Kering, the French luxury goods and sportswear group that owns Gucci and many other brands, has decided to regain control over its eyewear licenses and develop them in-house. The decision mainly affects Safilo, which holds the important Gucci license.

Among the other brands owned by Kering that will be affected by its decision are Yves Saint Laurent, Bottega Veneta and Alexander McQueen, whose licenses are also held by Safilo; Stella McCartney, whose license is held by Luxottica; Puma, which is licensed to Charmant; and Balenciaga, licensed to Marcolin. Boucheron is licensed to Gold & Wood.

There are other brands in Kering's portfolio that still have no eyewear licensee. Kering owns one brand of eyewear, Electric, and handles the eyewear line of Brioni in-house.

Kering, a group that was previously called PPR, said that the eyewear licenses of the brands in its portfolio currently generate annual sales of roughly €350 million, making it one of the top five players in the industry when it will manage the business on its own. Of those, about €250 million are represented by Gucci eyewear, according to well-informed sources. Kering added that the 11 brands of the group that are active in the eyewear sector, nine of which are managed through license agreements, involve annual royalty income of approximately €50 million, or about 14 percent of the turnover generated by the licensees.

The group obviously believes that it can generate higher profits by managing the eyewear business of its own brands directly. A brokerage firm, Exane BNP Paribas, estimates that Luxottica generates operating margins of 23 percent on its proprietary brands and 19 percent on licensed brands.

In order to maximize the potential of its own portfolio, Kering is establishing a new business model through which it will fully control the eyewear value chain, from design to product development and logistics, and from branding and marketing to sales.

The project involves the formation of a dedicated entity specialized in luxury, high-end and sports eyewear managed by a team of experienced professionals under the direction of Roberto Vedovotto, chief executive of Kering Eyewear. Vedovotto left a few months ago as chief executive of Safilo under less than friendly terms, and he and his team will be holding shares in the new entity. Kering said that all its brands would continue to control separately the creative process under the leadership of their respective creative directors.

The group hopes that bringing the eyewear business in-house will enable the full activation of its brand portfolio in both the luxury segment and the sports and lifestyle segment, which comprises the brands Puma, Volcom and Electric. Kering hopes to attract the best talents for design, product development and sales. It is aiming for full control over suppliers and for enhanced distribution with a focus on the group's directly-operated stores. These stores generate up to 70 percent of brand sales in the case of Gucci.

Little action is likely to take place before 2016, as Kering has decided in principle to wait for the expiration of the licenses before internalizing the respective eyewear operations. However, Kering has agreed to terminate Gucci's license agreement with Safilo two years in advance, but the break-up will be smooth. The deal will end on Dec 31, 2016 and will lead to a total compensation payment to Safilo of €90 million, to be paid out in three instalments between 2014 and 2018. The two groups will put in place a production agreement for four years, starting in January 2017, renewable upon mutual agreement “in order to benefit from Safilo's expertise and production capabilities in high-quality Italian manufacturing,” Kering said.

The loss of the Gucci license will have a dramatic impact on Safilo, as it currently represents between 22 and 23 percent of its annual sales according to a broker, Banca Arkos. The broker believes that Safilo could seek to compensate for Gucci's by buying a brand or through the signing of another significant brand licensing agreement. Significantly, Safilo's new management has lately insisted on the development of its in-house brands, organically and through acquisitions.

Banca Akros does not rule out some extraordinary corporate activity with GrandVision, which is now expected to go public on the stock exchange soon. Safilo and GrandVision are both controlled by Hal Investments.

Banca Akros described the transitional manufacturing agreement between Kering and Safilo as an “intelligent move” that will enable Safilo to maintain production levels and possibly avoid implementing restructuring measures at its Italian plants as it had to do after the loss of the Armani brands to Luxottica.