Friday, 13 April 2012

Luxottica

By: Sam Sutcliffe and Timmy Robinson



Who is Luxottica?

Luxottica is the world’s largest eyewear company.  It produces both sunglasses and prescription frames for a multitude of designer brands including Oakley and Ray-Ban.  The firm was started by Leonardo Del Vecchio in 1961 in the north of Italy.  Del Veccchio lived in Milan and had been trained as a tool mater, but soon turned to metal working and the production of spectacle parts (Group, Comapany History ).  In 1961 he moved to Belluno, the home of the Italian eyewear industry, where he formed Luxottica as one of the founding partners.  The firm began by producing and selling complete eyeglass frames under the Luxottica brand, a move that proved to be profitable.  Convinced of the need for vertical integration, Luxottica began purchasing distribution companies while setting up international subsidiaries in order to expand internationally.  In 1988 they began negotiating licensing deals with many sunglass designers (Group, Comapany History ).  The company currently has the eleven prestigious house brands, whilst creating eyewear under license for fifteen designer labels.  Through the vertical integrate process; they own many retail stores for their goods including the Sunglass Hut, Lens Crafters and Ilori (Group, Comapany History ).

Currently, 64% of the adult population is in need of vision correction, of that, 63% of those who need vision correction, use glasses as opposed to contacts or vision correction surgery.  Eyeglasses seem to be a near inelastic good, with Luxottica providing the supply for the ever constant demand of society.  (America, 2006 )


Licensing

One of the reasons that Luxottica has created a near monopoly over the sunglass industry is due to its licensing agreements with sunglass designers.  The firm began by producing and selling complete eyeglass frames under the Luxottica brand.  In 1988, the company began negotiating licensing agreements for designer brands like Oakley to Ray Bans.  Luxottica was the first sunglass company to sign licensing agreements with designers, giving them a significant advantage over the competitors.   

Luxottica expanded on this strategy and began aggressively seeking out and negotiating licensing agreements with many major sunglass designers.  Currently, the company has a host of house brands, including Arnette, K & L, Luxottica, Mosley Tribes, Oakley, Oliver Peoples, Person, Ray-Ban, Revo, Sferoflex and Vogue.  Whilst the company creates eyewear under license for designer labels, such as Brooks Brothers, Bulgari, Burberry, Chanel, Chaps, Club Monaco, D & G, DKNY, Miu Miu, Ralph Lauren, Prada, Tiffany & Co., and Versace.  Luxottica’s contracts with the major designers give it a dominant position in the market. 


Competitive pricing strategies 

Luxottica has worked to maintain an effective degree of monopoly over the sunglass industry through its use of pricing strategy.  The effective pricing strategy can be attributed to two key characteristic, vertical integration and computerization.  Convinced of the need for vertical integration, Luxottica began purchasing distribution companies while setting up international subsidiaries and retail stores in order to expand internationally.  This gave Luxottica complete control over the product from production to retail. 

Del Vecchio pushed the implementation of computerization, resulting with the integration in all facets of the industry’s process, from design to manufacturing to inventory control.  This early application gave Luxottica a significant cost advantage over its competitors, allowing it to reduce prices and undercut its competition.  A second attribute to the computerization was its ability to make small production runs more efficient, this helped the company adapt to the ever changing fashion trends that govern the industry.  Their ability to quickly adapt to the market defines them as an elastic supplier, allowing them to take advantage of changes in the markets demand. 


Economy of Scale
Luxottica is an international giant, with sales of over $900 million in 2011 and a profit of $237 million. Luxottica uses its size to lower its production costs to levels that very few other firms can compete with. The industry is nearly a monopoly because it’s virtually impossible for new firms to enter the industry and compete with the low costs of production costs and established infrastructure. Luxottica has 256 million in PPE in 2011, which it uses to specialize production and increase efficiency. Luxottica’s large market share of the glasses retail market also increases their control of the market and price.



Extent of Monopoly

The following is a break down between Luxottica and its closest competitor.  Luxottica has a share price that is $30 higher, nearly four hundred million more shares and a much larger market capital.  (Finance, Safilo Group SpA , 2012 ) (Finance, Luxottica Group SpA (ADR) , 2012 )
               

Market Stats
Luxottica
Safilo
Share Price
$34.04
$4.92
# of Shares
462 Million
56.8 Million
Market Capital
15.74 Billon
280.59 Million
P/E Ratios
26.0
10

(Finance, Safilo Group SpA , 2012 ) (Finance, Luxottica Group SpA (ADR) , 2012 )



Does Luxottica still hold a monopoly?
                Luxottica still holds a monopoly over the sunglass market, unfortunately due to an increase in cheap overseas labour, their effective pricing strategy has lost its competitiveness.  They still hold a strong grasp on the licensing agreements with individual designers, giving them a strong hold over the market.  With their size and financial power, they are the most formidable force in the sunglass market.










Works Cited

America, V. C. (2006 ). Vision facts and statistics . Retrieved April 8 , 2012 , from Medical Eye Services : https://www.mesvision.com/includes/pdf_Broker/MESVision%20Facts%20and%20Statistics.pdf
Finance, G. (2012 , April 08). Luxottica Group SpA (ADR) . Retrieved April 08 , 2012 , from Google Finance : http://www.google.com/finance?q=NYSE:LUX#
Finance, G. (2012 , April 08). Safilo Group SpA . Retrieved April 08, 2012 , from Google Finance : http://www.google.com/finance?q=BIT%3ASFL
Group, L. (2011, June 30 ). Financial Statments as of June 30, 2011 . Retrieved April 09 , 2012 , from Luxottica : http://www.luxottica.com/export/sites/default/shared/files/governance/governance_documents/SITUAZIONE_PATRIMONIALE_SRL_300611_ENG.PDF
Group, L. (n.d.). Comapany History . Retrieved April 8, 2012 , from Luxottica : http://www.luxottica.com/en/company/history/


Image

http://www.moodiereport.com/images/Luxottica_sept08_01.jpg

http://images.forbes.com/media/lists/companies/luxottica-group_200x200.jpg

http://www.irishjobs.ie/Logos/Luxottica-Trading-Finance-Ltd-5058.gif

https://lh6.googleusercontent.com/-7lpAAnOLOq4/TrksLuWKwrI/AAAAAAAAABQ/9P5BpmyYFKw/new50_logo_Gold_White_Back_.jpg

http://www.accessoriesmagazine.com/wp-content/uploads/2010/10/Luxottica-Group-logo.jpg


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  3. One interesting point is that Safilo USA has consistently held top marketshare in U.S. Market for prescription frame sales in total revenue. Based on an independent industry standard market share analysis conducted Quarterly by the Vision Council of America (VCA). In spite of the fact that Safilo sells little to no ophthalmic products to Luxottica's dominant chain retail network in the U.S. This is primarily because of Safilo's smart strategic decision of the U.S. Executive team working with Vittorio Tabacchi, the former Chairman and CEO of Safilo Group's parent company in Italy, years ago to concentrate on building distribution in the Independent Optometric segment in America. By Luxottica concentrating on building out their retail network the Independent O.D.'s began to purchase less and less Luxottica brands from their Wholesale structure that had historically top share in the market prior to buying LensCrafters in the 90's. It is one of the most interesting stories in business in my view. The real credit for Safilo's great decision making was a young, brilliant Italian Executive, Claudio Gottardi developing the strategic plan with Mr. Tabacchi and then coming over to the U.S. to execute the plan with a very bright Senior U.S. Executive Dick Russo. To their credit, they put a national leadership team in place of experienced and talented Safilo Sales Management pros and enhanced that team with an executive from a competitor to help plan, organize and restructure the field and internal sales support team for the future. This team also brought on the top salesforce led by a very talented regional team on the outside. The same steps were being implemented on the internal side to support a great deal of growth. This was accomplished by bringing in some external talent like John Judge, former C.F.O. that led many initiatives on the inside, but it was mostly made up of long term dedicated employees who believed in the mission and the journey while putting in long hours to seize the opportunity. As you may have guessed, I was a part of this great success story and was able to benefit greatly from the experience. A special recognition to Ross Brownlee who led a 2nd Generation of market share strength (Safilo 2.0) in the last several years. Mark Ugenti, a Senior Sales Executive who took Safilo's sunwear business and took a base of $3M that the Sun Division did the year he started to 3 Million units sold in the U.S. Of course this success story could not have played out to minimize a potential monopoly without the support of brave Independent Doctors and retailers to be willing to change and leverage the power of their buying dollars to make this happen. The Independent O.D. still holds the largest share of of the prescription frame business in revenue. There are indications that strong regional chains are growing fast on acquisitions of quality independent practices. Luxottica actually held the #3 spot behind Safilo and Marchon. This is unique to the U.S. Market with Luxottica dominating all other main economic markets worldwide.

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  4. Of course you always run the risk of forgettig key people in a story like this, I would be remiss by not mentioning John Wachsteter who was my mentor and coached me through some fun business challenges. Also Tom Carberry who worked for me in the early years but has risen up the ranks to V.P. Of Sales Operations and is one of the hardest working and talented executives in the industry today. And of course the Direct Sales Team that worked closely with Tom and I were constantly asked to meet impossible deadlines and never let us down.

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