Luxottica: A Google Glass Half-Full

Luxottica: A Google Glass Half-Full

Could Be a Smart Deal for Both Parties

RENEE SCHULTES

March 25, 2014 12:30 p.m. ET

Luxottica LUX.MI +3.95% is daring to see things differently. The Italian eyewear-maker is partnering with Google GOOG +0.07% to design, develop and distribute new versions of the U.S. technology giant’s internet-connected glasses. That’s a bold call: Luxottica’s luxury goods peers have more typically shunned technology groups’ advances.

The benefits to Google are clear. Google gets manufacturing know-how and access to Luxottica’s roughly 6,500 stores globally. Google Glass, currently in prototype, also has an image problem: It has prompted concerns around privacy. Getting a better-looking product with the help of Luxottica’s Oakley and Ray-Ban brands doesn’t address such worries. But positioning Glass as a more mainstream consumer product, rather than a high-tech niche gadget, might help the product’s appeal.

But it doesn’t take rose-colored glasses to see the deal could be smart for Luxottica too.

It would be easy to dismiss the nascent market for smartglasses. Shipments are expected to rise to 6.6 million units in 2016, up from 50,000 in 2012, estimates IMS Research. That’s minuscule in the context of the wider market for eyeglasses: about 900 million frames were sold last year and the market is expected to reach 1.2 billion in five years, estimates Euromonitor and Luxottica. Aging populations are buying more prescription glasses, while rising emerging-market wealth is creating new buyers of designer-label frames.

But partnering with Google looks a relatively low-risk way for Luxottica to protect itself against a product that has the potential to become a threat. Numerous companies have built smartwatch prototypes. making it hard for luxury timepiece makers to know which one to back. But Google stands tall in smartglasses, making it an “easier” choice for Luxottica, notes Luca Solca at Exane BNP Paribas.

Luxottica also has less to lose in opening up to a partner than, say, Swatch. The Swiss watchmaker owns valuable battery and antenna technology that is well suited for smartwatches. So far, it has refused to let technology titans put their mark on its products over concerns it wouldn’t fully control its capital spending.

But the Italian company’s move ultimately looks defensive. Luxottica owns the lion’s share of the world’s major eyewear brands, giving it a duopolistic position with France’s Essilor International. That underpins its premium valuation. Luxottica trades on 27 times forecast 2014 earnings; far smaller peer Safilo Group, which makes glasses under license for labels like Dior and Marc Jacobs, trades on 18 times.

Experimenting with Google looks a good way for Luxottica to ensure it doesn’t give up that lead should smartglasses take off.