Business Breakdowns
· Swetha Ramachandran
[00:00:00] S1: I mean, I guess to start off, it's interesting to consider that this is a consumer health company where none of its brands actually have the honor of making it to the company name. And that's quite unusual because typically branded companies tend to be very proud of their flagship brands. Look at LVMH, which is sort of the marriage of Louis Vuitton Moët Hennessy. This EssilorLuxottica, the merger of those two companies, in fact, is not made up of individual brands. There is no brand called Essilor. There's no brand called Luxottica. The individual brands, however, such as Ray-Ban, Oakley, and now Supreme that they bought just last year, are much more recognizable than the parent company itself. So what does the company do? I guess by thinking about those brands, you might have a picture that this is the global market leader in the eyewear industry. And it's interesting because it's the only company really that spans the entire spectrum from the more medical side of eyewear, with prescription lenses, as well as frames and sunglasses on the other hand. Its business does skew 75/25 revenue-wise between the lens side and the frame side. So the vision care side is the big money spinner, but it's also quite dominant in its space versus other consumer verticals because it's three times the size of its closest competitor, which happens to be Alcon, which operates in a very small segment of the eyewear value chain. And really it spans design, R&D, manufacturing, as well as, importantly, retail, which is something that we can talk about that didn't exist before the EssilorLuxottica merger for Essilor itself. And that is a huge distinguishing feature of this business versus other eyewear businesses that, for example, try to control only the consumer experience via retail, or only make brands that are sold in the wholesale channel.
· Zack Fuss
[00:00:00] S0: How big is the business and are there certain sub-segments of it that you think are better to quantify versus others? How do you kind of anchor to what we're looking at here?
· Swetha Ramachandran
[00:00:00] S1: So the business in terms of sales, they generated about €26.5 billion last year, which if you consider the size of the global eyewear market, the fact that the company made 550 million prescription lenses last year, which is enough to provide glasses for just over 5% of the world's population, it doesn't seem like it's a huge business. And that's really because it's primarily more volume than it is value. They make a lot of very relatively inexpensive lenses and frames. There are, of course, the high-end brands that we all know, but the bread and butter is made up at the lower end. So they sell a lot of volume, which in effect means that their overall sales are “only” about €26.5 billion, even though that's hand and fist above many of their peers. I mean, if you try to consider, let's say, the average selling price—and this is very hard to do given they sell so many different things across different businesses, from prescriptive lenses to now smart glasses. But I kind of roughly used, let's say €200 as an average selling price, which is perhaps even generous. And I came up with an estimate. If you assume that the average consumer is spending at EssilorLuxottica about €200 a year, they may be reaching only 113 million consumers a year. And that's actually considering the fact that myopia is touching more than 2 billion people's lives around the world. By the year 2050, it's expected that 5 billion people, or half of the world's population, will be shortsighted. So there is this question of penetration, particularly in emerging markets, where especially younger children have a much higher rate of myopia, for example, in China and India, than they do in developed markets, and where they remain underpenetrated. So you could see that actually the relative penetration of the products of this company should continue to increase as time goes on.
· Zack Fuss
[00:00:00] S0: So I know that this is the combination of two businesses with a very rich history. Prior to the merger, they operated in somewhat of their own different verticals. What was it that precipitated the merger of Essilor and Luxottica and the stories of these two storied businesses?
· Swetha Ramachandran
[00:00:00] S1: So 2018 was the year it all happened, when Essilor merged with Luxottica. And in fact, Essilor and Luxottica themselves were heavily acquisitive companies independently prior to coming together. The story, of course, is a fascinating case study in M&A and boardroom battles. The story is one of innovation, which is primarily at the Essilor level, meeting iconization, which is at Luxottica, and its ability, for example, to take these dusty, forgotten brands like Ray-Ban and really reignite and catalyze growth for those. It's hard to remember now, but Essilor was actually, all the way back in 1959, the first manufacturer of the progressive lens, which is Varilux, which was hugely influential and was also followed by several other innovations, as well as M&A, such as Transitions, etc. Similarly, of course, Luxottica has acquired over time these iconic brands. First Ray-Ban, Oakley, and then, of course, licenses for some very coveted luxury brands such as Chanel and Prada as well. And I think what really precipitated this merger was Del Vecchio, who was the Chairman and CEO of Luxottica at the time. He was a man with a very unique vision in that he thought that integrating and controlling all aspects of the value chain in eyewear was the key to unlocking value. And of course it turns out that he was right in that this is the only company really that even today has operations across manufacturing, distribution, R&D. They have over 12,000 patents under their belt, which is again no small feat. That was a realization that prompted them. At that time, they were really only in frames and sunglasses, and the view was marrying that with lenses would be a logical next step. So this is really what brought about that merger at the time. And it clearly wasn't without its problems, as we will probably talk about later on.
· Zack Fuss
[00:00:00] S0: When you think about the combined business, one of the more interesting aspects of optical retail is the separation of the healthcare and what I'll call the fashion part of the business. And so I think when you consider the strategic motivations for a merger, but also the combined economics? Can we just talk through what it looks like in terms of where the money's being made?