Earlier this month, we carried a blog on the history of what is arguably the world’s ‘biggest’ luxury company – Hermès. This piece in the WSJ does a detailed take on the economics behind Hermès’ flagship handbag brand ‘Birkin’, which seems to make it an appreciating ‘asset’.
“A basic black leather Birkin 25 costs $11,400 before tax at the Hermès store. Buyers can walk out and immediately give it to a handbag reseller like Privé Porter in exchange for $23,000 in cash. Privé Porter will then sell the Birkin on Instagram or at its Las Vegas pop-up store, possibly on the same day—box fresh, with receipt—for up to $32,000. All this for a bag that analysts estimate costs Hermès around $1,000 to make.”
What is so special about a ‘handbag’?
“The Birkin first hit shelves in 1984, a couple of years after the late actress Jane Birkin and Jean-Louis Dumas, then chief executive of Hermès, met on a flight to London. After complaining that she couldn’t find the right-size handbag, the two sketched out a design together—on a drink napkin or an Air France sick bag, depending on the retelling. In return for lending her name to the new product, Hermès paid Birkin an annual royalty.
The story about the bag’s creation is part of its appeal and one of the reasons why competitors have found it hard to replicate its success.”
But the resale market didn’t take off until the 2008 global financial crisis and the consequent zero interest rate regime which incidentally gave birth to other ‘alternate assets’ including cryptocurrencies. The resulting rise in wealth inequality gave rise to the biggest boom in luxury goods, thanks to the social needs of the uber rich across the world.
As implicit in luxury is exclusivity, supply is naturally controlled by the brands thereby leading to a resale market:
“The resale market has become a kind of “buy-now button” for Birkins, said Michelle Berk, founder of Privé Porter. Some shoppers are willing to pay a big premium to get their hands on a Birkin immediately, in the exact color they want. They might not have the patience for the steps needed to secure one of the bags at the Hermès store.
…One way Birkin hunters can accelerate an in-store purchase is by splashing out on the brand’s furniture or fine jewelry, said Judy Taylor, founder of Madison Avenue Couture and a handbag reseller for 15 years.
They can pick up an $8,000 paper basket for the home office, a $70,000 gold bracelet or a $140,000 sofa. Taylor said Hermès’s sales in categories like fine jewelry or watches, where the brand isn’t known for its expertise, are at least partially driven by Birkin hunters.
Really big spenders are offered bespoke goods. Hermès does a sideline in special-order skis, skateboards and fishing gear for super-wealthy clients and can customize the interior of a yacht or chopper. Privé Porter’s Berk received a message from a customer who was offered an $87,500 canoe. These buyers get access to the rarest Birkins.”
What does Hermès feel about the resale market?
“Hermès doesn’t like the flipping, but stamping out the resellers would harm the brand’s own interests. The company raised prices of its exotic-skin Birkins by around 20% in January. Resellers think the move was aimed at squeezing profits in the secondhand market, but it hasn’t worked. Dealers passed on the increase to their customers without a hitch.
Hermès could increase production and flood the market with new bags. This would end the financial incentive to resell Birkins, but it would also destroy their mystique.”
The blog goes on to argue that the Birkin still doesn’t cut it as an ‘asset’ as the expenses involved in acquiring one either directly or through a reseller eats away any potential return.
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