Fancy, luxury handbags start off looking like this:
Not exactly the image of exclusivity and sexiness that the likes of Hermes and Longchamp want to project when trying to convince customers to pony up for a bag but leather starts with hides and hides don’t start off in fancy colors.
The image comes from a Wall Street Journal article on Tanneries Haas, an old-school Alsatian tannery (French Tannery in Demand as Source of Top-Notch Leather, Nov 6). The article walks through the production process (quick: name a use for chromium!) but the interesting part of the story is how the industry of supplying high-end hides has changed. Tanneries Haas remains independent but luxury houses are buying up tanneries.
Until just a few years ago, the tanning business was the least glamorous cog in the designer-handbag industry. But recently Tanneries Haas and other French tanneries have found themselves the object of attention from famous luxury labels jockeying for secure sources of top-notch leather. “When they saw a certain number of tanneries disappear, they had to think about protecting their suppliers,” says Jean-Christophe Muller Haas, a sixth-generation French tanner. …
By acquiring suppliers, luxury goods purveyors hope to get more control over raw material costs. Prices of calf hides have soared in recent years due to Europe’s falling veal consumption. Calves are slaughtered primarily as a source of veal and skins are a byproduct. With fewer calves slaughtered to meet shrinking demand for veal, the supply of skins available for luxury leather goods is also diminished.
This move is not just limited to European calf leather. Businessweek reports that luxury firms are also buying up crocodile farms (A Crocodile’s Bumpy Road From Farm to Handbag, Oct 24).
This is an interesting question of supply chain design. It is hard to imagine that a luxury goods maker has any real advantage in running a tannery. The motivation for these moves then has to be securing a strategic resource. I suspect that even an independent firm like Tanneries Haas are signing longterm contracts that tie up a significant portion of their capacity.
But why now? I can see a couple of reasons. One is discussed in the WSJ article: There’s a lot of money in handbags.
Leather bags are the industry’s cornerstone. This year, goods made from leather and other skins like snake and crocodile are expected to make up 17% of the $293.6 billion world-wide luxury-goods market, according to a recent Bain & Co. report, with annual growth of 5% versus 2% for the industry overall.
If the market is growing fast and tannery capacity (or more accurately capacity of the right tanneries) isn’t keeping up, then locking capacity matters. China and other emerging markets has to be part of this story. A number of new buyers coming in the market is likely why demand has grown so much more than available supply.
Also mentioned in the article is a move away from canvas as a preferred material. Canvas, one suspects, is either to procure and hence inherently less exclusive. If customers are buying because they want a unique item, then committing to leather signals to buyers that not everyone can get the bag.