Hermès slump a sign of luxury’s wider woes in Iran war

• Hermès growth down 1.5 percentage points
• Stores in the region closed
• Sales at other luxury brands down

Luxury goods maker Hermès said the Iran war cut into its worldwide first-quarter growth, derailing a strong start to the year as temporary store closures and a slump in both inbound and outbound tourism weighed on sales.

The conflict is affecting luxury groups through multiple channels, effectively halting tourism into the Gulf and sharply reducing traffic at European stores as wealthy Middle Eastern shoppers stay home – amplifying the impact on global sales despite the region’s relatively small revenue share.

Hermès is the maker of Birkin handbags that retail in excess of $10,000 and can fetch hundreds of thousands of dollars at auction. It reported quarterly revenue of €4.1 billion euros ($4.4 billion), saying Middle East tensions reduced overall growth by about 1.5 percentage points.

Underlying growth would have been about 8.5 percent, rather than 7 percent, without the war impact, executive chairman and CEO Alexandre Dumas told the annual general meeting last week.

Sales in the Middle East, which accounts for about 4 percent of revenue, fell 6 percent as tensions escalated from March.

CFO Eric du Halgouët said Hermès temporarily closed some stores in the region in early March when Tehran began firing thousands of missiles and drones at Gulf states in retaliation for US-Israeli strikes.

Closures were concentrated in Dubai, Bahrain and Kuwait, due to airport shutdowns and security concerns, he said, with revenue falling 20 to 30 percent at some stores “depending on the day”.

Hermès employs about 500 people in the Middle East, roughly 400 of them in the UAE. The region had been one of the group’s fastest-growing markets, with sales rising about 15 percent last year.

Consultancy Bain & Company estimates 50 to 60 percent of Middle East luxury sales come from tourists.

Hermès said the war impact extends beyond regional stores. Its French business has been particularly affected, with more than half of sales linked to tourism, as fewer Middle Eastern customers visited Paris. 

“We’ve lost them for the time being because they used to travel to Europe quite a lot,” Dumas said.

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The Middle East has been one of the few reliable growth drivers for luxury groups in recent years, accounting for roughly 5 percent of revenues on average, according to investment bank Morgan Stanley. More than half of that revenue comes from the UAE, where spending is largely driven by tourists from Russia, China and India.

Other companies with major exposure to the region include Richemont, owner of Cartier, and the Ermenegildo Zegna Group, the bank said.

Zegna Group acting CEO Gianluca Tagliabue said the UAE was the group’s largest and most affected market in the region, accounting for a mid- to high-single-digit share of global revenue.