LUXOTTICA: AN INTERNAL ANALYSIS 1

Luxottica

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Eastern New Mexico University

LUXOTTICA: AN INTERNAL ANALYSIS 2

COMPANY PROFILE

Luxottica is an Italian eyewear company that was founded by Leonardo Del Vecchio, in 1961.

Since its establishment in 1961, Luxottica has become a global leader in the luxury and sports

eyewear industry. The eyewear manufactured, designed, and distributed by Luxottica are made of

top-level and stylistic quality (Luxottica, 2016). Luxottica is ranked as one of the largest eyewear

company in the world; it has six production facilities across the world. One of Luxottica factory

is located in the United States, it manufactures sport sunglasses. Luxottica has a well-balanced

brand portfolio that includes proprietary and licensed brands, which gives the company prestige

and popularity. The proprietary brands of Luxottica include; Ray-Ban, Oakley, Vogue Eyewear,

Persol, Oliver Peoples, Alain Mikli and Arnette. While the licensed brands include; Armani,

Bulgari, Burberry, Chanel, Coach, Dolce & Gabbana, Donna Karan, Paul Smith, Polo Ralph

Lauren, Prada, Stella McCartney, Starck Eyes, Tiffany, Tory Burch and Versace (Luxottica,

2013).

Luxottica uses wholesale distribution and retail network as its main distribution channels. Aside

the wholesale and retail channel, Luxottica also uses a smaller e-commerce channel. The

wholesale distribution channel caters to over 130 countries across five continents (Luxottica,
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2013). An analysis made in 2013 of Luxottica market showed that its extensive retail network

has over 7,000 stores globally. In the United States, Luxottica dominates the vision care market

through EyeMed and lens finishing market through LensCrafters stores and Oakley Labs.

BUSINESS MODEL

Over the years, Luxottica has dominated the eyewear industry through its vertically integrated

business model. The vertical integration approach Luxottica uses for its business model bounds

the company’s entire value chain (Luxottica, 2016). Luxottica founder Leonardo Del Vecchio

recognized the significance of the vertical integration approach that is why he was determined to

make entire frames rather than just the eyewear components. After the introduction of the

vertical integration approach, the company started to expand its distribution. Luxottica started off

with wholesale and then added retail in 1995. Over the decades, the Company has vertically

integrated all phases of the production process to attain a level of efficiency in line with the

quality of products and services it offers (Luxottica, 2013).

SUSTAINABLE COMPETITIVE ADVANTAGES (SCAs)

Luxottica has various SCAs that enables the company to maintain a competitive advantage in the

eyewear industry. Luxottica competitive advantages include:

 Design and Technological Innovation

 Logistics and Distribution
 Product quality control
 Top management
 Brand Portfolio Acquisitions and Licensing Agreements
 Market Presence

Design and Technological Innovation

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Luxottica design is where creativity, vision, and technology all meet. The company is

dedicated to providing current and emerging fashion trends to satisfy the needs and tastes of

their consumers with its design and style of products (Luxottica, 2013). Luxottica designs are

transformed into pieces that are hand crafted with meticulous precision. Their designers use

3D technology to print unique objects and complex shapes that traditional technique cannot

produce. Luxottica differentiates its products through technological and design innovation.

Every year, Luxottica adds about 2,000 new and trending styles to its eyewear collections.

Luxottica performs a rigorous and quality test of every product they produce. Each product is

a reflection of Luxottica’s DNA: product excellence, commitment to innovation in

technologies, styles and materials and unparalleled craftsmanship (Luxottica, 2016).

Logistics and Distribution

Luxottica has one of the most advanced and efficient distribution systems in the industry.

Luxottica provides services to both retail and wholesale businesses; the company is globally

integrated with a centralized manufacturing platform (Luxottica, 2016). Luxottica advanced

logistics system has 20 distribution centers worldwide; this helps the company to monitor

global sales performance and inventory levels in order to meet local market demand. The

logistics and distribution aspect of Luxottica contribute to its SCA by allowing the company

to have a highly automated order management system; this ordered system yields the

company in re-stocking warehouse and this provides product availability to consumers. With

a strong portfolio in distribution, Luxottica is well equipped to serve every segment of the

market.

Product Quality Control

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Luxottica satisfies its wholesale and retail consumers by their on-going improvement of the

quality of every phase of its production and distribution cycle. The continues improvement of

the product quality has been one of the biggest driver of Luxottica’s vertical integration.

Product quality is the core value of Luxottica; as their production capacity increases, the

company aims to deliver the same “Made by Luxottica” quality across the world (Luxottica,

2013). Wherever design and production of frames and sun lenses take place, a single quality

system applies to every process involved, from product development to procurement,

distribution, operational analysis and uniform and measurable performance management in

the plants. Luxottica has four main labs around the world that establishes and maintains its

quality standards in the region of their location. Annually, Luxottica heightens the

performance criteria used in its standard tests and introduces new requirements. As a result of

the effectiveness of the quality control program, the return rate for defective merchandise

manufactured by Luxottica has remained stable at approximately 1% in 2013. (Luxottica,

2013)

Top Management

Luxottica has achieved success so far, because its management has the vision, leadership, and

direction. Luxottica uses its vertical integration policy to create internal and external values

for the company. The top management of Luxottica implemented the growth by acquisition

strategy which constantly creates internal value and external value for the company. The top

management of Luxottica is a unique SCA for the company, because with the managerial

expertise and capability the company will continue to have international growth.

Brand Portfolio Acquisitions and Licensing Agreements

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Luxottica has one of the largest brand portfolio in the industry. The portfolio is well balanced

between proprietary and licensed brands, which gives the company a combination of stability

and prestige (Luxottica, 2013). Luxottica is supported by major global leading brands both at a

regional level and in particular segments and niche markets. Luxottica has a strong proprietary

base because of well-known brands like Ray-Ban, Oakley, Arnette, Vogue, etc. Luxottica

licensed brands excels in the global fashion and luxury industries. The licensed brands include:

Versace, Giorgio Armani, Chanel, Coach, Prada, etc.

As of 2013, Luxottica proprietary brands had an estimated 69% of total sales of frames. Ray-Ban

accounted for 24.7% and Oakley accounted for 11.4% of the company’s net sales. Ray-Ban

dominates the sun and prescription eyewear industry, while Oakley is a leader in the sports

eyewear industry. The licensed brands are produced and distributed through license agreement

with dominant fashion brands. Rules under the licensing agreement requires Luxottica to pay

royalty within the range of 6% to 14% of net sales; and an addition mandatory marketing

contribution of about 5% to 10% of sales (Luxottica, 2013).

Market Presence

Luxottica has an estimated 60% - 80% hold on the market industry in the United States. Studies

showed that approximately half a billion people around the world wear Luxottica eyewear.

Across the world, more than 80% of eyewear brands are designed, manufactured and shipped by

Luxottica. Luxottica constantly has an annually increase in its dividend and continues to grow

net sales and net income every year since 2009. Luxottica has an excellent distribution network

which enables the company’s presence to dominate the eyewear industry. Luxottica strategy of
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using growth by acquisition has helped increase their brand awareness and it has given the

company global level recognition.

Sustainable Competitive Advantages Summary

Luxottica has built SCAs with their business model and these SCAs have created synergies. This

lets the company to control the product process which creates internal and external value added

elements. Luxottica clearly has a business model that works for the company; this model helps

them to dominate the market in which they serve. Luxottica has a very solid brand portfolio with

12 house brands and 22 license brands.

WEAKNESSES OF LUXOTTICA

As previously stated, Luxottica dominates the global eyewear industry. Although Luxottica

eyewear is recognized worldwide, there are still weaknesses that threatens the company. This

weaknesses includes, but are not limited to:

 Presence in fragile economies

 Luxury eyewear based
 Cost structure and exchange rate
 Lack of scale

Presence in Fragile Economies

Fragile economies are one of Luxottica major weaknesses. The fragile economies can irreparably

damage the company’s global market. Between 2004 and 2010 the emerging market growth was

recorded to be 16.35%, while growth in developing economies was only at 4.94%.

Luxury Eyewear Based

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Luxottica’s high quality of products and innovative design has given the company an advantage

in the luxury market. Luxottica’s products are suitable for developed economies like Europe and

the United States. Luxottica is less likely to succeed in economies such Mexico and Brazil,

where the per capita level of the families is low.

Cost Structure and Exchange Rate

A weak cost structure means Luxottica’s costs are very high in comparison to their competitors.

The cost structure can also be affected by the exchange rate. Exchange rates are not constant

therefore this can cost Luxottica to generate lesser profits. Since Luxottica has a global market,

exchange rates tend to apply when the company is conducting international business. Any value

decrease in foreign currency will have a negative impact on earnings of Luxottica.

Lack of Scale

A lack of scale means Luxottica’s cost per unit of output is very high. Increasing volume, while

maintaining quality, would help reduce those costs. Luxottica has a proven business model that

works globally. If Luxottica can efficiently scale their businesses, it has the potential to multiply

revenue with minimal incremental cost.

Further Weaknesses

Some other weaknesses Luxottica is liable to face are:

 Investments in research and development

 Small business units and future debt rating

MARKETING STRATEGIES
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Luxottica’s strategy is to continuously expand in the eyewear and eye care industry by growing

its various businesses through acquisitions or organically (Luxottica, 2016). Luxottica uses

market research to determine and meet the needs of their consumers. Luxottica uses marketing

strategies such as its price, product, place, and promotion to target new niches in the market.

Price

Luxottica has very competitive pricing strategies. The company’s consumers are willing to pay

the price offered for their products, because Luxottica has a high product quality reputation.

Luxottica pricing strategy has helped the company to maintain an effective degree of monopoly

across the eyewear industry. The effective pricing strategy can be attributed to two key

characteristic, vertical integration and computerization. The vertical integration gives Luxottica

total control of every product from production to retail. The implementation of computerization

established the integration of all facets of the industry’s process, from design to manufacturing to

inventory control. The computerization application gives Luxottica a significant cost advantage

over its competitors in the industry; Luxottica at any time decide to reduce prices and undercut

its competition. Computerization also gives Luxottica the ability to make small production runs

more efficient; this has tremendously assisted the company to adapt to the ever changing fashion

trends that govern the industry. Luxottica capability to adapt to the market defines them as an

elastic supplier; this gives them an advantage whenever there are changes in market demand.

However, some of Luxottica competitions view them as a large-scale monopoly that is unjustly

priced; they view it as an unethical practice for one company to have so much control over

products and pricing.

Product
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It is obvious that Luxottica are popular with consumer, over half a billion people across the

world wears their product. Luxottica has a variety of inputs and distribution channels from which

its consumers can choose from; this enables the company to offer more differentiated products.

Luxottica grew its company through acquisitions, which gives them the advantage to meet their

consumer’s needs. Luxottica products are of high quality and its products meet the need, style

and exclusivity of their consumers.

Place

Luxottica has a wholesale and retail channel that enables them to distribute their products

globally. The retail aspect of the company helps to maintain higher margins; while the wholesale

aspect of the company brings profit by selling their product in bulk. Their products are easily

accessible to consumers and can be found in retail outlets and malls, which is the main

distribution point for both their retail and wholesale outlets. Luxottica is an international giant

that uses information systems to accurately monitor inventory levels and product availability in

the market place. Luxottica currently distributes its products in approximately 120 countries and

operates 28 wholly- or partially- owned wholesale distribution subsidiaries strategically located

in major markets worldwide. In markets where they do not have wholesale distribution

subsidiaries, they employ approximately 100 independent distributors (Luxottica, 2005).

Promotion

Luxottica has a successful record of promoting their products across the world. Luxottica uses

the retail department to engage in promotional and advertising activities; and uses the wholesale

department to promote the value of their product, brand portfolio, and corporate image. Luxottica

uses direct media, such as print, radio and television, as well as billboard advertising. The
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company also benefits from brand-name advertising carried out by the licensors of their designer

lines intended to promote the image of the designer line. Luxottica promotion strategy has long

term and short term objectives. The short term objective is to entice consumers to their stores and

promote sales. While the long term objective is to build their brand’s image and visibility across

the world.

FINANCIAL ANALYSIS

The world economic set back of 2009-2010 continues to offer growth opportunities for

Luxottica. By the company’s 50th anniversary, Luxottica recorded an accelerated growth in the

retail (+5.7% YoY) and wholesale (+9.9% YoY) division. The improvement of productivity,

logistics and IT services will cause Luxottica to use Sap implementation to decrease 20% of

inventory days; this will be very profitable to the company.

Sales Growth Drivers

Europe. Luxottica has a very strong brand portfolio in Europe. In 2013, Armani renewed its

license after 12 years adding to Luxottica’s profit. Tory Burch, a well-known American brand

and Oakley is penetrating the European market. European countries do not have a strong retail

network so Luxottica created STARS in other to reach consumers all over Europe. These factors

have driven Europe CAGR sales to 9.01%.

North America. Even though North America is not an emerging market, it has potential for

growth. North American Optometrists stated that a lot of people in this region are not aware of

their eyesight defect and difficulties. This is a key point that will enable future development and
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the possibility to open other LensCrafters stores that can be managed through Sap

implementations.

Asia – Pacific and Other Countries. The development of the new Asian-fitting glasses lines has

driven positive sales growth rate followed by GDP growth rate trend. There are about 500

LensCrafters stores in China, Luxottica continues to target new wholesales doors. Their

production plants are located in India and China. In 2013, there was an estimated net sale of 1.4

billion euros.

Cash Flows

Luxottica generated an estimated cash flow of 537 million euros in 2012. Given the Ebitda

Margin and the estimated sales growth rate, the cash flow will reach 766.4 million in 2019. The

high expected cash flow and the financial structure of Lux characterized by low debt give space

either to possible new deals or to stock buyback and extraordinary dividends.

CORPORATE GOVERNANCE

As a company, Luxottica uses the code of conduct that was made by the Committee for

Corporate Governance, which is promoted by the Italian Stock Exchange. Luxottica Board of

Directors ensure that the company’s management and Supervisory Board compliances with

regulations. Luxottica has very set limits to membership of its directors in its company.

SOCIAL RESPONSIBILITY

Luxottica pays particular attention to corporate social responsibility. In agreement with Labor

Union, Luxottica has developed projects designed to improve the purchasing power of

employees.
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CONCLUSION

At the moment, Luxottica is the biggest name in the eyewear industry. Luxottica has a great

reputation in the quality of its products. The company’s continuous growth has been achieved by

acquisitions and mergers; while obtaining licensing agreements with other organizations to brand

their products and company. Luxottica has a tremendous business model that enables them to

achieve SCAs. Luxottica has a big brand portfolio that permits it to obtain competitive

advantages in the retail, wholesale, distribution, and manufacturing market. Although, Luxottica

has great SCAs, there are also weaknesses within the company. Luxottica continues to improve

its business by acquiring new activities and brands. Luxottica business model of vertical

integration has been very effective and profitable to the company; many people believe that

Luxottica’s business model and structure is one of the most profitable in the world.
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