EssilorLuxottica: Sight To Behold - [Business Breakdowns, EP.210]
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In this episode, we break down Essilor Luxottica, a global leader in the eyewear industry formed by the merger of Essilor and Luxottica in 2018. The business today sports a nearly $130 billion market cap. Essilor Luxottica represents a vertically integrated business encompassing design, manufacturing, distribution, and retail operations across both vision care and eyewear fashion segments.

We will analyze the strategic rationale behind the merger, assessing how it shaped the company's competitive advantages. We will discuss the economics of prescription lenses, high-fashion sunglasses, and iconic brands like Ray-Ban and Oakley. Furthermore, we'll discuss the impact of emerging technologies like smart glasses, the Ray-Ban metaglasses, and evolving consumer preferences on the eyewear market, as well as the competitive impact of upstarts like Warby Parker.

To break down SLR Exotica, I am joined by Swetha Ramachandran, who manages the Artemis leading consumer brand strategy and is co-manager of the Global Select and Global Focus strategies. We hope you enjoy this conversation.

- Swetha, thank you for joining us to break down what I think is one of the more interesting businesses out there, Essilor Luxottica. We've got horizontally and vertically integrated business. We've got recognized brands, luxury to commodity,

Sunglass Hut, Ray-Ban, Oakley, Persol, Oliver Peoples, LensCrafters. There's so many directions we can go with for a business like this. Maybe just to kick things off and set the table, tell us what is Essilor Luxottica as a business?

I mean, I guess to start off, it's interesting to consider that this is a consumer health company where none of its brands actually have the honor of making it to the company name. And that's quite unusual because typically branded companies tend to be very proud of their flagship brands. Look at LVMH, which is sort of the marriage of Louis Vuitton, Moet Hennessy, this Essilor Luxottica, the

But the merger of those two companies, in fact, is not made up of individual brands. There is no brand called Essilor. There's no brand called Luxottica. The individual brands, however, such as Ray-Ban, Oakley, and now Supreme that they bought just last year are much more recognizable than the parent company itself. So what does the company do? I guess by thinking about those brands, you might have a picture that this is the global market leader in the eyewear industry.

And it's interesting because it's the only company really that spans the entire spectrum from the more medical side of eyewear with prescription lenses, as well as frames and sunglasses. On the other hand, its business does skew 75-25 revenue wise between the lenses side and the frame side. So the vision care side is the big money spinner. But it's also quite dominant in its space versus other consumer verticals because it's three times the size of its closest competitor, which happens to be Alcon.

which operates in a very small segment of the eyewear value chain. And really, it spans design, R&D, manufacturing, as well as importantly, retail, which is something that we can talk about that didn't exist before the Essilor Luxottica merger for Essilor itself. And that is a huge distinguishing feature of this business versus other eyewear businesses that, for example, try to control only the consumer experience via retail or only make brands that are sold in the wholesale channel.

How big is the business and are there certain sub-segments of it that you think are better to quantify versus others? How do you kind of anchor to what we're looking at here? So the business in terms of sales, they generated about 26.5 billion euros last year, which if you consider the size of the global eyewear, the fact that the company made 550 million prescription lenses last year, which is enough to provide glasses for just over 5% of the world's population.

It doesn't seem like it's a huge business. And that's really because it's primarily more volume than it is value. They make a lot of very relatively inexpensive lenses and frames. There are, of course, the high-end brands that we all know, but the bread and butter is made up at the lower end. So they sell a lot of volume, which in effect means that their overall sales are only, quote unquote, about 26.5 billion euros, even though that's hand-fist above many of their peers.

I mean, if you try to consider, let's say, the average selling price, and this is very hard to do given they sell so many different things across different businesses, from prescriptive lenses to now smart glasses. But I kind of roughly used, let's say, 200 euros as an average selling price, which is perhaps even generous. And I came up with an estimate, if you assume that the average consumer is spending at SLR La Zotica about

200 euros a year, they're maybe reaching only 113 million consumers a year. And that's actually considering the fact is myopia is touching more than 2 billion people's lives around the world. By the year 2050, it's expected that 5 billion people or half of the world's population will be short-sighted. So there is this question of penetration, particularly in emerging markets, where especially younger children have a much higher rate of myopia, for example, in China and India than they do in developed markets.

and where they remain underpenetrated. So you could see that actually the relative penetration of the products of this company should continue to increase as time goes on. So I know that this is the combination of two businesses with a very rich history. Prior to the merger, they operated in somewhat of their own different verticals. What was it that precipitated the merger of Estelor and Lexotica and the stories of these two storied businesses?

So 2018 was the year it all happened when Essilor merged with Luxottica. And in fact, Essilor and Luxottica themselves were heavily acquisitive companies independently prior to coming together. The study, of course, is a fascinating case study in M&A and boardroom battles. The story is one of innovation, which is primarily at the Essilor level.

meeting iconization, which is at Luxottica and its ability, for example, to take these dusty, forgotten brands like Ray-Ban and really reignite and catalyze growth for those. It's hard to remember now, but Essilor was actually, all the way back in 1959, the first manufacturer of the progressive lens, which is very Lux, which was hugely influential.

and was also followed by several other innovations, as well as M&A, such as Transitions, etc. Similarly, of course, Luxottica has acquired over time these iconic brands. First,

Ray-Ban, Oakley, and then of course, licenses for some very coveted luxury brands such as Chanel and Prada as well. And I think what really precipitated this merger was Delvecchio, who was the chairman and CEO of Luxottica at the time. He was a man with a very unique vision in that he thought that

integrating and controlling all aspects of the value chain in eyewear was the key to unlocking value. And of course, it turns out that he was right in that this is the only company really that even today has operations across manufacturing, distribution, R&D. They have over 12,000 patents under their belt, which is again, no small feat.

That was a realization that prompted them. At that time, they were really only in frames and sunglasses. And the view was marrying that with lenses would be a logical next step. So this is really what brought about that merger at the time. And it clearly wasn't without its problems, as we will probably talk about later on. When you think about the combined business,

One of the more interesting aspects of optical retail is the separation of the healthcare and what I'll call the fashion part of the business. And so I think when you consider the strategic motivations for a merger, but also the combined economics, can we just talk through what it looks like in terms of where the money's being made?

75% of our business today is actually from vision care. It's from corrective lenses. That is really where the bulk of the market sits. And sunglasses and frames are a much smaller 25% business overall. And the lenses business is actually much more profitable because it operates in a more concentrated market. So if we just look at the prescription lenses market, SLR Luxottica has over 50%, almost a 55% share of this market. And it tends to be much more concentrated

In that the other players are really Hoya, Carl Zeiss. It's almost an oligopoly. When you look at the other side of the business, which is frames and sun, that is a much more fragmented business because it's much more brand led. And here you've got SLR Luxottica with just over a third of the market, which is decent. It is a much smaller market. So for example, if we look at prescription lenses, that would be basically the bulk of their sales would be derived in that.

and frames and sunglasses, much smaller market overall. So 75% revenue from lenses and 25% from frames and sunglasses. And here, the fragmentation is such that you don't really have a meaningful number two. Kering, which has brought back some of its brands in-house, has set up Kering Eyewear, which has roughly a 10% share of the market. Cephilo, which Essilor Luxottica actually tried to buy, but walked away from, I should say Luxottica because this was pre-merger,

They tried to buy it but walked away from it. That has about a 7% share of the market. But there's really not a dominant player other than SLR and Glixotica. And even here, where I would say this really differs from prescription lenses is that the other end of the market, which is a real fragmented tail, constitutes only 3% of the market for prescription lenses. But actually, it makes up about 40% of the market for frames and sun.

And so I think one of the popular criticisms of a business like this is that they produce a piece of plastic frames for $10 and it ends up in a $200 plus at retail product to the consumer. And I know that the truth is not exactly a

aligned with this infinite markup, given the gross margin profile of the business, I believe is closer to 60. How do the unit economics of what they sell work? What part of the business is more commoditized versus differentiated? Pre-cal versus luxury? How do you think about the different components and strategies? Yeah, so I guess when we think about pricing power, what I really like to look at is gross margin. So stable as well as high gross margins tend to indicate that a company has sustainably durable gross margins over time.

And here, it doesn't strike me that eyewear is a segment that is particularly strong in pricing power. So why do I say that? I mean, on the one hand, gross margins are higher than, let's say, the sporting goods footwear category. If you look at Nike and Adidas, which are incredibly strong brands, but still have gross margins only in the 50s, percentage-wise, that gives you an indication that it's not just about strong brands. There's also a lot going on in terms of scale, distribution that drives gross margins as well.

And on the other hand, SLR Luxottica's gross margins at about 63%, 64%, they've remained very consistent over the last five years since the merger. Management itself is not guiding to a material uplift to gross margin because they expect that these benefits from price mix will be offset by some growth at some of their insurance businesses, etc.,

where there's not as high pricing power. So I would say this business pricing power is nowhere near as high as in luxury brands where it can exceed 80% in some cases, but it's not also as low as footwear. So that suggests to me that pricing power is moderate, but that you should expect some price elasticity given the market fragmentation and greater substitutability.

It's not the case that you are basically being gouged, if you will, because you have to buy a pair of Ray-Bans. There are perfectly respectable and serviceable substitutes out there in the market.

Because of how fragmented it is, because of how relatively low the barriers to entry are. Although, of course, SLR Luxottica would say that scale gives them an enormous benefit in terms of procuring efficiencies. Speaking to that scale, obviously a high profile merger completed in 2018 feels like yesterday, but we're coming up on almost seven years. Take us through kind of the trials and tribulations of combining the business and some of the complementary M&A they've done since. Yeah.

Yeah, I would have thought after having done the SLR Luxottica merger, they would have wanted to maybe sit still for a bit. But very promptly thereafter, they also acquired Grand Vision, which was primarily European distributor of lenses to fill out that white space that they had in European distribution. But maybe coming back to the SLR Luxottica merger itself, I guess this is quite a fascinating tale in

in terms of the corporate governance issues that ensued, it was imagined as a sort of merger of equals. Today, Delphin, which is the Delvecchio family holding, owns just over 32% of the group in terms of economic interest. But when it was actually first struck, the deal in 2018, it was envisioned by Luxottica's chairman, as well as Essilor's chairman at the time, that the two companies and that they would actually

have a power sharing arrangement equally for three years with Del Vecchio actually agreeing to limit the exercise of his larger voting rights and that they would wait for three years before they then jointly appointed a group CEO. And actually in practice, I mean, this is an Italian company marrying a French company, very different cultural profile, governance, managerial cultures as well. There were all of these things perhaps that in the excitement of getting the deal done had been swept under the carpet.

but that actually very much came to the fore over the subsequent few years. There's a very long and publicly drawn out battle in terms of corporate governance over 2018 to 2021. And these splits, it was quite damaging, I would say, for both morale, definitely the share price, market investor perception in the credibility of this combined management team, or even really the benefits of this merger because of the frequency with which these governance disputes were reported in the press. Mr. Delvecchio believed

actually that Mr. Sagnier, who was his French equivalent, was trying to grab power. Mr. Sagnier fought back and said that actually Mr. Delvecchio was trying to execute a nil premium merger. There was arbitration involved. And ultimately, the company, thankfully, had to, perhaps not to the benefit of the press, but at least to the benefit of other stakeholders in the business, reached a settlement agreement to overcome these governance issues. This happened basically in 2019.

And so now we have a co-CEO structure. Well, actually, there's a Luxottica CEO, Mr. Malleri, who is the official CEO. And then there is the Essilor CEO.

Deputy CEO Paul Desaillon, who is also in place today. So that has thankfully removed a lot of the distraction, the corporate governance struggles, the impact that that had on the share price for quite some time. And now we're in a different phase. But even very promptly after, actually, even while all of this was going on, they decided to acquire in July 2019, a company called Grand Vision, which is a global leader in optical retailing at

At that time, SLR Laxatica's own market cap was about 50 billion euros. And this deal was valued at about just over 7 billion euros. A very similar PE, so it was a hugely dilutive deal. But it was a very long, drawn-out acquisition process because the European Commission actually required a lot of concessions and remedies in order for the deal to be approved. And 350 retail stores across Belgium, Italy, and the Netherlands had to be sold. But what the deal did do

was to again enhance the company's vertical integration, which is what they had always touted as something that distinguished them from the competition. And this made even more sense, actually, in the wake of the SLR acquisition, because what SLR never had on its own was direct-to-consumer distribution. They had always relied on third-party wholesalers. So coming together with Luxottica, as well as with the added benefit of Grand Vision, this really became a full-service manufacturing

manufacturing to customer experience proposition under the aegis of one company. So now that you have this large combined, vertically integrated business, zoom out and let's talk about the industry itself. Secular versus secular, I understand that 60 or 70% of adults will need corrective vision at some point in their life. So clearly there's sustained demand for their products. How do you think about the way the industry ebbs and flows itself?

Yeah, it's interesting because of the two sides of the business. One is not as cyclical in the sense that prescription lenses, they're really a necessity for over 4 billion people worldwide. It's not quite a discretionary product. In some cases, for example, we're fortunate enough where eye exams are covered by insurance or employer benefits, which again, stabilizes demand. The key feature really is underpenetration in emerging markets, especially in Asia, which drives these long-term structural growth trends in corrective eyewear.

It's estimated that actually uncorrected vision impairment today might cost the global economy north of $300 in lost productivity. So there's a huge economic cost to not correcting vision issues. Then

Then of course you have the other side of the business, which is the frames and sunglasses business. Here it's much more about brand, quite a bit of fashion as well. And here we obviously know that luxury spending, spending on discretionary items does drop during recession. And so that tends to be more sensitive. So we did actually see this during the global financial crisis, for example, where the standalone SLR business at that time continued to grow. People of course still need prescription lenses, whatever the economy.

But the sunglasses business did experience some very moderate, though, mid-single-digit decline, which is somewhat better than what we saw elsewhere in the luxury industry. There may have been an element, perhaps, of this being an affordable luxury, similar to what Estee Lauder coined

as the lipstick effect, where no matter how bad times are, women will still indulge in a lipstick. Perhaps there's an element of that with sunglasses as well. But there's no doubting that actually this end of the business is more cyclical. But if we look at the growth drivers for the eye care industry overall,

It's clear that in aging population, growing population, penetration in emerging markets because of rising incomes, all of that are durable and sustainable trends for the long term. Vision impairment is still today one of the world's most untreated and undiagnosed disabilities, basically 90% undiagnosed in developing economies that are at the bottom of the income pyramid, which is really quite astounding even today.

The fact that innovation in eyewear is actually redefining the entire TAM. And that, to me, is hugely interesting because, of course, we have a huge hype cycle around smart glasses, which to no small extent, I think, has impacted SRL Exotica's valuation in recent months. Could they go mainstream in the same way that smart watches have? Could that unlock a huge new market? And in this, the Ray-Ban Meta, which is launched in October 2023,

has really been the only connected glass option to reach mass market adoption. They just said that they have sold 2 million units of this product. And so I think that could be really interesting if they manage to make that go mainstream in the same way that perhaps the Apple Watch has.

The other innovation could be hearing aids, where they've now announced an expansion into hearing solutions, which is basically there's a disruptive proprietary technology by this Israeli startup called Nuance, which is really at the intersection of sight and sound. So you've got quality hearing solutions, but in the form factor of glasses.

And that actually minimizes the stigma. It also addresses moderate, mild to moderate hearing loss, which is quite common to the growing aging populations in the Western world. And that, again, is a product that's about to be launched or is actually in the process of being launched at the moment over the counter in the U.S. at audiologists in Europe. That could be, I think, quite interesting to see how they're able to grow their market beyond their core eyewear market.

Laying out the strategic motivations of the business, the merger, understanding the nuances of their go-to-market strategy today, I think it'd be helpful if we maybe walk through the P&L of the business from the top line, business that'll do 25 to 30 billion euro, growing high single digits, and then down to gross profit margins, operating margins, all the money that's being spent in between those two. And then again, you spoke briefly on some of their capital allocation policies. You look at a business here that

seemingly you would expect to be somewhat capital light, but they do reinvest meaningfully below the OCF line. And just curious how you think about the financial profile of the business. That I think is quite interesting in that, yes, we're talking about a business that is now 26.5 billion euros in terms of revenues. Yet, if you look at their EBIT line, that is about under 3.5 billion euros.

So they're generating roughly a 16% EBIT margin despite having a 63%-ish gross margin. So where is all the money going? And this is quite amazing. Half of that gross margin is selling expenses. And we must remember that they have a huge network of retail stores, roughly around 18,000 retail stores around the world.

They also employ close to 200,000 people. And so that is really the bulk of the operating expenses of this company. It's also quite interesting to note that R&D, which we might expect for a company that is quite innovation heavy, is actually only about 2% of sales.

And even with this, they are outspending. They are basically outspending about three-fourths of the industry, which tells you maybe that the rest of the industry is increasingly becoming challenged in terms of fighting off the scalability of innovation that SLR Luxottica might be able to continue generating. So advertising, again, advertising, quite an advertising-intensive business because of competition.

particularly on the frames and sunglasses side of the business, that is about 7% of sales. And then here they do have a little bit, in my view, of general admin bloat, if I may, which is about 8% of sales, which tends to be on the higher side if you consider that they're in 150 different countries.

fully integrated value chain, perhaps there are good reasons for this being as high as it is. I mean, the company has targeted that it will over time be able to increase its EBIT margin from the 16% or so levels today to 19 to 20% by the end of FY 2026. It's my personal impression that that is likely to be delayed because their first priority will be to invest in growth. And if they see, for example, smart glasses continue

to grow in adoption, as well as nuance the audio, the hearing aid device, continue to grow in adoption, that those will be prime areas for reinvestment. And then it's also interesting that R&D is only 2% of sales, but CapEx, it has peaked at about 7% and steady state is expected to be about 5%.

And so that is really because a third of that CapEx is going into operations and another third into retail. So they're still very heavily investing behind their retail presence in order to make sure that they are able to sell both the enlarged suite that they are offering now to customers all within the same formats and therefore increase store productivity. Again, I think this is a longer term margin expansion potential, probably not right away.

Of course, e-commerce investment has been huge for them as well. This is an area where increasingly 7% of their sales are coming from e-commerce. So this has required investment. So about 20% of that capex is going into investing in digital technology. And I think this is now increasingly table stakes for a business like this, which is facing competition, of course, from many other retailers in the e-commerce arena.

It's interesting that you mentioned e-commerce because it's almost impossible to talk about Essilor without mentioning the likes of Warby Parker, which is now itself a public company. And if you think about the direct-to-consumer boom of the last decade, for a very long time, the capital markets afforded their competition to effectively lose money to acquire customers.

And that's no longer the case. But I'm curious, as people thought through some of the competitive pressures that a business like this would face, what the likes of Warby Parker meant for their business and how they've staved off such competition.

Yes. And I think this, again, brings to force their relatively unglamorous approach in terms of this insistence on vertical integration, which is to control everything from global manufacturing to global distribution to an offer like Warbeak Parker, which is much more centered around the consumer, the end consumer experience at retail. So if we just kind of even look back to five years ago when the phrase DTC was all the rage,

particularly for US companies. Consumer brands, for example, like Away and Luggage were competing against the likes of Samsonite, Warby Parker and iWear competing against Esselor Luxottica. And they were seen as disrupting what had traditionally been seen to be very staid, dull, but worthy industries. And so Warby Parker's model was really to own the customer experience and outsource mostly everything else, not everything because they did control the design element.

But for example, manufacturing was done at third party manufacturers, and they basically controlled the design and the retail elements. So that digital first model was a huge success during the pandemic, but they've actually struggled to turn a profit. And if you contrast that to SLO Exotica at 16% EBIT margins, that's quite a contrast. And it's quite telling that actually the value of scale and the benefits that vertical integration have had for this business have been huge.

And it's also, I think, the case that consumers, especially post-pandemic, have voted with their feet in that they want choice. So I think what was Warby Parker's strength at the beginning, which was that single brand focus, has now perhaps emerged to be a little bit of a weakness in not being able to give customers the full spectrum of alternatives that might be available out in the marketplace. I mean, the other key is, of course, that SLO Exotica has global scale. It's in 150 countries.

While Warby Parker is still very US Canada focused. And so their sales today are still sitting at about 2% of SRL Exotica's sales. That's I think the real difference is that what was seen as a disruptor is really perhaps now just sort of a me to want to be player rather than a true disruptor.

And then we haven't spoken much to the geographic mix of the business. Obviously, it's listed in Europe, but the majority of the business is still in North America. Are there differences in strategy based upon where the footprint of the business is and how aligned or integrated are those business units?

They're quite consistent in wanting to operate one type of business around the world. So I don't think that there are huge differences other than what might naturally emerge because of the different business mix. So for example, North America is their biggest business. It is roughly about 35 billion euros of revenues or so. And I think the big difference here is that the independent eye care channel is much more important in North America.

It's actually over half of their revenues come from the independents. But their product mix actually is overwhelmingly lenses and then frames. So sunglasses is probably the smallest element of the market in North America. And then you've got EMEA, which is actually just slightly bigger if you consider that you can split that into developed Europe and emerging Europe combined. That would be bigger than the US, but actually developed Europe is slightly smaller than the US business. And here the channel tends

tends to be today also still quite fragmented, even with the grand vision acquisition. So about 59% of their business or so is coming from independence. And I think the only market really where this is not the case is in Asia. So in Asia Pacific, independence are a much smaller proportion of the market, while brick and mortar retail and e-commerce tend to dominate. That is, of course, still today, despite the size of Asia, it is smaller than both North America and Europe. But of course, with a huge

optionality in terms of upside, given that children in Asia are most in need of corrective lenses because of a higher prevalence of myopia in that market versus anywhere else.

We've touched on some of the strategic, I'll call it aspirations of the business in smart glasses, in audio. I also want to talk about some of the acquisitions that they've done. Supreme obviously stands out as a bit of a funky one. What is their strategy for growth and what is informing some of these strategic endeavors that they're undertaking?

The recent acquisitions really, I mean, the major acquisitions that they did was, 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 $1.5 billion for.

which itself was actually less than what VF Corp paid to buy it a few years before that even. But there's 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 SRL Exotica'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 a 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 $1.5 billion of shareholder money.

It appears, I don't know if it was confirmed that Facebook or Meta took an interest in the business. Will that relationship expand beyond an investment? How do the two companies work together? Meta has said that they had approval to take a 5% stake in SLR Luxottica. They haven't confirmed whether they have done it. It's just interesting that it was reported, but not necessarily confirmed or denied. Exactly. And I think here, really, Meta, this

This is sort of a symbiosis where both companies do need each other. SLR Laxatica 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 smart watches, smart watches are estimated to be worth about market size of about $34 billion and smart watches, maybe about $3 billion. So there's a huge gap, I think, in

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 I think 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.

The companies both 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 U.S.,

And I think the reason for that is their attitude that if you build it, they will come. And so 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 functionality that comes out. Perhaps Apple comes out with its own version of the smart glasses, which...

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 SLR Luxottica 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, I think.

And so when you consider the strengths and weaknesses of the business itself in the competition, I think 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 like Warby Parker. What is, if you put it all together, the special sauce that makes this business tick?

I think their key is really 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. So that and also the unique aspect of SLO Exotica 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, they're

its own competitors are also its clients and customers because it has an open network framework. So they very proudly said, for example, at their Capital Markets Day, that Hoya, which is technically one of their competitors, they're also one of their big customers. And similarly, Caring Eyewear works closely with SLR Luxottica as well, given that the DTC, the retail network of SLR Luxottica is actually a significant customer of the Caring Eyewear, the Gucci, Sunglass brands, for example, selling them in their stores. So...

I think that is an interesting feature you would never find, for example, at a Zara store, something from H&M. So that is quite different about this business, that open architecture sort of which helps them scale up. And then that scale is a virtual 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 about over 12,000 patents pending or granted across over 2,000 patent families.

They have about nearly 21,000 trademarks that are pending or registered. And so that innovation really 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, sun lenses. They have over 50 sun lens researchers to think about new mold processing and optical technologies as

as well as of course, digital transformation. So 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 Rayban.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 Raybans. And so all of these, I think, help it distinguish itself from the competition. But the real secret sauce is this vertical integration, because that is quite unique about this company. And to cover every step of the value creation process, focusing on manufacturing, the 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. And so I think 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. And so when you think about vertical integration and a business that's described as dominant, we find that there's increasingly pressure under these types of businesses for the FTC or the DOJ to pursue them on the basis of antitrust. Do you

You have to think about how can they narrowly define a market in order to prove that they're instituting harm upon the consumer. But when you consider kind of sleepy categories such as retail, you typically don't see much in the way of antitrust action. And I guess my curiosity is headlines suggest that they face these trials. What is the concern and how

How do shareholders weigh what the actions being pursued against SLR like Luxada may or may not be? I don't want to dismiss these claims entirely. But if we just look at the objective facts, I mean, they have a 33% share of frames and sunglasses. That doesn't suggest to me that they're so dominant. It's not a category, again, where they're generating substantial gross margins, which suggests that they may be taking advantage of customers.

They also in their own stores, they're selling competitor products. So you're not obliged to buy something that is made by SRL Exotica that gives them a higher markup than one of their competitor brands. I mean, sunglasses, anyone who's ever spent any dead time at an airport trying to find something to do and has stopped by a sunglass store is you only have to see how many options there are for you to know that no company really has dominance or pricing power in this category.

Then we can look at the eyewear side of the business. And here you could say that perhaps this is similar to pharma in a sense where innovation does get rewarded with pricing power. So for example, the Nuance hearing aid technology

could retail for about $1,500. But that is OTC, that's private pay. You've got Stellast, which is their offer to actually arrest myopia in young children, which is hugely valuable, so that before the retina changes shape and the lens needs permanent correction, they're able to actually slow down the progression of myopia with Stellast. And you could argue that that innovation should also carry a premium should you want to maybe

buy those products. But in their core bread and butter business in lenses, it's very, very hard to argue that they actually have meaningful pricing power that is taking advantage of consumers. There's no evidence that I can see of this given that the market still is fragmented, even if in the lenses side of the business, they're a little bit more dominant. On the sunglasses and frame side of the business, I would find this incredibly hard to believe, given 40% of the market rests in other non big player companies.

So it sounds like over the next few years, we expect the business to continue to execute on their growth plans, layering in some of these more moonshot strategic actions. You've mentioned the prospects of tariffs, which to use the T word, I hope are transitory in some effect, but obviously will have competitive impacts on their ability to kind of sell cross-border.

But I guess I'm curious, what are the lessons that you take away from studying a business like this that you think, A, can be applied to other businesses that you evaluate for investment and B, strategically, where you see parallels to investments in your coverage universe? A lot of European businesses get a bad rap for having this heavy family control or shareholding type structure.

But that has also allowed these businesses on many occasions to take very long-term investment decisions that might not otherwise have been possible. And I think that's where like a visionary like Delvecchio in the vein of perhaps someone like Bernard Arnault are able to have this long-term investment horizon, but perhaps also discipline when assessing prospective returns, future returns from a current investment. And here, if you look at what they did, for example, with Ray-Ban, this was a brand that had been all but left for dead at Bausch & Lomb.

They transformed a struggling brand into a $3 billion plus annual revenue powerhouse.

I mean, it did take them 15 years, so it wasn't overnight, but they did have the wherewithal to do this, which is interesting considering the history of the brand from being launched for the U.S. Air Force during World War II to then its eventual Hollywood associations and becoming an icon. But we now perhaps forget that that process actually took many decades. And then, of course, they continue to build their dominance in terms of acquiring Oakley to build dominance in sports eyewear. They actually bid out several other bidders for this brand.

And again, grand vision, which perhaps no one thought that they had the appetite to do considering they were going through their own complicated merger, that actually expanded their retail dominance further, ensuring direct consumer access to their products worldwide. So I think that appetite for deal making, but also with a sensible rationale. And here we have evidence that they have walked away. They've said no when deals don't make sense. For example, in 2009, this is Luxottica. They were considering acquiring the financially troubled Saphir.

Cefilo Group, which is an Italian eyewear manufacturer. And actually, they decided against it because it didn't make financial sense. So I think that disciplined approach while seizing the day, but also knowing when to say no is an important lesson for investors as well as operators. And then I think also perseverance and risk taking in new businesses. The first iteration of smart glasses, I mean, let's look all the way back to Google Glasses. Let's face it, it wasn't a fantastic offer for consumers. We then had Raytheon,

Ray-Ban Stories, the first version, which didn't really take off. But I think now Meta Ray-Ban has really struck a chord. It's somewhat right time, right place because of AI and the integration, which has made it that much more interesting. So the question of continuing to tweak that proposition until the consumer readiness is there is something that has come to this company recently.

quite naturally. And as part of its evolution, it's not a, well, we tried this, it didn't work, let's move on. But also, I think the ultimate lesson is that if you see these otherwise lowish margin businesses, vertical integration is the key to unlocking value. And it doesn't work all the time. We saw this end quite badly post pandemic for say, brands like Nike and Adidas,

which tried to go completely DTC and forego wholesale, there the consumer wants choice. They want to be in a multi-brand environment. But the beauty of Essilor Luxottica is that with its 150 brands and plus its retail channel where it can offer other brands, that it is able to do that. And so I think that has also been a major driver of margins, which are now at 16% versus just above half of this margin.

about seven or eight years ago. I think the other lesson, of course, is don't air your dirty laundry in public because that corporate governance boardroom battle that we saw between 2018 and 2021 was quite distracting to the core investment thesis and I presume for management internally as well.

Well, we appreciate you coming back. This has been another fantastic conversation about a brand that has a ton of durability, an interesting story, and I'm sure things will continue to evolve in an interesting light, particularly as they go after smart glasses and adjacent categories and then attack the outsized opportunity in the rest of the world. So thank you. Thank you for having me, Zach. Thank you.

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