Luxottica-Essilor Deal Blurs Warby Parker’s Vision

The agreed €46bn merger of Luxottica (NYSE:LUX) and Essilor (EN Paris:EI), market leaders in eyeglass frames and prescription lenses respectively, poses a magnified threat for Warby Parker. The e-commerce start-up has worked to loosen Luxottica’s grip on the eyewear market, but the enlarged Italian group is likely to strengthen its hold.

Framing the mega-deal

Luxottica owns Ray-Ban and Oakley, operates LensCrafters and Sunglass Hut stores, and sells designer frames under licence from Chanel, Ralph Lauren and other luxury brands. Essilor boasts lens brands such as Varilux and Transitions, and also makes equipment, instruments and services for eyecare professionals.

The combined group is expected to generate over €15bn in annual revenue, employ more than 140,000 people and sell products in over 150 countries. It’s predicted to control about 16% of the $95bn eyecare market, rising to over 50% in segments such as sunglasses. Executives anticipate revenue and cost synergies of €400m to €600m in the medium term, stemming from the combination of Luxottica’s brands, supply chain and global distribution network with Essilor’s expertise in design, manufacturing and distribution of ophthalmic and sun lenses.

Leonardo del Vecchio, Luxottica’s chairman and majority shareholder, summed up the deal: “Finally, after fifty years, two products which are naturally complementary, namely frames and lenses, will be designed, manufactured and distributed under the same roof.”

A look at Warby Parker

Four students at The Wharton School, University of Pennsylvania, founded Warby Parker in 2010 after realising the lofty price tags on prescription glasses bore no relation to their cost of production; they reflected Luxottica’s dominance of the industry. “(Luxottica) has been able to keep prices artificially high while reaping huge profits from consumers who have no other options”, the founders state on their website.

Warby Parker has disrupted the market by selling prescription glasses for under $100 a pair, compared to Luxottica’s average price of over $300. It keeps costs down by designing frames in-house rather than licensing, working directly with suppliers, primarily selling online, and shipping straight to customers. It has also attracted fans with its social initiatives: it donates a pair of glasses to charity for every pair purchased. And it has increased people’s confidence in buying glasses online by allowing them to order five pairs of frames to try at home at no cost, and upload selfies to see how frames look on their virtual faces.

The company’s disruptive business model has fuelled rapid growth: sales reportedly tripled to over $100m between 2013 and 2015. It has also attracted high-profile investors: the business raised $100m in capital at a $1.2bn valuation in April 2015, making it one of fewer than 200 tech start-ups valued at over $1bn. And several of its investors also invested in Uber and Airbnb, suggesting it has comparable potential to those highly successful start-ups.

Focus on the facts

Luxottica-Essilor’s enormous scale, premium brands and global distribution network, combined with significant savings and efficiency gains from producing both lenses and frames, make it a much greater threat to Warby Parker than Luxottica alone. For instance, it could channel its expertise and reduced costs into launching a new line of high-quality, cheaper glasses that undercut the upstart. That could hit Warby Parker hard, while the impact on its own premium brands could be limited as buyers of designer frames are unlikely to be overly sensitive to price.

Warby Parker reportedly plans to expand its retail footprint — it already has nearly 50 outlets in North America — in order to increase brand awareness and drive sales. However, the costs of operating brick-and-mortar stores — which reportedly employ around half of its 800-odd employees — could weigh on profits if sales growth weakens. The company is also betting on new technologies, such as allowing consumers to test their eyesight using their smartphones, but it’s too soon to say whether those investments will pay off.

Despite the looming shadow of Luxottica-Essilor, Warby Parker’s vision hasn’t changed.

“We’re not surprised by the news of the merger,” the company wrote in an email to Convershaken. “We started Warby Parker with the goal of transforming the eyewear industry by offering an alternative to the overpriced and underwhelming prescription glasses on the market and we’re now more focused than ever on building the most impactful eyewear brand in the world.”

Originally published at convershaken.com.