Luxottica – vertical integration and managing multiple distribution channels

“I am proof that you can make money in Italy and be honest” Leonardo Del Vecchio, Founder of Luxottica

Luxottica is a market leader in the eyewear industry. It designs, manufactures and distributes fashion, luxury, sports and performance eyewear. The group was founded in 1961, in Agordo, Italy by Leonardo Del Vecchio, and is headquartered in Milan. It is listed on the Italian stock exchange (Borsa Italiana) under the ticker LUX.
The group owns several renowned eyewear brands such as Oakley, Ray-Ban, Vogue Eyewear, Persol, Alain Mikli, etc. It also holds many prestigious licenses, Burberry, Chanel, Dolce&Gabbana, Michael Kors, Prada, Ralph Lauren, Tiffany & Co., to name a few. In addition to its portfolio of eyewear brands, Luxottica also owns eyewear retailers LensCrafters, OPSM and Sunglass Hut.
Luxottica’s wholesale distribution network covers over 150 countries and is complemented by a retail network of almost 9,000 stores. Design, development and manufacturing take place in production facilities in Italy, China, Brazil, US (for sports and performance eyewear), and India (for the local market). It has also been producing sun and ophthalmic lenses for over 20 years.
The group’s main competitive advantage is its vertically integrated business model covering the entire eyewear supply chain, from product design and development to manufacturing and distribution (see Exhibit 1).

History – from component producer to eyewear company

Humble beginnings

Leonardo Del Vecchio founded Luxottica in 1961, in Agordo, Italy. Del Vecchio was born in Milan, Italy, on 22 May 1935 to impoverished parents. He began his career as an apprentice to a tool and die maker in Milan. Thereafter, he decided to specialize in making spectacle parts and moved to Agordo, north of Belluno, home to the largest players in the Italian eyewear industry.
The name “Luxottica” originates from the combination of “luce” and “ottica”, which respectively mean “light”and “optics” in Italian. During its early years, the company manufactured eyewear components and accessories.

International expansion

In 1967, the company began selling complete eyeglass frames. By 1971, the business proved to be so successful that the company launched its first collection of eyewear under the Luxottica brand at MIDO (the International Optics Exhibition in Milan) and entered into the contract manufacturing business. Seeing the need to reach customers directly, Del Vecchio commenced his vertical integration strategy in 1974 with the acquisition of Italian wholesale distributor, Scarrone S.p.A.
The company established its first overseas subsidiary in Germany in 1981 and continued to expand via acquisitions and opening new subsidiaries and joint-ventures in foreign markets. Its first of many licensing deals was struck in 1988 with Giorgio Armani.
Luxottica listed first in New York in 1990, then in Milan in 2000. The listing in New York boosted the company’s international visibility and provided access to an important market for the group.
The dawn of the new millennium saw the group’s acquisition of several major optical chains such as Sunglass Hut (2001) and OPSM (2003). The group also expanded its brand portfolio with many prestigious licenses, e.g. Burberry (2006), Dolce&Gabbana (2006), and Ralph Lauren (2007). In 2014, it announced partnerships with Google and Intel for the development of wearable technology.

Business model – vertical integration

Vertical integration

Vertical integration of manufacturing and distribution is one of Luxottica’s competitive advantages. The group’s structure covers the entire eyewear supply chain from product development to distribution (see Exhibit 2).
Controlling the entire production platform ensures quality of the product and cost optimization. Doing so also allows for product innovation – the group adds approximately 2,000 new styles to its collections each year – and process streamlining. Control of distribution channels supports understanding consumer trends and distribution management.

Co-existence of wholesale, retail and e-commerce distribution channels

“I realized that even distributors weren’t good enough for me” Leonardo Del Vecchio

Luxottica’s distribution system comprises of 13 advanced and efficient distribution centers strategically placed around the world. The group’s 4 main distribution centers are located in its major markets: Sedico, Italy for Europe; Atlanta, USA for North America; Dongguan, China for Asia Pacific; and Jundiai, Brazil for Brazil. The distribution centers are linked to production facilities and are integrated to serve both its retail and wholesale businesses. A centralized manufacturing platform provides daily monitoring of global sales and inventory levels. Orders are made via a highly automated order management system initially developed for retailers – Superior Turn Automatic Replenishment System (STARS) – with capabilities to ship products directly to customers thereby reducing delivery times. STARS is devoted to independent opticians who have chosen to partner with Luxottica and provide access to their inventory. Luxottica takes over inventory management as if they were running a proprietary store.
The group’s wholesale distribution channel spans over 150 countries. Its wholesale customers are mainly independent opticians, optical retail chains, department stores, and duty-free shops. Such customers also benefit from pre- and post-sale services. In retail distribution, the group capitalizes on its acquisitions of eyewear retailers and provides product differentiation through its proprietary and licensed brands, frames and lens options, and eye care services.
E-commerce channels in the form of the Sunglass Hut, Oakley and Ray-Ban websites complement the group’s wholesale and retail distribution channels. In addition to increasing points of sale, the websites promote brand awareness and provide convenience for customers. Customer experience is enhanced with technology enabling 3D virtual try-ons, customization of frames and lenses, personalized etchings, etc.

EssilorLuxottica – sustaining growth as a market leader

Despite the challenging economic environment, Luxottica managed to net sales of EUR 9,085.7 million in 2016, a 2.8% increase from 2015 sales. Earnings before interest, tax, depreciation and amortization (EBITDA) rose 0.3% to EUR 1,858.1 million last year. However, 2016 operating income dipped 2.3% to EUR 1,345.3 million and the group’s growth dropped from 15.6% in 2015 to 14.8% in 2016.
Luxottica’s financial results were greatly impacted by its numerous acquisitions and expansion in the US. However, these investments brought a 6% increase in US retail net sales. Being a multinational, foreign exchange rate fluctuations account for most of the financial risk of the group, especially since the group does not engage in long-term hedging activities.
The group has continued its expansion strategy in 2017 by merging with French lens manufacturer, Essilor, in a EUR 46 billion deal. The deal, one of Europe’s largest cross-border transaction, was announced in January 2017, after over 4 years of talks, and is expected to complete by the end of 2017 pending regulatory and shareholder approval.
As a result of the merger, the two companies expect to save between EUR 400 to 600 million in the mid-term and accelerate their global expansion. Furthermore, previous concerns over leadership succession at Luxottica are now allayed, as Hubert Sagnières would serve as executive vice chairman and deputy CEO with the same powers as Del Vecchio. Analysts are optimistic about the merger as it creates substantial synergies.
“In the last two years, I have worked hard together with my managers, sometimes taking daring choices, to prepare the company to seize opportunities”, says Del Vecchio. Evidently, Del Vecchio’s hard work has paid-off as Essilor-Luxottica would be the largest incumbent in the eyewear market (see Exhibit 3), fully vertically integrated and seizing strategic horizontal integrations.
Celine Fook
Research & Content Writing

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