Luxottica Group: Corporate Research Paper

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If the derivative instruments are eligible for hedge accounting, the following accounting criteria are applicable:

- Fair value hedge: when a derivative financial instrument is designated as a hedge of the exposure to changes in fair value of a recognized asset or liability, both the changes in fair value of the derivative instrument as well as changes in the hedged item are recorded in the consolidated statement of income. The gain or loss related to the ineffective portion of the derivative instrument is recognized as financial income/expense.

- Cash flow hedge: when a derivative financial instrument is designated as a hedge of the exposure to variability in future cash flows of recognized assets or liabilities or highly probable forecasted transactions, the effective portion of any gain or loss on the derivative financial instrument is recognized directly in other comprehensive income. The cumulative gain or loss is removed from OCI and recognized in the consolidated statement of income at the same time as the economic effect arising from the hedged item affects income. The gain or loss related to the ineffective portion of the derivative instrument is recognized in the consolidated statement of income. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated statement of income. When a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in OCI at that time remains in equity, and is recognized when the economic effect arising from the hedged item affects income. Luxottica utilizes derivative financial instruments, primarily Interest Rate Swap and Currency Swap contracts, as part of its risk management policy in order to reduce its exposure to interest rate and exchange rate fluctuations. Despite the fact that certain currency swap contracts are used as an economic hedge of the exchange rate risk, these instruments do not fully meet the criteria for hedge accounting pursuant to IAS 39 and are marked to market at the end of each reporting period, with changes in fair value recognized in the consolidated statement of income.

The use of derivative instruments is aimed only at the actual hedging of exchange risk that Luxottica is exposed to, therefore the use of these instruments for speculative purposes is not permitted. In addition to aiming at reducing counterparty risk, the policy specifies the minimum criteria to be met in order to be able to transact with the company. This principle sets forth: the obligation to operate with qualified banking counterparties through standard agreements, a limit on exposure per individual counterparty and a limit on the total exposure of the company, as well as fixing the minimum credit credential requirements for the counterparties authorized to engage derivative transactions.

Luxottica seek its competitive advantage through differentiation. This differentiation includes products’ features, produced with high standards levels, Brand’s recognition and after-sale services. Among customers Luxottica gained an high-medium segment perception, both for its goods and its retail network. Prices are rather high in the eyewear market, due to the relatively low level of competition in the market and the customer aren’t aware of the real cost of production of eyewear. Otherwise, “Brand perception” is the price discriminant which allows Luxottica to gain high profit margins.

The expansion of the Group has been fueled thanks to external growth, pursed with partnerships and acquisitions. Those operations were focused on purchasing well-known eyewear producers (RayBan, Persol, Oakley...) and licensed labels with luxury fashion brands. Acquisitions were also the mean of entering in foreign markets, such as the US geographic area through LensCrafter. At these days Luxottica produces and sells its products in 130 countries, owning retailer networks and factories. Since the recent years Luxottica policy has been focusing on emerging markets (China, India, Brazil…) through acquisitions and implantations of factories and improving its retaliatory capacity in these countries with and outstanding growth of luxury product demand.

Luxottica Group S.p.A. is the eyewear market leader and it is not diversificated: that is the only market it works in. The European and US markets have reached a state of maturity so Luxottica has been expanding to emerging markets such as Asia and South America by building facilities in those areas and promoting its brands worldwide. The macroenvironment’s opinion about Luxottica is quite concerned because of the monopoly system the company created around itself, journalists criticism has been fighting against the company purposes to keep on being the market leader following its acquisition strategy.

Bibliography

“2014 Annual Report.” Luxottica Website. 31 Dec 2014. Luxottica S.p.A. Web. 1 Jun 2015.

“Luxottica Group S.p.A.” Business Insights: Essentials. Gale Cengage Learning. PSU Library. Web. 1 Jun 2015.

“Luxottica Group S.p.A.” LexisNexisAcademic. PSU Library. Web. 1 Jun 2015.

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