EssilorLuxottica：尽收眼底 - [Business Breakdowns，第210期]

Swetha, thank you for joining us to break down what I think is one of the more interesting businesses out there: EssilorLuxottica. We have a horizontally and vertically integrated business, with recognized brands ranging from luxury to commodity, including Sunglass Hut, Ray-Ban, Oakley, Pearle Vision, Oliver Peoples, and LensCrafters. There are so many directions we can go with a business like this, so maybe just to kick things off and set the table, tell us: What is EssilorLuxottica as a business?

I think it’s interesting to consider that this is a consumer health company where none of its brands actually had the honor of making it into the company name. That’s quite unusual because typically branded companies tend to be very proud of their flagship brands. Look at LVMH, which is essentially the marriage of Louis Vuitton and Hennessy.

EssilorLuxottica, with the merger of those 2 companies, is not made up of individual brands. There is no brand called Essilor, and there is no brand called Luxottica. The individual brands, however, such as Ray-Ban, Oakley, and now Supreme, which they bought just last year, are much more recognizable than the parent company itself.

What does the company do? By thinking about those brands, you might have a picture that this is the global market leader in the eyewear industry. It’s interesting because it’s really the only company that spans the entire spectrum, from the more medical side of eyewear, with prescription lenses, to frames and sunglasses on the other hand.

Its business does skew 75/25 revenue-wise between the lenses side and the frame side. 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 3 times the size of its closest competitor, which happens to be Alcon. Alcon operates in a very small segment of the eyewear value chain.

EssilorLuxottica spans design, R&D, manufacturing, and, importantly, retail. That’s something we can talk about, because it didn’t exist before the EssilorLuxottica merger for Essilor itself. That is a huge distinguishing feature of this business versus other eyewear businesses that, for example, try to control only the consumer experience through retail or only make brands that are sold in the wholesale channel.

How big is the business, and are there certain subsegments that you think are better to quantify versus others? How do you anchor to what we’re looking at here?

In terms of sales, the business generated about €26.5 billion last year. If you consider the size of the global eyewear market and the fact that the company made 550 million prescription lenses last year—enough to provide glasses for just over 5% of the world’s population—it doesn’t seem like it’s a huge business.

That’s really because it’s primarily more volume than value. They make a lot of 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.

They sell a lot of volume, which in effect means that their overall sales are only, quote unquote, about €26.5 billion, even though that’s head and shoulders above many of their peers. If you try to consider the average selling price—and this is very hard to do, given that they sell so many different things across different businesses, from prescription lenses to smart glasses—I roughly used €200 as an average selling price, which is perhaps even generous.

I came up with an estimate that, if you assume the average consumer is spending about €200 a year at EssilorLuxottica, they’re reaching maybe 113 million consumers a year. That’s actually considering the fact that myopia is touching more than 2 billion people’s lives around the world. By 2050, it’s expected that 5 billion people, or half of the world’s population, will be shortsighted.

There is a question of penetration, particularly in emerging markets, where 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. You could see that the relative penetration of this company’s products should continue to increase as time goes on.

I know that this is the combination of 2 businesses with a very rich history. Prior to the merger, they operated in somewhat different verticals. What precipitated the merger of Essilor and Luxottica, and what are the stories of these 2 businesses?

2018 was the year it all happened, when Essilor merged with Luxottica. In fact, Essilor and Luxottica were both heavily acquisitive companies independently prior to coming together. The story 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 to take dusty, forgotten brands like Ray-Ban and really reignite and catalyze growth for them.

It’s hard to remember now, but Essilor was, all the way back in 1959, the first manufacturer of the progressive lens, Varilux, which was hugely influential and was followed by several other innovations, as well as M&A, such as Transitions. Similarly, Luxottica acquired iconic brands over time, first Ray-Ban and Oakley, and then licenses for coveted luxury brands such as Chanel and Prada.

I think what really precipitated the merger was Leonardo Del Vecchio, who was the chairman and CEO of Luxottica at the time. He was a man with a very unique vision: He thought that integrating and controlling all aspects of the value chain in eyewear was the key to unlocking value. It turns out that he was right, in that this is really the only company that even today has operations across manufacturing, distribution, and R&D.

They have over 12,000 patents under their belt, which is no small feat. That realization prompted them at the time—they were really only in frames and sunglasses—to see that marrying that business with lenses would be a logical next step. This is what brought about the merger.

At the time, it clearly wasn’t without its problems, as we will probably talk about later.

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. When you consider the strategic motivation for the merger, but also the combined economics, can we talk through where the money is being made?

Seventy-five percent of their business today is actually from vision care, specifically corrective lenses. That is really where the bulk of the market sits. Sunglasses and frames are a much smaller, 25% business overall.

The lenses business is actually much more profitable because it operates in a more concentrated market. If we look at the prescription-lens market, EssilorLuxottica has over 50%, almost a 55% share. It tends to be much more concentrated, with the other players being Hoya and Carl Zeiss. It’s almost an oligopoly.

When you look at the other side of the business, which is frames and sunglasses, that is a much more fragmented and brand-led business. Here, EssilorLuxottica has just over a third of the market, which is decent, but it is a much smaller market.

If we look at prescription lenses, that is where the bulk of their sales are derived. Frames and sunglasses are a much smaller market overall. The fragmentation is such that you don’t really have a meaningful number 2.

Kering, which has brought some of its brands back in-house, has set up Kering Eyewear, which has roughly a 10% share of the market. Safilo, which EssilorLuxottica actually tried to buy—but walked away from, and I should say Luxottica tried to buy it because this was pre-merger—has about a 7% share of the market. There isn’t really a dominant player other than Luxottica.

This is where it differs from prescription lenses. The fragmented tail constitutes only 3% of the prescription-lens market, but it makes up about 40% of the frames and sunglasses market.

One of the popular criticisms of a business like this is that they produce a piece of plastic—a frame—for $1, and it ends up as a $200-plus retail product for the consumer. I know the truth is not exactly aligned with this infinite markup, given the gross-margin profile of the business, which I believe is closer to 60%. How do the unit economics work? What part of the business is more commoditized versus differentiated? How do you think about the different components and strategies, from Pearle Vision to luxury?

When we think about pricing power, what I really like to look at is gross margins. Stable and high gross margins tend to indicate that a company has sustainably durable gross margins over time.

It doesn’t strike me that eyewear is a segment that is particularly strong in pricing power. On the one hand, gross margins are higher than in the sporting-goods and footwear categories. If you look at Nike and Adidas, which are incredibly strong brands, they still have gross margins only in the 50s percentage-wise. That indicates that it’s not just about strong brands; there is also a lot going on in terms of scale and distribution that drives gross margins.

On the other hand, EssilorLuxottica’s gross margins, at about 63% to 64%, have remained very consistent over the last 5 years since the merger. Management itself is not guiding to a material uplift in gross margin because it expects the benefits from price and mix to be offset by growth in some of its insurance businesses, where there isn’t as much pricing power.

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

It’s not the case that you’re being gouged because you have to buy a pair of Ray-Bans. There are perfectly respectable and serviceable substitutes in the market because it is so fragmented and the barriers to entry are relatively low. Of course, EssilorLuxottica would say that scale gives them an enormous benefit in terms of procurement efficiencies.

Speaking to that scale, obviously a high-profile merger completed in 2018 feels like yesterday, but we’re coming up on almost 7 years. Take us through the trials and tribulations of combining the businesses, and some of the complementary M&A they’ve done since.

I would have thought that after completing the EssilorLuxottica merger, they would have wanted to sit still for a while. But very promptly afterward, they also acquired GrandVision, which was primarily a European distributor of lenses, to fill out the white space they had in European distribution.

Coming back to the EssilorLuxottica merger itself, this is a fascinating tale in terms of the corporate-governance issues that ensued. It was imagined as a merger of equals. Today, Delfin, the Del Vecchio family holding company, owns just over 32% of the group in terms of economic interest.

When the deal was first struck in 2018, it was envisioned by Luxottica’s chairman and Essilor’s chairman at the time that the 2 companies would have a power-sharing arrangement for 3 years. Del Vecchio agreed to limit the exercise of his larger voting rights, and they would wait for 3 years before jointly appointing a group CEO.

In practice, this was an Italian company marrying a French company, with very different cultural profiles, governance structures, and managerial cultures. These were all things that perhaps, in the excitement of getting the deal done, had been swept under the carpet. They came to the fore over the subsequent few years.

There was a long and publicly drawn-out battle in terms of corporate governance from 2018 to 2021. It was quite damaging to morale, definitely to the share price and market and investor perception, and to the credibility of the combined management team. It also called into question the benefits of the merger because of the frequency with which these governance disputes were reported in the press.

Mr. Del Vecchio believed that Mr. Sagnières, his French equivalent, was trying to grab power. Mr. Sagnières fought back and said that Mr. Del Vecchio was trying to execute a zero-premium merger. There was arbitration involved, and ultimately the company, thankfully—not necessarily 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.

That happened in 2019. Now we have a co-CEO structure. There is Francesco Milleri, who is the official CEO, and then there is Essilor’s deputy CEO, Paul du Saillant, who is also in place today. That has thankfully removed a lot of the distraction and the corporate-governance struggles, as well as the impact they had on the share price for quite some time.

Now we’re in a different phase. But even while all of this was going on, they decided, in July 2019, to acquire GrandVision, a global leader in optical retailing.

At that time, EssilorLuxottica’s own market cap was about €50 billion, and the deal was valued at just over €7 billion. It was at a very similar P/E multiple, so it was a hugely dilutive deal. It was also a very long, drawn-out acquisition process because the European Commission required a lot of concessions and remedies for the deal to be approved. Three hundred and fifty retail stores across Belgium, Italy, and the Netherlands had to be sold.

What the deal did was further enhance the company’s vertical integration, which is something they had always touted as distinguishing them from the competition. It made even more sense in the wake of the Essilor acquisition because what Essilor never had on its own was direct-to-consumer distribution. It had always relied on third-party wholesalers.

Coming together with Luxottica, with the added benefit of GrandVision, created a full-service, manufacturing-to-customer-experience proposition under the aegis of 1 company.

Now that we have this large, combined, vertically integrated business, let’s zoom out and talk about the industry itself. Secular versus cyclical: I understand that 60% or 70% of adults will need corrective vision at some point in their lives, so there is clearly sustained demand for these products. How do you think about the way the industry ebbs and flows?

It’s interesting because of the 2 sides of the business. One is not as cyclical, in the sense that prescription lenses are a necessity for over 4 billion people worldwide. It’s not really a discretionary product. In some cases, eye exams are covered by insurance or employer benefits, which again stabilizes demand.

The key feature is underpenetration in emerging markets, especially in Asia, which drives these long-term structural growth trends in corrective eyewear. It’s estimated that uncorrected vision impairment today might cost the global economy north of $300 billion in lost productivity. There is a huge economic cost to not correcting vision issues.

Then, of course, you have the other side of the business: frames and sunglasses. Here it’s much more about brand, with quite a bit of fashion as well. We know that luxury spending and spending on discretionary items drop during recessions, so this side of the business tends to be more sensitive.

We saw this during the global financial crisis, for example, when the standalone Essilor business continued to grow. People still need prescription lenses whatever the economy is doing. The sunglasses business did experience a moderate, mid-single-digit decline, though that was somewhat better than what we saw elsewhere in the luxury industry.

There may have been an element of this being an affordable luxury, similar to what Leonard Lauder has called the lipstick effect. No matter how bad times are, women may still indulge in a lipstick. Perhaps there’s an element of that with sunglasses as well. But there’s no doubt that this end of the business is more cyclical.

If we look at the growth drivers for the eyewear industry overall, it’s clear that an aging population, population growth, and greater penetration in emerging markets because of rising incomes are all durable and sustainable long-term trends.

Vision impairment is still one of the world’s most untreated and undiagnosed disabilities. In developing economies at the bottom of the income pyramid, roughly 90% of cases are undiagnosed, which is quite astounding even today.

The fact that innovation in eyewear is redefining the entire TAM is hugely interesting to me. We have the huge hype cycle around smart glasses, which to no small extent has impacted EssilorLuxottica’s valuation in recent months. Could they go mainstream in the same way smartwatches have? Could that unlock a huge new market?

The Ray-Ban Meta, which launched in October 2023, has really been the only connected-glasses option to reach mass-market adoption. The company recently said that it had sold 2 million units of this product. It could be really interesting if they manage to make it go mainstream in the same way that perhaps the Apple Watch has.

The other innovation could be hearing aids. They’ve announced an expansion into hearing solutions through a disruptive proprietary technology from an Israeli startup called Nuance Hearing. It’s really at the intersection of sight and sound, offering quality hearing solutions in the form factor of glasses.

That minimizes the stigma and addresses mild to moderate hearing loss, which is quite common among the growing aging populations in the Western world. It’s a product that is about to be launched, or is actually in the process of being launched, over the counter in the U.S. and through audiologists in Europe.

It could be interesting to see how they’re able to grow their market beyond their core eyewear market.

Having laid out the strategic motivations of the business and the merger, and understanding the nuances of their go-to-market strategy today, it would be helpful if we walked through the P&L of the business—from the top line, where it will do €25 billion to €30 billion growing at a high-single-digit rate, down to gross-profit margins, operating margins, and all the money being spent in between those 2 points.

You also spoke briefly about some of their capital-allocation policies. You look at a business here that seemingly should be somewhat capital-light, but they do reinvest meaningfully below the OCF line. I’m curious how you think about the financial profile of the business.

What I think is quite interesting is that we’re talking about a business that is now €26.5 billion in revenue, yet if you look at its EBIT line, it’s under €3.5 billion. They’re generating roughly a 16% EBIT margin despite having a 63% gross margin. So where is all the money going?

It’s quite amazing: About half of that gross margin is selling expenses. We must remember that they have a huge network of retail stores—roughly 18,000 around the world. They also employ close to 200,000 people, and that is really the bulk of the operating expenses of this company.

It’s also interesting to note that R&D, which we might expect to be higher for a company that is quite innovation-heavy, is actually only about 2% of sales. Even with this, they’re spending about 3 to 4 times as much as the industry, which tells you that the rest of the industry is increasingly challenged in terms of matching the scalability of innovation that EssilorLuxottica might be able to continue generating.

Advertising is another meaningful expense. This is quite an advertising-intensive business because of competition, particularly on the frames and sunglasses side. Advertising is about 7% of sales.

They also have, in my view, a little bit of general-administration bloat, if I may, which is about 8% of sales. That tends to be on the higher side, although if you consider that they’re in 150 different countries and have a fully integrated value chain, perhaps there are good reasons for it being as high as it is.

The company has targeted increasing its EBIT margin over time from roughly 16% today to 19% or 20% by the end of fiscal year 2026. My personal impression is that this is likely to be delayed because their first priority will be to invest in growth.

If they see smart glasses continue to grow in adoption, as well as Nuance Audio’s hearing device continue to grow in adoption, those will be prime areas for reinvestment. It’s also interesting that R&D is only 2% of sales, but capex peaked at about 7%, with steady-state capex expected to be about 5%.

That’s really because a third of that capex is going into operations and another third into retail. They’re still heavily investing behind their retail presence to make sure they can sell the enlarged suite they’re offering to customers within the same formats and therefore increase store productivity.

I think this represents longer-term margin-expansion potential, but probably not right away. E-commerce investment has been huge for them as well. Increasingly, about 7% of their sales are coming from e-commerce, and this has required substantial investment. About 20% of capex is going into digital technology.

I think this is increasingly table stakes for a business like this, which faces competition from many other retailers in the e-commerce arena.

It’s interesting that you mention e-commerce because it’s almost impossible to talk about EssilorLuxottica without mentioning Warby Parker, which is now itself a public company. If you think about the direct-to-consumer boom of the last decade, for a very long time the capital markets afforded their competition the ability to lose money to acquire customers. That’s no longer the case.

I’m curious, as people thought through the competitive pressures a business like this would face, what did the likes of Warby Parker mean for the business, and how have they staved off that competition?

This again brings to the fore their relatively unglamorous approach and their insistence on vertical integration: controlling everything from global manufacturing to global distribution and the consumer experience.

If we look back 5 years, when the phrase “DTC” was all the rage, particularly for U.S. consumer brands, companies such as Away in luggage were competing against the likes of Samsonite. Warby Parker and other eyewear companies were competing against EssilorLuxottica. They were seen as disrupting what had traditionally been viewed as very staid, dull, but worthy industries.

Warby Parker’s model was really to own the customer experience and outsource mostly everything else—not everything, because it did control the design element. It controlled the design and retail elements, while manufacturing was handled by third-party manufacturers.

That digital-first model was a huge success during the pandemic, but Warby Parker has actually struggled to turn a profit. If you contrast that with EssilorLuxottica’s 16% EBIT margins, it’s quite a contrast. It’s also quite telling that the value of scale and the benefits of vertical integration have been huge for this business.

It’s also the case that consumers, especially post-pandemic, have voted with their feet in wanting choice. What was Warby Parker’s strength at the beginning—its single-brand focus—has perhaps emerged as a weakness because it can’t give customers the full spectrum of alternatives available in the marketplace.

The other key is that EssilorLuxottica has global scale. It operates in 150 countries, while Warby Parker remains focused on the U.S. and Canada. Its sales today are still about 2% of EssilorLuxottica’s sales.

That’s the real difference. What was seen as a disruptor is perhaps now more of a me-too player rather than a true disruptor.

We haven’t spoken much about 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 on where the business has a footprint, and how aligned or integrated are those business units?

They’re quite consistent in wanting to operate 1 type of business around the world, so I don’t think there are huge differences other than what naturally emerges because of the different business mix.

North America is their biggest business, representing roughly 35% of revenues. The big difference there is that the independent eyewear channel is much more important in North America. More than half of their revenue comes from independents.

Their product mix in North America is overwhelmingly lenses and frames, while sunglasses are probably the smallest element of the market. Then you have EMEA, which is slightly bigger if you consider developed Europe and emerging Europe combined. Developed Europe is slightly smaller than the U.S. business.

The channel in EMEA also tends to be quite fragmented, even with the GrandVision acquisition. About 59% of their business comes from independents.

The only market where this is not the case is Asia-Pacific. In Asia-Pacific, independents are a much smaller proportion of the market, while brick-and-mortar retail and e-commerce tend to dominate.

Despite the size of Asia, it is still smaller than both North America and Europe, but there is huge optionality in terms of upside. Children in Asia are most in need of corrective lenses because of the higher prevalence of myopia in that market versus anywhere else.

We’ve touched on some of the strategic aspirations of the business in smart glasses and audio. I also want to talk about some of the acquisitions 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?

The major acquisitions they’ve done include Ray-Ban in 1999 for $640 million, which has been a huge hit, and Oakley in 2007 for $2.1 billion.

The most left-field of these was perhaps the Supreme streetwear brand from VF Corporation in 2024. They paid $1.5 billion for it, which itself was actually less than what VF Corporation had paid to buy it a few years earlier.

There were some question marks in the market at the time of the acquisition, but I would say EssilorLuxottica has somehow been given a free pass on the deal since the smart-glasses phenomenon took off.

Since the end of last year, the relaunch of the Ray-Ban Meta, because of the integration of Meta AI—which did not exist in the earlier iteration of Ray-Ban Stories—has really made the product popular and ready for takeoff. Because of that, I think people have been a bit more forgiving, even though Supreme as a streetwear company has no obvious complementarities with EssilorLuxottica’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 skews much more Asian, much younger, and much more Gen Z. In order to popularize smart glasses among that demographic, it’s possible that Supreme becomes the brand vehicle to do that.

Ray-Ban and Oakley could do the same thing with slightly older consumers and consumers in developed markets. 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 Meta took an interest in the business. Will that relationship expand beyond an investment, and how do the 2 companies work together?

Meta has said that it had approval to take a 5% stake in EssilorLuxottica, but it hasn’t confirmed whether it has done so. It’s interesting that this was reported but not necessarily confirmed or denied.

Meta and EssilorLuxottica really do need each other. EssilorLuxottica needs Meta’s AI to power the interest in smart glasses. If you consider the relative size of smart glasses versus smartwatches, smartwatches are estimated to be a market of about $34 billion, while smart glasses are perhaps about $3 billion. There’s a huge gap in terms of potential, although you could argue that the form factor of a watch lends itself to much greater adoption than a smart glass.

AI is the key unlock here. Meta AI powering the Ray-Ban is a fundamentally different proposition from the old Ray-Ban Stories 1.0, which had much more limited functionality.

We don’t have many details about how the economics are shared between the 2 companies on sales of the Ray-Ban Meta product. Both companies are quite cagey about it, other than to say that this is a long-term partnership and that they want to continue to innovate.

I do think they’re building capacity to sell up to 10 million units. They sold 2 million units of the Meta Ray-Ban glasses last year. The product is priced surprisingly affordably, at about $300 a pair at retail in the U.S.

I think the reason is their attitude that, “If you build it, they will come.” The idea is to increase adoption before competition arrives 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 ultimately be the winner, depending on the functionality that comes out.

Perhaps Apple comes out with its own version of smart glasses with superior functionality. There are other players as well. I recently read about a voice assistant called Sesame that makes AI glasses, and they’re apparently very highly rated.

This is going to be quite a competitive space. It’s very different from anything EssilorLuxottica has done before because they don’t own the technology or the Meta AI functionality. It will be interesting to see how that partnership model evolves, and it will only be as successful as Meta AI itself is successful.

When you consider the strengths and weaknesses of the business and the competition, we’ve touched on a number of these topics. To summarize, you have a vertically integrated business with dominant brands. They reinvest heavily into the business and have been able to stave off competition from upstarts like Warby Parker.

What is the special sauce that makes this business tick?

The key is really their scale, which allows them to continue to invest in R&D and innovation. At the same time, their vertically integrated structure allows them to push that innovation into their own distribution channel.

There is also a unique aspect of EssilorLuxottica relative to other closed-network, vertically integrated players. Take Inditex, for example: It owns the Zara brand, makes the product, and sells it in its own stores. But EssilorLuxottica operates with an open network framework, where its own competitors are also its clients and customers.

They said very proudly at their Capital Markets Day that Hoya, which is technically one of their competitors, is also one of their big customers. Similarly, Kering Eyewear works closely with EssilorLuxottica because the retail network of EssilorLuxottica is a significant customer for Kering eyewear brands, including Gucci sunglasses.

You would never find something from H&M in a Zara store. That is quite different about this business: It has an open architecture, which helps it scale.

That scale is a virtuous cycle that allows them to reinvest behind their stores, but also behind innovation and R&D. Their investment in R&D has driven significant proprietary IP. They have over 12,000 patents pending or granted across more than 2,000 patent families, and nearly 21,000 trademarks pending or registered.

Innovation is really going to come to center stage because it spans all of their major areas. It covers vision care, eyewear design, technological innovation, smart eyewear, and sun lenses.

They have over 50 sun-lens researchers working on new mold-processing and optical technologies, as well as digital transformation. That includes the in-store experience, the option to explore the complete collection digitally, face-scanning technologies, and virtual try-on at Ray-Ban.com.

I have to say that I’ve personally been quite impressed by this. I was recently in the market for a pair of Meta Ray-Bans, and the virtual try-on was very useful.

All of these things help distinguish the company from the competition. But the real secret sauce is the vertical integration, because that is quite unique about this company. Covering every step of the value-creation process, focusing on manufacturing and service, while having a geographically diversified footprint, is quite complex. It’s not an easy feat for many companies to achieve.

That’s why perhaps a mid-teens margin is actually fair. I’m really not sure that the 20% target they’re pushing for may necessarily be achievable, given the complexity of operating this business. We haven’t even touched upon tariffs yet, and those could also be a potential spanner in the works of their margin ambition.

At least their scalability and relative competitive advantage should continue to be enhanced because of their vertical integration.

When you think about vertical integration and a business described as dominant, there is increasingly pressure under these types of businesses for the FTC or the DOJ to pursue them on antitrust grounds. You have to think about how they can narrowly define a market in order to prove that the company is harming consumers.

When you consider relatively sleepy categories such as retail, you typically don’t see much antitrust action. Headlines suggest that EssilorLuxottica faces these trials, so what is the concern, and how should shareholders weigh the actions being pursued against the company?

I don’t want to dismiss these claims entirely, but if we look at the objective facts, they have a 33% share of frames and sunglasses. That doesn’t suggest to me that they’re so dominant. It’s also not a category in which they generate substantial gross margins, which suggests that they may be taking advantage of customers.

In their own stores, they sell competitor products. You’re not obliged to buy something made by EssilorLuxottica that gives them a higher markup than one of their competitor brands.

Anyone who has spent time at an airport trying to find something to do and has stopped by a sunglass store only has to see how many options there are to know that no company really has dominance or pricing power in this category.

On the eyewear side of the business, you could say that perhaps this is similar to pharmaceuticals, in the sense that innovation does get rewarded with pricing power.

For example, the Nuance Audio hearing-aid technology could retail for about $1,500, but that is an over-the-counter, private-pay product. You also have Stellest, which is an offering designed to slow the progression of myopia in young children.

Before the retina changes shape and the lens needs permanent correction, Stellest is able to slow the progression of myopia. You could argue that this innovation should also carry a premium if you want to buy those products.

But in their core bread-and-butter business of lenses, it’s very hard to argue that they have meaningful pricing power that takes advantage of consumers. I don’t see evidence of that, given that the market is still fragmented.

Even if they are a little more dominant on the lens side than on the sunglasses and frames side, I would find it incredibly hard to believe that they are abusing that position, given that 40% of the market rests with other companies that are not major players.

It sounds like, over the next few years, we expect the business to continue executing its growth plans while layering in some of these more moonshot strategic actions. You’ve mentioned the prospects of tariffs, which I hope are transitory, although they will obviously have some effect and competitive impacts on the ability to sell across borders.

What lessons do you take away from studying a business like this that can be applied to other businesses you evaluate for investment? Strategically, where do you see parallels with investments in your coverage universe?

A lot of European businesses get a bad rap for having heavy family control or shareholding structures. But that has also allowed these businesses, on many occasions, to make long-term investment decisions that might not otherwise have been possible.

That’s where a visionary like Del Vecchio, in the vein of someone like Bernard Arnault, is able to have a long-term investment horizon, but also discipline when assessing prospective returns from a current investment.

If you look at what they did 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. It did take them 15 years, so it wasn’t overnight, but they had the wherewithal to do it.

That’s interesting considering the history of the brand, from being launched for the U.S. Air Force during World War II to its eventual Hollywood associations and becoming an icon. We perhaps forget that the process actually took many decades.

They continued to build their dominance by acquiring Oakley and building dominance in sports eyewear. They outbid several other bidders for that brand. GrandVision, meanwhile, perhaps no one thought they would have the appetite to acquire, considering that they were going through their own complicated merger, but it further expanded their retail dominance and ensured direct consumer access to their products worldwide.

I think that appetite for dealmaking, but also having a sensible rationale, is an important lesson. We have evidence that they have walked away when deals don’t make sense. For example, in 2009, Luxottica was considering acquiring the financially troubled Safilo Group, an Italian eyewear manufacturer, but decided against it because it didn’t make financial sense.

That disciplined approach—seizing the day but also knowing when to say no—is an important lesson for investors as well as operators.

I also think perseverance and risk-taking in new businesses are important. The first iteration of smart glasses, going all the way back to Google Glass, wasn’t a fantastic offering for consumers. We then had the first version of Ray-Ban Stories, which didn’t really take off.

But now Meta Ray-Ban has struck a chord at the right time and in the right place because of AI and its integration, which has made it that much more interesting. Continuing to tweak the proposition until consumer readiness is there is something that has come naturally to this company as part of its evolution.

It’s not a case of, “We tried this, it didn’t work, so let’s move on.” The ultimate lesson is that, if you see these otherwise low-margin businesses, vertical integration can be the key to unlocking value.

It doesn’t work all the time. We saw this end quite badly after the pandemic for brands such as Nike and Adidas, which tried to go completely DTC and forgo wholesale. Consumers want choice. They want to be in a multibrand environment.

The beauty of EssilorLuxottica is that, with its 150-plus brands and its retail channel, where it can offer other brands, it is able to provide that choice. That has also been a major driver of margins, which are now at 16% versus just over half of that 7 or 8 years ago.

The other lesson, of course, is not to air your dirty laundry in public. The corporate-governance boardroom battle from 2018 to 2021 was quite distracting to the core investment thesis and, I presume, for management internally as well.

We appreciate you coming back. This has been another fantastic conversation about a brand with a great deal of durability and an interesting story. I’m sure things will continue to evolve in an interesting way, particularly as they pursue smart glasses and adjacent categories, and attack the outsized opportunity in the rest of the world. Thank you.

Thank you for having me, Zach.