This piece explains why Hermès is the ultimate luxury icon. Fund manager Mark Urquhart says its moat is nearly impossible to copy—it deliberately limits supply, avoids online sales, and even destroyed a popular beach bag to maintain scarcity. He sees Hermès doubling revenue in 10 years via US, Middle East, and China expansion. Key holdings: Hermès (70% gross margin, like a software company), Chanel (strong brand but not Hermès), Ferrari (similarly hard to replicate).
At a Glance Hermès, as a top-tier luxury brand, derives its core advantage from the six-generation Dumas family heritage and a unique business model. In 2022, revenue reached $9 billion with a gross margin of 70%. Its iconic Birkin and Kelly handbags maintain high premiums through a scarcity strateg
Guest: Mark Urquhart, Partner and Head of Long-Term Global Growth Team at Baillie Gifford, who has held Hermès shares since the fund's inception in 2004.
Main Thread: Starting from the origins of the Birkin and Kelly handbags, the report dissects the unique business model built over six generations of the Dumas family at Hermès — French handcrafting, deliberate supply control, rejection of online sales, and no pursuit of short-term growth — and how these choices have constructed the deepest moat in the luxury industry.
The most weighty judgment in the entire episode: Mark Urquhart believes that Hermès' competitive advantage is nearly impossible to replicate — "Economic theory suggests a business like this, there's no shortage of capital to come in... But they're not substitutes."
Mark Urquhart points out that Hermès' core assets are the Birkin and Kelly, two iconic handbags whose designs have remained unchanged for decades, forming the brand's unchallengeable pricing power.
Key Data Comparison:
| Metric | Hermès (2022) | Industry Reference |
|---|---|---|
| Revenue | ~€9 billion | ~€1.2–1.3 billion 20 years ago |
| Gross Margin | 70% | Software company level |
| Operating Margin | 40% | Rare in manufacturing |
| Leather Goods Share | ~50% | Core profit source |
| Scarves/Ready-to-Wear/Perfume | 15–20%/20%/5–6% | Brand entry-level categories |
Urquhart argues that Hermès's most counterintuitive strategic choice is deliberately restricting supply and refusing to cater to demand, which is precisely the source of its brand scarcity.
Urquhart emphasizes that the Hermès family manages the business with a "40-year perspective," and this cross-generational mindset is the fundamental guarantee of the brand's long-term value.
Urquhart argues that Hermès's moat stems from the "irreplicability" accumulated over nearly 200 years of history — competitors have tried every strategy (same price, higher price, lower price, identical materials) but have failed to shake its position.
Divergence from Market Consensus: Urquhart believes younger consumers are equally interested in these brands. Although Hermès's core customer base is older, the brand "patiently waits for people to arrive at Hermès."
Urquhart believes that Hermès's valuation (approximately 50x forward P/E) reflects its "near-certain" long-term growth capability, which is the most scarce quality in the current market environment.
| Position | Guest Stance | Key Data |
|---|---|---|
| Hermès | Bullish (long-term hold) | 2022 revenue €9 billion, gross margin 70%, operating margin 40%, ~50x forward P/E |
| Chanel | Neutral (comparison reference) | Revenue close to Hermès level, "excellent brand, but not Hermès" |
| Kering (Gucci) | Neutral (position holder) | Gucci is "one of the ultimate indestructible brands," but design risk is higher |
| LVMH (Louis Vuitton) | Neutral (comparison reference) | Approximately 40 million LV handbags in Japan, "Hermès will not go that far" |
| Ferrari | Bullish (analogy) | Shares the "non-replicability" characteristic with Hermès |
| Intuitive Surgical | Bullish (analogy) | Ecosystem and 50-year competitive advantage built through years of operational accumulation |
| Man United | Bullish (analogy) | Brand is "indestructible," despite 10 years of poor performance |
| Tesla | Neutral (analogy) | Zero advertising spend but global recognition, similar to Hermès |
| Michael Kors / Coach / Tod's | Risk warning | Failed to challenge Hermès, "firework brands" |
| Brunello Cucinelli | Neutral (observation) | Relatively new brand, "has not yet stood the test of time" |
| Shang Xia | Risk warning | Chinese brand invested by Hermès, "never truly grew" |
1. "Economic theory says this type of business should be competed away by capital inflows, but what should rationally happen simply hasn't happened." (Mark Urquhart) — Hermès' 70% gross margin and 40% operating margin have "no reason" to exist in manufacturing, yet all competitor strategies (same price, higher price, lower price, same materials) have failed.
2. "The Birkin and Kelly haven't changed their design for decades. If you put a vintage piece next to this year's model, you'd know they are the same bag." (Mark Urquhart) — Zero design risk is the core feature distinguishing Hermès from brands like Gucci. "I know what Hermès will sell next year."
3. "When a beach bag went viral in Japan, Hermès' response was to pull it from shelves and destroy it, not double production. The board gave a standing ovation." (Mark Urquhart) — Actively rejecting short-term demand growth is the ultimate expression of brand DNA.
4. "The family is looking 40 years ahead. People in their 60s and 70s want to pass this asset to their grandchildren. I can't think of any other company that describes itself this way." (Mark Urquhart) — Intergenerational thinking enables Hermès to fend off LVMH's takeover, reject M&A, and maintain conservative capital allocation.
5. "I asked women of different ages: If you could choose any handbag, what would it be? Over 90% said Birkin or Kelly. That's the reality competitors face." (Mark Urquhart) — The "ultimate choice" status in consumers' minds is something competitors cannot replicate through advertising.
6. "If you gave me $10 billion and any talent, I would try to poach their artisans, price higher, and get celebrity endorsements — but in the end, I'd give up. I've never encountered a company where I couldn't imagine how to compete." (Mark Urquhart) — Urquhart believes this is the only company in his investment career where he cannot envision competitive disruption.
7. "Hermès doesn't need a second act — the first act has been running for 185 years, and it's still the same play." (Mark Urquhart) — Unlike tech companies (e.g., Meta, Alibaba) that need to find a second growth curve, Hermès' single brand and single model continue to create value.
8. "I look at my portfolio and ask which companies will still be around in 2050 — Hermès ranks first." (Mark Urquhart) — In an uncertain environment, "near-certain" long-term growth justifies paying a valuation premium (around 50x P/E).