Luxury dualism

TWO WAYS TO HEAVEN
India has always had room for conflict—between people, industries, and even religion. Hinduism, the dominant religion, has been seen by some as monotheistic (there is only one god), and by others as polytheistic, with its pantheon of gods and goddesses. The images here are an artist’s impression of the duality, and our interpretation of the conflict between the two divergent approaches to the business of luxury.

On a warm Parisian day, in an unassuming ninth-floor office on rue de la Ville-l’ Évêque, Hermès executive chairman Patrick Thomas, the first outsider to head the storied luxury firm, is talking philosophy. His office is round the corner from 24, rue du Faubourg Saint-Honoré where Émile Hermès set up shop in 1880 nearly four decades after his father, famous Parisian harness maker Thierry Hermès, began the business. Hermès occupies an entire block, housing the company’s flagship store, a museum, and executive offices. The antithesis of a stylish, luxury boss, Thomas (pronounced ‘Tu-mah’) could pass off as a French professor in his wine-red, owlish glasses, perpetually quizzical eyes, and rounded cheerful face. “What is the difference,” he says, eyes alight, and with the hint of a smile, “between morals and ethics?” He answers it himself. “Morals are what individuals have, personal character. Ethics are about institutions, about a larger system in which morals come into play. Also, morals are what you are obliged to do; ethics are what you like doing. You will ask me what distinguishes Hermès—well, we have both.”

The conversation moves to Herbert Marcuse, a German-Jewish philosopher, sociologist, and political theorist who lived between 1898 and 1979. Marcuse is known as the Father of the New Left, renowned for his writings on how late-stage capitalism and technology dehumanise people. Thomas identifies with Marcuse and his books, such as Eros and Civilisation and One-Dimensional Man. In the latter, Marcuse explains how things destroy men: “The people recognise themselves in their commodities; they find their souls in their automobiles, hi-fi sets, split-level homes, and kitchen equipment.”

It’s a commentary on how brands alter society even though Marcuse’s writings predate the era in which Chinese secretaries skip meals to save for a fashionable handbag. Coming from Thomas, such observations are reassuring as well as perplexing. After all, Hermès’s highly coveted Birkin or Kelly bags are also staggeringly expensive—they can cost between $5,000 (Rs 2.7 lakh) and $50,000. But Thomas sees no contradiction. He says that when people talk of luxury, they think excess. And that is a tragedy. “We are not in the business of excess. Why should you have 50 handbags? What is the use? Will it make your life better? How is it sustainable? If you buy one or two, of perfect quality, they will last you for years.”

He’s not de-selling the industry he’s part of. Only, as he explains, he hates the word “luxury”: Hermès has never used it in its 175-year history. A product of Hermès’s philosophy—he’s been there since 1989, when he joined as CEO of Hermès International—Thomas believes such abstract, and often esoteric, thinking allows him and others around him to reaffirm Hermès’s mission, and differentiate it from its competitors.

His ruminations come at a time when the world of luxury has been torn apart by its biggest story in years. Led by legendary predator Bernard Arnault, France’s richest man, LVMH Moët Hennessy Louis Vuitton (LVMH) declared in 2010 that it had stealthily acquired around 20% of Hermès, pitting the world’s biggest luxury conglomerate against the snootiest. Some said that LVMH was perfectly placed to take Hermès to the next level. To this Thomas replied, “If Hermès is sold to LVMH, within five years there will be no Hermès. It will be finished.” Hermès was suggesting that LVMH operated differently with a different definition of true luxury. “We also felt,” says Thomas, “that they exploited a loophole in the system to buy our shares; it was not open, not transparent, all hidden and surreptitious. Not clean and fair.”

Though LVMH has since clarified that it doesn’t want to buy Hermès, the conflict exposed a far deeper predicament confronting the industry—which way will it evolve? Equally significant is the timing of the debate. While luxury’s biggest purveyors are still coming to terms with how the slowdown has changed their business irrevocably, new markets in Asia are slowly replacing Europe and the U.S. as the latest hotspots. And, uniquely, India is emerging as luxury’s Petri dish. Its crafts tradition has long inspired designers from Roberto Cavalli to Oscar de La Renta; now it’s a market as well, estimated at $6 billion, and growing 20% annually. Says Thomas: “India is at the heart of this debate of artisanal versus commercial because it has never been only about consumerist ideas.”

Standalone companies such as Hermès (with 2011 sales of €2.8 billion or Rs 19,558 crore) and Ermenegildo Zegna, watch brands Patek Philippe and Rolex, or a jewellery outfit such as Tiffany’s believe that luxury is all about individual craft, and size is just a byproduct. As Thomas says, his late boss Jean-Louis Dumas, who built Hermès into a global powerhouse, always held that battles were cultural, never financial. But conglomerates such as LVMH (2011 sales €23.6 billion), PPR (formerly Pinault Printemps Redoute; €12.3 billion), or the Swatch group, all built by acquiring multiple independent brands, are betting on money, power, overall size, range of products, group synergies, and sometimes even the luxury version of mass production. Yves Carcelle, chairman and CEO of Louis Vuitton, told Fortune India some time ago how lower-priced (sub-$500) canvas bags with the Louis Vuitton logo are winning huge fans in Asia.

As Bernard Peillon, chairman and CEO of Hennessy Cognac, says, what works for Hermès may not work for others. “Hermès already has a very strong history and identity. That did not happen in a single day. And it is cash rich. But what about newer brands or brands that need support? We find that with LVMH, our power of negotiation with distributors, for instance, goes up exponentially.”

There’s a difference in approach between companies founded by businessmen and those founded by craftspersons, or artistes, as they say in Paris. Arnault, an engineer by training, came from a family that ran a construction business, but his career started with timeshare properties. In the 1980s he bought a bankrupt textile company which owned, among other things, Christian Dior. The rest of the empire was pieced together later. PPR head François Pinault’s father, François Pinault Sr., a school dropout who started out in the timber business, built the company similarly, as did the Hayeks of the Swatch group.

The artistes, meanwhile, often take a purist’s view. Generations later, members of the founding families still actively manage Hermès, Zegna, Patek Philippe, etc. As Ermenegildo ‘Gildo’ Zegna, CEO and scion of Zegna, named after his grandfather, says, “Every day I feel that everything I sell has my name on it. It’s a very different philosophy and pressure.” (Go behind the scenes at Zegna on page 116.)

The flagship stores of Louis Vuitton and Hermès in Paris provide a small sense of their cultures. The LVMH store is often described as the second-most-visited tourist spot in Paris. Spread over five floors, it’s one of the tallest buildings on the Avenue de Champs-Élysées. On every floor there are ushers from every nationality to guide shoppers. Teeming with people, this could be the United Nations of luxury.

At Hermès, the overwhelming sense is one of tradition—the Hermès museum is above the shop. The store itself is more quiet, and the guides are helpful, though not pushy.

Beyond bloodlines and shops, there are other things that make luxury confounding. The awe around labels comes from a combination of abstract notions, including sensibility, insights, taste, instinct, style, legacy, place of origin, and craft.

Though business empires get built around such notions, they are often difficult to quantify or even explain using regular business parameters such as profits, turnover, and margins. For instance, conventional business analysis may fail to explain Coco Chanel’s success in using the colour for funerals in Europe to make the little black dress, or how Christian Dior created an empire around the New Look (shorter lengths, lighter material) in postwar Europe. “Our job,” says Thomas, “is a bit like Apple’s. We give customers what we think they should have, which they don’t have at the moment.”

It’s not easy to tell which approach works better. By revenue and profit, the top three—LVMH, PPR, and Hermès—have all grown, even in bad times (see table). Their stocks are up, and they are expanding globally. But according to brand analysis firm Millward Brown Optimor’s annual BrandZ study, which measures the value of brands, Louis Vuitton has consistently pushed Hermès to second place for the last seven years. In 2011, Louis Vuitton was judged to be worth $25.9 billion compared to $19.1 billion of Hermès.

But here’s the thing: While Louis Vuitton’s worth rose 7% last year, Hermès’s rose by a mammoth 61%. The third company on the 2011 list is also an independent brand: the secretive Rolex, valued at $7.17 billion, whose worth rose by 36%.

The Optimor study hints that the Hermès and Rolex numbers may have spiked because customers at the very top are increasingly looking for history, legacy, a sense of heritage, and pure quality. Louis Vuitton has all of these but its most ubiquitous product is still the laminated, monogrammed canvas bag, while Hermès uses only pure leather to make its bags (see 112). Another recent study by consultancy Bain & Co. shows that twice as many Chinese now covet Hermès, and the brand is the third most likely to be purchased in the country after Gucci (part of PPR) and Louis Vuitton.

Cavalli CEO Gianluca Brozzetti who looks after brands Roberto Cavalli, Just Cavalli, and Cavalli Café, says books can be written on the differences between independent brands and conglomerates. As the former marketing director of Gucci, executive director of Bulgari, and president and CEO of Louis Vuitton, he has seen it up close. He says it’s easy to predict how different brands will target India. “For Louis Vuitton, it will perhaps be about vintage cars and maharajas; when Hermès goes, they will get an old building and do it up, and when we go, it will be this big, wild party that will go on all night Cavalli-style!”

He’s right. Louis Vuitton has been emphasising its historical links with erstwhile Indian royalty, while Hermès’s flagship store in India is housed in a century-old Mumbai business district. The company took almost a full block spanning most parts of a prominent lane and redeveloped it from scratch—including watering and decorating the scraggly trees outside with confetti banners and lights. Louis Vuitton has six stores in India, all located in shiny five-star hotel lobbies or glitzy malls, while Hermès has three—one in a boutique hotel in Pune, the one in Mumbai, and only one in a five-star hotel, the Oberoi, Delhi. PPR’s India foray is limited: It has opened one Gucci store so far. Cavalli has already opened one Roberto Cavalli store in Delhi with an adjacent Cavalli Café scheduled to open in October. Another store is planned for Mumbai.

But India is more complicated than façades. Five years ago, the understanding was that India was the next Japan or China where store after store could come up quickly with millions of new customers, but brands are beginning to realise the difference.

“Any international brand that tries to progress the same way in India as in other Asian countries is mistaken,” says Darshan Mehta, CEO of Reliance Brands, the local partner to labels such as Ermenegildo Zegna and Paul & Shark. “India is forcing every brand to rethink.” He argues that Indians are highly individualistic. “If we spend money, we want the items customised,” says Mehta, who has been breaking luxury retailing rules, including creating direct-selling models for smaller towns (see page 128).

Marketing consultant Rama Bijapurkar says that when Indians seek to buy expensive jewellery, they visit jewellers known to their families, or niche Indian artisans such as Nirav Modi (see page 145). “It’s an old concept and easy to understand if you see it through the eyes of history and politics,” says Modi. “Every conqueror—from the Mughals to the British—has been absorbed by India, while its core has remained unchanged. So it is those who come in that change, not us.”

For Hermès, India is as much of an inspiration as it is a market. Thomas says Dumas worried about selling to India. “He used to say, ‘What will we sell to India? They have such a magnificent heritage of their own.’” Dumas visited the Sarabhai family in Ahmedabad every year and spent hours at the Calico Museum of Textiles which they set up in the city. “That’s why,” says Thomas, “we want to be respectful, and in everything we do immerse ourselves in the real India. Many of the Hermès scarves are already inspired by Indian designs.”

A few years ago, Hermès sent its famous nose, Jean-Claude Ellena, to Kerala for about two months. The research the perfumer conducted there resulted in the scent that Hermès released as Un Jardin après la Mousson (A Garden After the Monsoon). This approach is radically different from that of other luxury houses that often buy a scent from commercial perfumeries and then brand it. Hermès executives say the perfume did well, but refuse to share numbers.

Last autumn, the company did something even more radical—it launched saris. Thomas says the saris were their way of paying homage to India’s crafts tradition. Around the same time, LVMH too paid homage to India by dressing their shop windows around the world in Diwali lights. While Diwali is a celebration of good over evil, it’s also the time when families pray to Lakshmi, the goddess of wealth.

Hermès’s Indian partner Neelam Khanna, owner of Ananda Spa, says that since the brand entered the country, it has sent a team annually to absorb and understand Indian craftsmanship.“It’s not necessary that they come only to research a product. Their people regularly travel from Gujarat to Kashmir, to Kerala, to look for diverse crafts, find out how they are made, and how the handwork is done. This is their way of getting deep into the heart of Indian craftsmanship, and not merely doing some peripheral branding.”

In some ways Hermès and LVMH are reaching out to two Indias—the old and the new. So, if Hermès is forging deeper links with craftsmen, LVMH is making inroads into modern businesses that dabble in luxe, many of which are products of liberalisation.

A key element of LVMH’s strategy here is to pick up stakes in different companies, either directly, or through its investment arm, L-Capital. Ravi Thakran, L-Capital Asia’s managing partner, says the company will spend $250 million to buy into three to four Indian firms in the course of a year. It already has a stake in fashion house Genesis Colors and ethnicwear maker Fabindia. LVMH has a stake in Puducherry-based leather goods maker Hidesign, but reports suggest that it has stopped making leather goods in India.

In addition, the Moët part of LVMH is collaborating with Nashik-based York Winery to produce their first sparkling wine. “The idea is to select brands that have the potential to scale up globally and then push them to acquire a bigger footprint,” says Thakran. There has also been a buzz for a while that Kolkata-based star designer Sabyasachi Mukherjee has been in talks with LVMH.

Hermès too invests in others. But while LVMH puts its money into brands that need a big push, Hermès characteristically invests in craftsmen. Over the years it has invested in British boot maker John Lobb, French gold and silversmith Puiforcat, French silk manufacturers Perrin and Fils, the oldest glass maker of Europe, Cristalleries de Saint-Louis, as well as Swiss watch movement specialist Vaucher Manufacture Fleurier. Thomas will not comment on partnerships that he may be considering in India, but points to Shang Xia, a company and brand created by Hermès in China as an example. Shang Xia works with fabric and porcelain and is Hermès’s attempt at reviving China’s crafts heritage.

Gildo Zegna says India’s handwork tradition has now begun influencing the way they sell to wealthy local men. “In China, men like to come to the shop and be seen emerging with many bags. But wealthy Indian men like the shop to come to them and make things especially for them,” he says. “That’s why our focus has been so sharp in su misura (made to measure). We want the Indian man to feel that we are making an extra effort for him.” Zegna has more than 70 stores in China and only six here. Meanwhile, 31 of the 45 looks in Cavalli’s fall/winter show this year used Indian embroidery.

The high priests of luxe believe the current round of soul-searching will ultimately benefit the industry. Michael Norsa, CEO of Salvatore Ferragamo, says as the focus on Asia grows, customers will become further segmented into multiple categories which, in turn, will require different approaches. “Unlike in Europe or America, tastes won’t move in a uniform direction in Asia: In the same income bracket you may see some wanting more glamour, and others a quieter style.”

Ferragamo’s shifting revenues over 2010 and 2011 show how things are changing. Italy, its home, has remained flat at 15.9% of sales. Europe and Japan have fallen: from 17.5% to 16.7% for Europe, and 10% to 8.3% for Japan. The only bright spot is Asia-Pacific whose contribution rose to 33.4% in 2011 from 31.4% the year earlier. Ferragamo does business worth around $1 billion a year.

Gildo Zegna, for his part, predicts that Europe will undergo a further shakeout, which will force brands to really think about what they bring to the table. “For too long, the really strong players have seen a lot of glamour and marketing, but that era is coming to an end. Finally, the wheel is turning full circle and luxury is going back to where it came from—quiet quality has maximum value today and will for the future. I feel very strongly that our time has finally come.”

But, almost in the same breath, he says that for a standalone outfit to survive, it needs to have at least €1 billion in sales. Somewhat rhetorically he asks: “How many businesses such as ours have survived from the last century? We are both independent and privately held. It’s unheard of. Even Hermès is public [the Dumas family owns about 72% while 6% is available on the bourses].” Zegna’s sales topped $2 billion last year, up 17% over the previous year.

Norsa says brands within large conglomerates, if they are careful about their identities, and standalone brands can both grow. “In a large company, there is a lot of money which is a huge help in the kind of global crisis we are seeing. But in an independent brand there is a lot of intense focus that really helps in the time of crisis.” And what about India? “Yes, India is at the heart of the debate because isn’t it the Indian theory that there is never just one way to the truth?”

INSIDE Hermès

We go behind the scenes at Hermès to understand the process and the mindset that creates a $20,000 handbag.

At its factory at Pantin, an industrial suburb of Paris, Hermès, one of the world’s most successful luxury companies, has no signs declaring its presence. A large courtyard-like space brings in light from 1,200 windows, each measuring 90 centimetres in length and breadth, the exact dimensions of the fiercely coveted Hermès scarf. Another brand might clarify “hand-stitched” scarf, but at Hermès everything is hand-stitched. For instance, the bag with the longest waiting list, the Kelly named after Grace Kelly, is made by a single craftsman and no craftsman makes more than two bags per week.

On the leather cutting floors, 28-year-old leather worker Benoit Vernal explains that the company uses a range of skins—ostrich, crocodile, lizard, cowhide, pigskin, and smooth-grain calfskin—but the most expensive and coveted is crocodile.

Getting the right skin is slippery. For one, only the skin from the stomach can be used. “The back [of the crocodile] is covered with scales and there might be injuries or breaks in the skin from other parts of the body,” Vernal explains.
One Kelly uses the stomach skins of at least two to three crocodiles (compared to one skin for calf and four to five for lizard). Different pieces of leather (from different crocodiles) must be matched for colour and tone. Each skin is treated for four months before appearing on the making floor. The lining, depending on the model, comes from thin goatskin or calfskin, and in three thicknesses, depending on the model.

Thirty-six pieces of leather and metal are hand-sewn with 680 stitches and 16 rivets by one craftsman, using 40 implements to make one Kelly. The construction of an Hermès bag comes from the idea promoted by French writer-performer Sidonie-Gabrielle Colette: “The beauty of the material calls for perfection of work, even if it can’t be seen. The bottom must be worthy of the top, and the inside the outside.”

This is why the bag is constructed inside out—every inch inside is as polished, waxed, stitched, and corrected for any flaws as the outside. One of the last things that the craftsman does is polish every rivet individually so that it is completely smooth.

Perhaps few who buy these bags know that their durability—Hermès is proud that all its leather or silk products last longer than a generation—is partly the result of a special type of hand stitching first perfected by the founder of the company and saddle-maker, Thierry Hermès.

The saddle stitch is created by two needles with waxed linen threads crossing each other in adjoining stitch holes to create tensile strength. Each Hermès craftsman signs every piece with his name. There is a record of each piece sold, so it can be returned for repairs by any generation of owner.

Lionel Prudhomme is manager of the leather units at Pantin. His cousin is the first expat employee of Hermès in New York and has been sent from Paris. Prudhomme is also a master saddle stitchmaker and has been so for more than 20 years. Before that, he says, he learnt to perfect the art for about a decade. He has been at Hermès for 32 years and says, once you join, you never leave.

BEHIND ZEGNA

There’s more than textile mills to this fabric and suit giant, as Fortune India discovers the thinking behind ermenegildo zegna.

From Milan, on the average working weekday, it takes about an hour on highways and into the Biella Alps to reach the mansion that Ermenegildo Zegna built in the 1950s. From the lion crest of the Zegna family on the black wrought iron gate to the whitewashed mansion, there is nothing to suggest that this a factory and museum that spreads across 50,000 sq. ft. of some of the most globally elaborate processes to fine-tune fabric. The entire estate, called Oasis Zegna, is spread across 100 square kilometres.

His father started a small, wool mill with four looms, but Ermenegildo Zegna saw potential in the then barren hills of Trivero. He decided to set up a giant factory that was different from any other in Europe at that time. It began with the planting of thousands of rhododendron saplings and conifers on the mountains, cutting a road connecting the hills with the villages downhill, and building a hospital, a childcare centre, and a recreational centre, including a swimming pool for factory employees.

“My grandfather understood that luxury means a luxurious environment for the workers too,” says Gildo Zegna, CEO of Ermenegildo Zegna. “Without a workforce that experienced a sense of beauty there could be no luxury.” Thus, artist Otto Maraini was brought in to design the villas that lead into the factories, and the area is dotted with statues and fountains. Paintings by Olivero Pistoletto, of workers at the mills, hang in the corridors.

Zegna has always balanced heritage, quality,—Paolo, its chairman and Gildo’s cousin, regularly goes to Peru to coordinate with the suppliers of vicuña, the world’s finest wool that comes from the Andean antelope—and a sense of somewhat louche Italian style. For instance, the museum displays a framed interview with Gildo who says that the tie Monica Lewinsky gave Bill Clinton in the Oval Office was a Zegna. There are also paper pattern cutouts for suits made for Prince Charles and Arnold Schwarzenegger. These are like elaborate origami creations since a Zegna suit usually has around 100 pieces. The lining alone has 12. One buttonhole can take a day to stitch and is only done by hand. Zegna believes the finesse that a human hand and eye can bring to stitching cannot be done by any machine.

A glass box shows the thickness of hair used in Zegna fabric—some of the finest in the world, varying between 19 microns (1 micron = 1/1000th of a millimetre) for extra-fine merino wool and 12 microns for vicuña. In comparison, the box also has a strand of human hair—it’s the thickest in the box at 60 microns.

On the top floors are Ermenegildo Zegna’s original diaries in which, for 40 years, he noted details of every kind of fabric that emerged from his factories. He also collected 200 books of patterns and fabric from the best French fabric manufacturers in the early 20th century. These collected volumes have become a source of inspiration for the new generation of fabric and pattern designers at the company.

The brand is rooted in these hills in more than one way. The water in the Trivero hills is among the softest in Europe. When the fabric is washed for seven hours in this water, it becomes extra soft. Four hundred and fifty employees work in three shifts, making fabric that is supplied to more than 10,000 tailoring workshops around the world and numerous brands, including Gucci, Tom Ford, and Armani.—H.S.