EssilorLuxottica | A monopoly hidden in plain sight

What if I told you that the glasses you wear, whether they contain the Chanel, Dolce & Gabbana, Ferrari or Brunello Cucinelli brand, all come from the same company. In this eye-opening episode, we uncover the hidden monopoly  (pun intended)  behind the eyewear industry, EssilorLuxottica.

Luxottica's dominance is remarkable for a company that doesn't put its logo on its products. This low-profile approach, inspired by founder Leonardo Del Vecchio, contrasts with other brands' heavy self-promotion. EssilorLuxottica's low profile is a deliberate strategy crafted by its founder, Leonardo Del Vecchio, known as 'Mr. Nobody' for the mystery surrounding him and his company. His master plan for Luxottica was initially met with skepticism but was executed to perfection until his passing.

This episode explores how Luxottica crafted its eyewear monopoly and what sets EssilorLuxottica apart in the market. You're in for a fascinating look at the publicly listed eyewear company, hiding in plain sight.

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Nothing in this podcast can be considered financial advice. This is for educational purposes only. We may hold positions in the businesses discussed. Do your own research.

Transcript

 Hi. Welcome back. Today we’re talking about a company unfamiliar or unknown by many consumers. Today we’re talking about EssilorLuxottica.  In this episode, we’ll explore how one man turned a fragmented industry into a hidden monopoly, the staggering numbers behind their dominance, and why this could matter for you as an investor. 

It will be quite the adventure, and I’m very excited about this specific episode. Let’s not waste anymore time.

Chapter 1: EssilorLuxottica introduction

Picture this: a €100 billion eyewear company, quietly dominating the global market, practically a monopoly hidden in plain sight. Yes, we’re talking about EssilorLuxottica, the giant that controls an estimated 80% of the eyewear market. But how did we stumble upon this fascinating company? To understand, we need to rewind just a little.

Earlier this year, we were knee-deep in a fundamental analysis of Kering, the parent company behind luxury brands like Gucci and Balenciaga. Kering had recently launched its own eyewear division, producing designer frames for brands like Cartier and, of course, Gucci. This move piqued our curiosity: Who exactly are they competing with in this market? Little did we know, we were about to discover a giant, a company that reigns supreme in eyewear, with hardly any real competition.

And that brings us to EssilorLuxottica. This publicly listed powerhouse doesn’t just dabble in the eyewear business; it essentially is the business. From frames to lenses, they own the production, distribution, and even the retail chains where the glasses are sold. It's an empire meticulously built over decades—a story intertwined with the vision of its founder, Leonardo Del Vecchio.

Now, just imagine walking into an optician or any eyewear store for that matter, and are looking for a nice pair of designer glasses. You see: Ray-Ban, Tiffany and Co, Versace, Prada, Brunello Cucinelli, Chanel and even Burberry glasses. You’re thinking to yourself, ‘my gosh’, there is so much choice, and there is, right? Well, not really. What if I told you that most of the glasses on the shelves, regardless of brand, come from the same company? At the end of the day, all of these designer glasses are made by just a single company, EssilorLuxottica. And that’s not all, they own over 150 designer brands, like the ones I just mentioned, but also: Ferrari, Dolce & Gabbana, Jimmy Choo, and Giorgio Armani. Crazy right?

That’s EssilorLuxottica—a name you don’t see in the news, in advertisements or in any store, but they’re a player you can’t escape from. This company produces nearly 80% of all eyewear globally. It owns over 150 brands, controls 17.500 retail stores, insurances, frame manufactures, lens manufactures and holds the only vertically integrated model in the industry. They produce over a billion glasses and lenses every year. From design to manufacturing to the very store you buy from, they control it all.

This isn’t just any company, Del Vecchio, the founder, has built an empire. But how did we get here? To understand that, we need to go back to where it all began.

Chapter 2: The birth of a visionary

Let me introduce you to Leonardo Del Vecchio, the mastermind behind EssilorLuxottica. His story is nothing short of extraordinary. Born in Italy in 1935, Leonardo's life didn’t get off to an easy start. In fact, it was anything but. His father passed away before he was even born, leaving his mother in a desperate situation, having to care for all his siblings. Unable to care for Leonardo, she made the heartbreaking decision to send him to an orphanage when he was just seven years old.

This wasn’t just any orphanage, it was a strict one, run by nuns. And according to the stories, young Leonardo cried for an entire month straight after arriving there. Can you blame him? He had lost everything: his father, his mother, and even his siblings, who were no longer with him. It was a lot for a little boy to bear.

But over time, something shifted. Leonardo, decided to make the best of his situation. The orphanage, while strict, had its redeeming qualities. And one of its rules was that every child had to learn and practice a craft, whether it was music, pottery, wood working, or something else. And it was here, in this unlikely environment, that Leonardo discovered his talent. Craftsmanship wasn’t just a requirement; it became his passion.

In 1961, Del Vecchio moved to Agordo, a small Italian town known for its eyewear production at the time. Back then, glasses were nothing more than medical instruments. We’re talking 60=70 years ago. Glasses weren’t worn for fashion, they were purely a medical device. And nobody viewed them as potentially stylish or for any other purpose.  But Leonardo had a different vision. He thought eyewear could be a fashion statement as well. It’s hard to image now, but this was extremely contrarian at the time. Leonardo Del Vecchio changed how eyewear was made by eliminating outsourcing and doing everything himself.

Del Vecchio’s first idea was to control every part of the production process. He invested a lot in R&D, made automated machines, and used jewelry techniques to coat frames with durable metals. Competitors did not think this strategy would work in business, but it gave Del Vecchio a big cost advantage that let him sell his goods at lower prices. Competitors thought he was crazy, but Del Vecchio’s integrated model allowed him to produce higher-quality glasses at a fraction of the cost. 

But people still didn’t like glasses, other than for medical purpose. Del Vecchio had a problem: his glasses were not more noticeable or different from other brands, even though he used a unique way to make them. What he needed was a way to position his eyewear as a premium product. 

His solution was branding. He started approaching fashion houses for licensing deals to make glasses with their logo. But he was rejected by almost everyone because glasses still had the stigma of 'ugly' and 'medical'. Luxury brands were afraid that they would suffer brand or reputational damage by having an external party make glasses with their logo on them. However, there was one brand that dared to do it: Giorgio Armani. Still an important brand for EssilorLuxottica today.

Chapter 3: Perception is key

Leonardo Del Vecchio built EssilorLuxottica on the perception that customers were buying designer brands like Armani or Prada and not just an any Luxottica frame. By operating in the background, the company convinced customers to pay premium prices, believing they were getting luxury craftsmanship. Something they still do today.

To expand, Del Vecchio acquired the U.S. Shoe Corporation in 1995 for $1.1 billion. At the time, this seemed odd because he was focused on Eyewear, and this holding was mostly footwear brands and retail chains for clothing. The move was exceptionally smart looking back. The US Shoe Corporation contained 10 different subsidiaries and one of them was LensCrafters. And this specific optical retail chain was the only this he wanted. Del Vecchio lobbied behind the scenes for years to ensure support for the deal, selling off all the non-optical parts, some basically 90% of US Shoe Corporation and retaining only LensCrafters. As the owner of LensCrafters, Del Vecchio instantly owned 350 retail locations. He redesigned all stores to prioritize Luxottica eyewear, pushing competitors to the back of the stores or putting them in less optimal places. This strategy boosted sales from 5% Luxottica products in 1995 to over 90% today. What a move looking back.

Now, with LensCrafters' revenue, Del Vecchio acquired retail chains like Sunglass Hut and Pearle Vision. But Del Vecchio was still very much reliant on other brands and margins were slim. He basically only made money on royalties. He wanted to reduce his reliance on royalties, so Del Vecchio acquired Ray-Ban in 1999 for $650 million, turning it from a poorly managed brand into the premium product we know today. This means he now owned an eyewear brand and could work on making them appear more premium, raise prices and margins over time. Prices for Ray-Ban rose from $79 for Aviators in 2000 to $170 today. The $2 billion hostile purchase of Oakley further solidified his vision and dominance. With every acquisition, Luxottica became stronger—and its competition, weaker.

Today, EssilorLuxottica owns over 17.500 retail chains worldwide.

Chapter 4: The final puzzle piece; Essilor

What a story so far, right? But you’ve only heard part of the tale. Everything you just learned only covers the Luxottica side of things. Today, the company is known as EssilorLuxottica. That “Essilor” piece had to come from somewhere—and this part of the story is what makes EssilorLuxottica the most powerful eyewear company in the world.

A pair of glasses, when you break it down, consists of two key components: the frame and the lenses. Luxottica handled all the frames—and handled them well. But this meant that the lenses had to come from other suppliers. And if there’s one thing we’ve learned from Del Vecchio, it’s that he likes to keep a firm grip on the reins. He wants control over the entire supply chain, from raw materials to retail stores. 

The 81-year-old Del Vecchio needed one final move to complete his master plan: the merger between Essilor and Luxottica. This merger was announced in January 2017 and completed in October 2018. The deal, valued at approximately $32 billion, instantly made EssilorLuxottica the most powerful (and virtually the only) vertically integrated eyewear company in the world.

Fun fact! Although most people think that Luxottica has merged with Essilor, it is a little different. Luxottica actually joined forces with Essilor, and Leonardo Del Vecchio became CEO of EssilorLuxottica. Leonardo Del Vecchio was also behind the idea of the merger.

I find it bizarre (in retrospect) that the Federal Trade Commission (FTC), the European Commission and other regulators approved this deal. This merger has made EssilorLuxottica impossible to compete with. It's nice for shareholders, but not for competitors or consumers.

Chapter 6: Takeaways

So, what does this all mean? If there’s one takeaway from today’s episode, it’s this: the glasses on your face are part of a much bigger story.

For consumers, it’s a reminder to look beyond the label or brand. That “designer” frame might not be as exclusive as you think. For investors, it’s an opportunity to explore a company with a monopoly-like grip on its industry. In our fundamental analysis we tell you what we think of the financials, valuation and whether we will buy the company or not. You can find it on our website at thedutchinvestors.com.

That’s it for today’s episode. If you enjoyed this story, please let us know by leaving a comment or dropping a show rating.

Remember: the most powerful companies are often the ones you don’t notice.

Until next time, stay curious, keep learning and happy investing.