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 structure is the result of a fundamental strategic vision that management had years ago and was a key to the Group’s remarkable future growth. Originally established as a manufacturer of frames, Luxottica Group has gradually integrated wholesale distribution into its structure and, since 1995, retail distribution as well. Today, the Group operates in all the world’s key wholesale and retail eyewear markets and plans to accelerate its expansion in emerging markets.
From a retail perspective, the Group operates through more than 5,700 stores mainly in North America, Asia-Pacific, the UK, China and the Middle East, thus ensuring broad distribution throughout the world’s key markets. The Group’s direct retail experience has translated into unique expertise and understanding of the markets.
The Group’s wholesale distribution network covers over 130 countries, with directly-controlled operations in its 28 main markets, where customers are mostly retailers of mid- to premium eyewear, such as independent opticians, optical retail chains, specialty sun retailers and duty-free shops. In North America and other areas, main customers also include independent optometrists and ophthalmologists as well as premium department stores. Direct distribution in the key markets gives Luxottica Group a considerable competitive edge, making it possible to maintain close contact with customers, 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 Group also provides its wholesale customers with the assistance and services needed to enable their businesses to be successful.
One of Luxottica Group’s main strengths is its ability to offer pre- and post-sales services which have been developed and continuously improved over decades. These high-quality services are designed to provide customers with the best products in a timeframe and manner that best enhance their value. The distribution system is connected at the international level to a central production planning 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 over the years have significantly improved distribution speed and efficiency. Luxottica Group is thus able to provide its customers 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:
2006 was an important year for the retail division, which continued its long run of strong results. With an excellent performance by the retail division’s store chains, especially LensCrafters and Sunglass Hut, the contribution from the OPSM chain in Australia and the ongoing remodeling of the store base, retail sales reached Euro 3.3 billion, a 7.6% increase from 2005. Comparable store sales (1) rose 6.7%. Operating income increased to Euro 431.5 million, up 21.5% from 2005.
In 2006, the Group initiated a major investment plan for its stores to strengthen the foundation for additional growth. Approximately 510 stores were remodeled and about 570 new and acquired stores were added.
In 2007, Luxottica Group plans to make ongoing investments in its store base of Euro 225 million so that it is well-positioned to take advantage of retail growth opportunities. The 2007 investment plan provides for the renovation of 480 stores worldwide as well as the addition of over 500 new stores. In North America, the Group will focus on Sunglass Hut, with plans for around 60% of its inline stores to be either new or recently remodeled by the end of 2007, and LensCrafters, whose new store format was a factor in its excellent 2006 results.
Luxottica Group’s operations in North America expanded in 2006, while sharpening their focus and fostering innovation. The Group controls the two largest chains in the prescription segment, LensCrafters and Pearle Vision, and is the largest operator of optical stores under license (Licensed Brands). The retail division strengthened its presence by acquiring D.O.C Optics, an optical chain with 100 stores in the Midwest United States, particularly in the Detroit, Michigan area, and with sales of around US$ 100 million.
The acquisition of Shoppers Optical, one of Canada’s biggest optical chains with 74 stores, improved the Group’s presence in this important market. Shoppers Optical is a key player in the Canadian retail prescription segment as well as the only chain with nationwide coverage. The Shoppers Optical stores, located in eight Canadian provinces, were converted to the Pearle Vision brand, which was historically a well-recognized optical retail brand in the United States. Pearle Vision’s business model and brand is being used throughout Canada.
Luxottica Group also has nine central lens finishing labs that are of strategic importance to its North American retail business as well as EyeMed Vision Care, one of the largest 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 biggest and best-known chain in North America with 1,502 stores.
With its organization structure, Luxottica Group is able to quickly respond to market opportunities and trends in fashion and luxury. This ability is especially important in the United States, where demands for fashion and luxury are now a nationwide phenomenon and have moved beyond cities like New York, Miami and Los Angeles.
In the Australia and New Zealand region, Luxottica Group continued to consolidate its direct retail presence. In 2006, the Group further integrated its retail network in the region, where it operates three optical brands: OPSM, Laubman & Pank and Budget Eyewear. At the end of 2006, Luxottica’s retail network in the region had 527 stores, with 488 in Australia and 39 in New Zealand.
In China and Hong Kong, Luxottica Group successfully extended and consolidated its retail network. In 2006, with the acquisition of Modern Sight Optics, the Group further expanded its presence in China after its acquisition of the Chinese Beijing Xueliang Optical Technologies and Ming Long Optical chains in 2005. Luxottica Group’s direct network in China and Hong Kong reached 270 stores, making it China’s leading optical and one of its biggest luxury retailers. The Group is well positioned to take advantage of growth opportunities in the near future.
Lastly, Luxottica Group announced the opening of Sunglass Hut franchise stores in the Middle East, which is one of the most promising markets for high-end fashion and luxury products, especially in the Gulf States. Sunglass Hut will operate in major shopping centers, mainly in the United Arab Emirates and Saudi Arabia. New stores will only carry the Group’s prestige brands such as Bvlgari, Chanel, Dolce & Gabbana, Prada and Versace, as well as Ray-Ban, the world’s best-selling sun brand.
Eleven years after joining Luxottica Group, LensCrafters is North America’s leading operator in the fashion and luxury eyewear segment, with 902 stores in the United States and Canada. In 2006, North American comparable store sales increased well above the chain’s historical average, while producing higher margins despite LensCrafters’ significant investments in its stores during the year. These results are due to both the growth trend enjoyed by the mid- to premium segment and the effectiveness of the strategies the Group has implemented.
Luxottica Group’s plan to strengthen LensCrafters’ high-end positioning, including focusing on customers interested in premium products, fashion and high-level service, was introduced with the opening of the flagship store on Fifth Avenue in New York. Inaugurated in April 2006 after a complete renovation and redesign of the store concept, based on extensive studies and market research, the new flagship store heralded a new concept and a quantum leap in quality.
Characterized by sophisticated interiors and a high capacity for product personalization, the new format targets sophisticated consumers who demand high quality of service. This type of customer is becoming increasingly important, partly due to LensCrafters’ communication campaign to target American consumers and its 2006 “Make an Appearance” ad campaign supporting the new store concept.
The opening of the New York flagship store, signaled by a prominent article in The New York Times, was followed up by the roll out of the new store design to approximately 50 stores across North America in 2006. LensCrafters’ results from these renovated stores in their first few months, through the end of 2006, were very encouraging. In fact, comparable store sales for these remodeled stores have been above the already high average.
A very strong performance was also seen in stores that had yet to be renovated. These stores continue to benefit from the Group’s ongoing investment in its store base.
With a North American market firmly focused on rediscovering luxury and fashion products and related values, LensCrafters’ revamping of its brand image in 2005 along with its new store concept introduced in 2006 have enabled LensCrafters to continue to grow by leveraging the Group’s highend brands. The introduction of the Dolce & Gabbana collections, followed by the launch of the new Burberry and Polo Ralph Lauren lines, will continue to strengthen the chain’s top-range positioning. Sales of prescription frames and sunglasses produced by Luxottica Group, particularly its fashion and luxury brands, accounted for around 72% of total sales in 2006.
Lenses are another important dimension of LensCrafters’ expertise. Sales of anti-reflective lenses grew 24% in 2006. In late summer 2006, LensCrafters introduced FeatherWates® Complete Lenses made with Scotchgard™ Protector, an innovative product that is resistant to water, dirt and dust and does not require frequent cleaning. This product accounted for 64% of total anti-glare lens sales in 2006.
During 2006, lenscrafters.com was relaunched, reflecting a more fashion-oriented look, in keeping with the new store concept, and with a stronger focus on highlighting designer products and fashion expertise. The site also allows customers to schedule eye exams online.
2006 was a very positive year for LensCrafters in North America. The breadth of its investments in store remodeling, products and its website enabled LensCrafters to capitalize on favorable trends in the North American market and to cultivate the organic growth potential on which future development initiatives will concentrate.
In China and Hong Kong, 2006 was a year of reorganization and extension of the retail network. After the 2005 acquisition of the Xueliang Optical and Ming Long Optical chains, in November 2006 Luxottica Group acquired Modern Sight Optics, a leading chain in the premium prescription frame segment operating 28 stores in Shanghai. By the end of the year, the Group’s retail network in China and Hong Kong included around 274 stores, making it China’s leading optical and one of its biggest luxury retailers.
With the September opening of LensCrafters’ new flagship store in Beijing’s Oriental Plaza, an icon of fashion and shopping, Luxottica Group took the first step towards making the LensCrafters brand a synonym for prestige eyewear in China. LensCrafters 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.
Under this program, 75 stores, 55 in Hong Kong and 20 in China, were rebranded in 2006 to the LensCrafters brand, alongside those of the Xueliang, Modern Sight and Ming Long chains. An objective for 2007 is to significantly increase the number of LensCrafters stores in the Chinese market, both by converting existing stores and opening new stores.
In 2006, LensCrafters in China reported improved sales, and contributed, along with a general increase in the level of the brands, to the Group’s double-digit growth rate for stores in China and Hong Kong.
Luxottica Group’s focus in China is for the long-term, and it is strategically making its stores accessible to all consumers seeking a premium service experience and brands. At present, the Group is growing mainly in the eastern part of the country, where GDP is rising twice as fast as in the rest of China. The Group’s product lines will vary by segment as the market continues to evolve and as more of the population reaches middle-class status.
The format of the new LensCrafters stores aids in assessing the various brands across different segments of the market and analyzing relative performance and demand. The optical segment will continue to grow in line with the offering of fashion brands and products. The sun segment is another business opportunity as increasing numbers of Chinese view sunglasses as an important part of their wardrobe.
Store performance was particularly strong in Hong Kong, where all of the Group’s optical stores have been converted to the LensCrafters brand. LensCrafters stores reported high sales performance in line with that of stores in the United States and Australia. Luxottica 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.
2006 marked a definitive return to profitability at Pearle Vision, which was acquired by Luxottica Group through the Cole National transaction in 2004. Its network consists of 840 stores, of which 423 are company owned in the United States, Canada and Puerto Rico, and 417 are franchise stores in the United States and the Caribbean.
In North America, Pearle Vision is the second largest 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’ trust in the doctor’s experience and the quality of service they receive.
The powerful relaunching of the Pearle Vision brand by Luxottica Group over the last two years 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 five quarters with 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 efforts to portray doctors in various advertising campaigns. At the same time, a significant reduction in promotions helped improve the positioning of the stores and consumer perceptions, resulting in increasing profitability.
Sales of the Group’s products at Pearle Vision stores enjoyed strong growth, reaching nearly 50% of total sales in 2006. Ray-Ban, Prada, Brooks Brothers and Versace were some of the betterselling brands.
Lastly, to centralize services and achieve economies of scale, all in-store labs were closed, and their work was transferred to nearby LensCrafters’ labs or to the Group’s nine large central lens finishing facilities. 2006 was a year of consolidation, building the foundation for solid, profitable growth in the future, and starting a program to add new stores. In Canada, a market with huge potential, Luxottica Group’s acquisition of Shoppers Optical gives it a good position and favorable geographical distribution. With 74 stores being rebranded to Pearle Vision, the Group now has 109 Pearle Vision stores in Canada.
While 2006 was a year of growth in the Canadian market, expansion in the United States is still a priority. This market offers a wealth of opportunities, and extending the franchising business will be a key factor for growth in the coming years.
Pearle Vision’s franchises are increasingly turning to Luxottica Group as their preferred supplier, 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, which is available to franchisees, features marketing solutions, preferential pricing and savings on selected categories of products, including lenses, lab services, contact lenses and accessories, all of which are provided 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 of 1,358 locations in Sears, Target and BJ’s Wholesale at the end of 2006.
Each of these brands, which offer consumers the convenience of taking care of their optical needs where they shop, 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. In 2006, Ray-Ban was introduced in all 941 stores. In general, sales growth in Sears Optical stores was higher than that of Sears’ total sales.
In 2006, Target Optical, which appeals to customers who enjoy fashion and novelty, reported improved performance in its 264 Target stores, which are mostly in big urban centers. Efforts were focused on improving service and consulting by the sales personnel, who adopted a new “take it and try it” sales method, as well as on strengthening its fashion positioning by offering brands such as Vogue and Ray-Ban.
There are 153 BJ’s Optical stores inside BJ’s Wholesale Club establishments in the eastern and southern United States. Sales in 2006 improved from the previous year.
In Australia and New Zealand, Luxottica Group operates three brands, which are specialists in the prescription segment: OPSM, Australia’s top eyewear brand for luxury and fashion-minded customers; Laubman & Pank, a provider of high-quality eye care and services; and Budget Eyewear, which is focused on price-conscious consumers. The three brands operate in all of Australia’s states, primarily in larger cities. In New Zealand, OPSM operates in the main urban areas. Results in 2006 were very positive due to a brand positioning strategy, which included a product assortment geared to the fashion segment, an innovative store format, called the Accelerated Fashion Program which highlighted its fashion positioning, and personnel training. Luxottica Group consolidated its leadership in the Australian market despite the weakness of the retail sector generally.
In the prescription segment, the objective was to differentiate the positioning of the three brands in order to cover complementary segments with product offerings catering to the needs of different consumer categories. In 2006, customer communication was upgraded thanks to the launch of our customer relationship management program. Improved understanding of customers and initiatives helping customers perceive eyewear as fashion accessories helped OPSM achieve a significant increase in sales and consolidate its role as the best-known brand in the Australian market. Laubman & Pank’s recognition as an optical fashion brand increased from 37% to 44%. 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 children in 2006.
Budget Eyewear managed to extend its product offerings while remaining the preferred destination for customers who want quality eyewear at lower prices.
Sunglass Hut is the world’s largest specialty sun retailer, with 1,502 retail locations in North America, 224 in Australia, New Zealand and Singapore, and 92 in Europe. 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.
In 2006, Sunglass Hut completed its brand repositioning with the goal of capturing more fashionminded consumers. The results of this process, which started in 2001 following the Group’s acquisition of Sunglass Hut, have been a key contributor to the chain’s excellent performance over the last two years. The repositioning effort has also solidified the chain’s foundation for future growth. In general, 2006 was a year of strong improvement for Sunglass Hut. Concentrating increasingly on fashion and luxury, and with a special focus on fashion-sensitive women, Sunglass Hut’s sales, on a same store basis, rose nearly three times the average growth in retail sales in the United States.
In the United States, Sunglass Hut further expanded with 90 new store openings and a restyling of another 153 stores, mainly in the key states of California, Florida, Texas and New York. In 2007, an additional 120 stores will be remodeled. Fashion products were popular, driven mainly by oversize designer sunglasses and by the launch of two new brands: Dolce & Gabbana in 300 stores and D&G in 1,300 stores.
In Australia and New Zealand during 2006, Sunglass Hut strengthened its position by acquiring 50 stores and securing a number of stores at major airports. Its market presence in the fashion and luxury segment grew, with the largest increase occurring in the luxury brands, where sales rose 79%. Brand awareness rose from 52% to 60%, with women in the 25-to-39-age bracket accounting for much of this improvement.
Strengthened by these results, Sunglass Hut plans to expand in Southeast Asia and Hong Kong, early in 2007. Sunglass Hut is already operating five stores in major shopping centers in Singapore. In Europe, Sunglass Hut has 92 stores in the UK. In 2006, it initiated a significant reorganization of its network and business plans to improve its brand positioning. The store format was redesigned, stores were moved to more favorable locations, preferably in airports, city high streets and shopping centers, and the product mix was improved. This process gave a strong boost to Sunglass Hut’s sales, especially in the luxury segment, with sales above the general retail average in the UK. Expansion plans contemplate ten new store openings per year for the next three years.
Good results in all the main markets contributed to the wholesale division’s record 30.9% growth in sales. Sales exceeded Euro 1.7 billion, mainly due to an improving brand portfolio over the last few years, and grew 26% over 2005. Operating income rose 46.5% in 2006 and reached Euro 445.8 million. Sales to wholesale customers grew 28.6%.
Geographically, the wholesale business continued to grow at rates above the market average in most countries where the Group operates. In Europe, which is the most important market for this division, Luxottica Group continued to improve its positioning, even in countries where the overall market did not grow in terms of value.
Wholesale 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 consistent and substantial, confirming the Group’s leadership position in Japan, Korea and Hong Kong. In emerging markets, wholesale sales rose 60%, indicating another area for future expansion. Strong growth was due above all to the fashion and luxury brands, particularly in the sun segment, in line with emerging markets’ growing demand for luxury products, and to marketing efforts.
Overall, Luxottica Group’s wholesale division retained its leadership position in the premium and luxury segments in 2006, thanks to one of the strongest and most balanced brand portfolios in the industry. Both house and license brands posted excellent results. Total sales of Ray-Ban were up for the fourth consecutive year, by 20% in 2006, and positive results were recorded by the other house brands, especially Vogue, Arnette and Persol, which all met their growth targets.
Sales of the Group’s luxury brands grew 40%. The first Burberry collections, launched in September 2006, were well received by the market, especially in Europe. This strong performance is an early endorsement of the license agreement with Burberry, one of the most dynamic and exclusive luxury brands.
At the end of 2006, Luxottica Group entered a long-term license 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 as yet another addition to the impressive list of long-term partnerships the Group has entered or renewed in recent years. These agreements allow the Group time to develop collections and position them effectively in the market, thus maximizing their potential, each in line with its particular brand values. This approach has also made it possible to strengthen the very top of the range, thanks to a jewelry eyewear concept that has had positive results, as in the case of Bvlgari.
The launch of the Polo Ralph Lauren collections in 2007 and Tiffany & Co. in early 2008 will make the brand portfolio even stronger and better balanced. The portfolio will encompass products covering the most diverse of consumer tastes and preferences while continuing to attract other prestige luxury and fashion labels.
Another factor contributing to the wholesale division’s excellent results in 2006 was increased spending on advertising for both house and license brands. This spending was mainly focused on enhancing the top brands in the Group’s portfolio in the eyes of both consumers and wholesale customers.
In 2006, Luxottica Group continued to extend its global organization and add people to its teams in key countries: the United States, Mexico, Brazil, Italy, Greece, The Netherlands, Russia, India, Australia, Japan, Spain, France, Germany and the UK. It continued to move its organizational structures closer to the key markets. The Group improved planning of sales and application of selective distribution, using the approach adopted by the luxury brands. A structure was also set up to serve emerging markets and be better prepared to exploit the strong growth prospects in these markets.
The wholesale division also improved its coverage of Eastern European markets. Offices that the Group has opened in Russia and Hungary now cover approximately 80% of the East European region. The Group opened a representative office in China to ensure a more efficient monitoring of the market and control over distribution. Direct distribution was also started in the important South Korean market. At the end of 2006, customers served by wholesale distribution numbered around 200,000 worldwide.
Luxottica Group manages one of the largest networks of optical manufacturing labs in North America, with nine central labs and close to 900 lens finishing labs, mainly within LensCrafters stores. To support the growth in sales of anti-glare lenses, the capacity of the Dallas central lab was expanded in 2006. Both the Dallas and Memphis facilities were reconfigured with advanced production technology to meet growing demand and maintain a constant focus on quality and customer service.
In-store LensCrafters labs allow customers to receive their eyewear with fast turnaround, frequently within one hour. LensCrafters’ labs were also used to handle the increasing order volume of the Pearle Vision stores. This approach will continue to be used in 2007.
EyeMed Vision Care is one of the largest managed vision care operators in the United States, serving over 3,000 large and medium corporations, government entities and health insurance providers through a network of over 17,000 locations, including opticians, ophthalmologists, optometrists and Luxottica Group retail stores.
In 2006, it added more than 100 new customers, including the State of New York, and renewed major agreements, including an agreement with the AARP. These were in addition to the contracts originally managed by the former Cole Managed Vision, the managed vision care operations of Cole National.
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.
There are more than three million clients using EyeMed’s services, which include a vast choice of the Group’s stores and independent providers. During 2006, EyeMed simplified administrative procedures to facilitate contact between clients and stores, while customer care service launched the EyeMed University to ensure advanced training for call center operators. EyeMed’s brand awareness was supported by advertising campaigns in the mainstream media in the United States, a strategy to be continued in 2007.
The Group’s strong growth in 2006 was supported by robust increase Italian and China’s production. Having its origins in what has become the global center of eyewear manufacturing, northeast Italy, Luxottica Group has produced prescription frames and sunglasses for over 40 years, controlling every phase of the production process, from raw material procurement to manufacturing of the finished frame. Its manufacturing process is the product of decades of careful honing, along a path of constant research and development. In 2006, this involved rationalization, reorganization and specialization of facilities in order to continue to achieve maximum efficiency and quality across the entire manufacturing base.
In 2006, investments in manufacturing, from materials and machinery, to design and programming, totaled Euro 70 million, reflecting the Group’s policy of building on achievements, rather than merely showcasing them. Luxottica is committed to keeping its manufacturing platform the most efficient, flexible and creative in an industry for which it already sets the benchmarks.
Production is concentrated mainly in six plants in Italy, mostly in the northeast. Of these, the Sedico plant, near Belluno, was expanded in 2006 and now covers approximately 30,000 square meters. Given the growth in the business, the Group also decided to expand the Lauriano plant, which specializes in glass and plastic sun lenses, by 11,000 square meters. The Group also has two wholly-owned plants in China. One plant with 26,000 square meters started operations in 2006. The Chinese plants handle the more labor-intensive lines of production, while the Italian facilities concentrate on «Made in Italy» production, which has very high value-added qualities. Consumer demand for such products is strong, driving the Group’s development of premium and luxury products, both directly through its stores and indirectly through its wholesale customers. In 2006, with this increased level of market demand, the Italian plants stepped up the production of luxury brands and premium products in general.
On the materials front, 2006 saw an increase in the production of metal parts to meet demand for metal detailing, even in plastic frames, while production with other materials, including injected plastic and acetate, remained stable.
Over the decades, Luxottica Group has vertically integrated every phase of the production process in order to achieve the efficiency goals of each type of product and service it offers. 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. 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.
Coordinating the production of the manufacturing plants with precise monitoring of the market makes Luxottica Group efficient and puts it in the best possible position. The Group is able to effectively meet its wholesale customers’ demands and adapt to changing trends in the market and fashion in terms of both type and quantity of products.
Over the years, Luxottica has brought both retail and wholesale distribution into its vertically integrated system. This enabled it to become a global leader in eyewear and one of the leading manufacturers of premium prescription frames and sunglasses with the most efficient cost control and highest profitability.In 2006, Luxottica Group continued its commitment to improving the efficiency of its manufacturing platform. It carried forward the process of optimizing production lines along with rationalizing and specializing plants. Injection molding was concentrated at the Pederobba plant, production of metal frames at the Agordo and Rovereto plants, lenses at the Lauriano plant and acetate at the Sedico plant, except for frames in acetate for Persol, which are produced at Lauriano. At the same time, in recognition of the upgraded production process, each plant’s internal organization structure put in place new operating roles, such as controllers, industrial area managers, human resources managers and quality control managers.
2006 also saw the completion of weekly production programming projects at Sedico and Pederobba. A similar project is scheduled for the Agordo plant in 2007. When fully implemented, these projects will significantly reduce production program times. This will result in reduced program lead time and program time and fewer project errors with less stock obsolescence. The Matrix project is a new initiative that will enhance systematic measurement of standard production times. It will be implemented by the end of 2007 and should result in more efficient production time monitoring and analysis and space requirements. It will also help calculate standard costs with greater reliability. Luxottica’s program of strategic integration will further improve the planning of new collection launches. For example, over time the product department will increase its control over the engineering department’s capacity to make new models for a given season. This will enable greater coordination and effectiveness in the study, selection and launching of new collections, using either internal production or external sourcing.
As a response to its need to improve efficiency as production times continue to shorten, Luxottica Group upgraded the buyer structure both in Italy and at the Group’s wholly-owned Chinese production company, Luxottica Tristar Optical.
In 2006, the Group started acquiring certain suppliers of components (e.g., Bottega S.r.l., a temple production specialist).
Over the year, procurement’s success in generally reducing the costs of lenses, cases and packaging offset rising metal prices, including both noble and base metals.
In order to stabilize finished and semi-finished product prices, the Group conducted an analysis of suppliers. Some were eliminated, and partnerships were formed with others that in turn became more closely involved in the model design and development stages.
A project was launched to integrate the Italian and Chinese procurement structures so that the Group’s Italian and Chinese buyers will collaborate more closely in order to improve their results. Integration also continued in the IT area to further improve the exchange of data between the two countries. This is particularly vital in the engineering and product development areas.
Knapp, a logistics project, was started to introduce a new automated warehouse and shipment system. By the end of 2006, 40% of the inventory was tracked using the new system. The project will be fully implemented in 2007.
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 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.
In 2006, research and development projects in both manufacturing processes and materials continued and included collaboration with major Italian universities. In the field of materials, the focus was on the problem of degradability (“sfogliature”) of injection molded plastic and how to significantly reduce waste by optimizing molding parameters. Research to achieve higher uniformity in sun lens tinting followed two paths: collaboration with suppliers and the University of Venice in order to develop a special colorable lacquer and the use of advanced high-pressure injection molding.
Luxottica Group believes that the most effective strategy to counter the widespread phenomenon of counterfeit goods is to attack it at the source. Therefore, Luxottica will concentrate its efforts on identifying the main flows of fraudulent goods and to organize brand protection strategies accordingly.
It has been established that most counterfeit eyewear products come from China. Luxottica Group is therefore concentrating its efforts on constant monitoring of production sites and customs offices in collaboration with investigation agencies and market watchdogs, such as the Administration for Industry and Commerce (AIC), the Chinese agency responsible for business registration. This has led to the seizure of vast quantities of counterfeit eyewear in production facilities and the identification of the major perpetrators that export them to the West. Strict controls are also in place in the main shopping centers in Beijing, where most of the demand from European and American counterfeit dealers is handled.
On a parallel front, Luxottica is implementing a system of customs and market surveillance in strategic areas, using customs control services already established by law (e.g., EC 1838/2003, Customs authority intervention against goods suspected of intellectual property rights infringement). The Group also lobbies government entities for their support.
In cases where Luxottica believes customs control to be inadequate against particularly large flows of counterfeit goods, it has initiated investigation programs to identify the main suppliers and distributors.
In 2006, brand protection activities as a whole led to the seizure and destruction of over a million pairs of counterfeit eyewear compared with 430,000 in 2005. Of that total, 350,000 came from operations involving Chinese producers, and 500,000 from a single, highly successful operation in July 2006, when Greek customs authorities detected large shipments of counterfeit goods from the port of Piraeus and the Athens airport.
Luxottica Group’s workforce, at year-end 2006, numbered 49,325, an increase of 6.3% over the previous year. Approximately 7,027 employees work in Italy.
The substantial change in the number of employees primarily resulted from the increase in production capacity and expansion of the retail business during 2006.
To support Luxottica Group’s development plans, there was a major effort to further strengthen corporate-level processes, systems and instruments for managing and developing human resources during 2006. Such activities included: