Stitching Up Success: Hermès 42-Day Cash Flow Advantage over its Competitors

Discover the secret sauce behind Hermès' lightning-quick customer payments, inventory magic, and supplier charm that leaves its industry peers fashionably late to the party.

In the ultra-luxury fashion industry, Hermes stands out for its rich history and enduring legacy.

Founded in 1837, Hermès began as a Parisian harness workshop for European nobility. The brand expanded into leather goods and handbags, introducing iconic silk scarves in 1937 and the famous Birkin bag in 1984.

But, beyond the glitz and glamor of its products lies a fascinating financial tale.

From loyalty programs that keep customers coming back for more, to supply chain sorcery that would make even the most seasoned fashion forecaster swoon—in this article, we'll unravel the threads of O2C fabric of Hermès.

So, buckle up your designer belts and get ready for a whirlwind tour through the world of luxury clothing, where every day saved is another dollar earned in the pursuit of sartorial supremacy!

Hermès converts Inventory into Cash Flow 42 days faster than its industry peers

In a striking display of luxury market resilience, Hermès has maintained an impressive Cash Conversion Cycle (CCC) over the past five years, outperforming the industry average by a significant margin.

From 2019 to 2023, Hermès' CCC fluctuated between 127 and 159 days, with an average of 143 days. This performance is remarkably better than the industry average of 185 days, highlighting Hermès' operational efficiency in managing its working capital.

Hermès' ability to maintain a CCC well below the industry average speaks volumes about its supply chain management, inventory control, and cash flow optimization.

This efficiency likely contributes to the brand's ability to maintain its exclusive image while delivering strong financial performance.

Now, let’s take a look at Hermès DSO, DPO, and DIO.

Hermès sells its inventory ~3 months faster

Over the past five years, Hermès has maintained an impressive average Days Inventory Outstanding (DIO) of 195 days, significantly outperforming the industry average of 275 days. This means Hermès is able to convert its inventory into sales 80 days faster than its industry peers.

By outperforming the industry average, Hermès showcases its ability to maintain a lean and responsive supply chain, adapting quickly to market demands while minimizing excess inventory costs.

Hermès' ability to maintain this level of efficiency over a five-year period underscores its strong inventory control practices and strategic supply chain management.

Let’s dig a bit deeper!

How does Hermes maintain a lower DIO?

1. Strong demand in China: According to Reuters, in 2022, Hermès saw robust sales in China even as other luxury brands struggled during the pandemic. Axel Dumas, Executive Chairman at Hermès, says "strong desirability in China" with "double-digit growth... including in the fourth quarter" of 2022. This performance helped Hermès increase sales and even beat margin forecasts, benefiting from post-pandemic consumer spending on luxury goods^[4]. 
2. Moderate price adjustments: While competitors like Chanel and Louis Vuitton significantly increased their prices during 2020-2023, Hermès made smaller changes. UBS reports Louis Vuitton raised prices by 9.6% in 2020 and 3.7% in 2022, versus Hermès’ 1% and 2.1% hikes in 2022^[4].
3. Customer loyalty program: Hermès' customer loyalty program and limited product releases contribute to its efficient inventory management compared to Louis Vuitton. The program helps predict demand, reducing excess inventory. By offering exclusive items to select customers, Hermès creates scarcity and maintains lower stock levels. This strategy allows Hermès to quickly sell new products upon launch, minimizing storage time. Consequently, Hermès achieves a competitive advantage in terms of Days Inventory Outstanding (DIO)^[5].

Hermès clears its dues with suppliers 2 months before Its Industry peers

Hermès demonstrates exceptional efficiency in managing its supplier payments. Over the past five years, Hermès has maintained an average Days Payable Outstanding (DPO) of just 65 days, significantly outperforming the industry average of 119 days.

This means Hermès pays its suppliers nearly twice as fast as its industry peers. While quick payment might seem counterintuitive from a cash flow perspective, it actually showcases Hermès' financial strength and commitment to supplier relationships.

By consistently paying suppliers 54 days faster than the industry average, Hermès likely benefits from preferential treatment, better terms, and a more resilient supply chain. This approach aligns with Hermès' overall strategy of maintaining high-quality standards and exclusivity in the luxury goods market.

How does Hermes maintain its supplier relations?

Hermès manages a complex supply chain due to its extensive collections of products. A single handbag may involve up to 15 different suppliers. While many suppliers are based in France, Hermès also works with partners in other countries, including Italy, South America, and Portugal.

• Long-term relationships: Hermès aims to maintain long-term relationships with suppliers to preserve know-how, secure supplies, and avoid aggressive purchasing practices. ^[6] In addition, Hermès works with local suppliers and partners, and 68% of their purchases are made in France.^[4] This trust and mutual respect facilitate smoother collaboration, potentially leading to better DSO.
• Supplier code of conduct: Hermès has an extensive supplier code of conduct shared with its suppliers, which outlines payment terms and contract conditions^[7]. This approach enhances transparency, builds trust, streamlines dispute resolution, and mitigates risks—and ultimately leads to a lower DSO.

Hermès collects Customer Payments 41 days faster

Hermes is a cash flow wizard. Over the past five years, Hermes has turned sales into cash at an impressive speed.

In 2023, its Days Sales Outstanding (DSO) was 149 days!

Over the past five years, Hermes has consistently turned sales into cash with an average DSO of 143 days. Compare that to the industry average of 185 days— that’s over 40 days faster!

This striking difference highlights Hermes' operational efficiency and ability to maintain liquidity, seamlessly fueling ongoing operations. Hermes' performance sets a new standard in financial management for the luxury goods industry.

What leads to Hermès’ better DSO?

1. Growing direct-to-consumer (D2C) sales: Hermès' strong D2C sales channel likely contributes to a lower DSO. Direct sales often result in immediate payment, reducing the time between a sale and receiving cash. Hermès’ D2C sales and four dozen retail stores in China accounted for half of the company’s revenue, with Asian sales — excluding Japan — rising 43% in Q4 2021. “The absence of tourists was offset by the loyalty of our local customers and a strong increase in online sales,” says Hermès Chairman, Axel Dumas^[1].
2. Buy now, pay later payment options: Companies thatprovide multiple payment methods to accommodate different customer preferences, can experience a better DSO. Hermès' has partnerships with buy now pay later credit lenders[2]. Credit lenders can provide financing solutions to customers, enabling them to pay invoices more quickly. In addition, credit lenders can purchase outstanding invoices, providing immediate cash flow and reducing DSO.

Hermès wins the O2C battle: A bright future ahead!

This luxury brand isn't just about fancy bags and scarves - they're financial wizards too. Here's how Hermès is crushing it in the world of Order-to-Cash (O2C):

First off, Hermès turns their stock into cash 42 days quicker than their rivals. They also get paid 41 days faster than other luxury brands. How? They're pros at selling directly to customers and offer multiple payment options like buy-now-pay-later.

But wait, there's more! Hermès sells their products 80 days faster than others in the game. They're hot in China, smart with pricing, and have a loyalty program that keeps customers coming back for more. And here's another trick up their sleeve: Hermès pays their suppliers twice as fast as others with the aim to build rock-solid long-lasting relationships.

All of this adds up to Hermès' secret sauce. They're not just selling luxury - they're running a tight ship that keeps them ahead of the pack.