Behind the Radical Shifts in Luxury Eyewear
Last week’s LVMH-Marcolin deal follows a string of changes in the competitive luxury eyewear sector as companies reassess their business models to adapt to growing demand.
LONDON, United Kingdom — On Wednesday, LVMH signed a joint venture with Italian eyewear manufacturer Marcolin as part of a long-term strategy to tighten control over its licensed brands. The deal, which will see LVMH take a 10 percent stake in Marcolin, follows a string of events that represent an ongoing restructuring of the global eyewear market.
Just last month, two of the largest companies in the industry — Luxottica and Essilor — signed a long-awaited deal with a combined market value of €50 billion. Meanwhile, LVMH rival Kering moved its eyewear brands in-house after terminating its licensing agreement with Safilo in 2014.
“It’s an industry that is going through a process of consolidation that started many years ago, says Mario Ortelli, head of the luxury sector at Sanford C. Bernstein. “It’s going through a transformation and the players in the market are thinking of different strategies.”
The global eyewear market, which includes frames, contact lenses and sunglasses, was worth $90.3 billion in 2013 and is expected to reach $140 billion by 2020. The increasing demand is thanks to a growing middle class, who are more likely to spend their disposable incomes on entry-level luxury products like eyewear. This represents a wealth of opportunity for global luxury groups to further expand their offering to a wider net of consumers and one that LVMH and Kering are evidently keen to gain further control over.
“Eyewear is an interesting category as it is accessible in absolute price terms, and dovetails with middle class consumers driving luxury growth going forward,” says Luca Solca, head of luxury goods at Exane BNP Paribas.
Control, however, can come at a hefty price. In order to bring its eyewear offering in-house, Kering paid Safilo €90 million to terminate their license agreement two years earlier than expected, sacrificing around €50 million in royalty income.
"Distribution is a platform that is complex and costly to manage. And Luxottica has got the biggest one at the moment."
“The advantage of bringing eyewear in house is that you control distribution more tightly. The disadvantage is that you will operate at a scale disadvantage in physical distribution, sales and manufacturing (assuming you internalise that too) in comparison to major eyewear players like Luxottica,” Solca says.
“[However] this risks being a heavy burden on the net working capital, and dilutive on return in invested capital in most cases — at least in a ramp phase of several years.”
LVMH’s Marcolin deal will be a blow to the Safilo Group, which currently makes eyewear for LVMH brands Celine and Dior, licences worth €340 million, more than a quarter of its annual sales. Earlier this week, Safilo reported its full year sales fell 1.2 percent, on a like for like basis, as a result of the impact of the brands that it stopped servicing, however the loss of LVMH brands is yet to be reported in results. Marcolin will make eyewear for LVMH brands Celine and Louis Vuittonfrom 2018, with a longer-term aim to become the luxury goods company’s preferred partner for eyewear.
However, LVMH may still face some obstacles if its long-term goal is to completely control its eyewear business. The Luxottica-Essilor deal could be an indication of further consolidation in the market from smaller players.
“The main player in this process was Luxottica and I see further consolidation opportunities,” says Ortelli. “So far by size, Luxottica and Essilor is the outlier in comparison to anything else. It remains to be seen if there is further consolidation between the smaller players to try to bring up a second champion.”
The merger, which is expected to complete by the end of this year, will add yet another twist to the structure of the eyewear market resulting in global eyewear giant with significant distribution and manufacturing capabilities that companies like LVMH and Kering may struggle to complete with in the long-term.
“There is a tendency of a luxury company to try to limit and control its brand licences and products as much as possible,” says Ortelli. “Still the biggest obstacle that I see is the distribution, because to distribute the product means that you need a capillarity of many thousands of point of sales around the world.
“It is a platform that is complex and costly to manage,” Ortelli adds. “And Luxottica has got the biggest one at the moment.”