Individual case study report
Luxottica: Internationalisation and Expansion
Introduction
Luxottica was established as a limited partnership with Del Vecchio as one of the establishing partners in Agordo, Italy in 1961. Luxottica’s recognition started from 1971 with its internationalisation strategy merging global acquisitions of retail chains and robust brand development. The founder of Luxottica Leonardo Del Vecchio took part in the Milan optics, optometry and ophthalmology international exhibition. Thats when Del Vecchio saw the significance of having direct control over distribution and started distributing directly in Europe and US. This was the turning point for the increasing exports, beginning of joint ventures and partnerships through local distributors in Europe and North America. The first subsidiary setup in Germany in the eighties, the first step to international expansion. Then a different growth strategy was developed for distribution. The move to a more direct strategy from an exported strategy was followed both to obtain local wholesale distributors and to directly setup distribution networks where essential. This change was determined by identifying the sharp change in consumer’s perception of glasses. Eyewear products were transformed with the profound promotion using famous celebrities, sports and movie stars. Eyewear products were no longer just medical product to improve eye sight or protect from sunlight. It had become a fashionable trend that was no longer a seasonal product. This trend continued and demands increased rapidly. Luxottica exploited on this opportunity by signing licence agreement with various designer labels and the first was Armani in 1988. In 1990 Luxottica was listed in the New York Stock Exchange. In 1995 acquisition of LensCrafters has transformed the company into an integrated company with vital distribution channels. This had given Luxottica a strong position in the US and increased distribution channels. Consequently, acquiring Sunglass Hut International has expanded its presence not just in the US but in Europe, Australia and Asia. Between 2001 and 2007 acquisition of different sunglass retailers and optical store chain operators in the US and Asia Pacific including China and India.
Luxottica is the world leading manufacturer, distributor and luxury brand designer of eyewear and sun glasses. It has net sales of euro €5.8 billion, over 60,000 employees and a robust global presence. It has presence in North America, South America, Europe, Asia-Pacific and South Africa.
This report will consist of several elements to analyse Luxottica’s current standardisation strategies in place to find whether there is any space for adaptation strategies. To conduct a thorough research this section will use PESTLE analysis to asses Luxottica’s internal and external factors impacting business. Than to answer the question whether there is room for adaptation strategies for Luxottica using marketing mix. The second part of the report will outline the reasons why Luxottica chose gradual approach in market selection. Furthermore examine Luxottica’s advantage and disadvantage of gradual internationalisation approach. Lastly explain why the US market has been the first choice to attract large investments. The third and final section of this report would debate the main risks associated with direct market control over distribution. The last section of the report will conclude alternative strategies that could have allowed control of brand recognition and risk avoidance.
1. Today Luxottica’s worldwide strategy is mainly global with a high level of standardisation and low adaptation. Do you see any room for adaptation strategies in price, promotion, distribution or productions?

Today with the level of globalisation activities Luxottica has undertaken in various countries and increased sales volume. It has attracted much attention to focus on the strategies applied in its foreign markets. The most crucial emphasis area has been on the level of standardisation or adaptation of numerous marketing mix elements. There has been much attention on communication and product elements of marketing mix. While this study focuses on other marketing mix elements. Luxottica is involved in several countries and is in a position to face and deal with variety of environmental uncontrollables. For example a solution to a problem in the United States market may not be the appropriate solution in the Chinese market.

Luxottica does have high standardisation but it also has high adaptation in various countries where it has retail and wholesale chains. In addition Luxottica is close and local to its customers as they are able to gain insight into consumer tastes and preferences. They have been very successful in fulfilling its consumer needs and expectation at all times.

Luxottica’s success with the internationalisation strategy is primarily global due to high level of standardisation and low level of adaption. Now Luxottica is in a great position to distribute in diverse parts of the market. It currently provides its consumers with various differentiation options with the latest designer frames and luxury sun frames and advanced lens option.

Elements of Marketing mix decisions
The decision to choose standardisation over adaptation is crucial to find a target market where it can be applicable either than where it’s unsuitable, income is low, the actual need for the product.

Price:
Even when Luxottica is a market leader providing customers various choices of eyeglasses and sun glasses, promoted it accurately and has distribution channels. The overall hard work fails if the products are not priced properly. Price should reflect quality and value. Price to charge in different marketplace. exchange rate, inflation, transportation

Marketing managers develop pricing strategies to achieve the objective such as return on investment, sales and market share. Although there are a number of pricing issues involved in international marketing. In various cases, cost structures of domestic organisation creates global competition that puts strain on the pricing policy.

There needs to be control over final pricing and it has to be consistent and competitive.

Promotion: Luxottica has short and long term promotional and advertising objective. The short term objective is to attract customers and promote sales. Luxottica believes that its short and long term objectives are contributed by product quality and services provided in store. There is also online promotion which attracts consumer’s attention for a bargain.

Distribution: logistics, customer service- Retail, Luxottica retail chains and Wholesale, independent distributors.

The objective of the wholesale and retail distribution networks is to provide customers quality and customer satisfaction. These platforms have been developed to give the customers after sales service that is reliable but not standardised, specially designed to meet local needs.

Negotiated lower transportation fees
_ Streamlining activities between:
_ Italy & North America
_ China & North America
_ Gaining benefits after the merger with Oakley across the European, Latin American and
Australian organizations

Production: optical lens, Sun lens, lens processing and frames production then eyeglasses.
Continuously readapting cost structure (e.g. efficiencies, waste, scrap, utilities, etc.)
Easier negotiations with longer-term agreements for purchases of commodities

Luxottica engages in research and development activities relating to its manufacturing processes on an on-going basis. As a result of such activities, Luxottica has invested and will continue to invest in automation and in innovative technologies, thus increasing efficiency while improving quality

Another big priority is the continual improvement of the product mix to guarantee coverage and differentiation of the entire premium market and minimize the risk of brand dilution.
The capacity to design and build in-house results in a great competitive advantage; it allows the Group to reduce the lead time for product development and thereby adapt quickly to market trends and limit production costs, as well as maintain smaller and more efficient production runs so as to better respond to the varying needs of different markets.

Product life cycle and adaptation
There may be few cultural differences among certain markets, the product may require considerable adaptation if the product is in a different stage of its life cycle in a market such as introduction, growth, maturity or saturation. Hence, a product can be at a mature stage in a market but undesirable in a different market in its introduction stage.

Taking the above points into consideration all following marketing strategies must include adaptations required in order to uphold to the stage of the product life cycle in a new market.

Marketing mix Implication

The Political Risks associated with Luxottica include exchange controls, import restrictions and price controls. The most ruthless act is confiscation asset without payment. Another risk associated is domestication where the government develop methods to relocate foreign investment to national control and ownership through various government verdicts. A lot of countries demand foreign companies may enter a market through Joint venture. There is the currency conversion restriction and unresponsive bureaucrats. The likes of EU and NAFTA demand that 60 % of the of a product must contain local content of that country. These are just some of the aspects Luxottica has to consider when managing its distribution and retails chains across channels.

Economic risks
To protect an infant industry, restraints on business operation could be implied under the section of national security. Furthermore to react against unfair trade practices and to conserve limited foreign exchange. Luxottica incurs most of its manufacturing expenses in Euro and receives considerable amount of revenues in other currencies. Large fraction of profits and expenses come from the US. Moreover if the dollar fluctuates in the exchange rate between the Euro it home currency and dollar then this will impact Luxottica’s financial position and activities.

Labour controls

Most sunglasses are made by the same company. Luxottica also makes sunglasses branded Burberry, Chanel, Polo Ralph Lauren, Paul Smith, Stella McCartney, Tiffany, Versace, Vogue, Persol, Miu Miu, Tory Burch and Donna Karan.
In many cases, the same company is also selling you the glasses. Luxottica also owns LensCrafters, Pearle Vision and Sunglass Hut. This is extreme vertical integration.
"We manufacture about 70% of those brands in our factories in Italy, and the balance in America and China," says Luxottica spokesman Luca Biondolillo. "We do the design, the manufacturing, and the marketing," he adds. The company makes most of those brands under license, working closely with designers at the relevant fashion houses. But it owns several brands itself, including Ray-Ban, Oakley, Oliver Peoples and REVO.
2. Today Luxottica’ is a global firm with global brands but this competitive position has been obtained thanks to a step-by-step strategy that started with a direct penetration of the US market and then moved on to other markets. Why do you think Luxottica chose this gradual approach in terms of market selection? Discuss the related benefits/disadvantages of the gradual internationalisation approach for Luxottica. Why, in your view, has the US been selected as the first foreign market in which to invest heavily?

Luxottica began onesight research programs in North America in the mid 1980’s. The programs were designed to collect used eyewear and provide voucher for free new ones.
Luxottica is one of the most recognised designer, manufacture and dispenser of luxury sunglasses and eyeglass frames. In 1995 the firm achieved its goal to gain access to exclusive distribution channels by transforming it from a manufacturing firm into an integrated firm with vital distribution activities. This has been achieved through acquisition of US Shoe Corporation involved in fashion business and also where LensCrafters the eyewear outlets.

The company chose a gradual approach to boost its brand portfolio in various markets before being able to take on the US market. The US market was the most mass market for sunglasses and eyeglasses. Luxottica saw an opportunity to enter the market which already has the like of Lenscrafter

Ever since 1971 Luxottica has been involved in a series of joint ventures and partnerships with local distributors in Europe and US. Already it was supplying its products to North American countries.

3. The recent (2008) financial crisis that hit the world economy has changed the global competitive landscape, especially in the luxury sector, with many luxury brands severely hit by the economic downturn. In these new circumstances many luxury brands are revising their strategies. What do you think Luxottica should do to maintain its competitive edge?

There are four methods that may lower the cost price:
To Lower distribution costs it’s beneficial to have shorter distribution channels which would help keep control over prices. A structure that has fewer middlemen or no middlemen means lower taxes and reduced distribution costs. Every time goods exchange hands and pass through channels they are taxed. The value added tax could be increasing in comparison to the selling price and is measured each time goods pass through channels. Clearly where countries value added taxes is increasing, tax offers a particular incentive for building short distribution channels. Anywhere this is successful, tax is just on the difference between the middlemen and the selling price.

Luxottica’s success

Companies search for ways to Lower tariffs as this explains for a large part of price rise. Goods can be reclassified into different categories or lower customs classification. A company could face higher tariff rates if they are classified lower. Different rate may apply depending on the assembled, ready to use, and those need some assembly. A ready to use good imported may incur a 20% tariff whereas 12% tariff when imported unassembled. Furthermore when a product is made in a country to export or some home content is added may even lower the tariff further.

To lower cost of manufacturing goods can be experienced throughout the chain. Manufacturing in a third country such as China and India have skilled labour and lesser hourly rate in comparison to the Italian manufacturing base. In the US its $7.25 per hour, India 2 rupees depending on the
Producing sunglasses or lenses in India at 00rupees in comparison to us dollar and euro will cut the manufacturing cost. Labour, Indians will deliver more for less costs.

Reducing the manufacturing costs can offer two benefits, the lower price to the buyer and also lower tariffs.

Using foreign-trade zones
Developing free trade zones to enhance trade internationally. As Luxottica is part of the EU it has 87 retail sunglass hut which allows free trade within the EU. In North America it has 4918 outlets allowing to use NAFTA to trade freely.

• If home country packaging or contents used in the last assembly, there may be an additional reduction on tariff.
• Shipping transportation rates are influenced by weight and volume, therefore unassembled goods may classify for lower freight rates.
• If the labour costs are lower than the exporting country considerable saving can be made on the final product. p445 4. Luxottica pursued an aggressive distribution strategy based on acquisitions in its main target markets ( US, China). This strategy allowed Luxottica to gain direct control of the market outlets but also generated additional risks. Discuss the main risks related to this distribution strategy. Would a strategy based on the development of a number of franchising chains not have been more efficient, allowing a comparable level of brand recognition and control over the retail stores but using a lower level of capital and allowing faster coverage of the different markets? What alternative strategies could have been used in order to balance company objectives of brand recognition/control and lower risk (and in which markets)?

Conclusion
References:
Luxottica (2006).United States Securities and Exchange Commission Form 20-F 2006 group S.p.A annual Report. http://www.luxottica.com/export/sites/default/shared/files/investors/31_12_2006_Group_SpA_Annual_Report_on_Form_20-F.pdf.

Luxottica (2011). http://luxottica.com/en/activities/retail_distribution/market_and_strategy/index.html http://www.netmba.com/marketing/pricing/