Business Breakdowns
· Swetha Ramachandran, Zack Fuss
So they're still very heavily investing behind their retail presence in order to make sure that they are able to sell both the enlarged suite that they are offering now to customers, all within the same formats, and therefore increase store productivity. Again, I think this is a longer-term margin expansion potential, probably not right away. Of course, eCommerce investment has been huge for them as well. This is an area where increasingly, 7% of their sales are coming from eCommerce, so this has required investment. About 20% of that CapEx is going into investing in digital technology. And I think this is now increasingly table stakes for a business like this which is facing competition, of course, from many other retailers in the eCommerce arena. [00:00:00] S0: It's interesting that you mentioned eCommerce because it's almost impossible to talk about Essilor without mentioning the likes of Warby Parker, which is now itself a public company. And if you think about the direct-to-consumer boom of the last decade, for a very long time, the capital markets afforded their competition to effectively lose money to acquire customers. And that's no longer the case. But I'm curious, as people thought through some of the competitive pressures that a business like this would face, what the likes of Warby Parker meant for their business and how they've staved off such competition.
· Swetha Ramachandran
[00:00:00] S1: Yes, and I think this again brings to the fore their relatively unglamorous approach in terms of this insistence on vertical integration, which is to control everything from global manufacturing to global distribution to an offer like Warby Parker, which is much more centered around the consumer, the end consumer experience at retail. So if we just look back even to five years ago when the phrase DTC was all the rage, particularly for US companies. Consumer brands, for example, like Away in luggage were competing against the likes of Samsonite; Warby Parker in eyewear competing against EssilorLuxottica. And they were seen as disrupting what had traditionally been seen to be very staid, dull but worthy industries. And so Warby Parker's model was really to own the customer experience and outsource mostly everything else. Not everything, because they did control the design element. But for example, manufacturing was done at third-party manufacturers, and they basically controlled the design and the retail elements. So that digital-first model was a huge success during the pandemic, but they've actually struggled to turn a profit. And if you contrast that to EssilorLuxottica at 16% EBIT margins, that's quite a contrast. And it's quite telling that actually the value of scale and the benefits that vertical integration have had for this business have been huge. And it's also, I think, the case that consumers, especially post-pandemic, have voted with their feet in that they want choice. So I think what was Warby Parker's strength at the beginning, which was that single-brand focus, has now perhaps emerged to be a little bit of a weakness in not being able to give customers the full spectrum of alternatives that might be available out in the marketplace. I mean, the other key is of course that EssilorLuxottica has global scale; it's in 150 countries, while Warby Parker is still very US-Canada focused. And so their sales today are still sitting at about 2% of EssilorLuxottica's sales. That's, I think, the real difference is that what was seen as a disruptor is really perhaps now just sort of a me-too wannabe player rather than a true disruptor.
· Zack Fuss
[00:00:00] S0: And then we haven't spoken much to the geographic mix of the business. Obviously it's listed in Europe, but the majority of the business is still in North America. Are there differences in strategy based upon where the footprint of the business is and how aligned or integrated are those business units?
· Swetha Ramachandran
[00:00:00] S1: They're quite consistent in wanting to operate one type of business around the world. So I don't think that there are huge differences other than what might naturally emerge because of the different business mix. So for example, North America is their biggest business. It is roughly about 35 billion euros of revenues or so. And I think the big difference here is that the independent eye care channel is much more important in North America. It's actually over half of their revenues come from the independents, but their product mix actually is overwhelmingly lenses and then frames. So sunglasses is probably the smallest element of the market in North America. And then you've got EMEA, which is actually just slightly bigger. If you consider that you can split that into developed Europe and emerging Europe combined, that would be bigger than the US, but actually developed Europe is slightly smaller than the US business. And here the channel tends to be today also still quite fragmented, even with the GrandVision acquisition. So about 59% of their business or so is coming from independents. And I think the only market really where this is not the case is in Asia. So in Asia Pacific, independents are a much smaller proportion of the market, while brick-and-mortar retail and eCommerce tend to dominate. That is, of course, still today, despite the size of Asia, it is smaller than both North America and Europe, but of course, with a huge optionality in terms of upside, given that children in Asia are most in need of corrective lenses because of a higher prevalence of myopia in that market versus anywhere else.
· Zack Fuss
[00:00:00] S0: We've touched on some of the strategic, I'll call it aspirations of the business in smart glasses, in audio. I also want to talk about some of the acquisitions that they've done. Supreme obviously stands out as a bit of a funky one. What is their strategy for growth and what is informing some of these strategic endeavors that they're undertaking?
· Swetha Ramachandran
[00:00:00] S1: The recent acquisitions, really—I mean, the major acquisitions that they did were of course, Ray-Ban in 1999 for $640 million, which has been a huge hit, Oakley in 2007 for $2.1 billion. I'd say the most left-field of these was perhaps the Supreme streetwear brand from VF Corp last year in 2024, which they paid one and a half billion dollars for, which itself was actually less than what VF Corp paid to buy it a few years before that even. But there were some question marks that the market had at the time of the acquisition. But I would say they've somehow been given a free pass on this deal since the smart glass phenomenon took off. So I think since the end of last year, the relaunch of Meta Ray-Ban, because of the integration of Meta AI—which did not exist in the earlier iteration of Ray-Ban stories—has really made this popular and ready for takeoff. And because of that, I think people have been a bit more forgiving. Even though Supreme, as a streetwear company, has no complementarities to EssilorLuxottica's core offering. I believe the reason for doing this deal is that over time they will seek to do a version of the Meta Ray-Ban with Supreme as well. Supreme tends to skew much more Asian, much younger, much more Gen Z. So in order to popularize smart glasses among that demographic, it's possible that Supreme becomes the brand vehicle to do that in the way that Ray-Ban and Oakley could do the same thing with slightly older consumers, more in developed markets. I think that is a potential reason for doing the deal. If it was just to sell hats and T-shirts with Supreme emblazoned on them, I'm really not sure this was the best use of one and a half billion dollars of shareholder money.