By and  on September 2, 2014

PARIS — Are brand stewards starting to look beyond the classic eyewear license?

Spying “significant” growth potential for frames and sunglasses in the luxury and sport segments, Kering plans to take back control of its eyewear business, allowing it to squeeze extra margin in a promising product universe.

The French group said Tuesday it would “evolve” its 20-year partnership with Italian manufacturer Safilo Group SpA, terminating the current license for the cash-cow Gucci brand at the end of 2016, two years earlier than planned, in exchange for compensation of 90 million euros, or $118.2 million at current exchange, to be paid in three installments.

Kering said it plans to take advantage of Safilo’s “expertise and production capabilities” for Gucci via a product partnership for four years starting in 2017, renewable after that.

This “new business model” is to allow Kering to “fully control the eyewear value chain, from design to product development and supply chain, and from branding and marketing to sales,” the company said.

The development turns on its head the usual practice of licensing eyewear to a manufacturing and distribution specialist, and comes against a backdrop of turbulence in the segment in Italy, with a changing of the guard earlier this week at Luxottica Group SpA.

Kering hinted at a big project in the eyewear space in November 2013 when it tapped Roberto Vedovotto, formerly chief executive officer at Safilo, to review the luxury group’s eyewear strategy across all brands. On Tuesday, the company said Vedovotto would become ceo of Kering Eyewear, and that he and his team would become co-shareholders of this new entity.

Financial terms and the size of Kering’s stake in the new business were not disclosed.

Vedovotto characterized eyewear as a “strategic” category for Kering brands, and this “innovative project” would help them “fulfill their full growth potential.”

Kering said the new setup would give it full control over external manufacturers, while ramping up distribution in its own store network.

The French conglomerate controlled by the Pinault family joins a select cache of luxury brands that operate eyewear in-house, with Louis Vuitton and Cartier among the few to control production, and Vuitton limiting distribution to within its own store network.

At Kering, design, product development and sales are to be handled internally, with the design process controlled by each brand’s respective creative director, the company noted.

At present, its Saint Laurent, Bottega Veneta, Alexander McQueen and McQ brands have licensing pacts with Safilo. Eleven of the group’s brands are active in the eyewear category, nine via licensing agreements with five different partners, generating royalty revenues of about 50 million euros, or $65.6 million.

Kering bills itself as one of the top five players in the premium high-end segment, with business of about 350 million euros, or $459.6 million, suggesting it currently receives royalties, and contributions for advertising, of about 14.3 percent of sales.

The French group pegs global growth in the segment at double digits.

The company hinted that it would gradually bring all brands under the Kering Eyewear umbrella, but did not elaborate on plans for individual labels. Its stable of names includes Puma, Volcom, Boucheron, Stella McCartney, Christopher Kane and Volcom.

It is understood Kering also holds eyewear agreements with Marcolin, Luxottica, Gold & Wood and Charmant.

Safilo was sanguine about the new twist in its business relationship.

“We are satisfied with furthering our partnership in a way that leverages the heart of Safilo’s strengths in eyewear product excellence,” said Luisa Delgado, ceo of Safilo Group, which celebrates its 80th anniversary this year. “We have a unique tradition in the market as strategic partner for those brands that consider eyewear a strategic category. Through this agreement we confirm our capabilities as trusted partner.”

A Safilo spokeswoman said the deal further accents the Italian company’s expertise and specific know-how, which is “what makes the difference in the path from a design to a product.”

A well-placed source said Safilo’s management feels covered from an economic point of view: “The [90 million euro] compensation and the combination of sales in addition to the reduction of costs contribute to a sense of protection for the future, also in light of an agreement that will last until 2020, and that can be further extended.”

Asked if Kering’s strategy could be replicated by other groups and affect the eyewear market, a Safilo spokeswoman said there is an increasing market demand for the company’s “fully integrated capabilities of unique quality and trust in eyewear design and product creation, manufacturing and logistics, as well as worldwide distribution in 130 countries across all channels. The brand builders who seek us out consider eyewear as a strategic category of sophisticated craftsmanship and commercial channel breadth.

“What we see is changing is perhaps the type of brands that are looking for an expansion in eyewear. They tend to represent new consumer segments, and also new geographies, with new growth potential,” she added.

Safilo did not break out sales derived by the brands under the Kering group.

The company, which produces prescription and sunglass frames for licensed brands including Fendi, Dior, Jimmy Choo and Marc Jacobs, as well as for own brands including Safilo, Carrera and Polaroid, in July reported that adjusted net profit in the first half of the year jumped 23 percent to 31.5 million euros, or $43.2 million, on the back of strong sales, especially in the second quarter, and a big drop in net financial expenses. In the period, the firm recorded an increase of 1.3 percent in sales to 606.3 million euros, or $830.6 million, boosted by consumer demand in the company’s leading European market, where turnover increased by 5.8 percent. Europe represented almost 43 percent of group net sales in the January to June period.

Another Italian eyewear powerhouse, Marcolin Group, which produces for brands including Tom Ford and Roberto Cavalli, has been investing in an international expansion, especially targeting the American market and developing the middle segment of the market through the acquisition of Viva International, and the production and distribution of some of the most popular eyewear labels in the American market, including Gant, Timberland, Cover Girl, Skechers and Guess.

Analysts were intrigued by Tuesday’s development.

Luca Solca, head of luxury goods at Exane BNP Paribas, said if Kering’s gamble pays off, it could spell trouble for other eyewear manufacturers down the road.

“But I have serious doubt this will in the end work for Kering to produce an overall higher amount of profit in absolute euro terms,” he said. “The challenge for Kering is to service a customer base that has no overlap with its own. Sales, marketing, after-sales service — all of these would be new areas for Kering to be familiar with, and without the know-how and scale of a specialist eyewear manufacturer.”

Antoine Belge, analyst at HSBC in Paris, agreed that “building a sales force able to visit hundreds of points of sale from scratch will be costly.”

He predicted some brands would try to emulate Kering, “but not all as Luxottica is doing a very good job.” He noted that the licensed business accounts for less than 15 percent of Luxottica’s total earnings before interest and taxes, Oakley being twice as profitable as Prada for Luxottica due to the absence of royalties.

Luxottica produces under license for firms including the Giorgio Armani Group, Bulgari, Burberry, Chanel, Coach, Prada and Versace, and controls its own brands including Ray-Ban and Persol.

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