Business Breakdowns
· 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?
· Swetha Ramachandran
[00:00:00] S1: Their key is their scale, which allows them to continue to invest in R&D and innovation, and at the same time, their vertically integrated structure that also allows them to push that innovation into their own distribution channel. That, and also the unique aspect of EssilorLuxottica relative to other closed network, vertically integrated players—let's say Inditex, for example, which owns the Zara brand: they make the product, they sell it in their own stores. But actually, its own competitors are also its clients and customers because it has an open network framework. They very proudly said, for example, at their capital markets day that Hoya, which is technically one of their competitors, is also one of their big customers. And similarly, Kering Eyewear works closely with EssilorLuxottica as well, given that the DTC, the retail network of EssilorLuxottica, is actually a significant customer of Kering Eyewear—the Gucci sunglass brands, for example, selling them in their stores. That is an interesting feature. You would never find, for example, at a Zara store, something from H&M. That is quite different about this business, that open architecture which helps them scale up, and then that scale is a virtuous cycle that allows them to reinvest behind their stores, but also behind innovation and R&D. Investment in R&D has actually driven significant proprietary IP. They have over 12,000 patents pending or granted across more than 2,000 patent families. They have nearly 21,000 trademarks that are pending or registered. That innovation is going to come to center stage because it's across all of their major areas. It's across vision care, eyewear design, technological innovation. It's across smart eyewear. Sunlenses, they have over 50 sunlens researchers to think about new mold processing and optical technologies, as well as of course, digital transformation. That is that in-store experience with an option to explore the complete collection digitally, the face scanner technologies that help you, the virtual try-on on Ray-Ban.com. I have to say I've personally been quite impressed by this when I was recently in the market for a pair of Meta Ray-Bans. All of these help it distinguish itself from the competition. But the real secret sauce is this vertical integration because that is quite unique about this company.
· Swetha Ramachandran, Zack Fuss
And to cover every step of the value creation process, focusing on manufacturing, service, all while having a very geographically diversified footprint is quite complex and it's not an easy feat to be achieved by many companies. That's why maybe the mid-teens margin is actually fair. Mid- to high-teens. I'm really not sure that that 20% target that they're pushing for may necessarily be achievable given the complexity of operating this business. And of course, we haven't even touched on tariffs yet. That could also be a potential spanner in the works of their margin ambitions. But that secret sauce, at least their scalability and relative competitive advantage, should continue to be enhanced because of their vertical integration. [00:00:00] S0: When you think about vertical integration and a business that's described as dominant, we find that there's increasingly pressure on these types of businesses for the FTC or the DOJ to pursue them on the basis of antitrust. You have to think about how can they narrowly define a market in order to prove that they are instituting harm upon the consumer. But when you consider sleepy categories such as retail, you typically don't see much in the way of antitrust action. My curiosity is, headlines suggest that they face these trials. What is the concern? And how do shareholders weigh what the actions being pursued against EssilorLuxottica may or may not be?