Assessing Kering’s ‘Eyewear Revolution’

PARIS, France — The practice of licensing out fragrance, beauty and eyewear has long been the dominant strategy for most big fashion brands. Indeed, the specialist nature of distributing these categories often meant that luxury groups were more than happy for licensing companies to take the problem off their hands. Yet, for decades, luxury houses have been steadily buying back certain licenses in order to protect their brands and seize emerging business opportunities.

In the decades before Bernard Arnault purchased the house of Dior in 1984, Mr Dior's enthusiastic licensing of his name for products ranging from nighties to sunglasses had cheapened the brand. As part of his consolidation of LVMH, in the 1990s, Arnault bought back 350 of Dior's licenses, including fragrance, bringing them under the company's direct control and safeguarding the brand from future misuse. Similarly, Saint Laurent has been on a buyback spree for over a decade, taking back 160 licenses as part of a plan to reposition itself at the high end of the luxury spectrum.

In October 2012, Burberry announced that it would end its 20-year-old beauty license with Interparfums and brought its beauty business in-house, taking full control of the category in April 2013. Eyewear, however, remained largely in the hands of eyewear licensing companies like Luxottica, Safilo Group, Marchon and Marcolin, which have long produced and licensed eyewear for brands like Chanel, Prada, Calvin Klein and Gucci — until now.

In September, Kering signed a deal to terminate its licensing agreement with Safilo and bring Gucci's eyewear business in-house, creating a new division called Kering Eyewear, helmed by Roberto Vedovetto, former CEO of Safilo. In a recent report published by Exane BNP Paribas, the move was described as nothing less than an "eyewear revolution."

Diminished desirability has been a recent concern for major luxury groups, as demand in critical emerging markets like China continues to drop, in part due to overexposure. Licensed products are particularly prone to this risk. “The ubiquitous distribution typical of most license contracts adds to brand trivialisation risk,” says the report. Conversely, by taking their eyewear business in-house, Kering have the chance to “maintain desirability through perceived exclusivity,” reining in the number of retail points for its eyewear and better aligning them with overall brand strategy.

Furthermore, by bringing eyewear in-house, Kering will be able to increase direct sales, which will provide "a significant boost to the top line," according to the report. It will also give the company the opportunity to serve aspirational consumers who are "closed out" from core categories like apparel at a brand like Gucci. The 'accessible luxury' consumer has been a wellspring of growth for brands like Michael Kors and Tory Burch, led primarily by accessories sales. Taking control of eyewear will give Kering the opportunity to develop and expand its relationship with this segment.

However, while there is ample evidence that the decision to take eyewear in-house has sound strategic value, there are, nonetheless, significant costs and risks attached to Kering’s new eyewear venture.

“Kering is moving into uncharted territory,” said Luca Solca, head of luxury goods at Exane BNP Paribas and one of the authors of the report. “Our analysis shows that this will pay off, only if Kering can substantially grow its eyewear business beyond what Safilo was doing under license.”

According to the report, there are two key elements of risk. First, there are the substantial costs Kering must pay to take ownership of eyewear. The group will have to not only pay Safilo €90 million (about $112 million) to terminate its license two years early and give up €50 million (about $60 million) per year in royalty income, but also invest a significant sum to get its new eyewear division off the ground. Second, there is the knotty problem of distribution. “As large as Kering's eyewear business is, Kering will end up having sub-scale operations against specialist players like Luxottica. This could be a problem particularly in distribution, limiting Kering Eyewear's reach,” says the report.

“Building scale is important for Kering as it will operate at a commercial and distribution cost disadvantage versus Safilo,” added Solca. “The major challenge in eyewear is to serve a very fragmented customer base — reaching it with sales and logistics is expensive and demands local scale.”

In a move sure to mitigate the necessary growing pains of this new venture, Kering has hired Roberto Vedovetto, former CEO of Safilo, to head up its nascent eyewear division. His depth of specialist experience and extensive network of industry-specific contacts should make him a safe pair of hands to navigate the transition, said Solca.

Clearly, Kering’s decision places Safilo at a significant disadvantage. “The decision by Kering may put other brands in the Safilo portfolio under pressure,” said Solca. “Without the Kering business, Safilo becomes a more fragile business — with significantly smaller scale and means.Other Safilo licensors will need to consider if or how to operate with it in the future.”

Indeed, if things go well for Kering Eyewear, other luxury brands may consider aping their move, but “only once it is clear that Kering is indeed succeeding with its independent eyewear foray,” added Solca. “As this is not a ‘slam dunk,’ I would anticipate Luxottica’s licensors [such as Prada, Armani, Dolce & Gabbana] will very likely stay put for the time being.”