it. But you look at, on the other hand, Google, they create a lot of value. You can find stuff on the internet. They're pretty damn good at capturing it. They've built a huge business on that. So there, I think, is a reasonable indictment to make that many of you will want to make on all of luxury and say it's just excess. They don't actually create value in the world. And then they capture a tremendous amount of value because they just have a brand that allows people

• 3:44:11Ben Gilbert?

  to social signal and all luxury is excess. And that's a reasonable viewpoint.

• 3:44:18Ben Gilbert?

  However, I think there's an interesting way to look at Hermes in particular, which is if what you desire is the highest quality craft, they offer at an extreme price a guarantee to be able to get that super high quality craft. And that's different than every other luxury brand that is no longer about craftsmanship, but is kind of about hype and logos.

• 3:44:46David Rosenthal?

  Brand.

• 3:44:46Ben Gilbert?

  Yeah.

• 3:44:47David Rosenthal?

  It's about brand and fashion.

• 3:44:48Ben Gilbert?

  Yes. So I would say Hermes has figured out that there actually is a pretty big niche for craftsmanship, or at least people who desire the brand of craftsmanship. And they're exceptional at value capture around that.

• 3:45:03David Rosenthal?

  Well, it's interesting. Yes. But the secondary market is this very direct, if you're talking purely about economic value creation, value capture, very direct data point that like, no, they are leaving a lot of surplus on the table for their consumers.

• 3:45:18Ben Gilbert?

  Yep. Another element to value creation, value capture is what they're doing good for the world, period, regardless of what they're able to capture. Anybody who's doing things with exotic leathers, you may have a problem with farmed crocodiles in mass quantities in order to create the Himalaya print Birkin bags.

• 3:45:39David Rosenthal?

  There's actually a brief period where Jane Birkin boycotted Hermes bags and asked them to take her name off of them.

• 3:45:44Ben Gilbert?

  Do you know how that got solved? Like, why is she cool with it now?

• 3:45:47David Rosenthal?

  I could be wrong, but I believe this is when Hermes took the crocodile farming in-house and improved a lot of the animal welfare standards.

• 3:45:55Ben Gilbert?

  So for everyone who's like, you know, it's absolutely cruel to do this to crocodiles to make handbags, Hermes doesn't really have like a counterpoint. They don't have like a, well, they lived good lives. That's not a part of their defense. Their defense is purely around sustainable farming, which is, hey, these are endangered species in many scenarios with these exotic leathers. And so what we do is for the ones that we farm, We also release a bunch into the wild to try to replenish the population, even though we're not actually taking away from the population in the wild because we're not hunting them. We are trying to sort of, almost in like an eye for an eye way, say, look, we're creating a bunch of crocodiles. And so we're releasing a bunch of them into nature also. And I don't know, it sits medium with me.

• 3:46:40David Rosenthal?

  Yeah, it's not a great response.

• 3:46:43Ben Gilbert?

  Right. Similarly, you see piles and piles and piles of cow hides for leather production. And the response is, well, look, these were beef cows. And so we're basically doing a good thing by making sure that we use the whole animal, since we were going to use it anyway for sustenance somewhere else in humanity.

• 3:47:03David Rosenthal?

  To me, that is a better argument than we farmed the crocodiles.

• 3:47:07Ben Gilbert?

  Right.

• 3:47:07David Rosenthal?

  For the skins. It's funny, actually, doing the Novo Nordisk episode gave me a new perspective on this with animal products. And obviously insulin doesn't come from animals anymore. It's genetically engineered, but a lot of pigs and cows went into producing insulin for many, many, many decades. That's a new perspective to look at things because people would have died otherwise.

• 3:47:27Ben Gilbert?

  Yep.

• 3:47:28David Rosenthal?

  Now, is that what's happening here with Hermes? Absolutely not.

• 3:47:30Ben Gilbert?

  Right. I mean, other brands, Chanel, Carl Lagerfeld, Mulberry, a bunch of them are banning exotic leathers in their products. So I think Hermes has played around with mushroom leather. But do I think Hermes is going to go all vegan anytime soon? Absolutely not. It's just not happening. The last thing that you can definitely be mad about if you are into animal welfare is the fact that Hermes cares so deeply about their brand that they burn imperfect products so they never see the light of day. That's a bummer. I understand Hermes's position of not wanting these bags to get out there and have their brand on it. And, you know, people realize like, oh, some Birkin bags look kind of crappy. But if you're destroying product that could otherwise have utility, especially when it's made from animals, bummer.

• 3:48:15David Rosenthal?

  Agreed.

• 3:48:16Ben Gilbert?

  So they spend a lot of time in their annual report, talking about how much more they're getting efficient in their manufacturing processes, how the rates of this are going down. They don't specifically call out burning bags, but how they're able to use more and more of the raw material and have everything that goes in the top of the funnel kind of get used in products all the way at the bottom of the funnel. So the company's taken a lot of heat for it over the years, and it's something that they spend a lot of time working on.

• 3:48:39David Rosenthal?

  Yep.

• 3:48:40Ben Gilbert?

  All right. David, I think that brings us to the question, which is, what is your big takeaway from this episode? What is something, it's like a big idea you're obsessed with after spending all this time with Hermes?

• 3:48:55David Rosenthal?

  We've kind of been struggling for a while with how do we end these episodes? These like books that we write now.

• 3:49:00Ben Gilbert?

  Right. We're not going to grade them the way that we used to grade.

• 3:49:03David Rosenthal?

  Right. That doesn't make sense. That was always kind of hokey anyway. And we've done bear case and bull case and like, again, are we going to do that better than an equity research analyst? Like, I don't know.

• 3:49:14Ben Gilbert?

  Well, and importantly, bear case, bull case has to take into account what are people's current expectations? So you sort of have to dissect the stock price.

• 3:49:22David Rosenthal?

  Right. Which isn't really the point of acquired.

• 3:49:24Ben Gilbert?

  Right. And we figure by the time you get to this point of the episode, you kind of already have a bear case and a bull case in your head. It's not like we're going to sit here and paint, well, if people keep being excited about luxury goods.

• 3:49:35David Rosenthal?

  Here's an incredible new insight that'll change your perspective on the stock. Like, no.

• 3:49:39Ben Gilbert?

  Right.

• 3:49:40David Rosenthal?

  So, you know, we've been casting about for honestly a while here of like, how do we land the plane on these episodes? So what we're trying here for the first time, and let us know what you think if you like it, in a very Hermes-like way, we dedicate really a month plus of our life to each of these episodes. Like, this is all we're doing for certainly the last four weeks. Every day we've been getting up, we've been studying this company, we've been writing, you know, it's sort of insane.

• 3:50:06Ben Gilbert?

  It's craft. We joke, but it's craft.

• 3:50:08David Rosenthal?

  And really, like you said, Ben, this episode started a year ago when we did the LVMH episode. And it's been percolating and percolating and percolating. And the last four weeks, it's been every waking moment for us. And so I think a fun way to try to end the episode is when we wake up in the middle of the night and Hermes is on our mind, what are the aspects of Hermes and why? And it ends up being personal for us, like what resonates for us from having told this story and done this work? And what resonates for acquired, honestly? And for me, we've touched on this a little bit throughout the episode, kind of with the whimsy and the dream element of Hermes.

• 3:50:48David Rosenthal?

  But there's something also to this company that I think is deeply interconnected with the fact that it's on the sixth generation of the family. You ask yourself, how is that possible? How six generations later is this company stronger than ever? And the family members are more committed than ever to running it. And I think it's because they have fun. And like, again, this comes through in the whimsy. This comes through in the annual reports. This comes through when you watch the interviews with XL and Pierre Alexi. And when you read the articles and hear people talk like Beatrice about Jean Louis, they are really having fun doing what they're doing.

• 3:51:33David Rosenthal?

  It's an amazing culture and it's kind of hard to have in a environment where you are also, I think, the 47th largest market cap company in the world. I think about other companies, like it's about winning, right? You think about a professional sports team or like, I think my mind goes to like the New England Patriots, you know, or like, honestly, it goes to like Benchmark and Sequoia, like the best venture capital firms out there. These are organizations that are 100% dedicated to winning. And it's not that Hermes isn't dedicated to winning, but they're kind of even more so dedicated to like having fun and enjoying themselves.

• 3:52:10Ben Gilbert?

  Yeah, there's a fun and they're staying true to their identity. And both of those things are more important than winning some numerical game.

• 3:52:18David Rosenthal?

  Right. So for me, that's the splinter in my mind over the last set of months with Hermes is honestly, it's what Acquire is for me and for us. Hermes could go out tomorrow and they could follow the consultants. They could borrow a page from the LVMH playbook and they could vastly increase their sales and profitability overnight. And if they were solely focused on winning, that might be what they do, but they are never going to do that.

• 3:52:45Ben Gilbert?

  But if they do that, it's still only a short term right thing to do.

• 3:52:49David Rosenthal?

  Right. So I think it's kind of tied into this short term, long term perspective thing. The reason I say it's fun is the family wants to keep doing this. And so if it weren't fun, they would probably maximize value and they would hit the short term bid and they would sell to Bernard. But they don't.

• 3:53:03Ben Gilbert?

  Yep. I love that. The splinter in my mind is that you can sell what on the face of it seems like the same type of products as someone else, but build two entirely different businesses. And Louis Vuitton and Hermès, on the face of it, do the same thing. And as soon as you start digging in, you realize that these companies could not be more different. And all of the puzzle pieces that fit together to create Hermès is an entirely different puzzle than the pieces that fit together to create Louis Vuitton. It's a great reminder that just because you are in the same product category as someone else, you don't have to build a similar business, and you might not even be competing with

• 3:53:48Ben Gilbert?

  them. There's a large number of people for whom Louis Vuitton and Hermès are not actually in a consideration set together ever. And I think that's fascinating.

• 3:53:58David Rosenthal?

  Right. These are mutually exclusive brands for a lot of people.

• 3:54:02Ben Gilbert?

  Yeah.

• 3:54:03David Rosenthal?

  Certainly not all, but a lot of people. I was thinking about that too, a little bit in the context of oftentimes in a market, the best way to compete with your best competitor is to do the exact opposite of them, you know, is not to compete with them.

• 3:54:16Ben Gilbert?

  Or at least be open to a, we don't have to do anything alike, open to that idea.

• 3:54:21David Rosenthal?

  Right. This is Android and iOS.

• 3:54:24Ben Gilbert?

  Right.

• 3:54:25David Rosenthal?

  Well, all right. That's our landing of the Hermès plane. Let us know what you think. I just love doing this one. This was one of the most enjoyable experiences for me. I mean, all of our episodes are about like, I just really loved this one.

• 3:54:38Ben Gilbert?

  Well, sometimes we get to learn about an industry that's interesting to know things about, like healthcare, or something we're a fan of, like the NFL episode. But sometimes we do an episode like Hermès, and it really teaches us how to run our own business. Again, acquired is not luxury, but we do create a product that has real scarcity, both on the listener front, because we only have an episode a month, and on the sponsor front, because we only have three sponsors a season. There is so much to learn studying the purity of Hermès when you run a business that's predicated on scarcity.

• 3:55:09David Rosenthal?

  Yes.

• 3:55:10Ben Gilbert?

  So this one was extra indulgent for you and I.

• 3:55:12David Rosenthal?

  Yes, yes, totally. Okay. Carvats. Let's do it. What you got?

• 3:55:18Ben Gilbert?

  I have three.

• 3:55:19David Rosenthal?

  Ooh, fun.

• 3:55:20Ben Gilbert?

  And none of them are a Vision Pro, even though the Vision Pro is sitting next to me on my desk. And the reason is not because I can't recommend it, but because this is acquired and we can't possibly do anything that's too current. I need more time to evaluate.

• 3:55:34David Rosenthal?

  The Hermes of podcasts, indeed.

• 3:55:36Ben Gilbert?

  Okay, first one, the Anker Prime Charger. I'll give you the model number because Anker products are impossible to figure out what's what. This is the A2343 model. It is a 100 watt charger that has two USB C ports and one USB A port. And it is tiny. It's lightweight. It's dense. You'll pick it up and be like, oh, my God, this is really heavy, but it's lightweight compared to large bricks. And here's the important thing. In those diagonal airline charging seats, you can plug it in and it doesn't fall out. And so it's 100 watts. You can super fast charge phone, laptop, whatever. There's two ports, two USB C ports and one USB A, and it works on airlines.

• 3:56:21Ben Gilbert?

  So it's the only thing that I travel with now. And it's the new gallium nitride GaN charging technology, which I think is totally game changing.

• 3:56:29David Rosenthal?

  Nice. I've got a 60 watt Anker that, you know, kind of same concept. And yeah, totally. Only thing I travel with.

• 3:56:36Ben Gilbert?

  Is it gallium nitride?

• 3:56:37David Rosenthal?

  No, no, no, it was a few years old.

• 3:56:38Ben Gilbert?

  Okay, yeah. I don't understand why nobody's talking about it because it feels like it completely revolutionized chargers. It makes everything 50% the size, even though it has super high power delivery.

• 3:56:48David Rosenthal?

  I might need to upgrade my travel setup. Maybe I need an Hermes leather case for it.

• 3:56:52Ben Gilbert?

  Might need to do it. All right, we'll link it in the show notes. Two more are apps or websites or web services. I don't know what we're supposed to call them these days. The first one is an app called Matter, which I have replaced for years. I used Instapaper and it was great, but it just hasn't been touched in forever. And Matter is Instapaper, but better. It is also an amazing way to listen to things that you save in a very realistic voice. So long time listeners know I don't absorb stuff very well by reading. I absorb it really well by listening. And so much of the research-

• 3:57:28David Rosenthal?

  So you're talking about text to speech, not like saving podcast episodes?

• 3:57:31Ben Gilbert?

  Correct. You can save podcast episodes, but you can forward an email newsletter and have that read it to you. You can use the bookmarklet on a website, have it read it to you. So it sort of bundles in text to speech and podcasts and email newsletters and read it later type services into one app. I mean, I did half the research for this by taking long things to read, including PDFs. It has an ability to parse PDFs now and like listening while running. Or my son was asleep in a carrier and I'm like walking around the house or I'm in a dark room somewhere. I'm on the treadmill in the garage. So I really like Matter. The team behind it is awesome. They actually were kind enough to reach out and have David and I collaborate with them on a couple of guest blog posts for their Words That Matter series of some of our favorite readings and writings of all time.

• 3:58:16Ben Gilbert?

  The team was great, which was my entree into it, but the product has exceeded expectations.

• 3:58:20David Rosenthal?

  Okay, I haven't actually tried the app yet. I love those guys. Now I gotta try the app.

• 3:58:24Ben Gilbert?

  It's awesome. My third one is another thing that dramatically has helped my research, which is perplexity AI.

• 3:58:31David Rosenthal?

  Oh, yeah.

• 3:58:32Ben Gilbert?

  If I could stop using Google, I would because perplexity is better for everything that I use to Google. Period.

• 3:58:41David Rosenthal?

  Oh, wow. Okay. All right, we gotta have perplexity on ACQ2 or something like, all right, more to come on this.

• 3:58:46Ben Gilbert?

  It's all the good things about ChatGPT and all the good things about Google and none of the bad things of either. It's reliable, it links to sources, it has good UI. I trust it because I've fact checked it so many times and it just keeps being right. It makes it easy to fact check. Accessing information is one of these things that if it's 97% good, it's bad. So it needs to be always good.

• 3:59:08David Rosenthal?

  Honestly, this is why I don't use ChatGPT for acquired work. I feel like we need to be 100% all the time.

• 3:59:14Ben Gilbert?

  Here's the best use case for perplexity. The other day I couldn't find something on Google and I went over to perplexity and I asked it the question and it said, "The answer to this is unknown on the internet." And I was like, "That is amazing. You just gave me confidence."

• 3:59:29David Rosenthal?

  Oh, getting that answer. Otherwise you're gonna spend half an hour on Google trying to find it.

• 3:59:33Ben Gilbert?

  Yes.

• 3:59:34David Rosenthal?

  Oh, that's amazing.

• 3:59:35Ben Gilbert?

  Yes, so it was both time-saving and confidence-inducing.

• 3:59:38David Rosenthal?

  I love it. Okay, I've heard from so many people about perplexity. I gotta give it a go and next episode, research.

• 3:59:45Ben Gilbert?

  It's phenomenal.

• 3:59:46David Rosenthal?

  I'm so disappointed in myself, but also it's just the reality of my life right now. I've become like the, you know, middle of the bell curve technology adopter. I used to be the bleeding edge, you know, early adopter. It's just. Man, getting old is hard. Joanna Stern had a great quote about this, The Wall Street Journal, when she was interviewed by Ben Thompson recently. She said, like, man, I wish I had the access that I have now when I was younger. I would be unstoppable, pulling all-nighters. I'd be using it to its full degree. And I don't have the energy now. Like, I got kids. And I'm like, man, I feel that.

• 4:00:18Ben Gilbert?

  That's the paradox. You often do your best work when you get older, even though you have less time, because you're wiser, your information's better.

• 4:00:26David Rosenthal?

  Your access, everything.

• 4:00:28Ben Gilbert?

  Yeah. You've gotten better at your craft, and you can never have both. But you live your life anyway. You'll make it through.

• 4:00:35David Rosenthal?

  What's the Dune quote? "Life is not a problem to solve, but a reality to experience."

• 4:00:40Ben Gilbert?

  Oh, yeah, I think that is it.

• 4:00:41David Rosenthal?

  There you go. Okay, my carve out. We are recording this. By the time the episode comes out, the Super Bowl will have been played and won by somebody. But, man, I am fired up. Go Niners, San Francisco 49ers, Brock Purdy. Hell, yeah. I'm channeling my inner J T O'Sullivan and QB School YouTube channel here. I'm so excited. Brock's story's amazing. So I was trying to think, okay, I can't have like, the Niners and the Super Bowl be my carve out.

• 4:01:10Ben Gilbert?

  Especially if this airs after they lose. We're leaving it in.

• 4:01:12David Rosenthal?

  Right, especially if they lose, right? But what I can have as my carve out, and is perfect for acquired, years ago, I read Bill Walsh's book. Bill Walsh was the legendary coach of the 49ers during the Joe Montana, Steve Young era. He invented the West Coast offense. And he wrote this book called The Score Takes Care of Itself. And it's so good. It's just like a great leadership book. But, you know, the title says it all. It's related to Hermes. It's related to acquired. It's, you know, the splinter in the mind, everything we've been talking about. It includes some ideas like scripting. This is now so commonplace in the NFL and football everywhere. But everybody scripts out your first set

• 4:01:52David Rosenthal?

  of, you know, five, 10, 20 plays, et cetera. Bill Walsh invented that. And like, we do the same thing on acquired. We have scripts. Like, I have a script. You know, you have a script. And obviously, the episode doesn't follow the script any more than an NFL game.

• 4:02:05Ben Gilbert?

  But you need a way to start that's predictable, or at least something you've thought through.

• 4:02:10David Rosenthal?

  Right. Obviously, Bill Walsh didn't invent that idea writ large, but he invented it for the NFL. There's also some really good stuff in there about when to persist with doing something different and continue to do it versus stop doing it. And like, what are the right reasons to do it? Like, especially in the early days when it's working or not working, like I'm thinking about, you know, launching the Birkin and all that. Anyway, it's a great book. Bill Walsh was a legendary figure. And yeah, go Niners. Hell, yeah.

• 4:02:38Ben Gilbert?

  There you go. Wishing you the best of luck. And listeners, you know what already happened.

• 4:02:43David Rosenthal?

  Well, either way, I'm celebrating because either the Niners won, or we're going to see a lot of Taylor Swift and Travis Kelsey. So I'm thrilled.

• 4:02:50Ben Gilbert?

  Ah, I tweeted this, that Taylor plus the NFL is literally the perfect bundle because they've both fully saturated their markets. That Taylor is America's musical cultural icon of this moment. There's no one who could be a Taylor super fan that's not already a Taylor super fan. And the NFL similarly has had close to 100 year history. And it is the fullest realization of itself already. The NFL is America's sport. And so they've already got all the super fans they're going to get. And so by bundling together, this is so awful.

• 4:03:24David Rosenthal?

  Oh, no, this is the ultimate collab.

• 4:03:27Ben Gilbert?

  Yes, they can address each other's sort of casual fans who wouldn't have tuned in specifically for one or the other.

• 4:03:34David Rosenthal?

  Taylor is 100% thing. I'm not saying she's dating Travis because of this, but Taylor is one of the smartest CEOs in the world, writ large, period, bar none. And like, of course she is thinking about this.

• 4:03:44Ben Gilbert?

  Yep. What's the phrase that Shashir Maroto used? The marginal churn contribution? There are people who will not turn off the Super Bowl who otherwise would have because there might be another Taylor viewing.

• 4:03:57David Rosenthal?

  Jenny has negative interest in football, but she's telling me about like what Taylor is wearing, you know, whether she's going to be able to make it back from Japan from the Super Bowl.

• 4:04:07Ben Gilbert?

  We'll see. All right, listeners, we have a bunch of thank yous. Huge thank you to Domenico De Salle, the former CEO of Gucci and the co-founder of Tom Ford with Tom Ford. Domenico, your conversation was just invaluable in preparing for this episode. And obviously, yes, a legend. Adam Pritzker, good friend of the show, is the co-founder of Assembled Brands and the company Kate, which is in the fashion and luxury space. And Adam is super kind and a huge contributor to this episode, just like he was to LVMH. To Derek Guy, who is at @diworkwear on Twitter for teaching me about saddle stitching and what makes Hermès special, and a bunch of the other

• 4:04:50Ben Gilbert?

  brands that we mentioned that do boutique leather goods, and for putting April in Paris on my radar. That was very helpful. Reginald Jerome Deman, or RJ, which is sort of a funny pen name, he wrote a book called Swan Songs: Souvenirs of Paris Elegance. He's obsessed, for lack of a better phrase, with Parisian luxury and the history of it. And so it was really educational to talk with him about this and fact check a lot of my Hermès history. And finally, there is a lot written about the company. I do think the best way to understand Hermès is just to go right to the source. Their 586-page annual report, they just lay out the whole strategy. So if you're curious about the company, that's an amazing place to look.

• 4:05:33David Rosenthal?

  It's funny, you know, we did not talk to anyone at the company. We usually never do when we're making an episode.

• 4:05:38Ben Gilbert?

  It's just kind of awkward.

• 4:05:39David Rosenthal?

  Yeah, we usually talk to them afterwards, but not during. In this case, we didn't need to. It gets right there. They wrote down everything.

• 4:05:44Ben Gilbert?

  Yep. And David, I know you had a couple of cool conversations.

• 4:05:47David Rosenthal?

  Yeah. Well, speaking of April in Paris, Beatrice Ambard here in San Francisco. So fun to talk to an actual former Hermès artisan. There's personal stories of Jean-Louis and the family. They really gave me a sense of just how special the family is, they are, the company is, and the work that they do. And then I also have to thank Lauren Sherman. Lauren is, I think, pretty much bar none, the very best business of fashion and business of luxury reporter out there. She was at The Business of Fashion for a long time. She's now at Puck. She's Puck's fashion correspondent. She launched the fashion vertical for Puck. Lauren is awesome. I chatted with her for a long time. She gave

• 4:06:31David Rosenthal?

  me a lot of great perspective on Hermès within the industry. Really, there are a few journalists out there. You know, I'm thinking of like Brad Stone and Emily Chang at Bloomberg and Kara Swisher, obviously, but they're incredible journalists.

• 4:06:46David Rosenthal?

  And they really, really understand the business and the industry that they're covering. And Lauren is one of those. And it was super great to get to chat with her.

• 4:06:55Ben Gilbert?

  Yep. Well, you can sign up for notifications on when new episodes drop at acquired.fm/email. You can also get little tidbits at what next episode will be and play the guessing game with the rest of the community at acquired.fm/Slack. We'll also be including listener corrections in acquired.fm/email. Subscribe to ACQ2 in any podcast player. We've got some great ones coming. And after you finish this episode, come get some of that sweet acquired merch that everyone is talking about at acquired.fm/store.

• 4:07:28David Rosenthal?

  Acquired Hermes collab coming soon.

• 4:07:30Ben Gilbert?

  One day. We'll see you next time.

• 4:07:32David Rosenthal?

  We'll see you next time.