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Introduction
Introduction // Industry // Pricing // Survey Data // Recommendations
•Determine how Luxottica affects industry prices •Determine how other firms try to competeIndustry Leader
•Does Luxottica exert true monopoly power?•What lines of business does it own and operate?Monopoly?
•Potential impact of Essilor’s merger with Luxottica•Possibilities for better prices in the futureFuture
Introduction // Industry // Pricing // Survey Data // Recommendations
Industry History“Glasses” traced to ancient China and Rome
True eyeglasses appeared in 1280s Italy
Sunglass era in 1920s Hollywood
Foster Grant mass-produced sunglasses in 1929
Polarized Sunglasses became available in 1936
Dominant Player
Introduction // Industry // Pricing // Survey Data // Recommendations
Luxottica – Founded in 1961 • Founded by Leonardo Del Vecchio in Agordo, Italy• Now headquartered in Milan, Italy
Began Vertical Integration through M&A in 1974• Luxottica acquired the wholesale distributor Scarrone• Presence in manufacturing, wholesale, retail, and insurance
Building an Unmatched Brand Portfolio• In-house brands include Ray-Ban, Oakley, and many more• Licenses with many of the world’s most recognized brands
Sunglasses Retail
Introduction // Industry // Pricing // Survey Data // Recommendations
Sunglass Hut
Oakley
ILORI
APEX by Sunglass Hut
Solstice
Sunglasses Stores
Introduction // Industry // Pricing // Survey Data // Recommendations
•Sunglass Hut1
•Oakley Store2
• ILORI3
4
Takeaways
•Luxottica and Safilo control 66.1% of the industry in revenue terms •Highly fragmented beyond top
players•No clear number for total industry
participants
33.9%
5.9%
60.2%
Market Share Breakdown
Other Safilo Luxottica
•APEX
Eyeglasses Retail
Introduction // Industry // Pricing // Survey Data // Recommendations
LensCrafters
Pearle Vision
America’s Best Contacts & Eyeglasses
Eyeglass World
Vision Center
Visionworks
Optical Goods Stores
Introduction // Industry // Pricing // Survey Data // Recommendations
•Market Share – 2.7% Refac Optical Group
•Market Share – N/A Wal-Mart Stores
•Market Share – N/A Costco Wholesale
Takeaways
•CR4 = 57.9% •Highly fragmented beyond top
players•No clear number for total
industry participants
38.9%
8.2%8.1%
44.8%
Market Share Breakdown
Luxottica National Vision Highmark Other
Introduction // Industry // Pricing // Survey Data // Recommendations
Optical Goods/Sunglasses Stores Barriers to Entry
Brand equity, both in terms of retail location and
actual eyewear brands
Licenses required for employees
High costs tied to marketing and store location
Supplier Relationships
Exit Barriers
Specialized equipment may have small resale
market
Small sellers with wholesale agreements
may have trouble relinquishing inventory
Introduction // Industry // Pricing // Survey Data // Recommendations
Optical Goods/Sunglasses: Rivalry Few dominant retailers
May try to compete on the basis of location, product selection, and brand recognition, but Luxottica’s control of brands makes it difficult
Warehouse clubs and superstores are attempting to compete on price, but have put little downward pressure
Sustained high prices delivers profitability and cash flow that allows Luxottica to make continuous acquisitions
Potential Increase in Rivalry?
Introduction // Industry // Pricing // Survey Data // Recommendations
•Mature Industry1•Annualized Growth Rate of 2%
through 20212•Emergence of Warby Parker as a
mid-priced retailer of stylish frames with differentiated business model3
Luxottica Prices
Luxottica Profit Potential
Introduction // Industry // Pricing // Survey Data // Recommendations
Characteristic Differentiated Slightly Differentiated
Undifferentiated Comments
Design Frame and lens shape, frame size
Function Some differentiation may stem from lenses
Appearance/Brand Varied brand loyalties
Geo. Market Offerings regionally uniform
Price Wholesalers, superstores, Warby Parker
Age Group Discounted offerings to kids
Customer Service Warby Parker
Eyeglass/Sunglass Differentiation Matrix
Government Regulation
Introduction // Industry // Pricing // Survey Data // Recommendations
FDA Regulation• Eyeglasses and sunglasses considered Class 1 medical devices•Must follow status-quo FDA guidelines such as those related to flammable materials,
and the “Drop Ball” test
Employee Qualifications/State Rules• Various license requirements for optometrists and opticians• 4 states, including New York, have special laws governing over the counter eyeglasses
The FTC’s “Eyeglass Rule”• Requires that optometrists and ophthalmologists provide patients with a copy of their
prescription without extra costs or conditionality• Sen. Charles Schumer has pushed for revisions of the rule
Industry Organization
Introduction // Industry // Pricing // Survey Data // Recommendations
Follows a model of extreme vertical integration
•Full control over the supply chain•Design•Manufacturing •Distribution•Retail
•No outsourcing – everything is produced in-house•Most companies invest intensely on internal R&D•Large number of different models being designed and
manufactured, all with different seasonalities, life cycles and marketing strategies
Pros and Cons of Vertical Integration
Introduction // Industry // Pricing // Survey Data // Recommendations
Pros Cons
• Reduced transaction costs• Allows more efficient collaboration
between different units• No need to coordinate between different
organizations to outsource tasks • High degree of control over quality of
the products, which means a higher competitive advantage for luxury brands
• Less flexibility in the market• Less access to different methods and
technologies• Less variety in production
Luxottica’s Business Model
Introduction // Industry // Pricing // Survey Data // Recommendations
•Focuses on introducing new designs, materials, and technologies•Five creative intelligence and product development centersProduct Development
•Six plants in Italy, additional plants in China, California, and Brazil •Produces 270,000 frames per day, 41% of output from Italian plantsManufacturing
Global Logistics
•150 countries: 50 subsidiaries and 100 independent distributors•Superior Turn Automatic Replenishment System for customersWholesale Distribution
Retail
•Network that links logistics and sales centers to production plants•18 distribution centers, primary hubs (Sedico, Atlanta, Dongguan)
•6,589 company owned retail locations, 676 franchised locations•Participates in e-commerce through retailer and brand websites
Luxottica’s Brands
Introduction // Industry // Pricing // Survey Data // Recommendations
In-House Brands Licensed Brands
Safilo’s Business Model
Introduction // Industry // Pricing // Survey Data // Recommendations
•Focuses on introducing new designs, materials, and technologies•This is done for in-house brands and licensed brands
Product Development
•Four plants in Italy, one in Slovenia, one in the U.S., one in China•Produces only 30% of the eyewear volume that it sellsManufacturing
•Distributes to 130 countries, with a direct presence in 28 markets•Has approximately 130,000 wholesale customers
Wholesale Distribution
Retail •Operates 116 Solstice sunglass retail stores in the U.S.•Participates in e-commerce through retailer and brand websites
Safilo’s Brands
Introduction // Industry // Pricing // Survey Data // Recommendations
In-House Brands Licensed Brands
National Vision & Highmark
Introduction // Industry // Pricing // Survey Data // Recommendations
National Vision
•Owned by KKR•Operates 900 retail
locations in 44 states and Puerto Rico
• Follows an everyday low pricing model
•Targets older population•Offers designer frames
as well as generic frames
Highmark
•Operates 700 retail locations in 42 states
• Focuses on the low to middle price consumer
•Has one manufacturing and distribution center in San Antonio
•Offers designer frames as well as generic frames
Luxottica and Essilor Merger
Introduction // Industry // Pricing // Survey Data // Recommendations
$24 Billion Dollar Purchase Price• Combined firm to be called EssilorLuxottica• Deal follows four years of negotiations
Maximum Vertical Integration• Luxottica will now produce prescription lenses• Significant cost and revenue synergies
True Monopoly Power• Some analysts believe that the deal will pass• Lack of overlap in current business models
The End of Safilo?
Introduction // Industry // Pricing // Survey Data // Recommendations
Losing Licensing Agreements• Saint Laurent, Gucci, Armani, Alexander McQueen• Will most likely lose the Dior license
Diminishing Retail Presence• 300 Solstice stores in 2009, 116 remaining in 2016• May look to sell off remaining retail assets
Weak In-House Brands• Only 25% of revenue comes from in-house brands• Very difficult to compete with Ray-Ban and Oakley
Pricing Strategies
Introduction // Industry // Pricing // Survey Data // Recommendations
Extremely High Markup• Demonstrates Luxottica’s market power• Luxottica can be viewed as a price maker
Goldilocks Principle• Pricing of popular in-house brands• Deviation from classic Goldilocks Principle
Tacit Collusion vs. Undercutting• Pricing in Sunglass Hut vs. Solstice• Price competition in prescription frame market
Illusion of Choice in Stores• Appearance of brand competition in retail• Similar price ranges for various brands
Self-Selection in Stores
Introduction // Industry // Pricing // Survey Data // Recommendations
Second Degree Price Discrimination Through Brand Isolation!
Goldilocks Principle – Sunglass Hut
Introduction // Industry // Pricing // Survey Data // Recommendations
Goldilocks Principle – Sunglass Hut
Introduction // Industry // Pricing // Survey Data // Recommendations
Tacit Collusion?
Introduction // Industry // Pricing // Survey Data // Recommendations
*Green line represents Warby Parker Plastic Frames - $95*Blue line represents Warby Parker Titanium Frames - $145
Tacit Collusion?
Introduction // Industry // Pricing // Survey Data // Recommendations
*Green line represents Warby Parker Plastic Frames - $95*Blue line represents Warby Parker Titanium Frames - $145
Goldilocks Principle – LensCrafters
Introduction // Industry // Pricing // Survey Data // Recommendations
Goldilocks Principle – LensCrafters
Introduction // Industry // Pricing // Survey Data // Recommendations
Competing on Price & Variety
Introduction // Industry // Pricing // Survey Data // Recommendations
*Green line represents Warby Parker Plastic Frames - $95*Blue line represents Warby Parker Titanium Frames - $145
Competing on Price & Variety
Introduction // Industry // Pricing // Survey Data // Recommendations
*Green line represents Warby Parker Plastic Frames - $95*Blue line represents Warby Parker Titanium Frames - $145
Disruptor - Warby Parker
Introduction // Industry // Pricing // Survey Data // Recommendations
Uniform Pricing Model
$95 for plastic frames
$145 for titanium frames
Differentiation Initiatives
Buy a Pair Give a Pair Program
5 Day Free Trials
Limited Showrooms
Survey
Introduction // Industry // Pricing // Survey Data // Recommendations
QualtricsSurvey
•Multiple Choice•Slider
Sample Size
•116 responses•Students and
adults
Segmentation
•Gender•Age•Home region
Survey
Introduction // Industry // Pricing // Survey Data // Recommendations
Ray-Ban’s Clubmaster Fleck, $160 Prada, $390
Oakley’s Holbrook Polarized, $170
Survey Demographic
Introduction // Industry // Pricing // Survey Data // Recommendations
● Total respondents = 116
By Location
Introduction // Industry // Pricing // Survey Data // Recommendations
● US Willingness to Pay stayed constant for all brands, despite predicting a higher retail price for Prada
● Non-US Willingness to Pay increased more for Prada
● Possible trend: Non-US markets, such as Asian markets, placing a higher value on brand name?
Perceptions of the Industry
Introduction // Industry // Pricing // Survey Data // Recommendations
● The majority (49%) believed that the eyewear industry was competitive
● 22% did not think it was competitive
● 29% had no opinion
Perceptions of the Industry
Introduction // Industry // Pricing // Survey Data // Recommendations
● We then asked for their estimate of the percent of market share owned by the leading firm in the eyewear industry
● In reality, some believe that Luxottica owns an estimated over 80% of market
share
Do perceptions differ by demographic?
Introduction // Industry // Pricing // Survey Data // Recommendations
By age group...
Do perceptions differ by demographic?
Introduction // Industry // Pricing // Survey Data // Recommendations
Americans vs. Non-Americans...
Data Summary
Introduction // Industry // Pricing // Survey Data // Recommendations
Respondents’ WTP is lower than the estimated price average and retail price•Possible untapped opportunities
Estimated price average is close to the actual retail price•But…how are sales still doing well?
Potential Criticisms
Introduction // Industry // Pricing // Survey Data // Recommendations
•Potentially a better way of collecting data?
Slide parameter may induce anchoring bias
•Was the proper amount of time used?
Mindless survey-taking
•Socioeconomic status, trend-following, preferences
Doesn’t include important factors:
•May cause people to lean a certain way
Question wording
Recommendations
Introduction // Industry // Pricing // Survey Data // Recommendations
Important trends to jump on:•Millennial price sensitivity•Eye health awareness• Sustainable business practices• Service-centricity•Personalization•New technology
Recommendations
Introduction // Industry // Pricing // Survey Data // Recommendations
•Market lower-end sunglass brands to younger demographics•Late teens/early twenties seem more aware of the lack of
competition •Differentiate products to appeal to millennials
Target different age ranges
•Design products that flaunt the company logo and have a distinctive appearance•Create customer value through prestige•Target the Asian market?
Prestige pricing
Investments
Introduction // Industry // Pricing // Survey Data // Recommendations
High Barriers to Entry
•Difficult to compete with established brands
Competition
• Luxottica has the advantage of economies of scale
Different Perspective
• Sustainable business practice
•Niche market
•Awareness of industry trends
Analyst Perspective
• Expect Luxottica’s stock to perform well
• Short sell Safilo’s stock
• Look into start-up disruptors