You may have heard about this recently, as the Business of Fashion website dedicated an article to this phenomenon a few days ago. I actually came across it and it reminded me of a few articles I had read a while ago. It's not new, however, the most recent turn of events, deeply tied to the power of social media and of GenZ customers, who are more vocal than any previous generation, is interesting enough to stop and reflect.
The controversy started in China a few years ago, but blew up a few months ago when a few (bold) Chinese shoppers began complaining loudly - and even protesting outside of some Hermès boutiques in cities across the country - about a practice known domestically as “peihuo” ... and got traction on social media.
Photo : shopping line outside a Hermes store.
"Peihuo" is a (rumored) pay-to-play sales tactic which is said to force buyers to make useless and undesired purchases to get access to the brand's most iconic bags, the famous "B,K,C" trifecta - aka the initials of the most sought-after bags from the Hermès brand, Birkin, Kelly & Constance. An unofficial (however quite well-discussed among customers) multi-step, structured path working one's way up to the graal. More recently, there were additional rumors about other luxury brands implementing the same practice (Celine, Chanel and Rolex to name but a few). Obviously, all brands have denied repeatedly until today and everything is only rumors (an unwritten rule that no one really doubts though...). Asked about this, the Hermes teams once replied :
"This is not a company-endorsed policy…what is true is that most markets have to manage scarcity. That means managing waiting lists, and sometimes managing disappointment and long wait times."
Same answer from Chanel.
And to be fair, Covid-19 certainly did not help, with productions sites closing down or slowing down for months at some point in the last two years...
In a way, Hermes say that they simply manage scarcity, not artificially organise it. If we're being honest, even if they did, would could blame them for it and why, really? If it's just how the market is, with v low offer vs. v high demand, why wouldn't they reward their VVVVIP with special access to those bags?
Also, such demand and desire for the brand did not magically appear yesterday. It took decades of hard work and of the most uncompromising strategy for the house to get there. To me, this doesn't sound like a tactic that Hermès would need or could have actively instituted, but rather a risky, short-term business tactic that's pretty contrary to everything the brand has been doing all along. I believe that as in any situation, the truth probably lies somewhere in between. Like a system that has probably been built naturally over decades, maintained passively (and probably against the will of the parties, brand and customers) and from which no one can really get out today because, ultimately, benefiting everyone world.
Indeed, one could also argue that such scarcity largely benefits the brands' most loyal customers too - well, at least those who do manage to get their hands on one of those bags. Indeed, they are guaranteed that their bag will not lose value over time (the opposite actually) and if customers ever decided to sell it on the secondary market, the demand is so high that they would sell it for a very high price, very quickly. Scarcity makes it very liquid. Virtuous circle. Curiously, in a way, the fact that there will always be disappointed or frustrated customers is exactly what actually makes customers happy and eager to buy one.
In 2022, should a luxury brand try to make everyone happy or focus on their most loyal customers, even if it means making the others angry? I have a personal opinion but that's definitely a question that could be debated for days and the topic of an another article!
Photo: screen capture from Sex and the City.
In my opinion though, whether one approves or disapproves the practice, is not really the point. I mean, yes, it is important to monitor this phenomenon closely - as no brand, even Hermes, is protected against a major bad buzz in 2022 (we have seen customers boycotting brands for less than that). Plus, brands like the ones mentioned in this article work too hard to build their reputation to see it damaged by a few social media posts gone viral.
But the real questions here are :
- Is it legal? Or is it not?
- And is there a form of discrimination in it?
- If it exists, how to make it a legal bundling strategy? And does anyone really benefit from taking the system down?
Well, first of all, it can actually be 100% legal. However, the line which a brand has to walk to make it legal is very thin and subtle. As explained in an article on HFG Law & Intellectual Property's website it can be legal for a brand to make some of their items available to their best customers & other VVVIP only, as long as the process is fixed, the same for everyone and the way to achieve such status communicated in a clear way (like a reward/loyalty programme). The problem seem to be dual in the current situation described by people online these days:
1 - some customers seem to imply that this Peihuo practice is mostly reserved to chinese customers - which could then be considered as discrimination.
2 - there is absolutely zero transparency whatsoever. Brands themselves are denying the very existence of such tactic, and customers seem to perpetuate that opaque system anyway by buying actively and without being asked - hoping that they will be allowed to get access to one of the most iconic items.
Truth is : even if those brands wanted to establish such open and transparent system, particularly in China, the high number of wealthy individuals able to climb their way up the brand's franchise and status program would make it impossible for the brand to satisfy everyone - because there would simply not be enough of those handbags for everyone (the estimation is around 120,000 per year... vs. an estimation of over 5M millionaires in china in 2020*...). And let's push the reasoning a bit further. Let's say those brands do that, and increase dramatically the production of those items to serve everyone. What will happen next? Because of the flooding of product everywhere, the value will decrease, both on primary and secondary markets. Desire will fade away, and at some point in time, sales will decrease. No one wins...
Hence my last question : would anyone really benefit from shutting down the system? I don't believe so.
* Source : Credit Suisse Global Wealth Report 2021 | Also, according to the 2021 Knight Frank Wealth Report, which defines HNWIs as individuals with over US$1m of investable assets, there are now more than 5.8 million HNWIs living on the Chinese mainland, and by 2025 it is projected there will be 9.1 million. This is up from 343,000 in 2010.
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