Luxottica Group S.p.A.

founded: 1961

Contact Information:

headquarters: via valcozzena 10
agordo, belluno 32021 italy phone: 39 0437 6441 fax: 39 0437 63223 url: http://www.luxottica.com

OVERVIEW

Italy's Luxottica Group S.p.A. is the largest eyewear company in the world. The firm designs its own eyeglass frames and sunglasses and manufacturers them via six plants in Italy. In 2002, Luxottica had the capacity to produce up to 130,000 eyeglasses per day. Through 29 wholly-owned subsidiaries, as well as various sales representatives and independent wholesalers, Luxottica distributes its products in 115 countries. The firm also operates more than 2,500 retail outlets, mainly Lenscrafters and Sunglass Hut units, in North America.

COMPANY FINANCES

Sales in 2001 reached $2.8 billion, a 27 percent increase over 2000 sales of $2.26 billion. Earnings totaled $290 million, also a substantial increase over 2000 earnings of $239.7 million. In fact, both sales and earnings have increased every year since 1992. Luxottica's profit margins exceeded 10 percent in both 2000 and 2001. While this margin was an improvement over margins in the mid and late 1990s, it was lower than Luxottica's record 15.4 percent profit margin of 1994. Stock prices in 2000 ranged from a record high of $17.06 per share to a low of $7.91 per share. Stock had also reached record highs in 1998 ($9.76 per share) and 1999 ($10.69 per share). In early 2002, as analysts remained positive about the firm's outlook despite the lagging North American economy, prices hovered near $20.00 per share.

ANALYSTS' OPINIONS

Along with Luxottica's strong financial performance throughout the late 1990s and early 2000s, many analysts were also impressed by the firm's move into North American retail sales, which allowed it to eliminate many middlemen from its supply chain in that region. After the purchase of LensCrafters in 1995, Luxottica was able to control the sale of its designs at the 700 LensCrafters stores operating throughout North America. The purchase of Sunglass Hut in 2001 furthered the firm's North American reach. As stated in a March 2001 issue of DSN Retailing Today, Luxottica's purchase of Sunglass Hut "will wed its existing LensCrafters prescription business in North America with mass market sunglasses." According to Ladenburg, Thalmann & Co. analyst Eric Beder, "In some respects, it's a dream acquisition. . .Luxottica now controls both the high and the lower end in the malls."

HISTORY

Leonardo del Vecchio and two partners established Luxottica s.a.s. in 1961. At first, the Agordo, Italy-based factory manufactured parts for eyeglass frame makers. Employees totaled ten. To increase earnings, the firm began to make finished frames in 1967. Production practices were modeled after those used by jewelry makers. Luxottica began selling its frames in the United States via a licensing agreement with Avant Garde in 1970, discontinued the sale of eyeglass parts in 1971 to focus its efforts solely on finished frames, and the Luxottica brand made its debut that year at the International Exhibition of Optics, Optometry and Opthalmology in Milan.

In 1974, Luxottica acquired Scarrone, a distribution company based in Italy. The acquisition of Avant Garde in the early 1980s boosted Luxottica to the number one spot among U.S. eyeglass manufacturers. In 1982, del Vecchio's son Claudio was sent to New York to oversee the new U.S. branch of Luxottica. The firm spent most of the 1980s expanding its international distribution networks by creating distribution subsidiaries around the world. For example, Luxottica founded Fashion Brillen Gmbh in Germany in 1981. Luxottica U.K., Luxottica France, and Luxottica Canada emerged mid-decade.

After securing a licensing agreement from Giorgio Armani in 1988, Luxottica designed and manufactured a line of Giorgio Armani eyeglasses. Similar agreements with firms like Giugiaro, Genny, and Byblos in 1989, Valentino in 1990, and Yves St. Laurent in 1991, allowed Luxottica to increase its designer eyeglass offerings.

Luxottica completed its initial public offering (IPO) on the New York Stock Exchange (NYSE) in January of 1990, raising $80 million in fresh capital. The IPO was particularly newsworthy because it marked the first time an Italian firm had listed its shares on the NYSE prior to listing them on the Milan Stock Exchange. Del Vecchio had made this decision in an effort to highlight Luxottica's international reach. It wasn't until December of 2000 that Luxottica's shares were listed on the Milan exchange.

To gain access to LensCrafters, a chain of 700 retail shops selling prescription lenses and a wide range of eyeglass frames, Luxottica paid $1.4 billion in a hostile takeover of LensCrafter's parent company, U.S. Shoe, in 1995. Eventually, Nine West bought the shoe operations of U.S. Shoe for $600 million. Del Vecchio folded the apparel arm of U.S. Shoe, which included chains such as Casual Corner, into a separate family business. Luxottica also acquired Italian sunglasses maker Persol that year.

In 1999, Luxottica gained access to Ray-Ban, Revo, Killer Loop, and other designer sunglasses via its $640 million purchase of the sunglasses operations of Bausch & Lomb. The firm also become the first distributor licensed to sell the Chanel brand after it convinced Chanel to forge its first ever brand licensing agreement.

Luxottica paid $462 million for Sunglass Hut International, another North American retail chain, in 2001. In an effort to strengthen its position in the managed care market, Luxottica also acquired First American Health Concepts that year and folded it into its recently established Eyemed Vision Care, LLC unit.

STRATEGY

Fully centralized production has been a key strategy for Luxottica since its inception. By keeping the manufacture of all eyeglass components in house, the firm has maintained both quality and cost control. It has also maintained control of its distribution network. Luxottica acquired its first distributor in 1974. Throughout the 1980s, the firm created several of its own distribution units, believing that close contact with its resellers allowed for an increased understanding of its market. This strategy was taken a step further in the 1990s when Luxottica moved into retail sales for the first time.

The reason for Luxottica's strategic move into retailing was the emergence of large discount retailers selling eyewear in the United States, a market that had accounted for more than 50 percent of Luxottica's revenues since the early 1990s. Because the United States had proved to be one of the firm's most important markets, Del Vecchio was determined to maintain market share there. According to a February 2002 article in Forbes, Del Vecchio believed the purchase of LensCrafters, via U.S. Shoe, "was the only way to prevent Luxottica from being squeezed by such discount chains as Wal-Mart—even if it meant competing with his best customers, the small opticians that then provided 90% of his sales." When the purchase was completed, Del Vecchio began to demand price cuts from LensCrafters' suppliers. Less profitable brands were discontinued in favor of Luxottica brands. In fact, by 2002, frames manufactured by Luxottica accounted for 70 percent of LensCrafters' sales, compared to 5 percent prior to the takeover.

Luxottica implemented a very similar strategy with Sunglass Hut. When the takeover of Sunglass Hut was completed in 2001, Del Vecchio began to exact discounts from Sunglass Hut's ten suppliers and to increase the number of Luxottica brands sold by the chain.

FAST FACTS: About Luxottica Group S.p.A.

Ownership: Luxottica Group S.p.A. is a public company traded on the New York Stock Exchange and the Milan Stock Exchange. Founder Leonardo Del Vecchio holds a 70 percent stake in the firm.

Ticker Symbol: LUX

Officers: Leonardo Del Vecchio, Chmn.; Luigi Fran-cavilla, Co-CEO; Roberto Chemello, Co-CEO; Enrico Cavatorta, CFO

Employees: 31,000

Principal Subsidiary Companies: Headquartered in Belluno, Italy, Luxottica owns and operates six manufacturing plants in Italy as well as 29 wholly-owned subsidiary companies throughout the world. Some of Luxottica's more well known subsidiaries include LensCrafters and Sunglass Hut.

Chief Competitors: Competitors to Luxottica include Marchon Eyewear, National Vision, Eye Care Centers of America, and other eyewear manufacturers, distributors, and retailers.

CHRONOLOGY: Key Dates for Luxottica S.p.A.

1961:

Leonardo del Vecchio and two partners establish Luxottica

1967:

Luxottica begins making finished eyeglasses

1974:

Scarrone, based in Italy, becomes Luxottica's first distributor

1988:

Giorgio Armani licenses its brand name to Luxottica

1990:

Luxottica lists its shares on the NYSE

1995:

Luxottica acquires LensCrafters

1999:

The firm acquires the sunglass operations of Bausch & Lomb

2000:

The Milan Stock Exchange begins to list Luxottica's shares

2001:

Luxottica pays $462 million for Sunglass Hut International

To improve the profitability of the Ray-Ban, Revo, and Killer Loop sunglass brands it acquired from Bausch & Lomb in 1999, Luxottica undertook several strategic moves designed to lower production costs and increase demand for the brands. For example, the firm began limiting the distribution of the Ray-Ban brand to department stores and shops specializing in sunglasses (under Bausch & Lomb, Ray-Ban sunglasses had been sold by nearly 13,000 outlets, including discount retailers). In addition, Luxottica closed four Ray-Ban factories, internalizing the manufacture of the sunglasses. Consequently, Ray-Ban production costs were nearly cut in half by 2000. The lower costs, coupled with Luxottica's decision to raise the price of Ray-Bans, boosted profitability despite fewer Ray-Ban sales over the next two years.

PRODUCTS

Luxottica sells both traditional and designer eyeglass frames, sunglasses, and related eyewear products. Along with the Luxottica brand, the firm owns the following lines: Ray-Ban, Vogue, Persol, Arnette, Killer Loop, Revo, Sferoflex, Luxottica, and T3. The firm also licenses several brands, including Giorgio Armani, Emporio Armani, Chanel, Ferragamo, Bulgari, Byblos, Genny, Ungaro, Tacchini, Moschino, Web, Anne Klein, and Brooks Brothers.

EYEWEAR GIANTS CLASH

When Luxottica founder Leonardo del Vecchio asked Sunglass Hut suppliers to reduce their prices shortly after Luxottica had purchased Sunglass Hut, most agreed. However, Oakley, Inc. CEO James Jannard refused, pointing out that because Oakley accounted for nearly one quarter of all Sunglass Hut sales, it should not be required to cut its prices. Increasingly tense meetings between the two billionaires in both May and July of 2001 resulted in Jannard's decision to lower prices modestly. However, when Del Vecchio slashed the Oakley order by roughly 66 percent shortly after the July meeting, Jannard responded by retracting his offer to cut prices. Del Vecchio then refused to carry the Oakley brand at all.

In November 2001, Oakley sued Luxottica, alleging that the firm had violated an Oakley patent on a particular lens coating called Iridium. As a result, a judge issued a preliminary injunction ordering Luxottica to stop producing Iridium lenses. When Del Vecchio and Jannard met again in December, shortly before the injunction had been issued, Del Vecchio agreed to Jannard's demands that Sunglass Hut restock the Oakley Brand while Jannard granted Sunglass Hut increased price concessions.

GLOBAL PRESENCE

Luxottica's North American subsidiaries, which account for more than half the firm's sales, include Avant Garde Optics, Inc., Lenscrafters, Inc., and Sunglass Hut International, Inc. Additional subsidiaries are located in countries such as India, Brazil, Argentina, South Africa, Japan, Hong Kong, Australia, Belgium, Portugal, Sweden, Poland, the Netherlands, France, and the United Kingdom.

SOURCES OF INFORMATION

Bibliography

kroll, luisa. "lens master." forbes, 4 february 2002. available at http://www.forbes.com.

kroll, luisa. "the son also rises." forbes, 17 september 2001. available at http://www.forbes.com.

"luxottica group s.p.a." international directory of company histories. detroit: gale research, 1997.

luxottica group s.p.a. home page, 2002. available at http://www.luxottica.com

"sunglass hut." dsn retailing today, 5 march 2001.

For an annual report:

on the internet at: http://www.luxottica.com/english/investor_relations/index_annual_report.html

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. luxottica's primary sic is:

3851 ophthalmic goods

also investigate companies by their north american industry classification system codes, also known as naics codes. luxottica's primary naics code is:

339115 ophthalmic goods manufacturing