What took eyewear licensors so long?

When I first started in optical, one thing struck me as strange about the industry: it was the only fashion related category in which the biggest selling brands were all licensed. Many of those licenses were worth tens, if not hundreds of millions of dollars over their duration.

But why don’t those licensors just start making and selling their own product? Although it’s true that building a distribution network is difficult and expensive, the fashion houses licensing the brands weren’t hard up for capital or know-how. It seemed like a no-brainer.

Some 15 years later, they’ve finally gotten around to doing the obvious.

First Kering (Gucci) Group formed an eyewear subsidiary for their brand portfolio, which includes:

Yves Saint Laurent
Bottega Veneta
Stella McCartney
Alexander McQueen
Christopher Kane
Tomas Maier
Ulysse Nardin
Cobra Golf

They recently partnered with Richemont Group, whose brand portfolio consists of:

A. Lange & Söhne
Azzedine Alaïa
Baume & Mercier
Giampiero Bodino
IWC Schaffhausen
Officine Panerai
Peter Millar
Roger Dubuis
Shanghai Tang
Vacheron Constantin
Van Cleef & Arpels

Perhaps most significantly, Richemont has considerable experience in the manufacture of luxury accessories that require machining. This includes a nearly 100,000 square foot factory for Cartier eyewear in Sucy-en-Brie in the Val de Marne that employs some 250 people. Their eyewear subsidiary generated nearly 45 million euros last year, but at around $700 to $4000 for most frames, that’s not a lot of volume. The revenue also represented a drop of nearly 10% in the past year. It seems probable they have both excess production capacity, and a need for more effective distribution.

Enter Kering. Richemont has taken a 30% stake in Kering Eyewear, and Kering Group now owns the Sucy-en-Brie facility. I’m not sure whether the deal includes Cartier’s eyewear facilities in Besançon or Fundão Portugal as well.

Of course, a few months ago LVMH purchased 10% of Marcolin to use them as the preferred partner for their brand portfolio, which includes:

Christian Dior
Emilio Pucci
Loro Piana
Louis Vuitton
Marc Jacobs
Nicholas Kirkwood
Thomas Pink
TAG Heuer

One wonders what licenses will be left for the optical companies to fight over?

Leonardo Del Vecchio is a rather brilliant fellow. When his business really began to boom he was busy taking steps to mitigate the giant risk factor of not owning their own brands. LVMH and Kering posed the greatest risk since both owned a giant brand portfolio that could drive big volume if either started a new entity.

It’s no coincidence Luxottica hardly has any of their brands in its portfolio. They’ve focused on major unaffiliated brands like Prada, Chanel, and Armani. In addition, they’ve been collecting strong house brands indigenous to eyewear for the past 20 years. They’re well prepared. Safilo, Marcolin, De Rigo et al., not so much.

But still, wandering past Luxottica’s main booth last Vision Expo, I noticed out of some 22 brands listed, only 3 were house brands. Has Luxottica done enough?

Even the mighty house brands they own aren’t enough to properly utilize their vast sales and distribution network, or make up for lost revenue if their bigger licensors drop out.

But my guess is they’re fairly confident this won’t happen.

Why do you suppose that is?

I recall once reading that Prada and Miu Miu combined represented close to a billion dollars in eyewear sold per year for Luxottica. Since the source document has vanished from my computer, let’s just say Prada’s name sells a few hundreds of millions worth of eyewear any given year. I figured I’d read Prada’s annual report to see how much actual money they got from their license deal. To my astonishment, their total royalties income (from all sources!) was less than 40 million euros.

It seemed a low number, considering their branding substantially made all those sales.   I’m sure Prada thought so, too. That’s probably why they left their license with Luxottica in 1999 and formed their own optical company in partnership with De Rigo.

What was the result? Sales plummeted, and by 2002 they were back with Luxottica, who promised to nearly quadruple their sales in a year.

Another way to understand the might of Luxottica’s distribution is by asking yourself the question: Which brand has the higher Q Score, Dior or Prada? Worldwide, I’d say it’s pretty close, but Dior Eyewear, manufactured and distributed by Safilo, generates much less revenue than Prada Eyewear.

And Safilo is no penny ante operation. Obviously, Kering won’t even be able to match them at first. But the real question for the luxury conglomerates is whether net revenues will top the royalties they’d received. This is certainly achievable.

All this raises a question: Does the brand name drive distribution or does distribution drive the brand? At what point does the strength of one outweigh the strength of the other? We’ll ponder that some more soon.

LVMH and Kering were great candidates for forming their own distribution networks because they have many, many lines they can offer, each with its own brand identity. Each can fill different niches in the market thereby generating more money collectively while sharing infrastructure and enjoying economies of scale.

But what about more solitary giants like Prada, Chanel, and Armani?

Having basically one brand each, it probably wouldn’t pay for each to set up costly infrastructure just to distribute their individual brand. But there’s another way: They could pool their resources and form a joint manufacturing and distribution company. Such cooperation between titans is not unprecedented. Sony Music Entertainment, Universal Music Group, and Warner Music Group did something similar in creating the video hosting platform Vevo.

Manufacturing and distribution, to a great extent, can be bought, and such a partnership would have plenty of money. Prada has a market cap of about $11B. Giorgio Armani is fully owned by Giorgio Armani himself and has a valuation of about $8B. Alain and Gerard Wertheimer own Chanel, which has a valuation of about $20B.

Put another way, you’re a sales rep. You’re currently doing well, but you’re offered substantial first and second-year bonuses, guaranteed, to start carrying Chanel in your territory. Their new line is really good and a newly formed giant company is pumping big resources into infrastructure and they’re not disappearing anytime soon. The Chanel name beats the line you’re currently carrying. There’s a chance to make substantially more money going forward. Would you switch?

This would be a nightmare scenario for Luxottica. I wouldn’t write it off as completely unlikely either. If the thought’s occurred to me, I’m sure it’s occurred to one or more of those companies. In such a situation, Luxottica would either have to raise royalties or, maybe, partner with the new entity, like Safilo partnered with Kering Group.

Something like this is the one thing Del Vecchio couldn’t entirely hedge against. It would be a logical “next shoe to drop” in the current industry environment.”

For more posts from Moss, visit his blog website at http://theeyewearblog.com.