Luxury eyewear in the spotlight as brands focus in on sector
All eyes are on the $90bn global eyewear industry and the personalities fighting for a piece of it.
A once sleepy sector dominated by two groups — Italy’s Luxottica in frames, and Essilor of France in lenses — is being transformed into a hot bed of corporate activity because it is the convergence point of fashion and health trends, favourable demographics and the internet.
Its prospects for growth are attracting the attention of players from other industries. Gucci designer Alessandro Michele’s latest catwalk concepts paired ball gowns with globe-shaped nerd glasses while watchmaker Nick Hayek is selling brightly-coloured sunglasses to match his Swatch watches.
But the big question is how the incumbents will react. Leonardo Del Vecchio, billionaire founder and executive chairman of Luxottica, which owns the Ray-Ban and Oakley brands, has returned to the helm of his group at the age of 80. Investors are watching to see how Mr Del Vecchio will play out his last hand in an industry that he in effect created as a younger man.
“We are at a moment in the industry when you have to do something unexpected. We are at a crossroads of technology and changes in consumer patterns of behaviour,” says Carlo Alberto Carnevale-Maffè, an expert on corporate change at Milan’s Bocconi University’s School of Management.
The main factor driving change is demographic shifts, especially in Asia.
Of the 7.3bn people in the world today, 63 per cent are considered to be in need of vision correction, but only 1.9bn have purchased glasses, contact lenses or surgery. More than 2.5bn are still in need, particularly in Asia, Africa and Latin America, according to industry data.
Meanwhile, the risks of damage from increasingly potent sunshine, UV and blue light are pushing sunglasses from being considered a “nice to have” item to a “must have” among emerging middle classes.
The longer-term outlook for the industry is “optimistic” with a compound annual growth rate of 2.5 per cent forecast for 2015 to 2020, says May Ling Tham, head of personal accessories and eyewear research at Euromonitor.
“We are even more convinced that eyecare is a fantastic business to be in as powerful drivers are likely to make richer an already rich industry,” write Citi analysts Mauro Baragiola and Thomas Chauvet.
The industry is also carving out a niche in the luxury products sector. Analysts estimate that annual sales of high-end sunglasses and spectacles — those priced at €200 and more — are worth €13bn and rising.
“Thanks to being linked to celebrities, eyewear products have been accepted as mainstream,” says Anna Cheng, eyewear industry analyst for Euromonitor.
Still, the current picture is not looking quite so pretty. Last year, overall industry sales fell 6 per cent as revenue was hit by currency fluctuations. Demand from Asia is ramping up, however, while the internet is also disrupting traditional retail networks. Consumers are buying more eyewear online, which has left the industry leaders on the back foot. And fashion groups such as Kering, the owner of Gucci, are “trying their hand” at building independent eyewear operations rather than licensing brands to traditional suppliers.
All these challenges are increasing the pressure on the sector leaders to do deals, say analysts and industry executives. “The industry is in flux,” says Luca Solca, analyst at Exane BNP Paribas.
At the epicentre of the ferment in the eyewear industry is its biggest personality, Mr Del Vecchio. Luxottica is the global leader with €7.7bn in sales and 78,000 employees. In addition to owning premium sunglasses brands — Ray-Ban and Oakley — the group also includes the Sunglass Hut retail chain and serves as the manufacturer for Armani, Prada and Chanel among many others.
Mr Del Vecchio has returned to the front line after seeing the departure of three chief executives in the past 18 months, including Andrea Guerra, Luxottica’s well-regarded chief executive of 10 years. Mr Del Vecchio is a lionised figure in Italian business, worth €20bn, who built his business after being orphaned and having spent his childhood partly in a poorhouse.
But his unexpected return has triggered a scattering of top executives beneath the C-suite and thrown into question the future of the group. Shares have dropped 20 per cent this year, even as Mr Del Vecchio has insisted the group is in “excellent hands”.
“I am not back to solve critical issues, but to fully seize new opportunities in retail, emerging markets, e-commerce and in our key brands such as Oakley and Ray-Ban,” said Mr Del Vecchio this month in a recorded speech to analysts. He said he will return to a non-executive role in a few years.
Luxottica insiders say the impression they have is that Mr Del Vecchio is back to do deals. He was the driving force behind the company’s transformative 1990s acquisitions of LensCrafters, Ray-Ban and Sunglass Hut. Luxottica this month said it plans to invest more than €1.5bn to revitalise and expand its business, a move that will, in the short term, hit its outlook for earnings growth.
Professor Carnevale-Maffe argues that it typically “takes an entrepreneur to make bold decisions”. But he notes that the return of Mr Del Vecchio, who distanced himself from management a decade ago, has reignited the “classic problem of an entrepreneur unable to detach himself from his creation”.
The potential megadeal that hangs over the sector would be a tie-up of Luxottica and Essilor, which has €5.7bn in sales and 58,000 staff. Analysts and bankers say a deal between two groups that each have a market capitalisation of about €23bn would create a company able to seize opportunities in both vision correction and sunglasses. A combination might also provide a natural successor to Mr Del Vecchio.
However, the two companies have been around the block before,
Essilor, led by French-Canadian chairman and chief executive Hubert Sagnierès, 60, approached Luxottica around three years ago to do a deal, according to insiders. The French group, which then was focused on healthcare, saw a combination as a way to get access to consumers. Luxottica saw little benefit and “closed the talks after a few months”, says one person familiar with the matter.
Today, Essilor is almost finished becoming a consumer-facing company. If a deal with Luxottica does not materialise, bankers and industry executives suggest Essilor could look to a smaller manufacturer such as Safilo, the Italian maker behind Polaroid and high-end eyewear maker for Céline, Dior and now Swatch.
If Essilor managed a buyout of Safilo, it would “be a game-changer for the industry”, says one industry insider, because it would put Essilor and Luxottica in direct competition.
Safilo is the industry’s third-largest player with €3bn in sales, increasingly squeezed between the titans, says Citi’s Mr Baragiola. But its chief executive, Luisa Delgado, a former head of P&G in the Nordics and a board member of Ikea, is representative of the new blood coming into the eyewear industry.
Since becoming chief executive in 2013, she has begun moving group manufacturing back from China to Padua in Italy as the company seeks to carve out an independent future as a high-end manufacturer.
In addition to producing expensive eyewear for designer brands, Ms Delgado is also pushing into the lower priced but rapidly growing “mass cool” segment. There, glasses usually retail for around €100 or less, putting them in reach of millennial spenders.
“It is like [clothing retailer] Zara, which had you buying maybe three pairs of trousers when you really only needed one,” she explains.
Ms Delgado says she is not in takeover talks, but adds: “We are constantly looking around like all companies to see something that is interesting, or not.”
If Safilo opts to be a buyer, analysts speculate that it could consider smaller manufacturers such as the US’s Marchon, or Italians De Rigo and Marcolin as possible targets.
The industry is also bracing for the impact of French luxury group Kering’s decision in 2014 to take back control of its eyewear business, including the Gucci brand. Kering has said it expects positive earnings contribution from 2017, although industry insiders say it will have a tough time building up manufacturing from scratch despite heavy investment.
Nonetheless, last month in Milan, Marco Bizzarri, chief executive of Gucci, the business mastermind behind the turnround of the “Double G” luxury brand, said at an industry event that the brand saw accessories such as jewellery and eyewear as a huge growth opportunity.
Watch this space.