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Is Competition In The Eyewear Segment Preying Over Luxottica’s Bottom Line?

February 24, 2015 | About:

What began as a small tool shop in the small Alpine town of Agordo in Italy, grew to become a power player of fashion eyewear manufacture, retail and distribution with a near-monopoly hold on the market in the United States. Luxottica (LUX) began by crafting spectacle frames from mountain goat horns in 1961. In a few decades, they were exporting to countries like the United States, China, Brazil, and India.

With licenses to design and manufacture for fashion labels such as Burberry, Dolce & Gabana, Versace, Bulgari, Tiffany, Ralph Lauren and Prada, it is fair to assume that if you own a pair of designer glasses or sunglasses, they are probably by Luxottica. Half a billion people in the world wear eyewear made and sold by Luxottica, CEO Andrea Guerra admitted to CBS News’ Lesley Stahl. Apart from the top-selling sunglasses brand in the world, Ray Ban, they also own pioneer sports eyewear brand, Oakley. They sell all these brands at their optical retail chain stores Lenscrafters and Pearle Vision, as well as, sunglasses retail store Sunglasses Hut. In a masterstroke, they have also established eye-care benefits programme named EyeMed. It isn’t without reason, then, that Milan-based Luxottica is the largest eyewear company in the world.

Mammoth market share

With an estimated 60-80% hold on the eyewear market in the US, Luxottica justifies its near-monopoly status with 5 to 9% pricing-led growth. Even in the current uncertain financial scenario, Luxottica boasts a 6.8% growth in net sales in the third quarter of 2014. Their dominant position translates to over 20% returns on equity and operating margins expanding at the rate of 15%.

Shareholders take particular comfort in Luxottica’s market position by bidding the shares of the company up to a dominant position in the financial markets, as well. Listed on both the New York Stock Exchange and the Milan Stock Exchange, the eyewear giant’s shares go at 28x the consensus earnings estimates for 2015. If they can hold on to double-digit operating income growth, which currently stands at 14.9% of sales, for the next five years, market-watch experts predict that Luxottica could continue to keep their shareholders happy. But low-price competition, both in retail and e-commerce segments, is challenging Luxottica’s high profits and in turn affecting its sales growth.

Let us take a closer look at the competition looking to see eye to eye with Luxottica.

E-commerce in eyewear segment

Online eyewear stores were a direct result of Luxottica’s market domination and marked-up prices in the U.S. FramesDirect came about in the early 1990s as the first online eyewear retailer. Two Houston-based optometrists wanted to make affordable prescription glasses available to everyone in the country. They are popular even today, for charging competitively low prices for guaranteed designer products. The World Wide Web offers a plethora of other options for customers to acquire (much) cheaper, similar if not same quality, spectacles and sunglasses. 39DollarGlasses, ZenniOptical, Goggles4U – the list is endless. And an online operation means lower operating costs, as well as, a user-friendly shopping experience. It is as simple typing in your prescription, pupillary distance, and address and payment information on the site. And prescription glasses, in some cases more than two options for you to choose from, are delivered to your doorstep. Online stores are limited by geographical location that decides the target market for traditional brick-and-mortar stores. Take for example, GlassessUnlimited, which sells fashionable frames fitted with lenses to customers across the U.S., from their operational base in Thailand.

On the battle field with Warby

A force Luxottica will have to reckon with are bright new upstarts from the Wharton School of Business, University of Pennsylvania, who are looking to steal some of Luxottica’s market share and profits away with their start-up, Warby Parker (WP). Created with the objective of taking on Luxottica’s formidable market position, WP designs, manufactures and sells frames and prescription lenses 70% cheaper than Luxottica. They offer branded frames with lenses at prices starting at $95, while $300 – 600 is the typical price range for frames with lenses at Luxottica’s retail stores. It must be noted that Luxottica does not make prescription lenses.

“It turns out there was a simple explanation. The eyewear industry is dominated by a single company that has been able to keep prices artificially high while reaping huge profits from consumers who have no other options,” WP says on their website.

WP started out as an online business in 2010, and already has retail stores in most major cities in the United States. In 2011, the New York-based company shipped more than 10,000 pairs of glasses to customers across the United States of America and the world. In February 2013, WP raised $4 million and added big-name investors such as American Express and Mickey Drexler to their portfolio. This month, they turned five years-old and stand at $41.5 million of funding with 300 employees. They are being regarded as the next big thing in innovation in the eyewear industry in the U.S.

Competition takes a bite

Luxottica must carefully weigh their options now as online eyewear retailers seems to have subverted their end-to-end control of the eyewear business operation. Their target for the next year includes a cautious high-single digit sales growth. Their financial statements, reflect a slowdown in growth. Their gross profit jumped by a mere 1.8% while earnings per share moved from 0.31 to 0.34, in the last year. Financial market watchers prophesise an inevitable slowdown in their growth rate, even if they are able to maintain a strong customer base willing to shell out the big bucks that make Luxottica’s profitable business model.

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