Luxottica Write-Up vFINAL PDF

MGMT 223: Final Paper
Project Group 01
Bollani, Lorenzo
Ekinde, Mark
Fuli, Iris
Jakab, Tamas
Schut, Martijn
History
Foundation
Luxottica Group, originally named Luxottica di Del Vecchio e C. S.a.S, was founded by Leonardo
del Vecchio in 1961 as a contract producer of dyes, metal components and semi-finished goods for the
optical industry.
Leonardo del Vecchio, owner and chairman of the company, at the end of the 60s led the transition
from contract manufacturer to independent producer through the widening of the range of Luxotticas
manufacturing processes. Such shift culminated in Luxotticas first collection of prescription eyewear
presented at Milans MIDO (an international optics trade fair) in 1971.
Distribution
In the early 70s, Luxottica sold its frames exclusively through wholesale dealers. However, after five
years of development of its manufacturing capacity, initiated with the acquisition of Scarrone S.p.A., a
Turin-based distributor with profound knowledge of the Italian market, Luxottica started to distribute
frames directly and pursued a strategy of vertical integration.
In the 80s, through the acquisition of independent distributors and the formation of subsidiaries and
joint-ventures, Luxottica started its international expansion that culminated in the acquisition of Avant
Garde Optics Inc., a wholesale distributor in the United States market.
In 1995, through the acquisition of the United States Shoe Corporation, owner of LensCrafters, one of
North Americas largest optical retail chains, Luxottica entered the retail market. Subsequently,
Luxottica strengthened its retail position through numerous acquisitions including Sunglass Hut
(2001), OPSM Group (2003) and Cole National (2004).
Luxotticas strategy and industry evolution
Luxotticas development strategy was based on heavy investments in products and R&D, together
with acquisitions. Worth mentioning is the purchase of La Meccanoptica Leonardo, owner of the
Sferoflex brand and an important flexible hinge patent that enabled the Company to enhance the image
and quality of its products while increasing its market share.
Luxotticas considerable investments in marketing and advertisements contributed to the evolution of
the industry. Indeed, from the late 80s, what were first perceived as mere sight-correcting
instruments, began to evolve into eyewear and accessories to define peoples personal style.
Accordingly, continuous aesthetic focus on everyday objects and designers interest in the accessories
segment led Luxottica to embark on its first collaboration with the fashion industry, in 1988, by
entering into a licensing agreement with Giorgio Armani.
The Company followed up that initial collaboration with numerous others and with the acquisition of
new brands, gradually building the current world-class brand portfolio and thereby increasing its
commitment to research, innovation, product quality and manufacturing excellence.
Starting in 2005, Luxottica began its penetration into key emerging markets such as China, the Middle
East, South Africa, Thailand, India, the Philippines, Mexico, Brazil and Mediterranean Europe (see
Exhibit 1 for a the history timeline).
Financial markets
In 1990, Luxottica was publicly listed on the New York Stock Exchange under the name of Luxottica
S.p.A (ticker LUX). Moreover, in 2000 Luxotticas stocks were also listed on Borsa Italiana and
admitted to Italys top 30 equities index
Luxottica today
As of 2013, Luxottica is the undisputed leader of the eyewear industry with a market share of 48%.1
Moreover, it operates on a perfectly integrated scale, benefiting from economies of scale and cost-
efficiency. Luxottica also has the largest brand portfolio of the industry, controlling more than 80%2 of
major eyewear brands such as Ray-Ban, Oakley and Persol (Exhibit 2).
1
Source: Marketline
2
http://www.forbes.com/sites/deancrutchfield/2012/11/27/luxottica-sees-itself-as-king-raising-questions-about-brand-authenticity/
In recent years, Luxottica has enhanced its position both in the high-end niche, opening new stores in
New York, London and Miami, and in the internet segment, launching the Ray-Ban Remix project,
an online platform allowing customers to personalize their Ray-Ban eyewear.
Approximately 60% of the companys sales volume comes from the sales of sunglasses, while the rest
from general eyewear and eye impairments glasses. North America is by far the biggest market and it
accounts for 58% of total sales. On the other hand, the Euro Area accounts Asia-Pacific accounts for
19% and 13% of total sales, respectively3.
Luxottica has recently increased its focus on emerging markets, especially China and Latin America
whose sales are expected to account for 20% of total revenues by 20164.
3
2013 Merrill Lynch report on Luxottica Group Research Analyst Flavio Cereda
4
Value Drivers
Enhanced production and distribution performance
As of today, Luxottica operates six plants in Italy, two in China, two in North America, and one each
in India and Brazil.
In the near future, production is expected to increase and distribution is expected to accelerate.
Specifically, the bulk of Luxotticas production is projected to shift from Italy to the emerging markets
such China, Brazil and India. As a result, Luxottica will likely benefit from an increase in capacity,
decrease in production cost as a result of cheaper workforce and less strict regulation. Moreover, the
increase in the production will be accompanied by ongoing improvement in the distribution platform,
and greater efficiency (Exhibit 3 & 4).
Emerging markets
A key point of Luxotticas growth strategy is increasing the companys exposure towards emerging
markets. Indeed, the eyewear industry in such markets is still in the early stages of development, and a
rise in the upper middle class consumers and consumer brand awareness is expected.
More in specific, Brazil is expected to rank second in Luxotticas wholesale segment, in terms of
revenues by 2015, as a more than double increase in sales. Luxottica is also focusing on India for the
first time and it is increasing its exposure to China with a 40% CAGR planned for 20155.
In conclusion, a further benefit of the emerging markets penetration is the reduction of Luxotticas
excessive reliance on North American trends (Exhibit 5).
Business model: wholesale vs. retail
One of the competitive advantages underpinning the Groups past and future successes is the vertically
integrated structure that Luxottica has built over decades. The Groups present structure, covering the
entire value chain is the result of a far sighted and gradual process.
5
Vertical integration of manufacturing was gradually accompanied by the expansion of distribution,
first wholesale and from 1995, retail, and by the creation of a key presence in the high value added
business of lens finishing. Direct distribution allows the company to offer its products directly to final
users and better understand customers taste (Exhibit 6).
Analysts6 expect an increase in sales for both retail (NAM 4%, EM +10-15%, Australia +7%, YOY)
and wholesale (Western Europe +4-7%, NAM +10-15%, EM 20-30%). In particular, for wholesale the
expected sales CAGR to 2015 is 12%. Moreover, the strategy of the company is to decrease the share
of wholesale revenues deriving from licensed brands through acquisitions. Finally, benefits are
expected from the Armani license launched in 2013, which will further strengthen Luxotticas
strategic position towards the wholesale.
As opposed to the increase in the wholesale business in the emerging markets, the focus of retail
segment remains on developed economies such as North America where Sunglass Hut and
LensCrafters are expected to account for most of the profits.
Demographics and macro-world trends
The macro-world trends seem to paint a bright future for the industrys long term prospect. Indeed,
being part of the so-called soft luxury sub-industry, Luxottica will benefit from the recovery of the
global economy and from the wealth effect associated with general changes in expectations. As far as
the demography is concerned, Luxottica will benefit from a growing and ageing population with
increased need for eye-correction due to behavioral changes. In specific, 500 million vision correction
wearers are projected by 20207 (Exhibit 7 & 8).
6
7
2013 Merrill Lynch report on Luxottica Group Reasearch Analyst Flavio Cereda
The Eyewear Industry
Industry analysis
In order to analyze the industry in terms of revenues, profitability, and structure, a definition of the
industry in which Luxottica operates is needed. After defining the industry, the revenues and
profitability will be discussed, followed by a discussion on the industry structure using Porters five
forces analysis.
Luxotticas industry can be defined as the eyewear industry, which can be divided in the following
segments: contact lenses, and spectacles.8 Each of these segments can be further broken down, with
the subsegments daily disposable, weekly/monthly disposable, traditional, and extended wear for
contact lenses, and spectacle frames, spectacle lenses, sunglasses, and readymade reading glasses for
the spectacles segment. Exhibit 14 shows the segment breakdown of the industry.
Of the two segments, spectacles has been historically the largest in terms of revenue with, on average,
87% of total revenues being earned in this segment (see Exhibit 15). Over the past 15 years, the
eyewear industry has shown an attractive compounded annual growth rate of 4.1%, seeing total
revenues grow from $66.9bn in 1999 to $122.9bn in 2013. To estimate industry profitability, the net
income of four companies9 was used to calculate an industry average profitability. As can be seen, at
the beginning of the century the average industry profitability rose to around 10%, before falling down
to 6%. After a short increase to 8%, profitability fell again due to the economic crisis to around the 6%
level.
In terms of growth and profit margin the market seems attractive, although this has to be further
investigated by looking at the industry structure. It is, however, also important to compare this
industry to other industries and national averages in terms of profitability. As Porter (2008) argued, the
return on invested capital (ROIC) is an adequate measure to compare profitability across industries, as
it looks at how much return every dollar invested in capital generates. This measure is not distorted by
8
Source: Passport (2012)
9
The four companies are: Luxottica, Safilo, Marcolin, De Rigo
differences in capital structures or tax rates across industries. In order to determine the industrys
average ROIC, it is important to consider what companies should be included to calculate this average.
Exhibit 16 shows the industry ROIC based on three different peer groups over a period of 15 years.
The first includes companies that are mainly active in the spectacles segment (which are Luxottica,
Safilo, De Rigo and Marcolin), which have a 15-year average ROIC of 7.6%. The second group adds
companies that are (also) active in the contact lenses segment (Fielmann AG and Essilor
International). This group has an average ROIC of 11.1%. The third group adds companies that
produce, in addition to spectacles and/or contact lenses, also other (unrelated) products, such as
medical equipment (Carl Zeiss and Hoya Corp). Including these companies results in an average
ROIC of 11.5%.
Independent of which composition of companies is used to determine the industrys return on invested
capital, the eyewear industry has a below-average ROIC. Porter (2008) found that the average industry
ROIC in the US over the period 1996-2002 was 14.9%, compared to a maximal ROIC of 11.5% in the
eyewear industry. This puts the eyewear industry amongst the 5 lowest performing industries that
Porter (2008) discussed.
To investigate where these low returns on invested capital come from, despite reasonably attractive
growth and profit rates, we now turn to analyzing the industry structure using Porters five forces
analysis.
Porters five forces

Buyer power
The eyewear industry is characterized by a large number of individual consumers the players in the
industry can sell their products to.10 These consumers buy on an irregular basis, causing them to have
low bargaining power. As eyewear is a product that is highly sensitive to fashion trends, determined
by designers and buyers, the demand for the eyewear is subject to very sudden and sharp changes in
these fashion trends, increasing buyer power. Another issue from the viewpoint of the producers is that
10
Source: Marketline (2012)
brand loyalty is mainly focused on the designer behind the brand and not the producer11. Even if brand
loyalty is high, this will not be a guaranteed benefit to the producers and retailers of the spectacles, as
after a contract period the designer can enter an agreement with another producer. Combined with the
low switching costs faced by consumers (once a pair of glasses from a certain brand is bought there is
nothing stopping the consumer from buying a pair from another brand) this increases buyer power. As
mentioned before, however, consumers buy very infrequently. On average, consumers replace their
spectacles every 3 years. 12 This lowers the bargaining power buyers have and this frequency of
replacement is expected to decrease. Most contact lens wearers replace their spectacles every 3-4
years, whereas non-contact lens wearers replace their spectacles every 2-3 years. As the contact lenses
segment is on the rise and growing at a higher rate than the spectacles segment, consumers will most
likely replace their spectacles less often.13 This will most likely increase pressure on the sellers of
spectacles, as they are faced with a lower demand. Consumers are still willing to pay a decent amount
for branded designer spectacles though, with average unit sales prices around $200 in the US in
2013.14 As contact lenses are gaining in popularity, they are increasingly becoming a substitute for
spectacles. Another possible substitute is laser vision correction surgery (LASIK). Spectacles are thus
facing increasing resistance from substitutes, thus increasing buyer power. A final factor that decreases
buyer power is that consumers experience a sense of choice when buying spectacles, whereas in reality
the market is dominated by just a few large players. This lack of buyer information and transparency
in the market has assisted companies to keep prices high, indicating low buyer power.
Given all the factors and issues discussed above, it can be concluded that buyer power in the eyewear
industry is medium.
Supplier power
In analyzing supplier power it is helpful to make a distinction between the suppliers of raw materials
and the designer brand many companies sign agreements with. Starting with the suppliers of raw
materials, it can be said that their power is relatively low. The inputs used to produce spectacles are
11
12
13
Source: Euromonitor (2012)
14
fairly common and can mostly be bought from a wide range of suppliers. Using Bloombergs supply
chain analysis function for Luxottica reveals that the company has a lot of suppliers of which each
makes up just a small part of Luxotticas cost of goods sold, implying that there is no critical
dependency on major suppliers. Because of the standard inputs switching costs are low. Given this, the
threat of forward integration is negligible, as manufacturing and distributing spectacles lies far away
from suppliers core businesses. The power of raw material suppliers is thus low.
Turning to analyzing the designer brands, it can be said that their power is medium to high. A
licensing agreement with one of the larger designer fashion houses in the world results in an important
supplier dependency for producers, as these agreements can account for a large part of revenues. In
2011, Safilo lost the licensing agreement with Armani Group which was picked up afterwards by
Luxottica.15 The licensing agreement was estimated to make up 15% of Safilos revenues, indicating
the importance of these agreements. For designer brands, it does not really make a difference who
produces their products, so switching costs for these suppliers are low. Another factor that increases
their bargaining power is the fact that there is only a limited number of these design brands, making
them relatively scarce suppliers. Setting up a new, world-wide recognized designer brand is not easy,
increasing the dependency on these players due to their low substitutability. As with raw material
suppliers, the threat of forward integration is low, as these designer brands focus on the design of all
the products that make up the brand, as opposed to (also) manufacturing the products. This
dependency is, however, mutual to some extent. There are not many manufacturers that can produce
and distribute on the scale and with the quality that is required for these well-known brands to be sold
globally, increasing the dependency of these brands on the manufacturers. One final important notice
is that these designer brands are produced partially through licensing agreements, whereas another
portion of these brands is owned by the producing company itself (e.g., Ray-Ban is owned by
Luxottica). Although important, the relative importance of these suppliers that are contracted under
licensing agreements should not be overstated. In conclusion it can be said that supplier power is
medium.
15
Threat of new entrants
The eyewear market is expected to grow over the coming years, with growth coming to a large extent
from the contact lenses segment.16 This makes the market more attractive for new entrants as they do
not have to steal away existing business from incumbent firms. The scale of incumbents, however,
makes it difficult to enter the industry. These large firms have signed important contracts with
designer brands, which are to a large extent responsible for the brand loyalty in the industry. Due to
the low switching costs faced by customers, the license agreements become even more important to tie
customers to a company. For new entrants it will be very difficult, if not impossible, to obtain these
licensing agreements, which therefore form a huge barrier to entry. Even if a new company achieves
successful entry, incumbent firms are likely to retaliate. The market is divided between a small amount
of players, making it easier for these players to assess what is happening in the market and thus
making retaliation more likely. Also, these players charge high prices (as discussed above), which
indicates that they can cut prices if needed to exclude a new entrant from the market.
Another difficulty for new entrants has to do with the distribution channels used to sell products to the
consumer. Retail stores still remain the most important distribution channel, with 76% of distribution
going through these stores17 and internet distribution expected to remain around 3% of the total market
in terms of revenues.18 Given that some of the incumbents (e.g., Luxottica) are forwardly integrated
companies that also own retail stores makes entering the market even more difficult. This can,
however, be countered by new entrants by introducing new business models. One new entrant that has
successfully introduced a new business model is Warby Parker, which almost exclusively sells its
products online at a fraction of the costs compared to its competitors.19 The introduction of such an
internet-based business model is not without its disadvantages though, as physical retail stores remain
an important channel for consumers to get professional advice regarding their (prescription) eyewear
and consumers continue to get more aware of this.20
16
17
18
19
20
It remains a difficult task for new entrants to successfully enter the eyewear industry, therefore the
threat of new entrants is characterized as low.
Threat of substitutes
The threat of substitutes can be seen as low. There are only a few possible substitutes for eyewear
products, depending on what purpose the products are used for. Spectacles used as fashion accessories
do not have a real substitute. Prescription spectacles can be substituted by contact lenses and vice
versa, although these are substitutes produced within the same industry. Another substitute is laser
vision correction surgery. Contact lenses and spectacles are, however, not mutually exclusive
substitutes. As said before, contact lens wearers replace their spectacles more often than non-contact
lenses wearers, implying that consumers use these products in addition to each other.21 The switching
costs between these substitutes is low, although this does not really increase the threat of substitutes as
the most common substitutes are produced within the same industry.
Degree of rivalry
The eyewear market is characterized by a large amount of players, although there are just a few
players that have actually significant market share22. In the eyewear market there are only 7 companies
that have a market share of 1% or higher. The smaller companies are niche players who do not have
real market power. In the different sub segments the market can be even more concentrated. In the
sunglasses sub segment, for example, Luxottica is estimated to have around 34% market share23 and
Luxotticas overall market share in the segments it is active in is estimated to be as high as 48%.24 The
fact that just a few players control the market decreases rivalry. The market offers an attractive growth
rate, also decreasing rivalry, as competitors do not have to fight over the same piece of the pie.25The
growth in the industry is mostly fueled by contact lenses and emerging markets.
Although the products sold are perceived different by consumers, especially spectacles and sunglasses,
this product differentiation only benefits the designer brands in terms of brand loyalty. The producers
21
22
23
24
25
Source: Euromonitor (2012 and 2013)
of these products do not enjoy any loyal customer base, which makes the licensing agreements with
these designer brands very important. Given that there are only a limited amount of designer brands
and these licensing agreements are signed for longer periods, the rivalry increases in the industry.
Another important factor increasing rivalry is the introduction of new business models and strategic
partnerships. As mentioned earlier, Warby Parker successfully introduced a new business model,
which entails selling low cost spectacles directly to the customer through internet channels. Luxottica
recently signed a contract with Google to help the company design and build future versions of Google
Glass.26 Expanding the industry to these new arenas will increase rivalry as incumbents will try to
compete in additional segments.
Given the abovementioned factors, the degree of rivalry in the eyewear industry can be characterized
as medium, higher in terms of rivalry for designer brands, yet low when prices are considered.
Conclusion
Given the five forces described above, it can be concluded that players in this industry are able to
create and capture value. According to Brandenburger (2002) potential for profit arises when
customers willingness to pay exceeds the minimum suppliers will accept. Given the profitability in
this industry, this is certainly true. As the threat of substitutes is low, the willingness to pay for
spectacles has been consistently high. Who captures the value is determined by the relative strength of
each of the other forces. Given that buyer and supplier power is medium, the players in the industry
are able to capture some, although not all, value. The low threat of new entrants keeps profits at a
reasonable level, although the existing competition between incumbents puts downward pressure on
profit margins. Considering the medium to high strength of the forces that mainly determine the value
captured, it is not surprising that the eyewear industrys profitability is low compared to the average
industry profitability (as discussed at the beginning).
26
Source: Etherington (2014)
Financial Analysis
Luxotticas financial performance appears very solid throughout the years. In specific, except for the
years of the crisis, i.e. 2008 & 2009, the Company has benefited from positive growth along all major
indicators of profitability.
According to the company annual report the success of Ray-Ban and Oakley are among the main
factors behind the companys positive results over the past years. Another element that has played an
important role has been the incredible growth of Sunglass Hut, one of Luxotticas retail businesses.
With an average revenues growth of 9.5% for the past 10 years (Exhibit 9), the company is constantly
expanding its business and consolidating its position through acquisitions and expansions in new
markets27 (Exhibit 10). The revenues split between the retail and wholesale segment has been stable
throughout the past 10 years, with an average split of 37% (wholesale) and 63% (retail) (Exhibit 11).
As for the regional split, Luxottica, whose revenues are mainly concentrated in North America, has
been increasing its exposure to both Europe and key emerging markets (see Value drivers-emerging
markets for more details; see Exhibit 12 for 2013 revenues split of revenues).
Also under the standpoint of operating profitability and net income, both with a 10-year growth
average of 10%, Luxottica appears extremely solid (Exhibit 13). To better assess the Companys
performance, we also compared Luxotticas results against the average of its closest competitors 28
along several key dimensions29. Across all such dimensions, the difference between Luxottica and its
competitors appears to be quite evident, with Luxottica consistently outperforming the industry
(Exhibit 14).
Finally, of interest is looking at the years of the recent financial crisis. Quite evident is the severe
impact of such crisis on the optical industry (Exhibit 14), but even more striking is the narrow time
frame within which Luxottica managed to recover, further proof of the financial solidity of the
company. Indeed, as Luxotticas CEO Andrea Guerra stated, the financial crisis was in fact over in
27
See History section for details about the company development
28
Safilo, Marcolin, De Rigo
29
Revenues, gross profit, opeartin profit, net income, operating margin
2010 for Luxottica, with its revenues growth turning positive once again. On the other hand,
Luxotticas key competitors30 only recently showed signs of recovery with results similar to the pre-
crisis years.
30
Safilo, De Rigo, Marcolin
Competitive Positioning
Introduction
Many people believe that the difference in price between a 50$ and a 250$ pair of sunglasses is
motivated by the difference in quality of materials and labor costs incurred in the manufacturing
process. Moreover, it is also believed that a 500$ BVLGARI frame is more valuable than a 200$
Dolce & Gabbana one, as they are thought to be produced by two different companies.
Nonetheless, this is only partially true, because it turns out that Luxottica produces both D&G and
Bvlgari spectacles, and their production cost is very similar. Hence, you may be asking yourself
whether these expensive brands are worth the price retailers charge.
Cost
A study by Lois Olson, professor at San Diego University, estimated that the manufacturing cost of a
pair of spectacles in one of Luxotticas Chinese factories is in the range of $3 to $4, and that the
difference between the production cost of different Luxotticas brands is negligible 31 . Moreover,
adding all possible upgrades, the overall cost does not exceed $5. For example, it has been estimated
that the cost of polarizing lenses is approximately 17. For this reason, it is evident that the retail price
is very different from the costs manufacturers incur (Exhibit 17).
Given that both Safilo and Marcolin have progressively transferred their facilities to developing
countries, we can expect them to be facing a similar manufacturing cost structure with respect to.
Hence, we do not expect Luxottica to be benefiting from cost advantage in the manufacturing process.
Nonetheless, looking at the portfolios composition of the three companies, we can identify a
difference in their cost structures, which stems from the royalty fees. Proprietary brands generate 70%
of Luxotticas revenues, with Ray-Ban and Oakley making up nearly 45% of the total32, while Safilo
31
Doug Myrland: Why Do We Pay Hundreds for Shades that Cost $3 to Make?
http://www.kpbs.org/news/2009/jun/22/why-do-we-pay-hundreds-shades-cost-3-make/
32
Halah Touryalai: Ray-Ban, Oakley, Chanel Or Prada Sunglasses? They're All Made By This Obscure $9B Company
and Marcolins proprietary brands account for only 25% and 5% respectively. This gives a cost
advantage to Luxottica, as a higher reliance on proprietary brands results in lower royalty costs as a
percentage of sales. In particular, royalty costs approximately represent 2.0% of Luxotticas total
revenues33, while for Safilo and Marcolin they account for 7.7% 34 and 15.0%35 respectively. If we
control for the differences in the mix of licensed versus proprietary brands, royalty fees respectively
account for 9.6% and 15.8%36 of Safilo and Marcolins licensed sales. On the other hand, royalty fees
represent only 6.7% of the Luxottica sales of licensed brands.
Price
Dr. Jay Duker, chair of ophthalmology at Tufts Medical Center, has argued that you can get a pair of
sunglasses for about $40 that offers 100% protection against ultra-violet rays, and that with $70 you
should be able to get a pair with decent quality polarizing lenses that cut out glare. Beyond that
[price], the medical benefits tail off pretty fast37.
However, if we look at a sample of glasses that are produced by Luxottica and by its main
competitors, it is evident that the spectacle prices differ to a large extent, as they span from $55 of a
Polaroid pair produced by Safilo, to $550 for a pair Bvlgari glasses manufactured by Luxottica.
Moreover, there is a big variety of prices even within the brands produced by the same company. For
example, Luxottica manufactures both $90 Vogue sunglasses and the aforementioned $550 Bvlgari
ones.
It is therefore clear that spectacle prices both incorporate a huge markup and do not depend on which
company produces the brand. The most important factor that affects their prices is ultimately the
licensor brand. By securing license agreements with companies operating in different segments of the
apparel industry, eyewear producers indirectly position their glasses in different market sectors
according to the underlying licensors reputation. Besides, given that most of the brands under
http://www.forbes.com/sites/halahtouryalai/2013/07/02/ray-ban-oakley-chanel-or-prada-sunglasses-theyre-all-made-by-this-obscure-9b-
company/
33
2013 Luxottica Annual Report, pg 92
34
Source: Safilo website
35
2012 Marcolin Annual Report, pg 52
36
Calculated by dividing the actual share of revenues which is lost in terms of royalty fees by the share of the revenues which are attributed
to licensed brands
37
High End Sunglasses and Knock Off Shades May Have No Difference in Quality
http://www.gwob.com/high-end-sunglasses-knock-shades-may-difference-quality/
Luxotticas umbrella are positioned in the high-end segment of the clothing industry, Luxottica is
charging average final prices greater than $100 on almost all of its glasses, reaching prices of even
$600 for specific brands.
The high markup that Luxottica applies to its products is reflected in the margins the company is
capturing. By looking at Luxotticas 2013 annual report, it is visible that the company earns a gross
profit of approximately 66 on each dollar of sales and, even after deducting sales, advertising,
overhead and brand licensing costs, the company is still earning 52 on every dollar of sales38.
Moreover, we can conclude that Luxottica benefits from an additional advantage over its main
competitors due to its vertical integration. With its strong presence in the retail business39 Luxottica is
capable of capturing the total value created in the value chain from the manufacturing stage to the final
customer. On the other hand, both Marcolin and Safilo have to rely on third parties as they have
historically operated through wholesale distributors, thus, giving up part of their margin.
Nonetheless, it is still difficult to conclude whether Luxottica has a price advantage over its
competitors because, as already mentioned, the final price charged on consumers is not dependent on
the producers brand (i.e., Luxottica, Safilo or Marcolin), but rather on the licensors one. The frequent
and numerous portfolio restructurings in the licensed brands market may give temporary price
advantages to different manufacturers. An example of this is Armanis decision to switch from Safilo
at the end of 2013, which resulted in a decrease in sales for Safilo by 15%. Additionally, the similarity
between manufacturers gross margins is a second factor that demonstrates the difficulty in
determining whether a producer has a price advantage, as both Luxottica and its competitors report
gross margins in the range of 61% to 66%40.
38
2013 Luxottica Annual Report, pg. 11
39
See Financial performance analysis for a detailed breakdown
40
2013 Safilo Annual Report, pg. 55, and 2012 Marcolin Annual Report, pg. 12
Willingness-to-pay
Over the last five years, Luxottica has been experiencing an increase in its market share to
approximately 48% in 201241. This positive trend can be attributed to a number of factors, including
its capacity to offer more value than its competitors to customers, measured as the spread between the
unobservable willingness-to-pay for its spectacles and their final price.
Nonetheless, this effect is mitigated by a number of factors. As already mentioned, the consumers are
willing to pay a premium for a pair of glasses with the brand name on the glasses rather than the
manufacturers name. Moreover, Luxottica finalized several acquisitions (e.g. Oakley in 2007 and
Alain Mikli in 2010) and underwent a number of portfolio restructurings in its licensed brands (e.g.
Luxottica lost Salvatore Ferragamo, but gained Armani in 2013). Hence, it could be argued that such
portfolio changes, rather than the difference in consumer surplus, caused Luxotticas growing
market share.
Therefore, we cannot conclude with certainty whether Luxottica is offering a better willingness-to-
pay/price trade-off than its competitors.
Sources of competitive advantage
As already mentioned, competitors are in line with Luxotticas manufacturing performance regardless
of their smaller size, as Safilo and Marcolin respectively earned gross margins of 62% and 61% in
2013.
Nonetheless, it is clear that Luxottica benefits from a competitive advantage over its competitors that
stands at the base of its success. We have identified three main factors which stand at the origin of its
profitability.
Vertical integration
Looking at the value chain of the eyewear industry, it is immediately clear that Luxotticas retail
distribution, consisting of more than 7,000 retail locations worldwide42, allowed the company to place
41
Passport Data, Euromonitor International
42
2013 Luxottica Annual report, pg. 99
itself in a dominant position relative to its competitors. This allows Luxottica to capture a greater share
of the overall value created in the production process and puts competition in a chokehold43.
Licensed portfolio
Secondly, over the last years, Luxottica was capable of adding to its portfolio a number of licensed
agreements with some of the most attractive brands in the industry, including Armani (2013)44 and
Michael Kors (2014)45, which will enable the company to further increase its market share.
Proprietary portfolio
Lastly, through a number of successful acquisitions and reevaluation of underperforming brands over
the last twenty-five years, Luxottica has built up a portfolio of lucrative proprietary brands, including
Vogue (1990), Persol (1995), Ray-Ban (1999), and Oakley (2007). This portfolio is of extreme
importance for Luxottica, as it accounts for approximately 70% of net sales46. On the other hand,
competitors have to rely more on licensed brands, which eventually results in less stable revenues over
the long run.
43
This concept is explained in more detail in the section on scope decisions.
44
Sulabh Madwal: Luxottica Winning Licence War as Safilo Tries to Repair Damage
http://blog.euromonitor.com/2013/11/luxottica-winning-licence-war-as-safilo-tries-to-repair-damage.html
45
Luxottica signs license deal with Michael Kors
http://www.reuters.com/article/2014/04/15/us-luxottica-group-kors-idUSBREA3E1C420140415
Vertical and Horizontal Scope
Summary
We proceed with the analysis of Luxotticas vertical and horizontal scope, attempting to explain the
economic logic underlying the apparent success of this company. We attempt to highlight why
Luxottica is in a position where competing retailers want to sell Luxotticas products, while competing
brands want to retail in Luxotticas shops.
First of all, a historical overview puts our analysis in context. Detailed analysis of scope decisions
follows. We analyze the companys horizontal scope, covering in detail the two most important layers
of Luxotticas business: brands and complementary businesses. We continue with vertical integration,
decomposed into two parts: downward integration and upward integration. Moreover, we also analyze
the scope decisions of Luxotticas most important competitors. Considering the extensive analysis, we
judge the answers that Luxottica gives to the Better Off Test and the Ownership Test. Finally, we
finish the analysis by evaluating the results of the company strategy.
Short historical overview from a scope perspective
Founded in 1961, as a contract supplier for the optical industry, Luxottica started gradual integration
in the 1960s by building up its capability to produce complete pairs of glasses. Arguably, we can
identify a conscious direction towards vertical integration, confirmed by Leonardo Del Vecchios
strategy. He decided to vertically integrate the company both upwards and downwards, while
expanding both geographically and in terms of brands and services. The ultimate goal was to establish
a company that is able to design, produce and market the glasses.
As a first-mover, Luxottica started to distribute frames directly to the market in 1974 by acquiring
Scarrone, thus gaining access to vast expertise about the Italian market and a powerful distribution
channel. After consolidating the Italian market, the horizontal expansion continued in the 1980s, by
establishing subsidiaries and acquiring other distributors. Moreover, Luxottica entered the eye care
insurance business in 1988 with the launch of EyeMed Vision Care.

In the 1990s, Luxottica continued its expansion on both the horizontal and vertical platforms. By
acquiring prestige brands, such as Vogue (1990), Persol (1995) or the biggest hit, Ray-Ban (1999) and
entering into licensing agreements with luxury powerhouses such as Bvlgari (1997) and Chanel
(1999), Luxottica significantly increased its reach.
On the other hand, integration of retail channels has also accelerated: Luxottica acquired numerous
retail companies; an exhaustive list can be found in Exhibit 18.
With subsequent development in the 2000s, nowadays Luxottica is a clear eyewear powerhouse,
possessing a market share of almost 50%. Although it cannot be called a monopoly according to the
legal jargon, it dictates trends, effectively sets prices, designs and retails 80% of the worlds major
eyewear brands. It is estimated that if you enter an eyewear retailer, the chances of buying a Luxottica
product is 70%.47
Turning to the technical part, at the end of 2013, Luxotticas wholesale distribution network covers
more than 130 countries across the globe, it has 20 distribution channels and over 40 commercial
subsidiaries. It also operates more than 7000 retail stores worldwide. Its brand portfolio is clearly the
strongest in the whole industry.
Scope
Luxotticas highly integrated business model complicates the analysis of its scope decisions. Namely,
given that the company is not only an eyewear manufacturer, but a retailer as well, the line between
horizontal and vertical integration becomes blurred. For example, how shall the companys acquisition
of Sunglass Hut be treated? Is it a market consolidation, such that one competitor acquires another or
rather vertical integration, thereby a manufacturer engaging in forward integration? In the following
analysis we assume that Luxotticas main profile is manufacturing, therefore we treat retail
acquisitions as vertical integration. On the other hand, complementary services are treated as
horizontal diversification.
47
Source: Eric Coppola: The Eyewear Market: Luxotticas Leadership, Strategy and Acquisitions (2012)
Horizontal
Luxottica has been active in penetrating new markets and geographies by actively acquiring
competitors and complementary businesses. At the same time, the company has not diversified into
segments unrelated to eyewear. In order to fully understand the scope decision, we describe two levels
of horizontal expansion, realizing that they are crucial for establishing Luxotticas leading position.
First, the company has been actively acquiring new brands, at the same time entering into licensing
agreements with other companies, thus producing (and also designing) on behalf of them. Second, it
has also reached out to complementary services by launching EyeMed Vision Care, now the second
largest vision benefits company in the United States, thus gaining control over the buyers side of the
market.
A. Global leader in eyewear brands
The overwhelming majority of renowned brands are associated with Luxottica. However, clear
distinction should be made between two lines of brands: Luxottica has a portfolio of brands
that are owned by the company and another portfolio that are licensed. However, control of
Luxottica is evident in both groups: it is not only a sole producer of the licensed brands, but it
also designs these products, with inspiration from the current collection of the respective
licensed brand. Luxottica contracts with names like Chanel, Polo Ralph Lauren, Versace, or
Tiffany. It virtually controls its own brand portfolio that includes names like Ray-Ban, Persol,
Oakley, and Alain Mikli. Exhibit 2 contains an exhaustive list of its portfolio of brands.
We believe that the underlying economic logic is twofold. On the one hand, Luxotticas gains
are larger the larger its market share. On the other, it can successfully differentiate its products
by using different brands, while the cost of production is not materially different. As a result,
it can maximize its revenue from customers.
B. Complementary services
Luxottica launched EyeMed Vision Care, the second largest vision benefits company in the
United States, as of 2012. The company has an extensive network of doctors nationwide,
together with retail locations. Serving more than 35 million customers, it provides Luxottica
with a great opportunity to orientate more customers towards buying a Luxottica product. It
also provides an online information portal for eye care and eye health related topics.48
Vertical
Leonardo Del Vecchio realized early on that two factors are key in the luxury industry: quality and
deep understanding of customer base. Therefore, he strived to implant it in his company. Leveraging
on the extremely integrated structure, 50 years after its foundation, the company has a deep
understanding of its customer base, while also having a comparative advantage in product quality.
It is indeed crucial when you contract with brands like Burberry, Donna Karan or Bvlgari, and
especially when you charge a markup as high as Luxottica. In fact, their ambitious aim is to deliver
the same Made by Luxottica quality everywhere in the world.49 The benefit of staying in direct
contact with the customers is twofold. On the one hand, you can identify upcoming trends in customer
tastes, shifts in their needs and their willingness to pay, thus you can serve them better. On the other,
you can directly influence the above mentioned trends, given that you do not have to rely on a third
party retailer. Also, this type of integration makes Luxottica able to fine tune its customer
segmentation.
We analyze the companys vertical integration by decomposing it in two parts: upward integration and
downward integration. Upward integration means mainly manufacturing, while downward integration
mainly deals with retailing. For a representative graphic, see Exhibit 19.
A. Downward integration: Manufacturing efficiency
In order to successfully position itself as a market leader, Luxottica has to achieve two
fundamental goals at the same time: i) high level of efficiency in order to produce cheaply and
ii) industry champion quality. It has therefore integrated the whole value chain backwards: it
designs processes and assembles the frames and lenses. The logic underlying is mainly
48
http://eyesightonwellness.com/
49
Luxottica Annual Report 2012
efficiency: the company should ensure that introduction of new operating methods is quick,
utilize as much synergy as possible, and introduce innovations quickly, thus optimizing
production time and costs. The company made significant progress with this. It is able to
better cater consumer needs, thus allowing the company to focus on customer segmentation
with a wide range of products, extracting the most from every segment.
In particular, Luxottica operates manufacturing facilities in Italy, China, Brazil and the United
States. Over the years, the company put in place a consistent production system in its Italian
facilities; three plants focus on plastic frames50, while another two on metal frames.51 Also,
Luxottica utilizes one single quality management system throughout product development to
procurement, operational analysis and performance management. In every Luxottica facility,
quality and process control teams regularly inspect semi-finished products, verifying the
feasibility of prototypes in the design phase, controlling standards in both the product
development and production phases, subsequently checking for resistance to wear and tear and
reviewing optical properties in relation to type of use.52
On the other hand, this level of integration facilitates faster and more detailed information
flow, resulting in reduced transaction costs. Transaction costs are also lowered by integrated
logistics services: Luxottica uses a globally integrated distribution system, which is supplied
by a centralized manufacturing programming platform. It has 20 distribution centers
worldwide and four main hubs in strategic locations:
Sedico (Italy)
Atlanta (US)
Ontario (US)
Dongguan (China)
50
Agordo, Sedico, Pederobba and Lauriano.
51
Agordo and Rovereto.
52
Annual Report 2012
These hubs operate as centralized facilities, offering customers a highly automated order
management system that reduces delivery times and keeps stock levels low.53
B. Upward integration: World class retail chain
Luxotticas distribution channels enable the company to reach the extraordinary financial
performance described above. It has established this presence through acquiring competitors
and covering new geographies. Today, Luxottica is a leader in the North American
prescription market through its LensCrafters and Pearl Vision brands; it sells licensed brands
using Sears Optical and Target Optical stores. The OPSM and Laubman & Pank brands serve
the Asian market, with LensCrafters also present in China. The company has global presence
in the sun and luxury eyewear industry, marketing the following brands:
Sunglass Hut
ILORI
The Optical Shop of Aspen
Bright Eyes brands
Adding to this the O-stores retailing Oakley products (not limited to eyewear; Luxottica
outsources production of Oakley accessories), and the e-commerce business, we can conclude
that Luxottica covers the global market.
The competition
As described above, Luxotticas closest competitor is Safilo Group. This company has a very similar
business model as Luxottica: it owns some of its brands, while licenses others. Also, it operates with
an integrated structure, owning manufacturing facilities together with distribution channels, thus
effectively controlling the entire business value chain. Safilo Group states that it has a competitive
advantage in product design, especially for the high-end brands.54 Looking at the value chain, there is
one significant difference: Safilo, together with its in-house manufacturing, outsources some
53
Source: Luxottica website
54
Source: Safilo website
production to third-parties in Italy, China, and the United States. In addition, Safilos products are
mainly sold through wholesale channels, which is another clear difference.55
In sum, we can conclude that Safilo, although following the footsteps of Luxottica, is not as highly
integrated. Comparing the operating results, it is apparent that Luxottica is more efficient, given that
its operating margin was 14.4% in 2013, which is significantly higher than Safilos 10.9%. In terms of
net margin, Luxottica has a more than twofold advantage. 56 These results indicate that the highly
integrated business model is superior in the eyewear industry. In fact, with its manufacturing
efficiency and extensive retail channel, Luxottica is able to outperform the competition. Also, major
part of Luxotticas revenue is created by the retail sector.
The Better Off Test and the Best Alternative Test
Applying the theoretical concepts learned in class, we examine Luxotticas integration strategy from
the point of view of the Better Off Test and The Best Alternative Test.
First, we ask whether Luxottica is better off with the diversification strategy described above. We
believe that indeed, there is overwhelming evidence for the diversification Luxottica is pursuing. Its
strategy is extremely consistent, since it acquires businesses that are either complementary brands, or
are significantly related to eye care. In fact, three major arguments support this decision.
1. Luxottica is able to benefit from economies of scale as it sources more brands. Nevertheless,
the cost of manufacturing and design is identical in the industry, independently from the
brand. Therefore, it does not require considerable effort from Luxottica to add an additional
brand to its portfolio, while the increased production numbers reduce marginal cost.
2. On the retailing side, stores can serve as one-stop shops for Luxottica products, selling solely
its products. This cannot be achieved with third-party stores. Moreover, Luxottica can
effectively block other firms from reaching the market, as it was made clear with Oakley in
2007-2008. Another, maybe unfair, advantage is that Luxottica is (theoretically) able to sell
55
In fact, 93% of distribution goes through the wholesale channel. as opposed to approximately 40% for Luxottica.
56
Net margin of Luxottica in 2013 was 7.5%, while only 3.5% of Safilo.
only their brands, and consumers still feel that they can choose from a variety of different
producers.
3. EyeMed Vision Care, on the other hand, perfectly fits into the strategy of offering
complementary products and thus incentivizing the consumer to purchase Luxottica products.
Second, we determine whether the firm should own the abovementioned channels. On this front, three
trends are apparent:
1. In the luxury business, brands and customer relationships are of key importance. Therefore, it
is advised to own the selling outlets and Luxottica has made the right decision.
2. As described above, its high operating margins justify that Luxottica is able to attain a higher
manufacturing efficiency than the competition. Therefore, it makes the right decision when it
comes to owning the production facilities.
3. Related to what has already been mentioned, by owning stores Luxottica is able to keep
competitors from being able to access customers.
All in all, we believe that Luxottica gives good answers to both tests and recommend that they do not
alter the strategy. Nevertheless, we also think that it might be a smart decision to establish a higher
presence in the e-commerce market (following a more detailed discussion).
The result
We believe that Luxottica has succeeded remarkably with establishing this extreme form of
integration, on both the horizontal and vertical side. It covers all main markets, controlling the
majority of eyewear retail distributors and also an eye care benefits company. It also possesses the best
brand portfolio, both concerning proprietary and licensed brands. Thus, it oversees a big portion of the
eyewear market. In fact, some critics argue that Luxottica has too much power in the marketplace.
They address that this strategy effectively eliminates serious competition, since if you make glasses,
you want to be in their store, and if you have stores, you want to sell Ray-Bans 57 , Therefore
Luxottica effectively puts the competition in a chokehold. At the vertical integration front, Luxottica
57
Luxottica was featured in CBS 60 minutes, arguing that Luxottica products are overpriced due to its extensive market power.
http://www.cbsnews.com/news/sticker-shock-why-are-glasses-so-expensive-07-10-2012/
mastered efficient production, kept design in-house, and ensured high quality. Also, it succeeded with
getting close to customers by keeping retail channels in-house.
An apparent indicator of Luxotticas success is the enormous difference between the production cost
of Luxottica and the price it charges its customers: it is essentially a price maker. The majority of
Luxottica products are assembled in Italy, thus allowing Luxottica to label them with Made in Italy
labels, as a clear indicator of quality. However, the parts themselves are mostly produced in China,
bearing really low production costs. The manufacturing cost of one pair of Luxottica glasses varies
between $3 and $7, while the retail price of the same pair of glasses depends on the exact brand, but is
often in the range of $200 - $850. Although this is also enabled by marketing efforts, brand image, and
consumers misconception of choice, it is evident that Luxottica is very successful pursuing the
strategy of extreme integration.

Analysis of Forthcoming Change in the Companys
Industry
In this section trends that can have a profound influence on the industrys profitability will be
discussed. Although the industry is faced with a multitude of different trends, not all of these are
expected to create major changes. The most important trends and their implications are therefore
discussed.
The first important trend is the strong growth that emerging markets will see over the next five years 58
with Luxottica having the top 1 or 2 position in all of these regions.59 Especially Brazil, India, and
China will fuel the growth of the industry. These countries are amongst the fastest growing countries
in the world, with strong GDP growth rates, and a middle class that is getting larger and more
affluent.60 As these demand in these markets expand, the players in the industry can increase their
revenues and profitability by catering to the demands in these countries. Not all players are evenly
well-situated to take advantage of these changes, as the growth in Asia Pacific for example is due to
increasing demand in contact lenses.61 These trends provide important opportunities for Luxottica,
which has a particularly good position in Brazil and China.62 Mainly through acquisitions Luxottica
has been able to gain a strong foothold in Brazil, where it currently enjoys double-digit growth and has
a growing network of retail stores to push its products. In China Luxottica has a similar position,
although here the potential has not been fully utilized yet. China does not rank in Luxotticas top 10
countries in terms of revenues, whereas China is already the seventh largest market with a very
attractive expected growth rate.
Another important trend that will fuel growth is the increasing demand for contact lenses.63 Disposable
contact lenses are getting more popular than traditional permanent lenses. Daily disposables are
expected to face the largest growth over the coming five years, despite the premium consumers have to
58
59
60
61
62
63
pay for these products. These products are gaining in popularity due to the elimination of the
associated cleaning procedures. Given that consumers are willing to pay a premium for these lenses,
the industry is likely to enjoy higher profitability as a consequence of this increased demand.
Luxottica, however, has no presence in this segment of the market, and will therefore not experience a
change in its profitability.
A third trend that will increase the demand for eyewear products is the rising rates of myopia and the
ageing population.64 Myopia, being nearsighted, is the most common visual impairment problem in the
world, with around a quarter of the adult population suffering from it. With the rapid increases in
myopia rates and children being diagnosed at earlier ages with myopia, the demand for eyewear
products will increase. The rising ageing population will also increase the number of people
potentially in need of eyewear products. By 2020 the population aged 65 and above is expected to be
41% higher than in 2010.65 These two factors will increase demand for eyewear products over the next
ten years and provide opportunities to increase profitability throughout the industry. These trends will
not impact Luxottica in any different way than its competitors, but will definitely provide growth
opportunities for the company.
Another important trend is the increased use of eyewear products as fashion accessories.66 Clear and
over-sized spectacle frames and sporty looks, and disposable and colored lenses are currently gaining
popularity. Consumers are willing to pay a premium for these products that are deemed more
fashionable than standard eyewear products, which are purely aimed at vision correction. This
increased willingness to pay will impact the profitability of the industry, although these fashionable
products are subject to trends and fads, and will therefore impact the industry at different and
unpredictable moments. Luxottica is not positioned properly to take advantage of the rising demand
for any type of lenses, as they do not produce these. With their luxury eyewear and sunglass brands,
however, such as Ray Ban, the company has a fair chance of profiting from this increasing willingness
to pay.
64
65
66
The final trend is the introduction of new business models, such as Warby Parker introducing a pure
online retailing model. 67Although physical retail stores remain important for consumer to get advice,
the significant lower prices of these new competitors may decrease the willingness to pay of
consumers, and thus ultimately cause lower prices. The profitability of the industry will then come
under pressure. These new business models have the potential to change the industry rapidly, as
exemplified by Warby Parker, which grew dramatically since it was founded in 2010.68
67
68
Threats to Profitability and Recommendations
Growing alternatives
From a more long-term perspective, the firms profitability may be hurt by the growing acceptance of
vision correction alternatives to prescription eyeglasses, such as laser eye surgery. There are three
main procedures which are commonly used for vision correction: Laser-Assisted in Situ
Keratomileusis (Lasik), Photo-Refractive Keratectomy (PRK) and Laser Assisted Subepithelial
Keratectomy (Lasek). With technological advancements, the cost of refractive optical surgery has
decreased to a considerable extent. Since 1992 when the LASIK procedure was first introduced under
FDA supervision69, more than 11 million interventions have been performed in the US and more than
28 million were performed worldwide70.
Proprietary vs. licensed brands
Luxottica retails both proprietary and licensed brands. The licensed brands are usually associated with
top names in the fashion industry (e.g. Chanel, Prada, Miu Miu, Dolce & Gabbana, Bvlgari, Burberry,
Armani etc.) while the proprietary brands include Luxotticas main brands: Oakley, Ray-Ban and
Persol.
Luxottica enters into licensing agreements to retail non-proprietary brands. These contracts have terms
of three to ten years and usually require Luxottica to make advance and royalty payments. Such
advance payments can go up to hundreds of millions of dollars (e.g. advance payments for the FY2012
totaled $73.8m)71. However, the profitability of licensed brands largely depends on the terms of the
licensing agreement and on the renewal of such agreements.
Luxottica has constantly reduced the dependence of its topline growth on licensed brands. As Exhibit
20 shows, the ratio of proprietary brands (as a % of overall revenues) has increased from 57.2% in
2008 to 70.3% in 2012. However, a substantial portion of the revenues (approx. 30%) is still generated
69
http://www.fda.gov/MedicalDevices/ProductsandMedicalProcedures/SurgeryandLifeSupport/LASIK/ucm192109.htm
70
http://bmctoday.net/crstodayeurope/2013/02/article.asp?f=ndyag-treatment-of-epithelial-ingrowth
71
Source: Annual Report 2012
from licensed brands. We think this may expose Luxottica to vulnerabilities from the non-renewal or
the renewal with unfavorable terms of these contracts. For example, in 2013, Safilo failed to renew its
license with Armani. This led to an estimated loss in revenues of approximately 15%.
Even though for the FY2013, no single licensed brand provided more than 5% of sales72, we think that
unfavorable terms or non-renewal can harm Luxotticas performance. In this view Luxottica should
continue to expand the share of revenues generated through proprietary brands in order to reduce its
exposure to non-proprietary brands.
Exposure to the US market
Currently, approximately 60% of Luxotticas revenues are generated in the North American market.
This exposure is usually considered to be a point of vulnerability that may pose a threat to its
profitability. Weakened general economic activity in North America or the entering of further
competition in the market exposes Luxotticas financial performance.
Counterfeit products
In recent years there has been rampant growth in counterfeit products. Only last year the number of
wearing apparel and accessories seized by the US Customs and Border authority amounted to $116
million73. This was up 27% from the previous year and the seized materials were usually related to
high-end fashion apparels (including eyewear). This excessive growth in counterfeit products hurts
both short-term and long-term profitability. In the short-term, customers reduce spending on luxurious
products, fearing that they are buying counterfeit products. In the long-term, brand reputation is hurt
by the easily imitable design.
Warby Parker business model
We covered in depth the rising trend of online stores which reduce retail stores costs in the industry
trends paragraph.
72
Source: Annual Report 2013
73
http://www.usatoday.com/story/money/business/2014/03/29/24-7-wall-st-counterfeited-products/7023233/
Appendix
Exhibit 1. Luxotticas company history
Foundation
1971 Entry in
1990 Acquisition of
1999
First collection wholesale Listing in NYSE Persol Acquisition of
distribustion Entry in retail Ray-Ban
Acquisition of
Vogue distribution
1961 1974 1995
Lisiting on
2001 Retail
2007 Retail
Borsa Entry into expansion in Acquisition expansion in
Italiana sun retail China of Oakley LATAM
2000 2005 2009
Exhibit 2. Proprietary brands and licensed brands

Exhibit 3 & 4. Production mix and volume
Exhibit 5. Geographic distribution of the wholesale unit
Exhibit 6. Revenue mix by brand type

Exhibit 7 & 8. Demographic trends74
Exhibit 9. Luxotticas operating performance
12 000 000
10 000 000
8 000 000
Revenues
6 000 000 Gross Profit
4 000 000
2 000 000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Exhibit 10. Eyewear market forecast
74
Source: IMF
Exhibit 11. Revenue distribution
80% 73% 70%

66% 66%
60% 61% 61% 61% 59%
56%
60%
44% 41% Wholesale
40% 39% 39% 39%
40% 34% 34% Retail
27% 30%
20%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Exhibit 12. Revenue growth
Exhibit 13. Performance comparison
Revenues
10 000 000
8 000 000
6 000 000 Luxottica
4 000 000 Competitors Avg
2 000 000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012
Gross profit
8 000 000
6 000 000 Luxottica
4 000 000 Competitors Avg
2 000 000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012
Operating Income
1 500 000
1 000 000
Luxottica
500 000 Competitors Avg
0
2004 2005 2006 2007 2008 2009 2010 2011 2012
-500 000
Net income
800 000
600 000
Luxottica
400 000 Competitors Avg
200 000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012
-200 000
Operating Margin
20,00%
15,00%
10,00% Luxottica
Competitors Avg
5,00%
0,00%
2004 2005 2006 2007 2008 2009 2010 2011 2012
-5,00%
-10,00%
Exhibit 14. Industry structure75
Eyewear
Contact lenses Spectacles
Daily disposable Spectacle frames
Weekly/monthly Spectacle lenses

disposable
Traditional Sunglasses
Readymade reading
Extended wear
glasses
Exhibit 15. Industry profitability76
130 000 12,0%

120 000
110 000 10,0%
100 000
90 000 8,0%
80 000
70 000
6,0%
60 000
50 000
40 000 4,0%
30 000
20 000 2,0%
10 000
0 0,0%
Contact Lenses Spectacles Profit margin
75
76
Exhibit 16. Industry ROIC77
20
15
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Spectacles only Eyewear Eyewear & other
Exhibit 17. Price structure of designer eyewear
Exhibit 18. Luxotticas key retail acquisitions
US Shoe Corp. 1995
SunglassHut 2001
OPSM 2003
Cole National 2004
Multiopticas Internacional 2009
Stanza 2011
77
Source: Bloomberg (2014)
High Tech 2011
Erroca 2012
Tecnol 2012
Sun Planet 2012
Salmoiraghi & Vigano 2013
Exhibit 19. The supply chain78
Exhibit 20. Luxotticas brand distribution
80,00%
60,00%
40,00% Designer
20,00%
Proprietary
0,00%
78
Source: Luxottica website
Exhibit 21. Geographic distribution of Luxotticas revenues
70,00%
60,00%
50,00%
40,00%
30,00% 2010
20,00% 2011
10,00% 2012
0,00% 2011 2012
2010

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MGMT 223: Final Paper

presented at Milans MIDO (an international optics trade fair) in 1971.

frames directly and pursued a strategy of vertical integration.

Garde Optics Inc., a wholesale distributor in the United States market.

(2001), OPSM Group (2003) and Cole National (2004).

Luxotticas strategy and industry evolution

and quality of its products while increasing its market share.

Luxotticas considerable investments in marketing and advertisements contributed to the evolution of

entering into a licensing agreement with Giorgio Armani.

commitment to research, innovation, product quality and manufacturing excellence.

Exhibit 1 for a the history timeline).

admitted to Italys top 30 equities index

an online platform allowing customers to personalize their Ray-Ban eyewear.

19% and 13% of total sales, respectively3.

Enhanced production and distribution performance

in India and Brazil.

and greater efficiency (Exhibit 3 & 4).

excessive reliance on North American trends (Exhibit 5).

Business model: wholesale vs. retail

users and better understand customers taste (Exhibit 6).

strategic position towards the wholesale.

LensCrafters are expected to account for most of the profits.

Demographics and macro-world trends

wearers are projected by 20207 (Exhibit 7 & 8).

Porter (2008) discussed.

Porters five forces

and consumers continue to get more aware of this.20

threat of new entrants is characterized as low.

compete in additional segments.

industry profitability (as discussed at the beginning).

is very different from the costs manufacturers incur (Exhibit 17).

represent only 6.7% of the Luxottica sales of licensed brands.

[price], the medical benefits tail off pretty fast37.

$600 for specific brands.

gross margins in the range of 61% to 66%40.

unobservable willingness-to-pay for its spectacles and their final price.

pay/price trade-off than its competitors.

Sources of competitive advantage

the long run.

brands want to retail in Luxotticas shops.

finish the analysis by evaluating the results of the company strategy.

Short historical overview from a scope perspective

a company that is able to design, produce and market the glasses.

insurance business in 1988 with the launch of EyeMed Vision Care.

(1999), Luxottica significantly increased its reach.

retail companies; an exhaustive list can be found in Exhibit 18.

strongest in the whole industry.

A. Global leader in eyewear brands

it can maximize its revenue from customers.

A. Downward integration: Manufacturing efficiency

procurement, operational analysis and performance management. In every Luxottica facility,

reviewing optical properties in relation to type of use.52

by a centralized manufacturing programming platform. It has 20 distribution centers

worldwide and four main hubs in strategic locations:

B. Upward integration: World class retail chain

The Optical Shop of Aspen

Bright Eyes brands

that Luxottica covers the global market.

mainly sold through wholesale channels, which is another clear difference.55

part of Luxotticas revenue is created by the retail sector.

The Better Off Test and the Best Alternative Test

trends are apparent:

comes to owning the production facilities.