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Kering Eyes an Opportunity in Optical Wear

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Euromonitor International Bio

As part of a wider move to gain tighter control of its luxury brands, Kering recently announced that it plans to terminate its licence with Safilo for Gucci eyewear early, ie in 2016. The news comes hot on the heels of an announcement by the French conglomerate that it is reorganising its luxury brands into two newly set-up divisions: ‘couture and leather goods’; and ‘watches and jewelry’. Similarly, Kering intends to set up an eyewear division, which will fully manage Gucci’s entire operations, from design and product development to distribution, supply chain, marketing and sales. The company has also signed a new 4-year product partnership with Safilo, whereby, from 2017, Kering will rely on Safilo for production capabilities. The buyback of license for Gucci eyewear is significant to both parties, as Gucci is Kering’s largest luxury label and Safilo’s most important licence to date. The decision also comes as Kering tries to tap into the affordable luxury segment, which sees consumers buy a branded pair of sunglasses but not a more expensive branded handbag.

A surmountable challenge for Kering

Kering’s move follows in the footsteps of luxury houses Burberry, Yves Saint Laurent and Dior buying back a number of licences over the years to gain more control over their brands. However, fashion and luxury houses (with some exceptions) have generally been less open to buying back licences for perfumes, cosmetics and eyewear, due to the specialised nature of these industries. In the same vein, a foreseeable challenge for Kering is to establish sufficient bargaining power when dealing with external suppliers of eyewear components and other eyewear distribution channels beyond its directly-operated stores.

That said, Kering’s move to gain control of its eyewear business is not overly ambitious. Kering already operates the eyewear business for its Electric and Brioni brands. Under Kering’s new eyewear division, running Gucci would not be akin to starting a business from scratch. Rather, Kering is tapping into existing research and development and marketing capabilities to create further cost synergies across its various eyewear brands, while relying on Safilo for production. Other value-generating synergies include combined product placements, such as advertising Gucci accessories (eyewear and handbags) together to reinforce the Gucci brand identity.

Safilo badly hit, but poised to recover

Kering has indicated plans to buy back the licences of its key brands. While Kering has licensed eyewear brands to Luxottica, Marcolin and Charmant, none would be as severely impacted as Safilo should their licenses with Kering be terminated. Safilo is the existing licensee of Kering’s biggest brands, namely Saint Laurent and Bottega Veneta. The licenses of both will soon expire and are most likely to be bought back by Kering. Gucci is also Safilo’s largest licensed brand, having generated US$685 million in retail value sales across the spectacle frames and sunglasses categories in 2013.

Safilo’s strongest rival Luxottica is better positioned to ride out the uncertainty posed by the prospect of having their licenses with Kering terminated. Luxottica has strong house brands (Ray-Ban and Oakley), which command solid leadership in the spectacle frames and sunglasses categories. Unlike Safilo, which owns only one retail chain, Luxottica has over 7,000 stores worldwide and thus is a major distribution partner, which many brands cannot do without.

In spite of the challenges faced, there is still light at the end of the tunnel for Safilo. Since the loss of its Armani licences in 2012, Safilo has been reducing its reliance on licensed brands and looking inward to strengthen its proprietary labels. Strong house brands include Safilo and Carrera, both of which performed well in 2013, as well as Polaroid, which has been growing rapidly as part of an international expansion exercise. In addition, sizeable growth is expected of relatively new brands Tommy Hilfiger, Céline and Fendi under Safilo’s charge. Long-term options exist for Safilo and these are discussed separately in “Luxottica Winning Licence War as Safilo Tries to Repair Damage”.

Eyewear industry set for change

The move to buy back eyewear licences, something which few fashion and luxury houses have done, underscores the potential which Kering sees in the eyewear industry. The eyewear market is valued at US$ 122 billion in 2014, and is set to grow by a CAGR of 3.3% over 2014-2019 in constant terms. Across the period from 2014 to 2019, sunglasses are forecast to be the second fastest growing eyewear category. If Kering successfully manages to integrate and capitalise on the growing eyewear business, rivals with the capability will follow suit. One thing is for sure, there will be a gradual but definite shift towards growing proprietary brands in an industry that has traditionally been reliant on brand licensing.

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