How much does it cost Hermes to manufacture a Birkin handbag?

The WSJ reports that Hermes generates 25% to 30% of total sales off of two, now iconic, handbags: the Birkin and Kelly. The challenge facing the company is that a resale market for high-end fashion has been growing and the purchase of a used luxury item is in vogue.

To date the company has done an excellent job creating scarcity. Per the article, production and distribution is limited to 120,000 units per year. The demand for both handbags is so high that they can generally be resold immediately after purchase for a gain (for rare colors this can be as much as a 50% to 100% gain – see the article for more details). In contrast, most luxury label handbags sell at a 35% discount to store prices.

The question is whether or not the growing second-hand market for luxury retail will become a risk factor for Hermes. The tight-supply strategy already pushes customers to make purchases in this market, which could accelerate this growth.

Christie’s sold the most expensive handbag to date:

Fabled as the rarest handbag in the world, this Hermès Himalaya Birkin bag became the most expensive handbag in auction history when it sold for $300,168 / £208,175 on 30 May [2016] at the Convention Hall in Hong Kong.

The post also cited that it takes 48 hours to create a Birkin by hand, which contrasts against Luca Solca’s estimate of 18 hours for a basic Birkin bag. The difference between the two estimates may be in working with different materials (in this case Himalaya Niloticus crocodile skin).

The WSJ recently covered the difficulty farmers face transporting crocodiles and crocodile skins so that they arrive undamaged. The sum received is surprising when you consider that a crocodile handbag, per the article, can easily fetch $50,000:

The animals are both culturally significant and an important income source for indigenous communities in the Outback, who collect the eggs by hand from swamps and incubate them until they’re hatched. Then, the juvenile reptiles are sold to farmers like Mr. Lever, who transport them to farms in less remote areas where they grow for a couple of years before the skins are harvested. A farmer can sell a high-end skin for about $1,000, while an egg can be worth about $35 to a collector. (Farmers also sell the meat, for food, and things such as claws and gall bladders for alternative medicines.)

The article cited that Australia accounts for 60% of the saltwater skin trade because Australian crocs have finer skin patterns than the American alligator. The trade is worth “US$78 million a year in a global crocodile and alligator fashion sector worth up to US$1 billion, according to the Crocodile Farmers Association of the Northern Territory.”

The Economist published an interesting article attempting to explain the economics behind the world’s most expensive bag. The cost of a basic bag is described below (bold text):

“Part of the explanation for the bag’s exorbitant price – and the one that Hermès 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. Hermès 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.”