By Chantal Marx & Motheo Tlhagale
The allure of the Veblen good
Veblen goods are typically luxury items for which demand increases as the price increases. These goods are not typically consumed simply for their practical use but can have investment value and are also often symbols of wealth and status. The Veblen good contradicts the "normal" relationship between price and demand. The phenomenon was first explained by Thorstein Veblen in 1899 in his book The Theory of the Leisure Class.
Veblen goods are usually high-quality, coveted products that the majority of the population will not or cannot purchase. Veblen goods are generally sought after by affluent consumers who place a premium on the utility of the good - the good makes the consumer feel more exclusive and important, since they are purchasing something of high quality that is out of reach for others.
The companies producing Veblen goods typically have a very strong brand identity that is synonymous with luxury.
In the listed space, there are two companies that stand out in their consistent delivery of the Veblen good over time - being Hermes and Ferrari. As a consequence, these companies' shares trade at substantial premiums to what are considered their "peers", although we argue that valuations cannot be regarded as comparable as "peers" are delivering high end, but ultimately normal goods.
Both Ferrari and Hermes' success in the second-hand market solidifies their status as Veblen good producers. Hermes' flagship bags and Ferrari's motor vehicles tend to appreciate in price over time. This is in stark contrast to other bags or cars that typically lose value as soon as it is sold.
Hermes
Hermes was founded in 1837 by Thierry Hermes as a Parisian harness workshop, quickly gaining acclaim for its craftsmanship, particularly its signature saddle stitch. Under the guidance of his descendants, notably his grandson Emile-Maurice Hermes, the company evolved from saddlery to luxury goods. Recognising the rise of the automobile as both a challenge (to the harness business) and opportunity, Emile-Maurice expanded the product set into leather goods, luggage, and accessories. He also introduced the zip to France and adopted the now-iconic horse-drawn carriage logo.
By the 1920s, Hermes had diversified into ready-to-wear fashion, scarves, ties, and perfumes - always maintaining a commitment to artisanal quality. During the 1930s, Hermes introduced some of its most recognised original goods including the "Sac a depeches" (renamed the "Kelly bag" after Grace Kelly in the mid-1950's), and the Hermes carres (square scarves).
Later generations modernised and globalised the brand. Robert Dumas (son-in-law of Emile Maurice) introduced key product lines and navigated the synthetic-heavy 1970s without compromising standards. Robert's son, Jean-Louis Dumas, led the international expansion, invested in complementary luxury houses, and attracted a younger clientele. Another famous Hermes handbag, the "Birkin bag" (named after British Actress Jane Birkin who co-designed the bag) was launched 1984. In 1993, Hermes went public while remaining under family control, enabling strategic investments in names like Jean-Paul Gaultier and Leica.
Today, Hermes International is not just a luxury brand but a cultural institution, revered for its craftsmanship, discretion, and exclusivity. Hermes designs, produces, and retails an extensive range across sixteen métiers, including Leather Goods & Saddlery, Ready-to-Wear & Accessories, Silk & Textiles, Perfumes & Beauty, Watches, Jewellery, and Home collections. Over nearly two centuries, the Maison has transformed into a global enterprise while preserving the artisanal spirit of its origins.
Its enduring success stems from a long-term strategy focused on preserving savoir-faire, sourcing exceptional materials, and maintaining its heritage of quality handcraftsmanship by investing heavily in the training and development of its artisans. The company strictly controls the number of products it produces - in part because most of its products are hand-crafted (naturally limiting available supply) and in part to preserve exclusivity. This approach fosters deep brand loyalty, ensures pricing power, and protects Hermes from market volatility and fleeting trends.
More than a luxury house, Hermes is a curator of lasting value. Iconic creations like the Birkin and Kelly bags, crafted by hand in limited numbers, embody its philosophy of creating "objects for life."
Ferrari NV
Ferrari was founded by Enzo Ferrari in 1939. Ferrari began producing road cars in 1947. The company listed in 1960 and between 1963 and 2014 it was a subsidiary of Fiat SPA. The business was spun off from Fiat Chrysler Automobiles in 2016. Ferrari produces all its vehicles at its factory complex in Maranello, Italy, where it has been based since 1943.
The company prides itself in its "racing DNA". Its racing team, Scuderia Ferrari, pre-dated the company and has been involved in racing since 1929, first competing (unofficially) in Grand Prix (now Formula One) events in 1933. The team also showcases racing cars in other motor sporting event including Le Mans.
Ferrari is one of the world's strongest brands, and it maintains a brand image built around racing heritage, luxury, and exclusivity. Many early Ferraris, dating back to the 1950s and 1960s, count among the most expensive cars ever sold at auction.
The company produces small volumes of cars to a very loyal customer base. Management uses very specific language when speaking about its client base. A person drives a Ferrari to feel something and the typical Ferrarista (Ferrari owner) will have more than one Ferrari - a different Ferrari for a different moment.
Ferrari very carefully manages supply with its explicit strategy being to produce one less car than the market demands.
Price points are very high and Ferrarista's are not particularly vulnerable to economic cycles. New launches are typically pre-sold two years in advance - at the end of FY24, the order book was covered through 2027.
Extreme care is taken in delivering special series models, Icona and Supercars. For example, a Supercar launch takes eight to ten years so that it includes enough new technology, and volumes are kept extremely limited. The previous Supercar model, the LaFerrari Aperta, was launched in 2016 to celebrate Ferrari's 70th anniversary. The new F80 (2026 launch) will only have 799 units delivered.
Ferrari is different from other automakers in that it has resisted the allure of mass production, thereby retaining scarcity in the market and its commitment to combining revolutionary technological solutions with exceptional artisanal craftsmanship, delivering timeless vehicles in a fast-changing world.
Financial strength is testament to their Veblen characteristics
Hermes has consistently delivered remarkable financial results, showcasing both growth and resilience. Over the past decade, the company has typically reported annual organic sales growth in the high-single-digits to low-double-digits, significantly outpacing the broader luxury market in many periods. This growth has been broad-based, stemming from positive contributions across its diverse product categories and geographic regions.
Profitability is a standout feature. Gross profit margins are exceptionally high, reflecting the significant value-add from its artisanal production and strong pricing power. Operating profit margins have consistently been among the highest in the luxury sector, frequently exceeding 40%. This is achieved despite substantial ongoing investments in expanding its manufacturing capabilities (e.g., opening new leather workshops in France), enhancing its retail network, and nurturing its talent pool. Net income has followed a similar trajectory of strong growth, translating into robust earnings per share.
Hermes' balance sheet is a testament to its financial prudence. The company typically operates in a net cash position, providing substantial financial flexibility to fund its organic growth initiatives, make strategic (though rare) acquisitions, invest in sustainability, and return capital to shareholders through consistent and growing dividends. Capital expenditure is primarily directed towards expanding and renovating its retail store network to reflect the brand's standards and increasing its production capacity to meet carefully managed demand.
Ferrari approaches pricing as part science, part art, considering among others, product profitability, residual values (the second-hand market), competitor pricing and client feedback. Volume growth is limited to preserve scarcity in the market and because of the artisanal approach to production. As such, organic revenue growth has been stable and high (in the mid- double digits) for several years.
The company has managed to expand margins over the last few years, and this is expected to persist - mainly due to higher levels of personalisation. Gross and operating margins are much higher than those of automaker peers as the company is able to price at higher levels and demand for its products remain robust.
Ferrari has very low net debt in the industrial business and at a company level, debt stands at about 0.5 times EBITDA - providing ample financial headroom - particularly when considering a continued strong free cash flow outlook medium term. Ferrari consistently invests in its manufacturing capability, research and development to improve products or bring new technology to market, and in certain vertical integration initiatives (if/when required).
Does valuation matter?
When looking at either Ferrari or Hermes' valuation multiples relative to industry peers, the companies trade at substantial premiums which has in the past put investors off in terms of investing in these counters.
Companies that produce and sell Veblen goods are, however, unique and should probably not be valued in a similar way to those delivering normal goods. Veblen goods are very defensive in terms of demand and typically are not impacted by broader economic cycles. Additionally, the scarcity of the product and the companies' ability to raise prices and control production means that the playing field is not level and therefore the multiples attached to the companies will not be close to the rest of their respective industries. High multiples, in our view, are justified and further complimented by relative certainty of demand and excellent financial visibility.
A better way to look at these companies is perhaps to look at their valuation multiples relative to their own long-term histories, in which case both companies are regarded as offering fair value currently.
