https://businessday.ng/life-arts/article/the-secret-economics-of-the-birkin-bag/ */ Life & Arts commercial,consumers BusinessDay BusinessDay [ ] * Home * News + Big Story + World o Africa + Legal Business + Sports. + Education + Energy o Renewables o Power o Oil & Gas + Interview * Companies & Market + Companies + Markets * Economy + Agriculture + Aviation + Banking + Maritime + Real Estate + Transportation + Research post * Technology * Commentary + Columnists + Opinion + Editorial * BD Weekender * Cartoon * Data Analytics + Market Data + Governance Data * App + Download Andriod App + Download IOS * Conferences * Newsletters * Login * My Account + Logout * Subscribe istore 1900 x 300 * Monday, July 24, 2023 Businessday Ng Businessday Ng - * Home * Newsletters * Companies & Markets + Companies + Markets * Economy + Agriculture + Aviation + Banking + Maritime + Real Estate + Transportation + Legal Business + Research post * Data Analytics + Market data + Governance Data * Cartoons * BD Conferences * Login * My Account + Logout * Subscribe [ ] [Search] Businessday NG * Home * Life & Arts * The secret economics of the Birkin bag The secret economics of the Birkin bag Brooke Unger Jul 17, 2023 Share On a flight from Paris to London in 1983 Jane Birkin, an Anglo-French chanteuse and actress, spilled the contents of her overstuffed straw bag, including her Hermes diary. Jean-Louis Dumas, Hermes's chief executive at the time, gallantly picked it up. They chatted about overflowing containers in general and her inadequate weekend bag in particular. Dumas, who had not only exquisite manners but also a fine nose for opportunity, designed a receptacle to her specifications that has become the world's most expensive handbag. Prices start at $7,000; in June Christie's Hong Kong sold a matte Himalayan crocodile-skin Birkin with a ten-carat diamond-studded white-gold clasp and lock for $300,168. Part of the explanation for the bag's exorbitant price - and the one that Hermes likes to emphasise - is the exquisite workmanship. Each Birkin is the handiwork of a single craftsman, who takes up to 18 hours to complete the job, more if the hide is a delicate crocodile skin. Hermes says its prices are based on its costs, which are necessarily high. Yet the many man-hours and fine materials that go into the making of the bag may not account for much of its price: Luca Solca, an equity analyst at Exane BNP Paribas, estimates that the production cost of a basic Birkin is around $800. At this point, an economist would tend to usher in the argument made by Thorstein Veblen, an American economist and sociologist, who, in 1899, put forward the idea of "conspicuous consumption" in his classic takedown of capitalism, "The Theory of the Leisure Class". So-called Veblen goods reverse the normal logic of economics. With most goods, demand falls as price rises; with Veblen goods, the higher the price, the higher the demand, for the more expensive they are, the more effectively they proclaim the status of their owners. The gap between the cost of producing a Birkin and the price tag suggests that it falls into this category. Yet in a couple of ways, Birkins do not look like classic Veblen goods. First, they're not all that conspicuous. Almost everyone can identify the provenance of Gucci's double-G spangled Dionysus shoulder bag; only initiates can spot a Birkin. So Veblen's theory needs to be adapted to explain the power of inconspicuous but expensive goods. The authors of "Signalling status with luxury goods: the role of brand prominence", which appeared in the Journal of Marketing in 2010, do so by dividing the rich into two groups: "parvenus", who want to associate themselves with other rich people and distinguish themselves from have-nots, and "patricians", who want to signal to each other but not to the masses. They theorise that more expensive luxury goods, aimed at patricians, will have less obvious branding than cheaper ones. Sure enough, they found that Gucci and Louis Vuitton charge more for quieter handbags and Mercedes slaps bigger emblems on its cheaper cars. People who cannot afford luxury but want to look as if they can ("poseurs") go for big logos: counterfeiters usually copy louder goods. Secondly, the producers of Veblen goods ought to raise prices until they are just below the point at which normal economic laws start to reassert themselves. But, as the existence of a flourishing secondary market suggests, Hermes could charge far more than it does for a Birkin. Instead of rationing by price - standard market practice - Hermes rations by queue. You cannot walk into an Hermes boutique and expect to walk out with a violet ostrich 30cm bag with palladium hardware, or indeed a Birkin of any description. You have to place an order, and wait. Helene Le Blanc, then a lawyer working in Paris, was initially rebuffed when she approached the flagship shop in Faubourg Saint-Honore several years ago. Once she persuaded the saleswoman that she was serious, and willing to wait, she was presented with binders filled with leather samples and hardware options, and allowed to place an order. About two months later she received a registered letter saying the bag was ready. Florence Paul, a public-relations consultant in London, says a friend of hers took up a collection to buy her mother a Birkin for her 60th birthday; it was ready for her 61st. Read also: Tsunami warning issued in US as earthquake hits Alaska Peninsula That is why the Birkin has its own literary sub-genre while the expensive but accessible Chanel 2.55 does not. In an episode of "Sex and the City" from 2001 Samantha jumps a five-year queue by claiming she wants the bag for actress Lucy Liu. Wednesday Martin recorded the competitive-consumption behaviours triggered by the Birkin bag among rich New Yorkers in her book "Primates of Park Avenue". An entrepreneurial American, Michael Tonello, squeezed a memoir, "Bringing Home the Birkin", out of his buying escapades in Europe. So why does Hermes starve the market for Birkins, when it could sell many more, and so make much more money? Hermes says that the constraint is the availability of high-quality skins and people qualified to work with them. Hermes's leather-goods division (metier, in company parlance) hires 200 craftspeople a year and takes two years to train them. The limit on the number of bags that can be made is therefore a natural one. Like gold and Bitcoins, Hermes suggests, Birkins are mined, not simply made. But as Solca observes, there are good commercial reasons why rationing by queue rather than price can make sense. First, it gives Hermes a buffer: even if demand drops, sales will not. Second, it creates surplus demand for the bags, which overflows into demand for other Hermes products. Much of the firm's business consists of selling consolation prizes: wallets, belts, beach towels and so on. As J.N. Kapferer of the Inseec Luxury Institute in Paris observes, the wait induces "impatient buyers to switch to other products of the brand, to calm their hunger until the much-awaited object of desire is achieved." Third, although market-clearing prices might raise profitability in the short term, in the long run they would drive French women away, leaving nouveaux riches from the developing world as the bags' main buyers. If elegant Parisiennes lose interest, so, eventually, will women who aspire to be like them. But the balance between making few enough to keep consumers hungry and enough to keep the brand's profile high is a delicate one. Do not imagine minuscule production runs, meant for a handful of cognoscenti. Solca guesses that Hermes makes 70,000 Birkins a year and that a million are in circulation. If exclusivity, or the perception of it, were just a function of rarity, Birkins would yield to some of their competitors. Delvaux, a Belgian luxury house founded in 1829 (eight years before Hermes), makes 60,000 items a year all told and claims to rival Hermes in quality. But its Brillant and Tempete handbags cost 15-20% less than a Kelly (the Birkin's slightly less famous but equally unattainable sister) in part because compared with Hermes, "we are a dwarf", as Christina Zeller, Delvaux's artistic director, puts it. The Birkin and the Kelly need to be big enough for people to know about them, but not so big that their value is undermined. The perception of exclusivity thus depends on a ratio: the number of people who want something compared with the quantity available to satisfy that demand. Can Hermes keep that ratio high? Part of the power of the Birkin is that it was born of serendipity, not marketing. Think back to the fateful mid-air meeting between Dumas and Birkin. He was assisting her as much as adorning her - solving a problem, not signing a celebrity-endorsement deal. As Zeller points out, there is a "full story" to be told about Birkin and the bag. The fact that Birkin recently threatened to withdraw her name from the crocodile-skin version of the bag after allegations that a farm that supplies skins to Hermes mistreated the animals shows that the company is beholden to its muse, rather than - as is usually the case with celebrity endorsements - the other way round. But the trouble with serendipity is that it cannot be manufactured. Hermes was "not able to launch another iconic bag in 32 years", points out Mario Ortelli of Bernstein, an equity-research company. At best, the company can tend to the flickering aura that surrounds the two it has. That may be getting harder. Sophisticated buyers do not identify with starlets like Kim Kardashian and Tamara Ecclestone, who flaunt their large Birkin collections. "When you see some celebrity stepping out of an suv with a bag, it takes away from the mystique," says Le Blanc. She fears the Birkin is becoming "too exposed". All big luxury brands fret about that risk, but even here the Birkin stands apart. The danger of over-exposure comes not from the zeal of its marketing but from the ardour of its fans. Brooke Unger is International correspondent for The Economist megamillionmegamillion Share You might also like More from author Life & Arts Hardship dominates art expression in Garden City Life & Arts Afrobeats beckons as Latino stars push global streams over 1trillion Life & Arts Nigeria Prize for Literature: Eleven in contention for $100,000 Life & Arts 'Moult', an enthralling exhibition to see this summer Prev Next [INS::INS] [INS::INS] [businessda] Business Day, established in 2001, is a daily business newspaper based in Lagos. It is the only Nigerian newspaper with a bureau in Accra, Ghana. It has both daily and Sunday titles. 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