How a Few Luxury Brands Are Thriving in the Crisis

Feb. 9 seemed like an odd night for a party. New York City was locked in the jaws of one of the coldest winters on record, and the economy was in deep freeze. Yet few of the guests at the Park Avenue Armory, sipping French champagne and munching on Wagyu beef sliders, seemed to notice. They were there for a gala thrown by Hermès, the 173-year-old French bag maker and fashion house. The pretext for the party was the next-day opening of Hermès's new 278-square-meter men's store, in a jewel-box Madison Avenue townhouse. The store would be the company's 24th in the United States and its 250th in the world, but the first anywhere dedicated exclusively to men.

If that was the ostensible cause for the gala, however, Hermès had more profound reasons to celebrate. The company is one of a handful of luxury brands that have not only weathered the global financial crisis but thrived. Most fashion houses slumped last year: according to Bain & Company, the overall luxury market fell for the first time ever during this recession, dropping 10 percent in the U.S. and 8 percent worldwide in 2009. But Hermès managed to increase sales by 8.5 percent, including an 11 percent bump in the final quarter (and a whopping 20 percent gain in the Americas). Its secret? Rather than slash prices, follow fashion, or go downmarket, Hermès decided to focus on what it does best: produce expensive but timeless classics with unimpeachable quality that will last a lifetime.

Call it the end of the trend: as the experience of Hermès and a few other deft brands shows, the crisis hasn't killed the luxury market. Buyers have just become more discriminating, "moving away from conspicuous consumption, fat logos, and lively colors," says HSBC analyst Erwan Rambourg, toward tried-and-true stalwarts. As Bernard Arnault, the chairman of LVMH—which saw sales by its flagship, Louis Vuitton, grow by double digits last year—puts it, "with the crisis, bling bling is passé." Instead, there's been what Luca Solca of Sanford C. Bernstein calls a "flight to quality," which a few smart companies have capitalized on by getting back to basics. Even as trendier houses such as Christian Lacroix have gone bust, heritage brands have kept customers loyal by redoubling their focus on what they do best—classic bags and scarves for Hermès, old-fashioned luggage for Louis Vuitton, and for Burberry raincoats based on a World War I template.

Something similar is happening in the hotel industry, where trusted old firms like Ritz-Carlton are holding steady and Asian companies such as Raffles and Shangri-La are expanding by carefully replicating their traditional look and feel in new places. In the car business, Bentley—which traces its lineage back to the '20s—has just introduced a superpowered new model that gestures back in time even as it roars forward. And the airline industry is trying to get in on the act, with its highest-end carriers introducing first-class air suites that harken back to Victorian rail carriages and the luxe golden age of air travel.

All these firms seem to have recognized that during downturns, people—especially at the high end—don't stop spending, but they do become much more conservative. A woman who, during the boom, might have bought five expensive handbags a year may now purchase only one or two—but those are even more likely to come from brands known for quality and timelessness. "People are looking to be reassured," says Rambourg. So they are turning to products, like Louis Vuitton luggage, that isn't "just a nice bag, but an inherently precious object, almost a piece of art," says Solca—something "investment grade," in the words of Tod's chairman Diego Della Valle. This process favors big, established companies that stand outside seasonal fashion. Milton Pedraza of the New York–based market research firm the Luxury Institute says that at a time like this, successful firms can be "trendy along the edges, but they don't bet the whole brand on something too edgy. People are not going to buy Versace."

Having recognized this, heritage brands are doing everything they can to emphasize their traditional core. During New York City's recent Fashion Week, LVMH, which owns Louis Vuitton—a 156-year-old company best known for its stodgy suitcases, which are selling briskly even as newer offerings like watches suffer—held an event called "The Art of Craftsmanship," to educate young hip designers on the importance of old-fashioned values such as artisanship and the mastery of traditional skills.

Hermès too—which got its start as a bridle and saddle maker—is emphasizing its leather goods and ultraclassic ties and scarves over more trendy fare. Though its new men's store does feature burgundy leather sneakers and an $8,500 baseball glove, these are clearly not the focus. According to Bob Chavez, the CEO of Hermès's American operation, the lion's share of the company's recent sales has come from its core products, while purchases of more evanescent goods like perfume have fallen. Pierre-Alexis Dumas, the 43-year-old Paris-based artistic director, stresses that the company's core concept is simple: "What does quality mean, and how to you achieve it?" Chavez adds that the firm also aims to distinguish itself through service. "Hermès isn't about trendy," he told me. "It isn't even a fashion house. We are a house of craftsmanship. We are committed to making products that have an enduring quality and are very versatile"—even if that means many longtime customers visit Hermès shops more to repair 20-year-old bags than to purchase new ones.

My own experience with the company bears this out. As I type, I have in my breast pocket a small, tan, pebble-grained leather Hermès notebook that neatly typifies the values Chavez and Dumas stress. A gift from a French girlfriend, the notebook seemed like a wild extravagance when I first got it; I was shocked to discover the price. But after almost five years of hard use, the thing hardly shows any wear (score one for quality). Meanwhile, the two times I've taken it into Hermès stores—once in New York and once to the Paris flagship on Rue du Faubourg Saint-Honoré—I've been startled by the princely attention I received, despite the fact that I was there to discuss what is basically the cheapest thing the company offers. (Score two for service.)

Hermès works hard to maintain such virtues in several ways. For one thing, it is quite cautious about expansion, even though luxury markets are booming in the developed world. China recently displaced the United States as the second-largest market for luxury goods after Europe, and Hermès's sales there were up 29 percent last year. Even so, "you're not going to find Hermès anywhere and everywhere," says Chavez. Second, the company keeps service standards high by frequently sending all staff back to the mother ship in Paris for training. And the quality of goods is assured by producing most of them in France (as well as Italy and Switzerland)—a rarity in this age of global supply chains. Unlike most other luxury brands, Hermès also insists on producing everything itself, with no licensees. This has clearly cost the company money—for example, it refuses to get into the lucrative sunglasses business because it hasn't found a way to produce them at an acceptable standard—but Chavez deems it a price worth paying.

But for how long? With Western economies finally starting to thaw, industry analysts and luxury executives are wondering how long this anti-trend phase will continue—and when, if ever, bling will bounce back. Sparkly brands continue to suffer; Bulgari's sales fell 14 percent last year. And recent research on the psychological impact of downturns shows they can affect a generation's buying habits for decades.

That said, there are two reasons to expect more trendiness and glitz in our future. One is our baser instincts. Scott Galloway, an NYU professor who studies luxury marketing, expects conspicuous consumption to resume as soon as people have money in their pockets again. "As long as men feel the need to spread their DNA to the four corners of the earth, they're going to buy Porsches," he says. "And as long as women look for as many offers for mating as possible, they're going to keep buying Manolo Blahnik shoes."

Even if sex appeal doesn't drive us back to flash in Manhattan, it probably will in Beijing. Retailers are already enjoying a huge boom in emerging markets like China, India, and Brazil, all of which scarcely suffered from the downturn and have exploding middle classes and nouveaux riches. While these countries currently represent only about 20 percent of the global luxury market, Bain predicts that will soon shift as high-wealth individuals in these countries up their luxury spending by 20 to 35 percent in the next five years. The message for Hermès and other luxury brands, in other words, is that they're unlikely to sell many $8,500 baseball mitts in the States. But a soccer ball in Rio—that may be a whole other story.

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