The news came like a bolt from the blue. Luxottica - the Italian giant of the eyewear industry - had snatched the eyewear license for Dolce & Gabbana ? a rapidly growing Italian fashion house ? from a smaller Italian eyewear producer, Marcolin. Some 48 percent of the latter's turnover is currently generated by D&G, so when Luxottica announced last Oct. 8 that it had signed a 5-year licensing agreement with the famous Italian fashion house, Marcolin's share price dropped from €1.27 down to €0.93 on the Milan Bourse, and was consequently withdrawn from the market. After trading resumed, the stock settled the following day at €0.90, before closing last Friday at €0.89, but it's down today to around €0.85.

The deal with Luxottica becomes effective only at the beginning of 2006, giving Marcolin a lot of advance notice to reorient its strategies and find new licenses. For the next 15 months, up to the expiry of its current contract on Dec. 31 2005, Marcolin will continue to produce and sell all its D&G eyewear lines. Marcolin and Luxottica have announced that they will begin discussions to identify potential distribution synergies between their respective organizations that would help to strengthen the presence of D&G's eyewear in the market, maximizing its sales irrespective of who is the licensee.

Officials of Marcolin indicate that they are willing to negotiate a deal that will avoid swamping the market with unsold inventories, repeating a situation that took place when Safilo took over Giorgio Armani's big eyewear licenses from Luxottica. They would like Luxottica to delay the presentation of its own D&G lines for Spring 2005 in order to maximize the sales of Marcolin's own lines during the 2nd half of 2005.

It may be speculated that the huge distribution network put together by Leonardo Del Vecchio in the USA and other countries could be put to fruition to help out some of Marcolin's eyewear brands. Luxottica may want to use the agents who have been selling D&G for Marcolin successfully in the USA. It's unlikely that Marcolin will be producing D&G eyewear for Luxottica under contract to save it from having to make cuts its manufacturing capacity or workforce, as the initial announcements speak exclusively of possible commercial synergies. On the other hand, Marcolin will certainly try to negotiate new licenses to help fill the gap left by the loss of D&G.

Marcolin's latest 6-month results showed that all its remaining brands were on an upward growth curve, with the operating profit (Ebit) almost 3 times higher than for the same period last year, but these figures will not be sufficient in the longer term to fill the gap left by the loss of D&G, which generated sales of €75.4 million in 2003. Marcolin has announced an agreement to extend its Kenneth Cole license from the department stores to the optical retail circuit in the USA, replacing ClearVision. This deal should bring in additional revenues of €15-20 million a year, the same as the amount being sold in the department stores.

Luxottica's deal with Dolce & Gabbana is based on a higher sales target of €120 million for the 12 months following the commercial launch of the new collections, with further growth in the future. The idea is to double the turnover generated with Marcolin in a very short space of time. In the first half of 2004 only a few of D&G's lines grew by more than 30 percent.

As part of its agreement with Luxottica, which will be automatically renewed for another 5 years if certain sales targets are met, D&G receive an advance payment of €60 million from Luxottica on royalties due over the first 5-year term of the agreement. The royalty fee is comparable to that of other Luxottica licenses. In a statement of their own, Domenico Dolce and Stefano Gabbana admitted that their 10-year-long collaboration with Marcolin had been positive and fruitful, but they now felt the need to exploit the growth potential ?within a dimension that can guarantee the company's growth.? D&G remains one of the fastest-growing fashion houses in Italy. Its sales grew by 23 percent to €585.1 million in the financial year ended last March 31, not including their licensed fragrances and eyewear.