Hermes defies the trend of slipping sales

Shanghai store expands as China volume rises more than 25 percent

The white, life-sized paper pony standing proudly in the display window of the newly expanded Hermes store at Plaza 66, Shanghai's most exclusive shopping mall, characterizes the French luxury house's confidence in China.

While many luxury retailers are undergoing an unprecedentedly difficult year in China, a one-time beacon of sales growth, Hermes is continuing to increase its presence in one of its most important markets, if not the most.

"The expansion is mainly due to popular demand here. Last year, Chinese customers contributed 25 percent of our total sales. Five or six years ago, the proportion was less than one percent," said Leo Lui, president of Hermes China, on Sept 11, one day before the grand re-opening of the newly enlarged shop.

The outlet, first opened in 2001, has been increased in size from 180 square meters to a 540 square meter space with a brown sugar-colored facade that echoes the "low-key profile" of the brand.

"We don't want to be the kind of store that can be remotely distinguished from streets away," said Lui. "We find our Chinese customers are becoming more and more sophisticated and in dire need of products of high quality and nice materials, instead of big logos."

Sitting next to brands such as Louis Vuitton and Tiffany in this 66-floor mall and office building, the new Hermes store, covering two floors connected by a white spiral staircase, will be the largest one on the Chinese mainland with merchandise ranging from the brand's signature silk scarves and leather bags to babywear and household products, the latter branded items being sold in the mainland for the first time.

"It's true the year of 2012 has probably been the toughest one for many luxury companies in China after the past decade of prosperity, as the real estate market dried up and stocks turned rather gloomy," said Lui.

In July, the British luxury company Burberry Group said in its financial report that sales in its Chinese stores accounted for only half of that of the previous year. China's biggest luxury watch retailer, Hengdeli, also complained to the Shanghai-based Oriental Morning Post that sales growth had already slowed down to single digits in the past couple of months.

The latest half-year financial report released by Hermes International on August 31, however, showed that global sales reached 1.59 billion euros ($2 billion) during the first six months of 2012, a rise of 22 percent. China alone, according to Lui, registered a robust sales growth of more than 25 percent.

"Recession, or no recession, Hermes' sales are going up every year globally and in China particularly," said Lui. "The increase for Hermes will continue over the next five years."

Ben Cavender, associate principal from the Shanghai-based China Market Research Group, revealed the reason: "There are basically two kinds of luxury consumers in China, the ultimately wealthy and the aspiring middle class," he said. "What we are seeing right now is that affluent consumers are moving upmarket in their purchasing decisions and are favoring more exclusive ultra-luxury brands such as Hermes over the mass luxury brands such as Louis Vuitton or Gucci that have done well in China in the past.

"This group of affluent buyers has already had the experience of purchasing the more mainstream luxury brands and no longer feels the need to buy luxury accessories that are immediately obvious to everyone on the street. Instead, they are looking for exclusivity and the best of the best, even if only a few people will be able to tell what they have purchased. This is opening the door for ultra-luxury brands such as Hermes or Bottega Veneta, or expensive one-off pieces."

The door certainly seems to have opened for Hermes. Its latest financial report stated the company will increase its supplies in order to meet growing demand. Lui said there will be another eight to 10 stores opening or being renovated in China over the next five years, excluding China's first Maison Hermes, due to be inaugurated in Shanghai in 2014 and the fifth of its kind globally.

"We are taking it step by step, with no rush," said Lui, whose office sits beside and overlooks the Maison Hermes, a 100-year-old building with an H-shaped exterior.

"The incredible geographical coincidence is saying that the building was built for Hermes a century ago, isn't it?" said Lui, looking down on the premises.