As Recession Deepens, Luxottica Group Tightens Belt

Cathy Ciccolella: Senior Editor

MILAN—On the heels of a 17.6 percent drop in net income in 2008, Luxottica Group is enacting a number of cost-cutting measures, including store closings, manufacturing reductions and cuts in advertising.

Andrea Guerra, Luxottica

On the wholesale side, Luxottica will reduce its eyewear manufacturing volume by 15 percent—production in Italy alone was down 20 percent in 2009’s first quarter—and will eliminate three low-performing brands while reducing its number of frame styles, Guerra said. In addition, the company is reducing wholesale advertising expenditures by 10 percent, to be replaced by more in-store support including an enhanced emphasis on store displays.

Due to the global recession, Luxottica’s income fell to €395 million in fiscal 2008, down 17.6 percent. The fourth quarter was particularly hard-hit, with income falling 44.2 percent to €54.1 million. As previously reported, Luxottica had net sales of €5,201.6 million in 2008, up 4.7 percent (up 10.7 percent at constant currency rates). Sales in the fourth quarter rose 4 percent (but were flat at constant currency rates) to €1,236.5 million.

“We have already implemented a series of measures that will enable us to rapidly and flexibly adapt to the new environment, and that will both contribute to boosting sales and streamline our cost structure across all divisions and geographic regions,” Guerra noted. He added that Luxottica is “rapidly adapting our manufacturing, distribution and sales capacity to the new needs of the market.”

Guerra said the company is aiming for total spending cuts of more than 30 percent this year. Plans include creating a more unified supply chain for the group, and boosting shared services among its divisions. Overall, he projects a 10 percent to 15 percent inventory reduction, along with new centralized inventory management, excluding Oakley.

Despite the cost-cutting measures, Guerra stressed that Luxottica still sees opportunities ahead in the luxury and fashion eyewear and sunwear market. “The market is more difficult above €200, but nothing is changing in our long-term strategy for luxury and fashion brands,” he said.

Within Luxottica Retail, the company is revising the merchandise mix of its Sunglass Hut stores in North America, with more emphasis on the popular retail selling points between $50 and $150. Further expansion of its upscale Ilori sunwear boutiques is also slowing, with only six or seven more Ilori locations set to open this year, Guerra said.

According to Kerry Bradley, president of Luxottica Retail N.A., other changes within that division include a shift in LensCrafters’ lens mix to attract more entry-level customers.

Luxottica Retail is also adjusting its marketing message and product offering to address the “new economy” consumer. For example, its Sears Optical locations are reintroducing warranty sales, “a value for Sears customers.” And Ray-Ban prescription lenses will be launched soon in all Luxottica Retail stores, while LensCrafters stores will offer in-store one-hour capability on Transitions lenses.

In addition, Bradley said Luxottica’s stores are moving toward “selective participation” in additional insurance programs beyond its own EyeMed Vision Care managed vision operation, such as “government-sponsored health plans we haven’t been a party to before.”

Once the depth of the recession became apparent, “our organization moved into action immediately, with results to be realized over the coming quarters,” a Luxottica announcement said. In that announcement, the company acknowledged, “In recent years we experienced a mix of real growth and market euphoria, and our business thrived,” with consolidated sales up by more than 80 percent over a six-year period.

Today, however, what Luxottica is seeing in the industry is “not a temporary crisis, not a drastic and definitive change, but a global structural reset of the relevant market, resulting in [an industry] resizing by approximately 10 percent.”    ■