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LXFM 745 | Winter 2018 HERMĂˆS | Saudi Arabia Professor Alessandro Cannata By: Abbey Dahl Sasha Noronha Madison Ottenbacher Komal Sandhu


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The intriguing conversation of the 21st century within the fashion industry is whether or not luxury brick and mortar stores are still relevant with the phygital (physical blended with digital) platform continuing to grow and being a large disrupter. Luxury retailers are in the process of transitioning their stores from a place solely to purchase expensive products to an all encompassing educational experience for their consumer. Also, the online platform as of now does not have a way to replicate that tactile element of visiting a luxury store and touching the product. So with this shift in the industry when deciding on where to open the next boutique or flagship store ample research must be performed to ensure the store will be a profitable business venture. Hermès still remains to be a role model for connoisseur luxury brands after 181 years in regards to creating this unparalleled experience in their stores, as well as localizing them to the specific region regardless of being a flagship or boutique store. Contrary to other luxury stores, like Louis Vuitton who operate 460 stores worldwide, Hermès has a significantly less number with 307 stores around the world. They are extremely hesitant and particular when tapping into a new market, which is why they have decided to open a boutique store at the luxury outdoor shopping mall, The Boulevard in Jeddah, Saudi Arabia. Hermès noticed the Saudi Arabian luxury market beginning to flourish again after they took a financial hit in 2015 with the oil crisis, which is the country’s largest source of revenue. With private wealth in Saudi Arabia expected to rise to $2 trillion by 2020 (BCG Group) Hermès recognized that their target consumer would be ever present. Since Hermès already has five stores in the Middle East the legalities would be handled by their joint venture partner, the Al Mana Group. Hermès foresees high profitability through this business venture, and is thrilled to thoroughly explain the process they embarked on to open their new boutique at The Boulevard in Jeddah, Saudi Arabia.

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The iconic Birkin Bag, the bright orange box accompanied by the Bolduc brown ribbon, and the timeless, exquisite craftsmanship all come to mind when one ponders over the French connoisseur brand, Hermès. Thierry Hermès was the man who laid the fundamental foundation 181 years ago when the brand began on the Grands Boulevards focusing on saddlery, iron harnesses, and bridles for the equestrian elite. Over the next six generations the company was passed down from generations, and today remains to be one of the most globally successful family-owned and operated business’. Throughout the generations Hermès expanded from their origins of saddlery into other product categories like purses in 1922, couture women’s apparel in 1929, the introduction of the timeless silk scarf in 1950, and even perfume in 1950. Today, the company is led by CEO and 6th generation family member, Axel Dumas who is constantly exploring innovative ways for Hermès to grow whether that be in product categories, brick and mortar, or their phygital platform. Regardless of the direction that the company explores, it is the credible and quirky reputation of Hermès that must be preserved in order for it remain one of the world’s most renowned fashion houses.

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Hermès has a wide reach in terms of distribution. They have a worldwide presence of 307 stores, amongst which 210 are directly owned and operated by Hermès. The remaining 97 stores are called concessionnaires.The two major channels of distribution for Hermès products is DOS and concessionnaires.

common phenomena.

Hermès products are also sold through a specialized distribution network that includes sales through departmental or specialized stores like Saks Fifth Avenue and Selfridges to name a few. They are also sold through duty- free shops called tailored airport concessions or shop-in-shops.

These are directly owned stores by Hermès and the distribution and operations of the store are managed by Hermès themselves.The company has a major say in the activities that take place in these stores.

Hermès also has a good wholesale or third-party distribution system, although this is for special cases of watches, perfumes and homeware.

Hermès launched their e- commerce website in 2001, a step ahead in time when other luxury brands had not even considered this option. Their e- commerce website is the fastest growing platform within the company. The distribution of Hermès products is very limited because of the exclusive nature of these products and limited production capacities of the brand. The brand has strict regulations in terms of selling online- Hermès products can exclusively be sold only through the Hermès website.

The Hermès distribution system is segregated by five major geographical areas- the Americas, Europe, Asia, Middle East and Oceania. Asia has the highest number of DOS and concessionnaires in Asia followed by Europe. Due to stringent government regulations, Middle Eastern stores are only operated through concessionnaires and in Oceania, only through DOS.

An interesting feature is that Hermès bags or items cannot be loaned or rented through online platforms like Rent the Runway or the Real Real. However, resale of used Hermès bags and products through department stores and online shops is a

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North America

Europe

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Asia

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DOS account for almost 80% of the sales as compared to the 20% which is generated through concessionnaires worldwise. Out of the 80% DOS sales, 14% is generated from the Hermès e-commerce website. Figure 2 highlights the revenues generated by each geographical area. There has only been a marginal improvement from the year 2015 to the year 2016. The Asia Pacific generates the highest revenue of 34% followed closely by Europe and America. Interestingly, Hermès ranks the 8th amongst the top 10 leading luxury brands for generating a substantial online market share revenue.

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Online Market Share by Brand 2016

Figure 1

Hermès Revenue Breakdown by Geography 2016

Figure 2

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Hermès currently follows a distribution model of licensing and joint ventures. A good example is Dubai, wherein through licensing agreements, Hermès operates stores through licensing with the Al Mana Retail Divisions owned by Wasim Al Mana, and are liable to pay a certain amount of royalty to the licensor. Hermès operates in India through joint ventures in a 51:49 ratio where the larger stakes lies with the regional company. Hermès has a joint venture with the ISTA Hotels owned by Ashok and Neelam Khanna and they currently operate two stores- Mumbai and Delhi.

This graph highlights Hermès’ decision to operate their stores through the group itself. From 2012 to 2016, Hermès strategically closed down franchises,bought them out or launched new directly operated stores. Previously, Hermès had followed numerous franchising agreements but their decision to close down or convert them to DOS stems from the fact to strengthen their brand equity and to channelise efforts into the markets that generate the maximum revenue. This was a good call as company operated stores brings maximum returns and more control over product distribution.

Change in the Number of Exclusive Retail Stores

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Hermès has only six métiers (product categories): Leather Goods – Saddlery, Ready-to-Wear & Accessories, Silk & Textiles, Other Hermès Métiers, Perfume, and Watches. These métiers together are compiled with over 50,000 items that are all created with the utmost quality and craftsmanship. All Hermès products are manufactured and produced in France, so they keep the number of métiers on the lower side in order to guarantee the highest quality of craftsmanship in each and every product. Among these métiers there are those iconic product that many global citizens aspire to purchase one day such as the Birkin Bag, The Kelly Bag, and the Silk Scarf. Since these products are a large part of Hermès’ brand identity, it is important to discuss their own history within the company. The Birkin Bag: The Birkin Bag was a result of a serendipitous moment between actress and singer Jane Birkin and Jean-Louis Dumas, CEO of Hermès in 1983. They sat next to one another on an AirFrance flight from Paris to London, and when Jane Birkin accidentally dropped her diary papers she complained to Jean-Louis there are was not a big enough purse to hold all of a woman’s everyday items. Upon hearing this, Jean-Louis took it upon himself to create the perfect bag for women, and even sketched out his ideas on that same flight. Later that year the bag was introduced the world, and Jane Birkin’s name was

attached to its creation. To this day the Birkin Bag is the most desired bag in the world. The Kelly Bag: Although the Kelly Bag was created in the 1930s by Robert Dumas it was not until twenty years later that the bag made its famous debut. In 1956, pregnant Princess of Monaco – Grace Kelly was exiting her vehicle, and covered her baby bump with her coveted Kelly Bag. Paparazzi captured the moment, and the picture circulated around the world. Once the world saw that Grace Kelly adored the Kelly Bag, everyone followed suit, hence the Kelly Bag. The Silk Scarves: The silk scarf was introduced in 1937, and it takes up to two years to produce just a single scarf. The silk comes from a Brazilian mill, and is then sent to Lyon, France where all the scarves are manufactured. The process continues when the raw materials are turned into rolls of silk twill, which can take up to three months. For Hermès the scarves are an avenue for creative expression. The company with collaborate with artists around the world for a myriad of prints. These designs are held in the “Le Frigo” until the company decides to use them. Once finished these 90cm x 90cm works of art are worn as scarves, head wraps, belts, or even a top.


Hermès 2018 Métier/Product Sales

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RDAI Architecture was built on the legacy of its late founder Rena Dumas, the wife of former Hermès chairman Jean-Louis Dumas. Today, Denis Montel, artistic director of RDAI, and lead designer on Hermès flagship projects states that his task at hand is to blend contemporary with Hermès heritage. Denis also wants to ensure that each store is unique while following a similar aesthetic, localizing each store design based on the region’s culture.

Hermès has 307 stores worldwide, 210 are directly owned stores (DOS) and 97 are concessionaires. The recent trend within the decade was luxury brands opening as many stores as the company could in order to remain relevant, as well as meet the customer wherever they are. Hermès followed this trend for a small amount of time, but then realized that there was potential of diluting their brand if it was in too many locations around the world. So in contrary to their luxury competitors they began to consolidate, and close stores in order to maintain their mysterious reputation and remain highly desired by their consumer.

Some Hermès Store Design RDAI Include: • Emphasis on natural lighting • Climate specific floors • Cherry wood displays • Open room • Mosaic Ex-Libris at the entrance • Recessed Lighting • Flâneur Experience • Wooden artistic elements

Much like other luxury brands when it comes to the design of their stores there is a distinct aesthetic that has been developed over generations, to the point where one can walk into a luxury store and know what brand it is. For Hermès they collaborate with the family affiliated French architecture firm RDAI.

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Elements

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ribbon have their own little history. Window Displays: Hermès window displays are designed to inspire the flanerie, someone who strolls, while simply daydreaming. These window displays are drenched in artistic expression, and this all is thanks to one women who changed the course of visual merchandising for this brand, Leila Mencheri. Leila Mencheri went against the status quo of bland window displays only showcasing catalog items, and incorporated over the top surrealist window displays. She believed that these displays should reflect one’s dreams and desires, there should not be boundaries. By following her intuition Hermès was put on the map for their original and extremely unique window displays.These window displays intrigue the customer walking down the streets, and as a marketing technique make them want to continue with an Hermès journey inside the store. Each year a theme is chosen, and then tailor their window displays with that theme depending on where they are located around the world. Iconic Orange Box/Logo: A part of making a Hermès purchase is influenced by the fact that the customer will receive that quintessential orange box and Bolduc brown ribbon. The orange box is bold yet refined status symbol, one knows that no matter what product is that box it was an investment. It is interesting to point out that the Hermès color and

Back in the 1920s and 1930s the Hermès box was actually cream coloured imitated pig skin with a gilded edge, and then a couple years later the boxes were changed to a mustard color with a brown edge. It was during WWII that everything changed. There was a lack of materials for the boxes, so in order to contribute to the war effort Hermès switched to a cardboard material. Finally, at the end of the war they introduced the orange color with their logo imprinted on the top. To finish up the full design the Bolduc brown ribbon was added in 1949.Today, there are about 188 different sizes of Hermès boxes to accommodate to each product size. Flagships Store Plan: For Hermès flagship stores the product is displayed in a certain layout to create a unique and fluid customer journey. The first floor is typically filled with their iconic products: scarves, leather goods, perfumes, ties, and stationery. The second and third floors include: furniture, home accessories, the equestrian métier, and a VIP suite. Then in five stores around the world there is an art space on the fourth floor of Hermès stores that is run by the Fondation d’Entreprise Hermès. The space has a whimsical element in that each room has a distinct style and has two doors so ensure the journey flows perfectly.


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appreciates their loyalty to their brand. They will have regional specific eats and beverages available while the customers shop in an exclusive space that provides the sense like they are a part of the Hermès family, Print Media: Hermès is extremely specific in how they market themselves because they want to remain elusive and exclusive, so they invest in spreads in credible, traditional print fashion magazines like Harper’s BAZAAR and Vogue to reach their consumer.

Themed Grand Openings withVIP Guests: With each grand opening for Hermès flagships, the company makes sure that is an exclusive and extravagant event. They will tailor/localize the events at the grand opening to reflect the region’s culture. Examples include the Grand Gatsby themed grand opening on Rodeo Drive in Beverly Hills with famous guests like Jessica Alba, and the Havana themed grand opening in Miami that incorporated flamingo dancers, and a photobooth that had theme appropriate costumes for guests. These events are talked about for years after they occur, which just highlights that Hermès leaves no leaf unturned when it comes to opening a flagship store.

Hermès Tie Society: The Hermès Tie Society was a more recent business venture beginning just last year in 2017. This service speaks to the male consumer who may not have the time to go to an Hermès store to pick out their ties for the season or year. The men must fill out an in depth questionnaire, in order to accurately understand their individualistic style. The subscription service is $180/month, and the male customer can choose to receive a tie every month, every two months, or every quarter. The customer does not only receive ties but also invitations to exclusive events at the Madison Avenue flagship, expert laundering, repairs, and tie reshaping. The Hermès Tie Society service will be offered at 10 boutiques in the United States. They include: San Francisco, South Coast Plaza, Houston, Dallas, Beverly Hills, Washington D.C., Boston, New York, Chicago, Madison Avenue men’s store, and Wall Street.

Sponsoring Equestrian Teams and Riders: Since Hermès’ heritage lies in the equestrian realm they make sure to pay tribute to their roots by sponsoring equestrian teams like the U.S. Equestrian Jumping Team. Along with sponsoring teams they also sponsor the most elite and successful riders. A couple of these riders include Rogrigo Pessoa, a multiple medal winner at the Olympics, World Equestrian Games, and a World cup finalis. Then Alexandra Paillot, who competed for seven years in France and Florida and competes in the prestigious Grand Prix event. VIP Lounge in Stores: Hermès makes a substantial effort to create a space for their most elite and loyal customers. In their stores they design VIP room for these special clients to make sure their experience is above and beyond, and exemplify that Hermès

Hermès Waiting List: Hermès has implemented a hunger marketing technique throughout their long22


standing history that allows it to be one of the most desired brands in the world. Every Hermès product produced touches human hands, and is not produced on a mass scale. They did not raise production to meet customer demand, they instead established an extensive waiting list to make the customer come to them. Take the Birkin Bag for example. One bag can take up to 18 to 48 hours to produce depending on the material (i.e. crocodile/leather/denim)


craftsmen per year, so they want to choose the best of the best to reflect their companies standards. There is a two-year mandatory training they must complete to demonstrate they understand the materials and specific Hermès way of creating these timeless products.

Actual: Hermès invests ample time to ensure the right people are hired and properly trained in order to act as brand ambassadors within their stores or as their craftsmen. In order to work in a retail setting the potential employees attend an event called “Inside the Orange Box”. This training event educates the future employees on the métiers and the Hermès history, so instead of reeling off information they are able to create a story to educate the customer, potentially enticing the customer to make a purchase. The uniform for an Hermès employee is very simple. The colors they are asked to wear are black, white, and navy. The doorman who greet the customers at the entrance wear a tailored suit, which adds to the prestigious aura of an Hermès store.

Figurative: Hermès is a timeless and esteemed brand, but always find a way to be effortless quirky that does not take away from their highly-regarded reputation. For mannequins, they will incorporate animals like ostriches, giraffes, and horses making it catch someone’s eye instead of being a standard type of mannequin that one can find in any department store. On their Instagram they even use plants to act as mannequins, adding to this fun and quirky element. This company is not afraid to explore different ways of doing traditional things, and they are the leader in the market in this aspect.

The craftsmen also go through an extensive process before beginning their work. Hermès only hires 200

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rush to its customers by bringing the runway shows to life through virtual reality. This speaks to their competitive advantage of being a luxury titan in the market.

Céline’s products and persona truly identify with her connoisseur clientele. Her products exemplifies the modern, minimalistic and chic take on luxury fashion. Within Phoebe Philo’s nine-year reign at Céline, she transformed the brand to focus towards providing a platform for women to define themselves through Céline’s products. The label is an intrinsic part of the LVMH galaxy of luxury brands thus financially securing her connoisseur brand market placement.

The Coco Chanel legacy lives on to this day and is immersed in every product line of the label. Chanel has triumphed within the luxury market by incorporating her legacy into a storytelling promotional strategy. This strategy inevitably prompts the customer to associate the brand with the icon who revolutionized the fashion industry. Chanel’s timeless modernity comprises of the core clientele who purchases its classic couture line but also extends to the millennial following of Karl Lagerfeld.

Louis Vuitton’s blatant global brand awareness and accessibility stem from their successful business model towards ensuring visible global distribution complemented by loud marketing techniques. Their business model has not only maintained their market leader position but captured the hearts of their aspirational customer. Louis Vuitton’s popularity has blurred the line of its meta-luxury perception and has now established itself as a star brand in the world of luxury.

Yves Saint Laurent is remembered as the maverick of the fashion era as he invented prêt-a-porter collections, bringing haute couture to women of the 60’s. The label has since embodied contemporary French aesthetics as the the innovative collections today marry elegance, boldness and timeless style. The ‘Psych Rock’ show in 2015 speaks to the label’s rock aesthetic that attracts a younger demographic. Saint Laurent has established itself as a classic, but modern luxury brand that gives them an advantage with the millennial consumer.

Dior embodies a clientele of an extraordinary mixture of romanticism, feminism and modernity. The brand has perfected the harmony of its artistic expression and excellence through strategic product placement and lucrative marketing strategies. Dior stays one step ahead by incorporating experiential services into its stores (Dior Eyes). Dior Eyes stimulates an adrenaline 26


Goyard has maintained its exclusivity throughout the years while continually attracting the connoisseur by their lack of advertising presence and conservative distribution style. The brand has the least number of stores in comparison to all competitors in the luxury galaxy. This business model speaks to Goyard’s brand identity as we see their discretion in every channel of communication. Past loyal customers of the brand included the likes of royalty from the Duke of Windsor to legendary fashion icons like Coco Chanel herself.

Prada has tailored its advertising techniques to enhance its communication with the emerging market with their latest innovative strategy ‘Prada 365’. The advertising initiative is set to bring in more spontaneity and life back to their product lines. Prada’s

communication enhances their key strategy of hyperlocalisation. Each and every Prada flagship or boutique reflects the regions aesthetic, blending in with Prada’s distinctive style. Muicha Prada was quoted saying “The mountain is not the seaside,” reinforcing the brand ethos of differentiating themselves from the competition.

Gucci has been dominating the luxury market by being the ‘cool kid on the block’. They have drawn the consumer towards their popularity and on-trend collections that speak to their exponential growth strategy. Gucci, as a star brand, has taken over the market by boosting sales and brand buzz with commercial product lines and engaging marketing collateral that personifies the brand’s quirky persona.


The perceptual map clearly distinguishes Hermès from its competitors as the connoisseur brand originating in sportswear. Hermès’ foundation since 1837 is built from saddlery, as we see this as their most crucial competitive edge as they analyze new geographical regions for expansion.

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Perceptual Map

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Price/Accessibility Matrix

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The price accessibility map highlights Hermès’ market accessibility in regards to its pricing structure as well as its current distribution reach. Hermès commands the highest price with its exquisite craftsmanship and quality which speaks for its strong brand equity against its competitors. The map also highlights its controlled distribution model of 70% directly operated stores but still makes them a key player in the market against connoisseur and star brands.

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Financial stability: Revenues passed $5 billion mark Controlled distribution model: 70% DOS Strategic expansion: 10% sales growth generated by DOS Marketing through experiences Growing in-house manufacturing: 18 production units in France Family owned by generations: Thierry Hermès descendants own 74% of the company Strategic collaborations with key players (John Lobb) and suppliers Luxury position: Its consumers are less vulnerable to an economic slowdown

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Diseconomies of scale: in comparison to industry conglomerates The supply-demand disparity by Q4: a repetitious trend of supply constraints Weak brand equity in other categories in its portfolio beyond leather goods and silk Feeble digital presence in luxury market compared to key competitors PETA animal abuse claims: adversely affect brand loyalty

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The global luggage and leather goods market: valued at $108 billion by 2019 Euro currency value increased: Hermès SCA contributed 1.9% to jump in January ‘18 Consumer preference towards understated luxury culture China luxury watch industry forecasted double-digit growth Shang Xia: has earned the moniker “Chinese Hermès” from its Chinese customers

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Rising labor costs in Europe: affect operating costs and impact profit margin Competitor marketing strategies: advertise through celebrities and events Hermes brand equity of substantial value due to its niche market placement Counterfeit products could stray the connoisseur customer towards brand substitution Taxes and import duties on luxury goods in international markets

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craftsmanship was established, as it was a business built on the strength of a stitch that could only be done by hand. The clients of Thierry Hermès at the time comprised of Parisian beaus and European royalty, including Napoléon III and his Empress. Since its origin, it has been focused on the quality that speaks for its allure, tailored masculinity and richness in leather. It was in 1880 that saddlery was added to the core business by his son, Émile-Charles and since then, the brand has never looked back. It was in this era that the family created an empire whose personal values of perfection shown through their business to create excellence. Even today, the perceptual map highlights Hermès’ distinction within their competitors, which speaks to its conspicuous differentiation and edge for future success.

Hermès’ philosophy through the six generations of leadership has focused on scarcity and exclusivity. The main strength of the Hermès brand is their love for craftsmanship. The artisan goes through a mandatory two-year training process focused on brand heritage and craftsmanship before he or she can craft any leather product in the Hermès portfolio. The soul of the product is an extension of the brand as the artisan who starts a product, has to end it. Each product is entirely manufactured by hand by only one craftsman, signifying the quality of craftsmanship and uniqueness of its products. The Paris workrooms produce only five Birkin bags a week, as each bag can take from eight to twenty-five hours to make.This can be criticized as the gap that slows down production. However, CEO Alex Dumas highlights that it is not the desirability that puts Hermès ahead of its competitors in price but the quality of the production methods.

Thierry Hermès established a legendary empire without realizing its uniqueness in 1837. Hermès specialized in the horse harness required by society traps and carriages. It was in that year that the

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Hermès positions its product portfolio under the umbrella branding strategy as it doesn’t incorporate a marketing department in its structure, the brand believes the two core drivers of intuition and creativity markets the product. The brand culture is to focus on the product to speak for itself and thus everyone is responsible for marketing. The only two products that can stand on its own without the Hermès title endorsement is the eponymous Birkin bag and Kelly bag.This reinforces the brand strategy to maintain the aura of exclusivity and limited output scarcity. The driving force behind the platforms of quality and uniqueness is the intense desire for the iconic Hermès bag. Each piece is handmade by one artisan and can take up to twenty-five hours to make, this falls in line with the meta-luxury pricing that can range in price from $7,000 to $300,000. Hermès has immersed “patience” as a very strong virtue in its brand strategy. The customer cannot expect to walk into a store and walk out with a Birkin or Kelly bag, but one has to

build a relationship with the brand and wait a long time before it is ready. It is known to take upto six years to walk out with the bag of your dreams!

“The luxury industry is built on a paradox: the more desirable the brand becomes, the more it sells but the more it sells, the less desirable it becomes”, said CEO Axel Dumas. This quote perfectly captures the strategy of exclusivity and scarcity that Hermès successfully implements by its controlled distribution model. Two key drives for Hermès growth: the connate conservatism that prevents aggressive expansion and unbending expansion through DOS. However, 30% of its stores are not DOS as this is when the only possible mode of entry to a new region is through a joint venture. Controlling the distribution maximises its ability to tell the Hermès story and remain consistent with the communication strategy of conveying heritage and exclusivity. The marketing campaigns always celebrate the Hermès way of life and do not aim at directly advertising products.


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Hermès as a company does not have a mission statement; however, we see the brand ethos immersed in the working culture of the brand. Through their key drivers of controlled distribution, exclusivity and controlled marketing, the brand with its successful product portfolio have registered double-digit growth rates year-on-year in their annual 10K reports.This is a true reflection of the Hermès brand strength as they consistently ensure to differentiate and build their competitive edge through their strong history, superior craftsmanship and a strong sense of allure.

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The A.T. Kearney 2017 Global Retail Development Index discusses potential candidates for expansion. Hermès with its current geographic portfolio of 307 stores is already in reach to its core customer base, however, as we notice the emerging markets exponential growth this is an ideal time to penetrate the market. The three countries to consider: Peru, Morocco and Saudi Arabia.

and political stability and in addition it offers plenty of opportunities to interested investors. As we see the government introducing investor-friendly policies which make Morocco a key candidate for Hermès to continue its growth strategy by expanding through directly operated stores.Tourism is an essential factor as we believe the Hermès customer travels with the brand, however, we see Morocco is known for its experiential tourism and yet to develop the attractive qualities of a Rue Saint Honoré street

Peru’s GDP growth rate of 1.28% shows signs of an upcoming economy as we see the economy spending their disposable income towards hedonistic experiences. However, as enticing as Latin America’s current growth is for luxury brands, it’s important to highlight the challenges that unnerve most high-end retailers. As we see Hermès’ key competitors favoring Chile as the performing region in Latin America. The unemployment and fiscal crises both pose a real risk to set up shop in Peru. Multinational executives are anxious over corporate governance issues and security. The one detrimental issue that keeps global brands and investors on their guard, is Latin America’s reputation for political instability. It is known to be driven by inequality, corruption and other social problems, such as violent street protests which haunt a consumer-focused industry like fashion.

Saudi Arabia has the highest GDP growth of 4.24% and we anticipate the economy to continue booming as they are focusing on diversifying away from oil, and give the retail sector the spotlight. There are market talks on eased restrictions on FDI ownership which will help strengthen support for the sector, with continued growth in retail sales currently valued at $114 billion in sales. The luxury brands are allured by the Saudi Vision 2030, its strategy to reduce dependence on oil, diversify its economy, and develop public service sectors such as health, education, infrastructure, recreation and tourism. In line with economic growth, a key market attraction is the UHNWI (ultra high net worth individual), as Saudi Arabia has the highest number of UHNWI’s whose net worth is $320 billion. Their wealth is 32% of the total wealth generated in the Middle East ($995 billion), making Saudi Arabia a key emerging market after Dubai. Their wealth portfolio growth is expected to grow by 20% by 2020.

Morocco’s economy has seen considerable growth as we see GDP growth of 3.90% with retail sales grown by 13% since 2016. It is known to be a leading tourist destination favoured by continued economic

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Top Three Potential Geographic Candidates


A.T. Kearney GRDI score is a key indicator in finalizing the ideal country expansion for Hermès. However the four essential factors analyzed within the equation are market attractiveness, country risk, market saturation and time pressure. The table highlights Saudi Arabia as the most favorable choice as it has the highest value of market attractiveness with low country risk on average, even in comparison to its peers. On the overall listing, Saudi Arabia falls in third place for market attractiveness, with first place to India, and second place followed by China. The market saturation of only 22, speaks to Hermès’ understated expansion strategy in line with the comparison of the lowest time pressure. This path is an ideal time frame and economic boom for Hermès to capture the luxury market.

A.T. Kearney 2017 Global Retail Development Index

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Saudi Arabia’s government leadership is comprised of a monarchy of the Al-Saud dynasty originated in 1930. King Abdullah bin Abdulaziz serves as both chief of state and head of government as these positions are passed on from generations, as the monarchy is hereditary; there is no election. However, there are talks of eased restrictions of FDI ownership that lines with Hermès’ growth strategy to open a directly operated flagship store when seen as a favorable mature market. The GCC (Gulf Cooperation Council) is a regional intergovernmental political and economic union consisting of all Arab states of the Persian Gulf.The council is home to key emerging

countries shaping the luxury market. With UAE, Qatar, Bahrain key players with 7% of UHNWI and 4% of HNWI worldwide. The member countries promote cooperation among countries’ citizens as their key objectives are formulating similar regulations in various fields such as religion, finance, trade, customs, tourism, legislation, and administration. The main objective of setting up joint ventures provides an opening for Hermès to expand into Saudi Arabia as they already benefiting from a joint venture with Al Mana group who operate and manage their Middle East geographic region.


Saudi Arabia is the founding member of OPEC (Organization of Petroleum Exporting Countries), an intergovernmental organization of 14 nations as of February 2018. Saudi Arabia is referred to as the world’s ‘swing producer’ as it possesses the world’s largest proven conventional crude-oil reserves which are estimated to be about 20% of the world’s total. The title came upon as it was Saudi Arabia’s unique ability to cut large amounts of crude-oil and hence large exports that no other country could level to. This has had much voluntary influence on the world crude-oil market. However, the kingdom is pushing ahead with an economic overhaul aimed at ending the once called its ‘addiction’ to oil.

value at $1 billion. Boosting tourism is another key ideal market indicator as tourists will be able to visit as the economy expects to attract 30 million visitors a year by 2030. The government has also initiated a 5% sales tax as an effort to boost government revenues from sources other than oil. The Saudi Arabia economy is in its development stages but speaks to an understated economy to set off by 2030. Hermès expanding into a booming economy with the world’s highest number of UHNWI sets the tone to gain market knowledge of the region-specific culture and expand its reach to benefit from the 2030 vision. The government in an effort to boost the economy and introduce favorable conditions for investors is developing special economic zones.The establishment of the Economic Cities (ECs) is under the authority of the Saudi Arabian General Investment Authority (SAGIA). The ECs will operate independently from the “existing governmental framework” with its own tax and labor laws and an autonomous judicial system to shift from oil to high tech and place Saudi Arabia at the forefront of technological advances. This is the post-oil era.

The Saudi Vision 2030 is enabling the economy to evolve towards western modernization as companies are starting to employ females in high numbers but most importantly lifting the long-standing ban on women driving.The most notable reforms of the Saudi Vision 2030 will involve advancing women’s rights. In addition, the government will begin granting commercial movie theatre licenses this year where chains eyeing opportunities in the market of $30 million people claim investments could turn over to

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The Saudi government forbids the practice of any religion other than the state-sanctioned interpretation of Islam. Those who do not comply are subject to interrogation, humiliation, and imprisonment. Such practices are unfavorable for a country that wants to attract more investments and foreigners. Saudi Arabia would need to find the golden middle between religious devotion and international recognition. As we see notable actions towards women’s rights from Saudi Vision 2030, the social conditions are still daunting in comparison to the western world. Women in Saudi Arabia are less represented in political, social, economic and scientific fields than

women in any other Arab or Muslim country.They are prohibited from studying certain subjects in schools, such as chemistry and biology. They may not legally drive and must obtain “permission” from a male “guardian” to travel within or outside the country. These few examples, highlight the conditions that violate women’s human rights and have devastating personal and social effects. However, as we see Saudi Arabia continuously work towards evolving their social economy and in line with our joint venture with Al Mana Group we should not be affected by unfavorable social conditions.

Saudi Arabia government is working towards being a centre of research excellence. The government body has dedicated 12% of the country budget to upgrading its higher education system, the highest level of funding in the world. The main development towards this goal is the King Abdulaziz City for Science and Technology (KACST), the country’s national science agency. King Abdullah University of Science and Technology (KAUST) is another initiative focused exclusively on graduate study and research. By 2020 KAUST aims to be included within the world’s top ten

science and technology universities with research set to a global standard. This speaks to the development of the population and enhances Hermès consumer profiling as they want to educate the customer about their heritage and excellence. KAUST is also working with new technology businesses by supporting early investment and the transfer of technologies to the market through its own innovation funding programs that are helping to nurture the nascent venture capital market in Saudi Arabia.

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Saudi Arabia is referred to as the world’s ‘swing producer’ of oil, as its historically known to produce the largest amount of crude-oil in the world. Ninetyeight percent of Saudi Arabia territory is composed of a desert which points to its most concerning environmental issue of desertification and droughts. To control the issue, Saudi Arabia produces its own water from desalinating sea water. This process leads to water pollution as the desalination plants throw the polluted water away to sea that is surrounded by the Arabian Sea and the Red Sea. To combat the pressing problem Saudi Arabia is creating Eco-city. A long-

term project that is focused on reducing greenhouse gas and pollutants that influence the environment. The Arabian region is exposed to extreme levels of sunlight that Saudi Arabia is working towards converting to high-efficiency solar power for urban use. Scientists expect that by using solar power, the whole city can reduce the emission of greenhouse gas in large scale. In urban use, solar energy may replace oil to produce electricity for air conditioner or lights. Highlighting Saudi Arabia’s focus to be less dependant on oil to produce electricity.

Saudi Arabia’s legal system is based on Shariah, the, Islamic law. The Shariah law is derived from different sources but principally the Holy Qur’an and the Sunnah traditions of the prophet Islam. Saudi Arabia is the only country who most strictly applies the Sharia law which does not have a parallel civil legal code. For example, a business would incur income tax on business profits and Zakat, a form of wealth tax based on Shariah law principles. Under the Nitaqat law, an employer will be given a quota for employment Saudi nationals which can be a difficult transition of managing human resources in a new

expansion region. It is important to understand as favorable KSA is for new market penetration, it is important to gauge the complications that may arise as a result of the local business law and practices. By dedicating sufficient resources towards strategic store operations management.These conditions would alarmingly be unfavorable to Hermès if the decision was to enter by the channel of DOS, however as we have strategically planned expansion through joint venture with Al Mana, who are experts in the retail operations structure in the Middle East.

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Asia

Europe North America

Middle East

Oceania Latin America

Saudi Arabia – Jeddah

Lebanon

Saudi Arabia

Kuwait

Bahrain Qater UAE

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Hermès, even with its controlled distribution model, has a wide global reach in the prime luxury markets. The Middle East is home to highest number of UHNWI’s, in addition, Saudi Arabia ranks third after India and China, to be the most attractive market for expansion (A.T. Kearney, 2017). Hermès’ current Middle East market consists of U.A.E, Bahrain, Qatar, Kuwait and Lebanon, the only emerging country crucial to the list is Saudi Arabia. The demographic traits development of an increase in population, median age, GDP and most importantly retail sales to be valued at $156 billion by 2022.

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Saudi Arabia’s luxury market is booming with the total retail sales valued at $114 billion (A.T. Kearney, 2017). Riyadh is the capital, however, Jeddah is the second largest city in Saudi Arabia and hub for luxury retail with its latest retail real estate development,The Boulevard.This prestigious property is a luxury destination that houses the finest collection of international brands. As we explore Saudi Arabia’s market characteristics, we see that shopping is ranked as the top leisure activity and is built into their culture as a way to spend time with friends and family. Statista 2018 report ‘Retailing in Saudi Arabia’ clearly highlights that store-based retailing is still the preferred method of retailing. The report confirms by 2022 there will be a higher CAGR for non-store retailing growing 11.4% and store-based retailing at 4.9%. However, in actual value terms, we see store-based retailing still the key channel of distribution. Hermès’ brand identity of understated and exclusive luxury, makes Saudi Arabia an extremely attractive market for expansion. In addition to favorable channels towards brick & mortar, another favorable factor is a large number of incoming religious tourists for Mecca. It is anticipated Saudi Arabia will see over 12 million pilgrims tourists in 2018, who are expected to spend $9 billion which will spike retailers monthly sales on an average of 15%.

Saudi Arabia Distribution Channel


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Direct Competitors

Indirect Competitors

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Engineering

Automotive Real Estate & Distribution Investments

Luxury Goods

Beauty

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Retail

Media Entertainment

Fashion

Home Interiors

Food & Beverage

Watches & Jewelry


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Hermès’ major target market is split into primary and secondary consumers. The primary consumer is the one who is well-versed in the Hermès brand. They are aware and informed about the Hermès heritage and brand history. They are regular customers and have grown with the brand which provides a sense of brand loyalty amongst them.

Rise in Private Wealth: As per Boston Consulting Group report, private wealth in Saudi Arabia is expected to rise to $2 trillion by the year 2020, encouraging luxury spending which means generating higher revenues for the luxury stores. Shopping malls and social gatherings with relatives and friends serve as the main source of entertainment for Saudi families. They are also the only source for families to bond and spend some quality time together.

They comprise of the ultra high net worth individuals and high net worth individuals. Between them, there are a few lifestyle traits which both these segments share.

Further Investments and Philanthropy: Philanthropy ranks the highest in terms of luxury investments for the UHNWIs and HNWIs followed by future investments in foreign ventures and stakes as a way to capitalize on the wealth. They love to spend on luxury items like yachts and expensive automobiles and believe in investing in luxury purchases. This is followed by arts and collectables succeeding to fashion and jewelry.

Exclusivity: These primary consumers prefer exclusivity in acquiring luxury goods. They desire to own luxury products before others and like getting services and experiences specifically tailored to their needs and preferences. Generous Spending: Families love to spend generously on their children. They prefer buying luxury labels which highlight, the fact that kids luxury labels are so prevalent and would tend to overspend as well.This is because they feel it leads to a sense of belonging and equality within the family. Wealth Legacy: Wealth stays in the family and is passed down through generations - the concept of saving is not followed in Saudi Arabia, leading to overspending which causes a pressure on the cash flow leading to financial burdens. While only 26% of the Gulf population saves regularly, 89% of Saudi citizens borrow despite being aware economic stress. 69


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Ultra high net worth individuals are the ones who own liquid assets exceeding $30 million. Saudi Arabia holds the highest number of UHNWIs and they’re expected to grow from 740 to 890 by the year 2020 as per the Wealth X report 2017. Their wealth accounts for 32% of the total wealth generated in the Middle East ($995 billion). However, they hold 53% of their assets in cash due to caution around investing. Previously, they believed in investing in a number of foreign businesses, however, the mindset is sifting and they would love to invest in Saudi businesses as a form of stable investments. Only 8% of the UHNW Arabs inherit their fortune fully and most of the billionaires proceed to build on that fortune. Private wealth distribution is expected to grow by 4.8% in the next five years signifying a increase in luxury consumption.

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Status: Comes from an affluent family, married with four kids, self-made billionaire living a lavish lifestyle Education: Bachelor’s engineering Stanford University, Graduation MBA from Harvard University Employment: Entrepreneur, owns multiple businesses and investments in real estates- US, Europe; stakes in foreign businesses like Swiss banks Geography: Settled family in Jeddah, Saudi Arabia, travels globally for work, owns a chateau in France Net Worth: $5.7 billion Interests & Leisure Activities: Traveling on exotic holidays, loves boating with his friends in private yacht, equestrian lover-owns a ranch with horses, premium club member-Monaco Yacht Show, Dubai World Cup-Meydan Grandstand, philanthropy, watching and investing in sports Technology Usage: Uses an iPhone, iPad regularly Media Consumption: Twitter follower, relies on BBC and WSJ apps for constant updates, follows the stock market online Shopping Habits: Luxury consumer, shops in- store for self and family, collectables and automobiles, best quality products, splurges on equestrian leather goods and travel luggage


Status: Raised in an affluent family, married to a millionaire, three kids, stay-at-home mother and religious Education: Bachelor’s from King’s College, London Geography: Settled in Jeddah, Saudi Arabia with her family Net Worth: $22 million Interests & Leisure Activities: Educated and loves family time, caring for the house, planning big family events, socially active, fashion follower, enjoys shopping, takes exotic holidays with family-ski trips, philanthropy, reading and fashion Technology Usage: iPhone user on an everyday basis. Regularly keeps in touch with her friends worldwide Media Consumption: Facebook and Instagram profile, follows fashion influencers, subscribes to Vogue Arabia, BBC (part of her lifestyle) Shopping Habits: Luxury brands make up her lifestyle, craves shopping experience, prefers shopping in- store, spends on beauty, jewelry, fashion and buys for herself, likes showing off her wealth. She has grown up buying Hermès products and has built that reputation and relation with the brand and hence is a loyal follower. She would invest in core Hermès products- Birkin and Kelly bags, Hermès homeware, trunks and luggage.


Saudi Arabia holds about 59,000 millionaires and they’re the most rapidly growing and well-spread out consumer population. The total number of HNWIs is expected to grow by 1.3% by 2020, as per the Boston Consulting Group report. The upper HNWIs (net worth between $20 million to $30 million) is expected to increase at a rate of 4.1% whereas the low HNWIs segment (net worth between $1million and $20 million) is expected to rise by 2.6%.

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Hermès’ secondary consumer are the new buyers that are recent luxury consumers. Depending on their status, they might or might not be brand loyal or regular buyers at Hermès. As opposed to the primary consumer, they do not understand the brand heritage and do not purchase similar products. They are experimental buyers and are looking to spend their newly acquired wealth. This segment has yet to grow with the brand and only buys side products.

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Status: Single, comes from a wealthy middle-class family Education: Currently pursuing a bachelor’s degree in marketing at Dar Al-Hekma University Geography: Lives in Jeddah with parents Interests & Leisure Activities: Keeping up her fashion blog, going on holidays with her family, enjoys shopping and dining out with friends Technology Usage: Uses her iPhone and MacBook daily, active on Facebook, YouTube, Twitter and Snapchat Media Consumption: Subscribes to Vogue Arabia and Elle Arabia, reads Business of Fashion, listens to music on Spotify, streams her favorite shows and videos on Netflix Religion: Muslim Shopping Habits: Loves to show off, purchases luxury products that reflect her personal taste and status, follows the latest trends, status seeking, impulsive buyer, splurges on handbags and accessories


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Status: Single Education: Received a bachelor’s degree from the Institute of Technology in Mumbai, India Employment: Chemical Engineer at Saudi Aramco Income: $150,000 a year Geography: From Mumbai, currently resides in Jeddah Interests & Leisure Activities: Enjoys going to pop music concerts and dining out with friends, goes boating in the Red Sea on the weekends, follows the Indian National Cricket team, likes going shopping Technology Usage: Uses his iPhone and Mac daily and tablet regularly, he is active on Twitter and Facebook Media Consumption: Follows the BBC network for news information, streams Netflix, develops playlists on Spotify Shopping Habits: Interested in fashion because his self-image is important to him, seeks value for his money and wants to invest in pieces of quality, researches online before buying a product in the store, purchases pieces that speak to him, and buys for the aesthetic value


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Hermès decided on the city of Jeddah for a multitude of reasons. Jeddah is not only the second largest city in Saudi Arabia, a massive hub for travelers and Saudi citizens but also the new luxury destination. Hermès swayed away from opening a flagship because it would not be a directly operated store with the joint venture Al Mana, so they went with the option of a boutique store in a luxury destination. The Boulevard recently opened in 2015, Hermès’ new location is a luxury outdoor mall with 36 boutiques including the flagships of Prada and Gucci. The Boulevard is owned by the Al Rubaiyat Group, which has been owned by the Binzagr family for over 30 years. Hermès did not want to be in a typical mall setting, which was is why the outdoor Boulevard environment that incorporates copious greenery and many fountains is appealing. In Jeddah, Saudi Arabia shopping is an extremely popular leisure activity for women and families.The heat makes it difficult for citizens and tourists to be outside for extended periods of time, so malls act as an avenue for a family outing and opportunity to splurge.

The Boulevard

King Abdulaziz Branch Rd. Ash Shati 5967 Jeddah 23414, Saudi Arabia

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The hours of operation in Saudi Arabia differ to that of many western countries.This is the result of the extreme heat and lifestyle. The trend for hours of operation in Saudi Arabia from ten o’clock in the morning till eleven at night. The malls are the busiest at night when the temperatures has cooled down, and people can walk and mingle comfortably outside. The mall is the busiest during the Middle Eastern holidays, Eid and Ramadan. On these holidays the malls will remain open till 4am to cater to the celebrations.The natives will often break fast after the sun goes down, have a large meal, and then drive to the malls to shop.

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Direct Competitors

Indirect Competitors

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The Hermès boutique opening at The Boulevard in Jeddah will be a family store, and there are copious other activities that families can partake in a 5 mile radius from The Boulevard.To begin with there is the local aquarium and theme park right on the coast that abduct the beloved Promenade. The Promenade is an extended walkway that has also beach access where families can go experience a new restaurant looking over the Red Sea, go for walks, or even have picnics on the beach. Another attraction includes King Fahd’s Fountain just twenty minutes south of The Boulevard, which has the title of being tallest fountain in the world. Finally, there is the local competition of Star’s Avenue Mall, which a couple blocks over from The Boulevard Location.The Boulevard differentiates itself from the Star’s Avenue Mall by being an outdoor luxurious mall unlike Star’s Avenue which is an enclosed three-story mall. Overall, this highlights the justification for the new Hermès location with there being ample luxurious family activities in such close proximity from the Boulevard, and Hermès looks forward to see footfall that is generated to do these area attractions.

As of now, Jeddah does not have a public transportation system, but the Saudi Arabian government is striving to create one following their new Saudi Vision 2030 Plan. In the Saudi Arabian, culture wealthy citizens like to show off their luxurious vehicles, so they actually prefer to be driven to the malls like the Boulevard and to the local attractions. At The Boulevard parking is available, but also speaking to the Saudi Arabian culture they prefer using the valet services instead of parking themselves. The valet will park their vehicle in the underground parking lot. The underground parking lot is a design feature as a result of the local climate. The cars could be potentially damaged due to the extreme heat, so the underground parking lots preserve the vehicle’s integrity.


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Joint Venture

Group Chief Financial Director

Group Chief Operations Officer

Retail Operations Manager

Customer Service

Customer Experience

Regional Manager 2Store Manager 3 Assistant Managers 6 Senior Sales Consultant 14 Junior Sales Consultant 93

Marketing


Outside View

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Bird’s Eye View of 1st Floor

1st Floor ISO


Entrance

96


Leather Goods 97


Luggage Wall

98


Home Goods 99


Bird’s Eye View of 2nd Floor

2nd Floor ISO

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101

Fragrance


Equestrian

102


VIP Room


Hermès Saudi Arabia: Product Plan 2018

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Non-Traditional: Social Media

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Partnership with Alfrosia

Alfrosia Trainer in Hermès

Hermès Senior Sales Associate

Hermès Core Customer

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Non-Traditional: Virtual Reality In-Store

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With 3,600 square feet, Hermès has utilized each corner of the boutique to its best potential to generate revenues of $18 million in the first year. The Cost of Goods sold will be recorded at $7 million. The average baskets based on various consumer profiles vary depending on the number of footfall each month. The store, which will launch in May 2018, will see the highest footfall in that month, owing to the festive season of Ramadan and Eid. We predict sales to benefit a positive momentum of average units of Accessories and Silk and Textiles segments. The Leather Goods section will account for the highest revenue generator. By 2019, we believe Hermès’ sales to increase by 10% to reach $20 million and a further increase of 10% by 2020. An additional 2.5% Zakat tax is applicable on the profits earned as a part of the Saudi Arabia Sharia Law. The net income is expected to reach cross $5 million by the year 2020, highlighting the future exponential growth for the Hermès Jeddah, Saudi Arabia store.

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Hermès has built a boutique for an intrinsic, all-encompassing and educational experience for their clientele in Jeddah, Saudi Arabia. Hermès’ success lies in developing a strong relationship by providing a global luxury brand experience infused with a Saudi Arabian local touch. For Hermès, the brand ethos embodies an unparalleled experience, which speaks to their exquisite craftsmanship. Through its 300 years of timeless heritage, Hermès continues to be the connoisseur brand of the luxury market.

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Callan Flynn – Interior Design Elizabeth Garison – Promotional Activity Illustrations


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Hermès Store Expansion: Jeddah, Saudi Arabia  
Hermès Store Expansion: Jeddah, Saudi Arabia  
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