Luxottica

Luxottica Internal Analysis

By

William Burczyk
 Luxottica

BACKGROUND

Luxottica was founded in 1961 and has grown into a global leader in manufacturing and

distributing prescription frames and sunglasses, consistent with technical quality and style

(Luxottica, 2014). The organization has six manufacturing facilities located Italy, China, Brazil

and the United States. In addition to producing world well renowned brands including Ray- Ban,

Oakley, Vogue Eyewear, Persol, Oliver Peoples, Alain Mikli and Arnette the organization also

has licensing agreements with highly profiled brands including Giorgio Armani, Burberry,

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

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

Luxottica has two primary distribution networks including wholesale distribution and a

retail network (Luxottica, 2014). The wholesale distribution expands to more than 130 countries

in five continents and also has a number of subsidiaries that help provide direct operations within

key markets. The wholesale distribution creates a synergy element for the retail network

consisting of over 7,000 retail stores. Importantly Luxottica dominates the U.S. Market as the

largest managed vision care company, and ranks second in lens finishing in this market. In

addition to providing prescription frames and becoming a well branded organization Luxottica is

enable to enhance their global retail brands including the sunglass hut by building on former

success within the industry. Lastly, the organization also has several smaller forms of channels

of distribution including e-commerce from several websites including Oakley, Ray-Ban,

Sunglass Hut, and the Target Optical sites.

BUSINESS MODEL

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The business model of Luxottica is an important element for success since it incorporated

the Sustainable Competitive Advantages (SCAs), which will be discussed in the next section of

this analysis. Luxottica takes a vertical integration approach to their business model to

encompass the entire value chain (Luxottica, 2014). At the top of the business model the

organization has the research and development of their products, which in turn create prototypes.

Upon completion of a successful prototype the production of lenses, optical or sun are

manufactured. While the lenses are being produced the production of the frames begin and are

then joined with the frames to complete the eyeglasses. After the production phase of the

eyeglasses the organization than distributes the eyeglasses through their wholesale and retail

networks. The distribution to these networks is sophistically done so with an intensive logistics

and customer service approach for the wholesale and retail networks, respectively. The finished

goods are sent to independent distributors or retail chains to be made available to the end users.

SUNSTAINABLE COMPETITIVE ADVANTAGES

Luxottica generates the following SCAs, distribution and logistics, innovation, research

and development and innovation, product quality, market presence, top management, mark up,

brand portfolio and licensing agreements. All of these SCAs combined together have helped

Luxottica become the most dominate player within the market. Luxottica uses each of the SCAs

within their business model where each SCA provides synergy to the preceding phase of their

business model.

Distribution and Logistics

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The distribution of the products offered by Luxottica are done both at the wholesale and

retail level, which gives the organization two primary channels of distribution. Luxottica uses an

intensive programming platform that allows the organization to monitor both sales and inventory

levels. The programming platform is the source of the distribution and logistics SCA since it

allows the organization to efficiently monitor their 20 distribution centers scattered across the

globe. The program enables the company to re stock warehouse as needed and ensure that the

market demand in that locality is maintained. This provides the value added services of

availability to the end user, reduced delivery times, and lower inventory carrying cost to

Luxottica.

Research Development and Innovation

The R & D and Innovation is a unique SCA for Luxottica as it allows the organization to

merge vision, creativity technology, and innovation to produce products that meet or exceed the

needs of consumers. Luxottica does market research on their markets around the globe to

determine how to produce each model of glasses that offer an astonishing design, top notch

quality, and the needs of consumer. The R & D is a strong focal point for the organization

because it allows them to offer many quality designs that meet different needs of customers to

help create a well balanced portfolio. The source of this SCA is through past industry experience

and research, which indicated the need to incorporate innovation from the R & D phase of their

business model to produce current and emerging needs of both existing and new markets.

Product Quality

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Luxottica indicates that product quality is the core value of their business as stated “We at

Luxottica aim at protecting the eyes and enhancing the faces of men and women all over the

world, by manufacturing and selling ophthalmic eyewear and sun wear characterized by their

high technical and stylistic quality, in order to maximize our customers' wellbeing and

satisfaction (Luxottica, p.1). Product quality is a key element which provides value to concerns

and furthers their brand awareness and recognition within the market place. The source of SCA

of product quality is manifested through vigorous market research, research and design, and

innovation, which is the first step in their business model.

Market Presence

Luxottica is able to produce a high level of market presence based on the organization

controlling the entire production process from inception of a product to delivery to a customer.

The organization uses distribution, marketing, and commercialization strategies to create a

superior level of market presence. The organization is successfully able to provide direct

customer control and value added partnerships with many top designers. The organization has

been able to further enhance their market presence through the use of growth by acquisitions,

which are targeted to help create more value for both the organization and their brand. This

approach of growth through acquisition has helped increased their brand awareness and

recognition at the global level.

Top Management

The success of Luxottica did not come without vision, leadership, and direction. The top

management of the organization has helped the organization achieved passed success, and

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promising future success. The organization started out in 1961 when founder Agordo Belluno

started the production of eyewear frame components in Italy (Luxottica, 2014). In 1971 the

organization deployed their vertical integration strategy aimed at creating internal value and

external value. In 1981 the organization began their acquisitions by acquiring Avant Garde

Optics INC. In 1988 the company began to partner with top designers in the fashion industry,

which helped further evolve the evolution in the industry. In 1990 the company enlisted on the

NYSE and the international financial market as a way to raise capital for further expansion. In

1995 the organization acquired the largest optical retailer in the United States, LensCrafters and

the company of PERSOL which was an Italian company known for having the highest Italian

quality of eyewear. In 1999 the organization made its most important acquisition, Ray-Ban,

which is the global leader in the Luxottica portfolio today. In 2001, the organization acquired

Sunglass Hut, which now allowed the organization to control all phases of their product from

inception to distribution, now at the retail channel. In an effort to enter more markets the

organization acquired the leading optical retailer in both Australia and New Zealand, OPSM

group. These were the earlier acquisitions of the company and to this day the company continues

to use the growth by acquisition strategy to further creating internal value and external value for

the organization.

The success and growth through acquisitions was strategic move which acquired the keen

knowledge of top management, who possessed a strong managerial capability to take Luxottica

through many international expansions.

Mark Up

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From a financial standpoint the organization has the ability to control the mark up of their

products since they own the entire process from manufacturing to distribution to the wholesale

and retail new works. Since the process is entirely owned by Luxottica they are able to control

their COGs to an extent, thus lowering manufacturing cost and setting the price where they want,

since there is little competition within the market. The control on markup allows the

organization to maximize their profits, which are then distributed to shareholders, or retained in

the organization to fund further growth, expansion, or acquisitions. The mark up control allows

the organization to carry less risk compared to other industries where product and growth are

fueled by price points. This may be a SCA for Luxottica but it does put the customers of their

products at risk for increasing prices without cause.

Brand Portfolio Acquisitions and Licensing Agreements

The vast brand portfolio of acquisitions and licensing agreements in which Luxottica has

grown since inception contribute to the SCA of variety and needs for consumers. The variety

and appeal to consumer taste of different preferences in different markets has been achieved by

both acquisitions and licensing agreement with high end designers. When broken down

individually the internal value added from acquisitions and licensing agreements illustrate how

the organization has been meeting the needs of consumers within a variety of sub markets.

Below are a few examples of both acquisitions and licensing agreements that have helped

contribute to both the success and growth of Luxottica.

Arnett was an acquisitions made by the organization in 1999. This acquisitions focused

on the target more of sports eyewear while combining functionality and comfort of the products.

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This acquisition served as a way to meet the needs of customers who engaged in sports activities

(Coppala, 2012).

Oliver Peoples was another acquisition made by the company in 2007. Oliver Peoples

focused on producing top quality retro inspired products (Coppala, 2012). This company also

focused on exclusivity with their private labeling making them a prestige eyewear product. This

acquisition served to meet another need in the market for upscale eye glasses made in limited

quantities, specifically targeting the rich.

Revo was an acquisition that occurred in 1999 and was acquired due to their innovation

and technology (Coppala, 2012). The company was known for offering the best products to

protect from UV and infrared light. This acquisition allowed the organization to target customer

who had safety as a concern.

Vogue was an earlier acquisition that came about in 1973. This company has a strong

brand name due to the magazine that it shared its name with. The branding of Vouge focused on

extreme fashion accessories which now allowed Luxottica to go into a new market where

eyewear was seen to be a fashion accessory. The brand awareness of Vouge helped the

organization tremendously to create a strong brand name, recognition, and awareness.

In 1992 Luxottica entered into a licensing agreement with Brooks Brothers. This

company focused on providing American brand products that focused on affordability and style,

while maintaining high quality standards. This agreement allowed Luxottica to target customers

who valued price and quality, thus entering into yet another customer segment.

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Luxottica also entered into licensing agreements with the following Ralph Lauren, Prada,

Burberrry, Chanel, Dolce & Gabanna, Miu, Paul Smith, and Tiffany and Company. Each of

these brands allows Luxottica to promote their products through licensing agreements with some

of the most luxury brands known throughout the world. This allows the company to strengthen

their brand awareness and recognition, target new customers based on preferences, and gain

consumer confidence.

SCA CONCLUSION

Luxottica has been able to build sustaining competitive advantages within their entire

business model while building synergies among each of the SCAs. This allows the organization

to control the entire product process from inception to delivery creating value added elements

internally, as well as externally. Since they control the entire business process they are able to

provide shorter delivery times to consumers, reduce carrying cost, focus on innovation, create a

strong brand image through the value added propositions that acquisitions and licensing

agreements provide, and expand into new markets to achieve growth as envisioned by top

management. This organization has all the facets needed to dominate and control the market in

which they serve, and will continue to see growth as they venture into emerging markets.

WEAKNESSES

Considering that the company conducts business in a global market there still are

weaknesses that the organization can see as a threat to their business. The organization is

susceptible to exchange rates, which have the possibility to decrease profits. As the company

continues to growth through acquisitions the cost associated with total management can grow as

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well, thus leading to the possibility again of lower profits. Since the organization is a dominant

player within the industry the possibility to face antitrust concerns can manifest. Finally, the

threat of entry is always a possibility in almost any market.

Exchange Rates

Since exchange rates are not constant it is possible for the organization to generate a

lesser profit. When sales agreements are executed, or in this case prices are set on products, the

agreement or price is set based on the exchange rate at that point in timer. Once the funds are

received it is only at that point in time in which the exchange rate will apply if conducting

international business. If the exchange rate is different from the sale agreement or time of

pricing than the profit earned may be less or greater. Any value decrease in foreign currency will

have a negative impact on earnings for the organization.

Management Cost

Every time the organization acquires a new company the size of the organization has

grown. Luxottica needs to maintain an acceptable cost for total management cost. In this area

Luxottica will need to monitor their total management cost to ensure that the growth anticipated

will net a gain after any additional cost in total management have been calculated for the

acquisitions. So far the organization has coped well with growth by acquisitions, possibly due to

having a well capable top management team.

Antitrust

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The Merger between Pearl Vision and LenCrafters has raised antitrust concerns

considering that these two organizations were the two most dominant within the industry,

specifically distributing their product through retail malls (O’Donnell, 2004). The concern is that

this merge would cause the organization to mark up their prices and possibly reduce the quality

of their products, since consumer options on where to purchase their products would be limited.

The merger also removes the competition from the marketplace, thus allowing for the above

mark ups to occur. This can be a weakness for the organization since high profile mergers may be

reviewed by the Federal Trade Commission. This may prevent the organization from further

growing by acquisition within sectors of their industry in which they what to achieve growth by

acquisition, or mergers.

Threat of Entry

As with any organization the threat of entry can pose a problem to dominate market share

holders. A new organization can come into the market either from producing their own eyewear

products, or by acquiring licenses similar to the model in which Luxottica has practiced. Even

though the possibility for new organizations to enter the market is present there are still barriers

for new competitors. Most importantly, it would be difficult for a new organization to enter the

market and immediately begin competing against Luxottica, just based on the economies of

scale. It will also be very difficult for new companies to imitate the distribution process in which

Luxottica has.

KEY MARKETING STRATEGIES

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The marketing strategy used by Luxottica is based on their retail distribution and

marketing efforts of companies in which they have licensing agreements with, which help the

organization target new niches in the market. The organization also creates their products based

on market research to determine the needs of their consumers.

Product

Luxottica offers a wide array of product offerings based on colors, features, needs, and

exclusivity. The company has grown through acquisitions which in turn have given the

organization all the necessary resources needed to meet a variety of consumer needs and wants.

The company has built a reputation on offering high quality products, regardless of the need,

style, of exclusivity.

Price

Luxottica has been able to charge a range of prices for their products depending on each

product, and the fact that they have become the dominant player within the industry. They have

also been able to remove completion from the industry as seen in the Pearl Vision and

LensCrafter Merger. The reason that consumers are willing to pay the price for their products

offered is based on the quality of their products, which has been part of Luxottica’s Reputations.

The organization is also able to set various prices depending on the model glasses and the need

that they are meant to serve. For exclusive lines they can demand a higher price to meet both

style and exclusivity demanded by the upper class target market. For other classes they are able

to meet price points that consumers are willing to pay, based on the total manufacturing cost of

their products, since they own the entire inception to market cycle of their products.

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Distribution (Place)

Luxottica is able to distribute their products in two ways, wholesale or retail. This makes

the organization unique and provide a competitive advantage. They are able to maintain higher

margins by bring the product to the retail side, and yet be profitable while selling their products

at a whole sale level 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. In addition, they are able to maintain accurate inventory levels through the information

systems to ensure that the product availability is present in the marketplace.

Promotion

Luxottica has been able to successfully promote their products within the market place.

They have been able to raise awareness through the growth that has been achieved in the market

and through providing high quality products. Every time the organization has growth through

acquisitions, mergers, or licensing agreements they generate awareness by consumers. The

appeals to creating brand awareness due play a large part in the licensing agreements they have

with other high end companies. Not only does Luxottica generate awareness through their own

stores, but that of stores that have agreements with Luxottica, thus increasing their awareness in

the market. Luxottica is also able to increase the demand for their product through these

licensing agreements. Consumers see products that are tailored to their preferences based on the

store in which Luxottica may have a licensing agreement with.

Financial Results

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Key Ratios - Ratio Analysis 2013 vs 2012 Luxottica

Balance Sheet
Current Assets
Cash & Cash Equivalents 617,995 790,093 -21.8%
Accounts receivable, net 680,296 698,755 -2.6%
Inventories Net 698,950 728,767 -4.1%
Other Assets 238,761 209,250 14.1%
Total current assets 2,236,002 2,426,865 -7.9%
Non Current Assets
Property, Plant and Equipment- Net 1,183,236 1,192,394 -0.8%
Goodwill 3,045,216 3,148,770 -3.3%
Intangible Assets- Net 1,261,137 1,345,688 -6.3%
Investments 58,108 11,745 394.7%
Other Assets 126,583 147,036 -13.9%
Deferred Tax Assets 172,623 169,662 1.7%
Total long-term assets 5,846,903 6,015,295 -2.8%
Total Current and Non Current Assets 8,082,905 8,442,160 -4.3%
Total current liabilities 1,700,386 1,804,984 -5.8%
Total long-term liabilities 2,232,583 2,643,936 -15.6%
Total shareholders' equity 4,149,936 3,993,240 3.9%

Income Statement
Total sales 7,312,611 7,086,142 3.2%
COGS 2,524,006 2,435,994 3.6%
Gross profit 4,788,605 4,650,148 3.0%
Total operating expenses 3,732,931 3,680,009 1.4%
Other Income (99,308) (125,692) -21.0%
Income (loss) before taxes 956,366 844,447 13.3%
Net income (loss) 548,861 538,556 1.9%
Net Margin 7.5% 7.6%
KEY RATIOS

Profitability Ratios
Return on equity 13.2% 13.5% -0.3%
Return on assets 6.8% 6.4% 0.4%
Return on sales 7.5% 7.6% -0.1%
Gross profit margin 65.5% 65.6% -0.1%
Asset turnover ratio 90.5% 83.9% 6.5%

Leverage and Liquidity Ratios

Return on Assets

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The financial analysis reports a few things to consider internally on the company. The

size of the organization based on current and long term assets reduced 7.9%, while the return on

assets increased 0.4%. The asset turnover ratio increased 6.5% indicating that the organization is

turning over their assets more quickly in 2013. This overall asset analysis indicates that the

organization is better utilizing their assets to generate additional profit in 2013 vs 2012.

Sales Growth and Profitability

In 2013 Luxottica achieved 3.2% sales growth and decreased their net profitability

margin to 7.5%, down 0.1%. The reason for the decrease in profitability is that the organization

only saw 3.2% sales growth, while their cost of goods sold increased 3.6%. The organization

either needs to reduce their COGs or increase their sales growth to maintain their net margin.

The Net GP on the growth in sales of 226,469 (in thousands), only resulted in 10,305 (in

thousands) in additional Net GP dollars for the organization, or 4.55% Net GP on the growth.

This indicates that the organization’s is profitable on the growth they are achieving, but at a

reduction of approximately 3% compared to their net GP margin.

Liabilities

The organization has reduced both their short term and long term liabilities, which

indicates that they are meeting their financial obligations both short and long term. Luxottica did

raise equity bot not enough to cover the long and short term liabilities in which it paid during

2013. The significant cash and equivalents decrease of 21.8% indicates that this money was

most likely used to pay down both short and long term debt.

Conclusion

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Luxottica has grown tremendously since inception and has become the most dominant

player in the market within their industry. The organization chose to growth through acquisition

and mergers, while obtaining licensing agreements with other organizations to brand their

products and company. In addition to their unique branding, the organization also has a unique

business model meeting both wholesale and retail needs. It is within their business model that

the organization is able to achieve the SCAs including distribution and logistics, innovation,

research and development and innovation, product quality, market presence, top management,

mark up, brand portfolio and licensing agreements. Even with these SCAs still has some

weaknesses that need to be considered including, exchange rates, cost associated with total

management, antitrust concerns, and threat of entry. Despite these weaknesses the organization

has been able to meet positive financial results including generating a positive net profit and

sales growth year to year.

References

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Coppola, E. (2012). The Eyewear Market Luxottica’s Leadership, Strategy and Acquisitions.

Retrieved from tesi.eprints.luiss.it/9617/1/coppola-eric-tesi-2013.

Luxottica. (2014). #EXPLORE | Luxottica. Retrieved from http://www.luxottica.com/en?

gclid=CNP8xr22xcECFQMT7Aoda2gAQw.

O'Donnell, J. (2004, May 12). USATODAY.com - Antitrust worries rise over LensCrafters-

Pearle merger. Retrieved from

http://usatoday30.usatoday.com/money/companies/regulation/2004-05-12-

eyeglasses_x.htm.

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