2007 was another record year for Luxottica, the fourth year running in which Group sales saw double-digit growth at constant exchange rates. We hit our Euro 5 billion sales target, achieving a 12.5% growth in sales at constant rates, which was close to our exceptional performance in 2006, when sales were up 14.0% over the previous year.
Even without taking Oakley into account, the wholesale division saw 20.2% growth in sales at constant rates in 2007, with sales of around Euro 2 billion, reflecting the excellent work done on the brand portfolio in the last few years. Sales to third party clients (a particularly good indicator of business performance) grew 21.7% at constant rates. Ray-Ban’s total sales grew by double digits for the fifth consecutive year and excellent results were likewise recorded by the luxury brands, including Bvlgari, Chanel, Dolce & Gabbana, Prada and Versace. Geographically, Luxottica continued to strengthen its presence worldwide. Revenues from the wholesale business in emerging markets were up 41.6%, making this market a priority for expansion.
Retail results, again excluding Oakley’s contribution, were satisfactory, with growth of 5.6% in sales at constant rates and an increase in sales of 1.1% (on comparable stores, exchange rates and consolidation area basis) despite the ups and downs of a North American market reacting to fears of recession. In all its other markets, Luxottica recorded excellent results, especially in its retail business in Australia and China. Sunglass Hut continued to grow in all its markets: over the last three years it has posted growth of 40% on comparable stores, exchange rates and consolidation area basis.
The overall business performance in North America, excluding Oakley, was positive throughout the year, with total sales (wholesale and retail) up 6.1% (in US$) on the previous year.
In 2007, Luxottica Group acquired Oakley for US$ 2.1 billion. The acquisition provides an incredible opportunity for the Group.
The agreement will integrate two strong and complementary business models. It will strengthen the Group’s portfolio of house and license brands and provide Oakley with a global distribution platform for its products. Oakley is a strong and innovative brand, a world leader in sport, technology and lifestyle, and has great growth potential in various market segments.
A new Group with extraordinary potential has thus come into being: aggregate pro forma net sales for 2007 was approximately Euro 5.5 billion, and pro forma EBITDA was approximately Euro 1.2 billion. Luxottica Group expects the Oakley acquisition to yield synergies worth approximately Euro 100 million over the next three years deriving from increased sales and enhanced operating efficiency.
Luxottica Group’s distribution structure is one of the most extensive and effective in the industry, embracing retail stores and serving third party independent stores and chains through a wholesale distribution network. This robust distribution and unique structure, one of the Group’s greatest competitive advantages, is the result of a fundamental strategic insight that Luxottica’s founder and current chairman had years ago: increasing control over distribution was key to the future growth. Originally established as a manufacturer of single eyewear components and then finished frames, Luxottica Group gradually integrated wholesale distribution into its structure and since 1995, retail distribution as well. Today, it operates in all the world’s key wholesale and retail eyewear markets and continues to expand in emerging markets.
From a retail perspective, the Group operates mainly in North America, Asia-Pacific, the UK, the Middle East and South Africa, thus ensuring optimum distribution in the world’s key markets. Luxottica controls a total of over 6,400 stores mainly in the United States, Canada, Australasia, China, and the Middle East. In Europe, there are around 90 Sunglass Hut stores, mostly in the UK.
The Group’s wholesale distribution network covers more than 130 countries, with directly controlled operations in its key 44 markets, where clients are mostly retailers of mid- to premiumprice eyewear, such as independent opticians, optical retail brands, specialty sun retailers and duty-free shops. In North America and other areas, key clients also include independent optometrists and ophthalmologists and premium department stores. Direct distribution in the key markets gives Luxottica Group a considerable competitive edge, making it possible to maintain close contact with clients, maximize the image and visibility of the Group’s brands and optimize distribution.
In addition to making some of the best brands, with a broad array of models tailored to the needs of each market, Luxottica also provides its wholesale clients with the assistance and services needed to enable their business to be successful.
One of Luxottica Group’s main strengths is its ability to offer pre- and post-sale services which have been developed and continuously improved over decades. These high-quality services are designed to provide customers with the best product and in a timeframe and manner that most enhance their value. The distribution system is connected at the international level to a central production planning function through a network linking logistics and sales functions and outlets to the manufacturing plants in Italy and China. Through this network, global sales and inventory are monitored daily and, based on the information from the market, production resources and inventory levels are adjusted. This integrated logistics system is one of the most efficient and fastest in the industry. In Asia, Europe and the United States, centralized distribution centers have over the years significantly improved distribution speed and efficiency. Luxottica Group is thus able to provide its clients with a highly automated system for order management that reduces delivery times and minimizes inventory, while providing high-quality products.
Luxottica Group’s retail division includes:
In 2007, the retail division, excluding Oakley, saw a slight (1.8%) contraction in its revenues to Euro 3.2 million, mainly due to the unfavorable trend in the Euro/Dollar exchange rate. On a comparable exchange rate basis, revenues would have grown 5.6%. Further, on a comparable number of stores, exchange rate and consolidation area basis, and including Oakley, sales increased by 1.2% despite the ups and downs in the North American market. In Australia and China, two major markets for the Group, sales were stable. Sunglass Hut continued to develop in all the countries in which it operates: over the last three years it has recorded 40% growth on comparable stores, exchange rates and consolidation area basis. Operating income in the retail business (excluding Oakley) amounted to Euro 362 million, down 16.2% from the previous year, while its ratio to sales (operating margin) was 11.2%. In 2007, the Group’s retail business benefited from its major investment plan, mainly focused on point of sale, which laid the foundation for future growth. Around 700 stores were totally renovated and 581 new points of sale were added (413 from new openings and 597 from acquisitions, Oakley retail chains included).
The acquisition of Shoppers Optical, one of Canada’s largest optical chains with 74 stores, improved the Group’s presence in this important market, making Luxottica the main player in the Canadian retail prescription market segment as well as the only one with nationwide coverage. The Shoppers Optical stores, located in eight provinces, were converted to Pearle Vision to exploit in Canada the strength and business model of an optical retail brand long established in the United States.
In general, Luxottica Group further improved the balance and organization of its operations in the North American market and continued to innovate. It now controls the two top retail prescription chains (LensCrafters and Pearle Vision), it is the no. 1 operator of optical stores under license (Licensed Brands) and recently launched ILORI, the new label with which the Group officially entered the top end of the luxury market in response to the current trend in North America. This new development began with the opening of the first flagship store in SoHo (NY), followed by openings in San Francisco, Beverly Hills (LA), Chicago and other major US cities in the second half of 2007. Luxottica plans to reach a total of 150 stores in North America in the next three years.
Luxottica Group also has eight central lens finishing labs that are of strategic importance to its North American retail business as well as EyeMed Vision Care, a leading administrator of managed vision care programs for corporations, government agencies and health insurance providers in the United States.In the sun segment, Sunglass Hut is the largest and best known chain in North America with 1,600 stores.
With its organization structure, Luxottica Group is able to quickly respond to market opportunities and especially in the United States, where demand for fashion and luxury has grown out of cities like New York, Miami and Los Angeles to become a nationwide cultural phenomenon.
In Asia-Pacific, the Group continued to strengthen its retail operations and consolidate its
leadership in the region. Luxottica worked on the integration of its direct distribution network in
Australia and New Zealand, which now operates three brands in the prescription segment: OPSM,
Laubman & Pank and Budget Eyewear. At the end of 2007, Luxottica’s retail network in the region
numbered 910 stores (551 for the prescription business and 359 for the sun segment).
In China and Hong Kong, Luxottica Group’s organization is already well structured and fully
operational. The next steps will be to boost the visibility of the distribution network and product
brands, thus consolidating the Group’s presence in the country, which is of long-term strategic
importance. The product offering will gradually be tailored to the evolution of the Chinese middle
classes, who tend to favor well established fashion brands.
Twelve years after joining Luxottica Group, LensCrafters now spans two continents with significant presence in the United States, Canada, China and HongKong. It is North America’s leading operator in the fashion eyewear segment, with 951 stores in the United States and Canada, and by the end of 2007, 140 stores were operating under the LensCrafters brand in China and Hong Kong.
Nord America
In 2007, despite the slowdown in the economy in North America and a perceptible shift in the role of managed vision care affecting consumer choices in the North American optical category, the total comparable store sales increased for the year. 2007 was a very positive year due in part to heavy investments enabling LensCrafters to capitalize on favorable trends in the North American market but also on its internal potential, on which future development will focus.
LensCrafters continued in 2007 to roll out the new fashion store design that debuted in 2006. At the year end, there were 140 LensCrafters stores featuring the sleek and inviting new look. Comparable store sales in locations with the new design continue to outpace the rest of the chain by 3% in their first year after re-model. The new format, characterized by refined, exclusive looking interiors and a high degree of product personalization, openly addresses customers with sophisticated tastes who are very demanding in terms of quality of service (a clientele that is becoming increasingly important as a result of LensCrafters advertising campaigns targeting the American consumer). For example, the new store concept was forcefully backed by the “Make an Appearance” campaign.
Very positive performance was also recorded by stores that hadn’t undergone restyling but
continued to benefit from development initiatives undertaken in the past.
While the new store design and positioning make LensCrafters the destination for top eyewear
collections from designers such as Burberry, Dolce & Gabbana, Polo Ralph Lauren, Prada, and
Versace. LensCrafters also broadened its selection of conservative and classic frames and Oakley
products to meet male customer demand.
Sales of prescription frames and sunglasses produced by Luxottica Group, particularly its fashion and luxury brands, accounted for around 57% of total LensCrafters sales in 2007, up 9% over the prior year. In 2008, LensCrafters looks forward to introducing customers tth important new brand Tiffany & Co., and a full line of Oakley prescription and sun products.
Lenses are another important dimension of LensCrafters offering and expertise. Sales of Anti- Reflective lenses continued to grow at 13% in 2007, fueled by an 18% increase in sales of LensCrafters premium AR lenses and FeatherWates Complete? lenses made with Scotchgard? Protector. In 2007, LensCrafters introduced the Advanced View Progressive? lens, a new type of progressive lens that allows a more natural transition between near and far distances. With new, state-of-the-art digital surfacing technology, this lens is providing a very welcome development for customers used to standard progressive lenses.
In addition to its offerings of fashion products and high technology in lenses, LensCrafters launched a pilot program aimed at setting a new standard in the industry and transforming eyeglass shopping into a positive experience for all customers. The program generated significant growth in sales, traffic and conversion of customers notwithstanding the weak economy situation. The program will be extended to many other stores in the network in 2008.
LensCrafters also embarked on a new marketing mission in 2007 to “shatter perceptions” commonly held of optical eyewear and LensCrafters itself. In April 2007, the brand launched a campaign entitled “Open Your Eyes” centering on the concept of never underestimating the importance of having good sight. The long-term objective is to change customers’ attitudes to optical eyewear and the personalized service that LensCrafters provides to ignite their personal style.
Alongside the TV and magazine campaign, the marketing program targeted customers with high profile fashion media. One such initiative was the sponsorship of a special issue of TIME Style & Design magazine, in which LensCrafters was the sole advertiser with more than 20 “Open Your Eyes” ads. In addition, LensCrafters completed its third consecutive sponsorship of Conde Nast Magazine Group’s “Fashion Rocks” during New York’s Fall Fashion Week.
Also in 2007, the new Lenscrafters.com web site complemented the new store concept. The new site now accelerates the path to eyewear purchase, while reflecting a more fashion-oriented look and knowledge of eyewear trends. The site now features the entire product range and puts new emphasis on LensCrafters service and expertise. The site experienced a 27% increase in average monthly site visitors and a 35% increase in time spent on the site. Also very successful is the new feature of booking eye exams on-line, with nearly 100,000 exams booked in its first year.
China and Hong Kong
In China and Hong Kong, 2006 was a year of re-organization and extension of the retail network following the acquisition of the Xueliang Optical, Ming Long Optical and Modern Sight Optics chains (around 270 stores in all). With the opening in September 2007 of LensCrafters’ new flagship store in Beijing’s Oriental Plaza, an icon of fashion and shopping, Luxottica took the first step towards making the LensCrafters brand a synonym for prestige eyewear in China. LensCrafters in fact offers the best of “Made in Italy” eyewear, an extraordinary level of customer service and the most advanced technology in the industry, thus positioning itself as the first real eyewear “boutique” in the Chinese market and serving as a benchmark for premium eyewear products. LensCrafters is the first chain in China to guarantee its products for 30 days from the date of purchase. Further, thanks to specialist personnel, LensCrafters stores are now seen as a valid alternative to hospitals, which used to be the only trusted venue for eye-exams. LensCrafters will be launching a major initiative in 2008 to differentiate itself from all other optical chains.
In 2007, a total of 85 stores were re-branded to LensCrafters bringing the LensCrafters network to 140 stores in China and Hong Kong.
In addition to a 15.7% increase in sales on comparable basis, 2007 saw both a higher average selling price and an increasing number of customers. As a premium optical retailer, LensCrafters’ positioning has become a more attractive option versus traditional optical retailers. High levels of service, eye-care programs, lenses and brands will be key to long-term growth in this region.
The optical segment will continue to grow in step with the offering of fashion brands and products,
introducing brands tailored to the demographic profile of the areas served. The sun segment is
another business opportunity as increasing numbers of Chinese view sunglasses as part of their daily
wardrobe, being increasingly fashion conscious and aware of health issues, especially theyouth.
Store performance was particularly strong in Hong Kong, where all stores have been converted to the
LensCrafters’ brand. The Group’s premium brands, the high profile of its stores and its high level of
service quality have been a great success, as reflected by its growing market share in Hong Kong.
Part of the Group since 2004 through the Cole National transaction, 2007 was for Pearle Vision the year of the re-launch. Its network consists of 880 stores (40 up vs. 2006), of which 477 are company owned in the United States, Canada and Puerto Rico, and 403 are franchise stores in the US and the Caribbean.
In North America, Pearle Vision is the number two optical chain after LensCrafters. Although both brands address the mid- to high-end customer bracket, their positioning in practice is complementary. Pearle Vision focuses on the factors that made the brand a success: customers having trust in the medical expertise and quality of service.
The powerful relaunching of the Pearle Vision brand by Luxottica was centered on a return to its original values, which had made Pearle Vision a byword for generations of Americans, their “Home of Trusted Eyecare.”
After a long period of positive comparable store sales results and a significant and structurally solid return to profitability, Pearle Vision is producing the desired results. A product mix increasingly geared to premium, high value added products has helped restore strong customer relationships, as have doctor and optometrist involvement and training initiatives and advertising campaigns (including TV).
At the same time, a drastic reduction in promotions helped improve the positioning of the stores and consumers perception, resulting in improved quality and profitability. Sales of Luxottica products enjoyed strong growth. Ray-Ban, Prada, Brooks Brothers and Versace were some of the better selling brands.
Lastly, to centralize services and achieve economies of scale, all in-store labs were closed and their work transferred to the eight large central lens finishing facilities serving all the Group’s retail business in America.
Canada is also a market with huge retail potential. Here the Group had already acquired Shoppers Optical, a 74 store chainthat, given its good positioning and favorable geographical distribution, was rebranded to Pearle Vision.
A similar operation was carried out in 2005 when Precision Optical was acquired. The total number
of Pearle Vision branded stores in Canada has now reached 98.
Luxottica is increasingly becoming the preferred supplier to the Pearle Vision franchisees, not only
due to the strength of its brands and the quality of its products but also because of the new and
much improved services of the Franchise Advantage Program. This program features marketing
solutions, and savings on selected categories of products (lenses, lab services, contact lenses,
accessories), all with a high level of service and merchandising support.
Luxottica Group is the leading operator of licensed brand stores in the United States and Canada,
with a network, at the end of 2007, of 1,338 locations in Sears, Target and BJ’s Wholesale.
Each of these brands offer consumers the convenience of taking care of their optical needs where
they shop and has a precise market positioning. Sears, a department store with a vast and
heterogeneous customer base, has further improved the services that were launched in 2005. Ray-
Ban, in particular, was introduced in all 886 stores. In general, sales growth in Sears Optical stores
was higher than that of Sears’ total sales.
In 2007, Target Optical, which appeals to fashion-minded customers, reported improved sales
performance in its 296 Target stores, which operate in America’s big cities. Efforts were focused on
improving service and consulting by the sales personnel (new “take it and try it” sales method) as
well as strengthening its fashion positioning by offering brands such as Vogue and Ray-Ban.
The license with BJ’s Wholesale terminated effective March 2008 since the brand was no longer in
line with Luxotttica Group’s licensing strategy.
In Australia and New Zealand, Luxottica Group operates three specialist prescription brands: OPSM, Australia’s top eyewear brand for luxury and fashion-minded customers, Laubman & Pank, provider of high quality eyecare and services, and Budget Eyewear, focused on price-conscious consumers. The three brands operate in all of Australia’s states, (especially in cities), while OPSM operates in key areas of New Zealand as well. At the end of 2007, Luxottica Group retail prescription stores were 511 in Australia and 40 in New Zealand.
Results in 2007 were very positive (sales up 6.3%) due to a brand positioning strategy, a product assortment geared to the fashion segment, an innovative store format (the Accelerated Fashion program highlighted its fashion positioning) and personnel training. Luxottica Group consolidated its leadership in the Australian market through organic growth and acquisitions, even though the retail market was not particularlystrong.
In the prescription segment, the objective was to differentiate the positioning of the three brands in order to cover complementary market segments with product offerings catering to the needs of different consumer categories. In 2007, consumer communication was stepped up thanks to a Customer Relationship Management program. Improved understanding of customers and initiatives helping consumers perceive eyewear as fashion accessories helped OPSM achieve a significant increase in sales and consolidate its position as the best known brand on the market.
Laubman & Pank’s reputation with Australian customers as an optical fashion brand was further
strengthened as promotional programs clearly positioned the brand as a national chain. Research
showed that the brand was perceived as having a special focus on eye health, thanks to a series
of initiatives, including TV campaigns and the Lauby’s EyeMobile national screening program,
which conducted eye tests for 9,000 kids in 2006. The brand also launched a new channel to
market by launching four concession stores in major Australian department store chains.
Budget Eyewear managed to extend its product offering while remaining the preferred destination
for those wanting quality eyewear at lower prices.
Sunglass Hut is the world’s largest and most important specialty sun retailer, with 2,003 stores (1,600 in North America, 219 in Australia, New Zealand and Singapore, 87 in Europe. In addition to the 23 stores in Middle East, Sunglass Hut opened in 2007 six stores in Hong Kong, and has now a national presence, thanks acquisitions made, in South Africa, with 67 stores currently being rebranded. In the eyes of consumers, Sunglass Hut increasingly represents fashion and the latest trends. Founded in 1971, initially only inside department stores in the United States, Sunglass Hut has cultivated a young, active and fashion-conscious image. It is now the leader in the high-end sun retail market.
While 2006 saw the completion of the brand repositioning process, 2007 was characterized by the
ongoing conversion of stores to a new format, the aim being to further refine Sunglass Hut’s image for
fashion conscious consumers. Thanks to this gradual move up-market and increasing appeal to
fashion-conscious women, sales have risen 40% over the last three years on a comparable store
basis.
In the United States, Sunglass Hut further expanded with 199 new store openings and a restyling
of another 249, mainly in the key states of California, Florida, Texas and New York. Fashion
products were popular, driven mainly by oversized designer sunglasses and by the launch of new
brands: Dolce & Gabbana in 300 stores and D&G in 1,300 stores.
In Australia and New Zealand, Sunglass Hut strengthened its positioning and secured a number of stores at major airports. Its market presence in the fashion and luxury segment grew, with the largest increase in the luxury brands. Brand awareness improved significantly, especially amongst women in the 25- to- 39 age bracket.
In Europe, Sunglass Hut has nearly 90 stores, mostly in the UK and notably in the country’s major airports. In 2007, it continued with its brand repositioning process by rolling out the new store design, improving product mix, stepping up personnel training and cultivating the image of a truly customer-focused retailer. Such efforts attracted more fashion conscious customers and fueled sales of premium and luxury products of special appeal to women. Further improvements will be made in 2008 with a focus on airports; for example, a new store will open in Heathrow’s Terminal 5. A strong brand campaign to consolidate Sunglass Hut’s focus on the consumer will be launched in 2008.
Luxottica Group manages one of the largest networks of optical manufacturing labs in North
America, with eight central labs and close to 905 lens finishing labs, mainly in LensCrafters stores.
All the labs use state-of-the-art processing technologies to meet growing demand, accommodate
new products and maintain a constant focus on quality and customer service.
Two laboratories with less advanced technology were closed and replaced by one state-of-the-art
lab in Columbus, Ohio. The eight central labs now serve all the Pearle Vision stores, which no
longer have in-store lens-finishing facilities as well as the Licensed Brands and some franchisees.
The labs in LensCrafters stores were upgraded to serve over-flow from both Sears Optical points of
sale and Pearle Vision stores. LensCrafters in-store labs can prepare glasses chosen by the
customer in as little as an hour.
EyeMed Vision Care is the second biggest managed vision care operator in the United States. With a strong surge of new clients in 2007, the renewal of important agreements and the contribution of Cole Managed Vision contracts, it now serves over 23 million subscribers in large and medium size companies, public administrations and insurance programs and has a network of over 17,000 points of sale including opticians, ophthalmologists, optometrists and stores in chains operated by Luxottica Group.
EyeMed Vision Care is also a recognized leader in terms of quality, choice, value for money and service excellence - all priority concerns for managers shopping for vision care programs, especially for large groups.
Clients using such services enjoy a vast choice amongst the numerous stores in the Group’s chains and independent optical retailer network.
In 2007, the wholesale division’s sales, excluding Oakley, reached Euro 1,993 million, up 16.2% from 2006. At constant exchange rates, growth would have been 20.2%, due to excellent work on the brand portfolio. Operating income from wholesale business rose 18.4% from the previous year to reach Euro 528 million, with a ratio to sales of 26.5% (26.0% in 2006). Sales to third party clients grew 21.7% on constant exchange rate basis. Sales by the wholesale business in emerging markets rose 41.6%, indicating a key area for futuregrowth.
Geographically, the wholesale business continued to grow at above market average rates in most countries where the Group operates. In Europe, which is the most important market for this division, Luxottica Group continued to gain ground in every country.
It saw significant growth in the United States thanks to both restructuring efforts and the growing
trend towards fashion eyewear, especially in the sun segment.
In Asia, growth was constant and substantial, confirming the Group’s leading position in Japan,
Korea and Hong Kong.
In emerging markets, wholesale sales rose 41.6% indicating another area for future expansion. Strong growth was primarily due to the fashion and luxury brands, particularly in the sun segment, in line with emerging markets’ growing demand for luxury products, as well as to marketing efforts. Overall, Luxottica Group’s wholesale division retained its leading position in the premium and luxury segments in 2007, thanks to one of the strongest and most balanced brand portfolios in the industry.
Both house and licensed brands posted excellent results. Total sales by Ray-Ban, the world’s best known eyewear brand, were double digits up for the fifth consecutive year of increased sales. Positive results were recorded by the other house brands as well, especially Vogue, Arnette, Persol and Revo, which all achieved their growth targets.
The Group’s luxury brands grew as well. The first Burberry collections, launched in September 2006, were very well received by the market, especially in Europe. This was an early endorsement of the ten-year licensing agreement with one of the most dynamic and exclusive luxury brands.
At the end of 2006, Luxottica Group entered a ten-year licensing agreement for the design, production and exclusive worldwide distribution of Tiffany & Co.’s prescription and sun collections. This new agreement, marking Tiffany’s debut in the eyewear market, is also significant in being yet another addition to the impressive list of long-term partnerships the Group has entered or renewed in recent years. The duration of these agreements, at least ten years on average, allows the Group time to develop collections and position them effectively on the market, thus maximizing their potential, each in line with its particular brand values.
The launch of the Polo Ralph Lauren and Tiffany’s collections in 2007 made the brand portfolio even stronger and more well balanced, encompassing the most diverse of consumer tastes and tendencies while continuing to attract more and more other prestige luxury and fashion labels.
In 2007, Luxottica Group continued to extend its global organization and add people to its teams in the key countries in which it operates (United States, Mexico, Brazil, Italy, Greece, The Netherlands, Russia, India, Australia, Japan, Spain, France, Germany and the UK), thus moving its structures closer to the key markets. The Group improved its sales planning and applied selective distribution, using the approach adopted by the luxury brands.
Improvements were made to the structure serving emerging markets, which has already moved quickly to exploit the strong growth prospects in this region.
The wholesale division also improved its coverage of Eastern European markets. Offices opened in Russia and Hungary now cover four fifths of this region. Similarly, the Group opened an office in China to ensure a more efficient monitoring of the market and control over distribution. Direct distribution was initiated in the important South Korean market.
Healthy demand for eyewear in international markets in 2007 led the Group to maintain its policy of operating two production centers. Italy and China are the two countries in which Luxottica Group’s production facilities are concentrated.
Having its origins in northeast Italy, the world’s largest center for eyewear manufacturing, Luxottica Group has produced prescription frames and sunglasses for over 40 years, controlling every phase of the production process, from raw materials procurement to manufacturing of finished frames. Its manufacturing process is the product of decades of careful honing, along a path of constant research and development. The drive to achieve maximum efficiency and improve quality was kept up throughout 2007.
In 2007, investments in manufacturing, from materials and machinery to design and programming, totaled Euro 70 million approximately, reflecting the Group’s purpose to keep its manufacturing platform one of the most efficient, flexible and creative in the industry.
In 2007, the Group focused on the following priorities:
Growing demand in 2007 led the Group to step up last year’s already high levels of capacity. The Italian plants turned out 1.25 million pieces more than in 2006. This increase in production entailed the hiring of around 1,120 people directly by Luxottica S.r.l.
At the same time, extensions were made to facilities at Agordo and Rovereto (not completed yet), new production lines were installed and the new paint shop at Pederobba was enlarged.
The Italian plants continued to focus on luxury brands and premium products in general, leaving the Group’s Chinese facilities to produce other brands.
Increasing output also involved the ongoing process of renewing the entire system of supply forecasting and production planning and monitoring. Programming at Agordo was converted to weekly (as already the case at Pederobba and Sedico), as this can drastically reduce forecasting errors and thereby lowers warehouse obsolescence rates.
Output was also increased as a result of a reduction in lost working hours, partly due to the numerous initiatives to raise awareness of the problem of absenteeism amongst employees.
Events were also organized in a number of plants for employees’ families, with very positive reactions from the trade unions.
Despite these efforts, the Group still needed to take on temporary labor to cover production peaks in 2007. An agreement with the trade unions also made it possible to introduce “flexible days” in order to scale working days to actual production requirements (agreement dated December 22, 2006 renewing Luxottica’s supplementary contract until 2009).
Flexibility, group and individual overtime, shift work and result-oriented bonuses are the main features of Luxottica’s new supplementary contract, which aims to achieve greater efficiency in the use of plant while respecting people’s personal and family needs.
All this makes it possible to ensure a rapid response to fluctuations in the market and improve pay and conditions for employees. Luxottica’s supplementary agreement also dealt with important new themes such as supplementary insurance, the labor market and training, which will improve conditions for employees over the duration of the new contract.
Over the decades, Luxottica has vertically integrated all the phases of the industrial process, from product design to delivery to the wholesale or retail client.
Control of the various phases of production makes it possible to monitor the quality of products and processes, introduce new operating methods and exploit synergies. It also enables production time and costs to be kept under control and optimized. This has worked in step with direct control of its wholesale and retail distribution networks, which enabled the Group to become a world leader in this industry.
To meet the urgent need for reduced production times resulting in greater efficiency, and to lower purchases costs of lenses and cases, the Group continued to upgrade its buyer structure in Italy and at Luxottica Tristar Optical, its wholly owned Chinese subsidiary.
2007 saw the completion of the Matrix Project, focused on systematic measurement of standard production times for the purpose of monitoring and comparing efficiency (time and space) and calculate standard costs with absolute reliability. Such activities help improve planning capability regarding new collection launches. The production office in particular will be able to know with greater precision the engineering department’s capacity to produce new models for a given season and can thus more effectively coordinate its study, selection and launching of new collections, using either internal production or external sourcing.
To increase the speed of communication between Italy and China, integrating IT systems was made a priority, especially in the product development engineering area.
The objectives of theses initiative were to (i) tighten control of delivery times and quality of external suppliers of both raw materials and finished products; (ii) develop procedures for selection of new suppliers as alternatives to existing ones; (iii) create and manage a database of suppliers’ potential output (suppliers of single types of product) in order to handle growing requirements from the plants in a more structured manner and more rapidly; and (iv) implement systematic medium-term forecasting for every single supplier, so that suppliers can plan their output to meet the Group’s requirements.
Comparative analysis of suppliers and ongoing “make or buy” assessments were made to establish optimum purchase prices for finished and semi-finished goods and on the basis of this it was decided to terminate business with certain suppliers and form partnerships with the best ones, involving them in the whole process, from creation to engineering of models; or produce in house to increase manufacturing efficiency and cost effectiveness.
Rationalization of manufacturing activities proceeded with a full review of production flows, passing from work center manufacturing to production line manufacturing. Initiated in 2006 with finishing work, this process was then applied experimentally to other departments (metal pressing, welding and pre-assembly) at Agordo and Rovereto. Given the excellent results, the process will also be extended to Sedico and Pederobba in 2008.
Of particular importance in this context is the “G6G” (rough frames in 6 days) project, which aims to cut the average production time for rough frames from 12 to six days. This halving of the lead time makes response to market demand considerably faster, with obvious benefits for sales and customer service.
The re-organization of processes also involves a radical reduction of production layout surface area and a full remapping of work areas and work organization.
Plant workforces were upgraded by taking on young engineers to provide industrial control, study of improvements to layouts and production flows, improved coordination of production progress and, lastly, the study of new process automation systems.
Efforts continued in all the plants to implement investments in production lines to eliminate nonvalue added activities, cut production times and upgrade personnel by requalifying their work. This will also significantly reduce semi-finished product and warehouse stock levels.
In addition to having efficient plants, the Group utilizes a centralized system for monitoring inventory and orders. Daily analysis of this information, especially from its retail business, provides data to support projections of demand, making it possible to plan production and other necessary tasks in advance. The coordination of supply and demand reduces potential problems in inventory and raw materials sourcing. This is a major competitive advantage.
The logistics project based on the Knapp automated warehouse and shipment system, which was handling 40% of the inventory by the end of 2006, was fully implemented in 2007.
Coordinating fast, efficient production in the manufacturing plants with precise monitoring of the market puts Luxottica Group in the best possible position to meet its wholesale customers’ demands and adapt to changing trends in the market and in fashion in terms of both type and quantity of products.
Alongside Quality, Research & Development is another key activity for improving response to market demands, especially in the premium and luxury segments. Work proceeded on a number of projects in this area in 2007.
The development and renewal of the entire system of requirements forecasting, production planning and production progress monitoring brings about a substantial reduction in the time elapsing between arrival of an order and delivery of the product to the store.
To improve its response to an increasingly dynamic market that tends to shorten the average life cycle of models, the Group in 2007 focused on coordination between the engineering and product departments, the samples factory and the Italian and Chinese manufacturing facilities.
Thanks to these activities, the Group has improved its capacity to plan new collection launches. The product department has precise knowledge of the engineering department’s capacity to make new models for a given season and can more effectively coordinate its selection and launching of new collections, also with external stylists and using either internal production or external sourcing.
In recent years, modelling has showed an increasing preference for plastic temples, even in metal models. As a result, plastic temples have gradually become more elaborate, with metal or microforged decorations, rhinestone and other increasingly diverse and sophisticated materials (motherof- pearl, straw, leather, etc.). In some cases the temple is the richest and most expensive part of the model, becoming a sort of “product within the product”. This has led the Group to more and more external sourcing of temples, in terms of both manufacturing and ornamentation.
Research & development of both processes and materials continued throughout the year. A group of engineers was formed to work exclusively on research and a series of projects were launched in collaboration with major Italian universities.
On the process front, research focused mainly on the automation of certain key phases in production and on identifying machinery employing new technology capable of delivering improved quality, process consistency and reduction of material losses; for example, new molds for lens production at Lauriano, new pantographs for acetate production at Sedico, robot systems to apply rhinestones, new lasers for cut-outs and brushing, new digital prints for logo application, etc.
Materials research activities continued along the following lines:
Product quality has always been Luxottica’s main focus and has led to the integration of every phase of production. Quality is the critical factor in the premium and luxury segments for both wholesale customers and end consumers. Quality and process control teams regularly inspect semi-finished products during the various phases of production: verifying the feasibility of a prototype in the design phase, controlling standards across the spectrum of products during the production phase, and subsequently checking for resistance to wear and tear and reviewing optical properties in relation to type of use.
The manufacturing processes and materials used by primary suppliers are also controlled and certified. Thanks to ongoing verification of precision and expertise in all phases of production, the quality of the Group’s end product is always of the highest level. The effectiveness of this quality system is reflected by both the relationship of trust that the Group enjoys with independent optical store operators, both large and small, and the low levels of returns.
Luxottica Group believes that the most effective strategy to counter the widespread phenomenon of counterfeit goods is to attack it at the source. Luxottica has therefore decided to limit action against retailers of counterfeit eyewear and concentrate its efforts on identifying the main flows of fraudulent goods and to organize brand protection strategies accordingly.
In 2007, brand protection activities were stepped up, leading to the destruction of over a million pairs of counterfeit eyewear seized on the international market. This significant result was due to the consolidation of programs initiated in previous years and which were already providing excellent results. Two sorts of cooperation are involved, one with the world’s main Customs authorities and the other with a number of investigation agencies in the countries where counterfeiting is particularly rife in terms of both production and large scale marketing.
Brands being one of its most important assets, Luxottica Group is inevitably committed to maintaining, indeed strengthening, its anti-counterfeiting operations.
As of December 31 2007, Luxottica Group’s work force numbered 61,903 worldwide, of whom
7,791 in Italy, up 25.5% on the previous year.
The substantial change in the number of employees was due mainly to new internal production
capacity and the integration of the Oakley organization into the Group.
In 2007, human capital development programs launched in 2006 were carried forward in the following seven priority areas of action:
