Business Breakdowns
· 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.
· Zack Fuss, Swetha Ramachandran
[00:00:00] S0: It appears, I don't know if it was confirmed, that Meta took an interest in the business. Will that relationship expand beyond an investment? How do the two companies work together? [00:00:00] S1: Meta has said that they had approval to take a 5% stake in EssilorLuxottica. They haven't confirmed whether they have done it. [00:00:00] S0: It's just interesting that it was reported but not necessarily confirmed or denied.
· Swetha Ramachandran
[00:00:00] S1: Exactly. And I think here, Meta, this is sort of a symbiosis where both companies do need each other. EssilorLuxottica does need Meta's AI in order to power this interest in smart glasses, where if you consider the relative size of smart glasses to smartwatches, smartwatches are estimated to be worth about a market size of about $34 billion, and smart glasses maybe about $3 billion. So there's a huge gap in terms of potential, although you could argue that the form factor of a watch lends itself to much greater adoption than perhaps a smart glass. But AI is the key unlock here. And so Meta AI powering Ray-Bans is a fundamentally different proposition from the old Ray-Ban Stories 1.0, which had much more limited functionality. We don't have a lot of details in terms of how the economics are shared between the two companies on the sales of the Meta Ray-Ban product. Both companies are quite cagey about it, other than to say that this is a long-term partnership and they want to continue to innovate. I do think that they're building capacity at the moment to sell up to 10 million units of this. They sold 2 million units of the Meta Ray-Ban glasses last year. It's priced surprisingly affordably at just about $300 a pair at retail in the US, and I think the reason for that is their attitude that "if you build it, they will come." And the idea is to increase adoption before competition comes and staves off their growth potential. I don't know that this will necessarily be successful because this is an inherently competitive space. They have a first-mover advantage, but they may not be ultimately the winner in this space depending on the functionality that comes out. Perhaps Apple comes out with its own version of the smart glasses with superior functionality, or any other player. For example, I just read about a voice assistant called Sesame, which makes AI glasses, and they're apparently very highly rated as well. So I think this is going to be quite a competitive space. It's quite different from anything EssilorLuxottica has done before because they don't own this technology; they don't own Meta AI functionality. So that partnership model will be interesting to see how that evolves, and it'll only be as successful as Meta AI itself is successful.
· Zack Fuss
[00:00:00] S0: When you consider the strengths and weaknesses of the business itself and the competition, we've touched on a number of these topics, but if I can just summarize: you have a vertically integrated business with dominant brands; they reinvest heavily into their business. They've been able to stave off competition from upstarts such as Warby Parker. What is, if you put it all together, the special sauce that makes this business tick?