Getting a Handle on the Steep Price of Leather

By Andrew Roberts

Emanuele Carminati Molina’s latest beef is the cost of leather. The chairman of Valextra, an Italian maker of high-priced handbags and luggage, says the unblemished cowhide his company relies on is becoming an ever more precious commodity: The price of calfskin, the king of luxury leathers, surged 21 percent in the first half of 2011, on top of last year’s 43 percent increase, according to Italy’s tannery industry union UNIC. “There’s less top-quality leather in circulation, and it costs a lot more,” says Carminati Molina. “This has an impact on the price of all products.”

Who’s to blame? No one has uncovered a cabal of leather speculators just yet. It’s just traditional supply-and-demand forces at work. Shoppers from Paris to Ulan Bator have become more discerning in the wake of the financial crisis. Those willing to spend thousands of dollars on a handbag now favor animal skin over canvas and other materials, prompting luxury brands such as Louis Vuitton and Gucci to add more leather to their collections, increasing demand. “Clientele, wherever in the world, is not duped” by prices that do not reflect value for money, says Christian Salez, chief executive officer of Belgian luxury goods maker Delvaux.

At the same time, consumers watching their wallets (and waists) are eating less beef. Cattle production fell 20 percent in Italy and 13 percent in France from 1995 to 2010, according to estimates from the European Union’s statistics agency. The decline in beef consumption on the Continent has restricted the availability of top-quality hides, which are free of scars and other defects, says Carminati Molina. At the same time, Latin America, India, and China—which account for the majority of leather production outside of Europe—have hiked export duties on hides.

A luxury handbags made from?

Hermès International, the French purveyor of $7,500 Birkin bags, doesn’t see the trend revdrsing anytime soon. CEO Patrick Thomas says he’s bracing for “significant” increases in leather prices in 2012, in response to rising demand. Hermès’s sales were up 22 percent in the first half of 2011. “China is buying more and more,” says Thomas. Sales of luxury goods in the world’s most populous nation are projected to surge eightfold, to $105 billion, by 2020 as the newly affluent seek to broadcast their success, according to Crédit Agricole’s CLSA Asia-Pacific Markets unit.

Louis Vuitton, whose monogrammed, laminated canvas accessories are highly sought—and copied—began pushing more leather last year. It introduced the Monogram Empreinte collection, featuring calfskin tote bags for $2,720, and ran ads showcasing its leather handiwork. The strategy will help widen margins, says brokerage house Exane BNP Paribas.

Gucci is taking a similar tack. Excluding shoes, leather goods account for 57 percent of the Italian label’s sales, and the share is increasing, Jean-François Palus, chief financial officer at Gucci parent company PPR, told analysts in July. Gucci’s profit margin widened 2.7 percentage points to 29.9 percent in the first half as it sold more goods in leather and other precious skins, he said. The company gets most of its calf leather from French livestock that are reared primarily for their hide.