LVMH could take in-house eyewear for its brands

Italian eyewear group Safilo may be about to suffer a new setback, after losing the Armani licence in 2013 and those for the Kering group labels (Gucci, Bottega Veneta, Saint Laurent and Alexander McQueen) at the end of 2014. This appears to be the thinking at Italian investment bank Mediobanca, in a report it published about the Italian eyewear group, owned by Dutch investment fund Hal. According to the report, LVMH may be about to follow in Kering’s footsteps, and internalise its entire eyewear business.

The report focuses on Safilo’s recent announcement of the termination of its licence agreement with Céline, and the extension of the contract with Christian Dior until 2020. The licence for Céline’s eyeglasses collections – the LVMH label joined Safilo’s portfolio in 2012 – will end on 31st December 2017.

The licence agreement for the design, production and distribution of eyeglasses and sunglasses for Dior and Dior Homme, also part of LVMH’s galaxy, has instead been extended until 31st December 2020. But Mediobanca underlined how the extension is for three years only, and not for seven years, as for the previous contract which was renewed in September 2010. The analysts also noted how a three-year contract is even shorter than the standard five-year renewable licence contract.

“We reckon that markets are much more volatile than in the past, and renegotiating contracts on a more frequent basis may be to the advantage of both parties. But we think this could also signal a change in LVMH’s approach, since the group has the financial strength to internalise the eyewear business, as Kering has done a few years ago,” wrote the bank in the report.

This would not be a new approach, since LVMH has been managing the eyewear collections for its leading brand, Louis Vuitton, internally for some years. The model will not be easy to introduce, as it means incorporating the eyewear business within the group in lieu of using a classic licensing approach, but it would respond to the need for having an ever-tighter control on the brand’s values, a crucial factor in an increasingly complex, tough market environment.

According to Mediobanca estimates, sales for Céline and Dior eyeglasses collections are worth respectively €40 million and €200 million, and to these we must add the sales for the eyewear lines for Marc Jacobs, Fendi and Givenchy, all licensed to Safilo. Altogether, LVMH brands are worth €350 million in annual revenue for the eyewear group, equivalent to nearly 30% of its total revenue, which according to Mediobanca is €1.2 billion.

“Estimating operating margin at 7.5%, we reckon that a strategic decision by LVMH to internalise its eyewear business would put at risk nearly €26 million worth of EBITDA between now and 2024,” stated the report, which also highlighted “the Safilo portfolio’s marked reliance on one single client, and the weakness of its own brands.”  Last year, Safilo indicated it wants to increase its own brands’ share of the business, among others of Polaroid, Carrera and Smith, growing it to 40% compared to 25% in 2014. According to Mediobanca, it is an objective that will be hard to reach, “making Safilo’s business vulnerable with respect to any structural change in the eyewear industry,” concluded the analysts.

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