Ever since news broke of the single biggest merger in the history of global optics, between Essilor and Luxottica, the silence has been deafening.
As observed by Optician in last week’s editorial comment, UK optical bodies and practitioners have been cautious to react following the shock of a merger agreement between optics’ two biggest heavyweights.
Possible repercussions of the Essilor Luxottica merger, announced last month, include less choice, price changes and more control of the lens, frame, equipment and web services they already have a powerful position in. But it also has the potential to bolster technology and consumer awareness of eye care.
Indeed, one look at the joint portfolio of brands collectively owned by the French and Italian firms is enough to make your eyes water. Varilux, Transitions, Crizal, Shamir Optical, Ray-Ban, Sunglass Hut, Oakley, LensCrafters, Framesdirect and Transitions – to name but 10.
Despite the plethora of global brands and categories affected, attendees at last weekend’s opti Munich gathering were reluctant to offer an opinion at this early stage. Subject to clearance, Essilor and Luxottica majority shareholder Delfin hoped to close the deal by the second half of the year, and will not be discussing the deal further until then.
Instead, Optician decided to approach some of those in the UK optical community who might be wondering what the future holds after the formation of a €50bn optical goliath. Business analysts close to the deal, meanwhile, also offered their verdict after a few more weeks reflecting on the deal (see analysts' verdict below).
Mega-merger reaction
Fiona Anderson (pictured left), president of ABDO, believed that while the merger seemed to make strong business sense for both parties, it might not necessarily be such positive news for high street practices.
She said: ‘Having had time to reflect on the “mega-merger” as quoted by Chris Bennett [Comment 27.01.17] it seems to me the there is no doubt that the winners in the deal will be Essilor and Luxottica.
‘Both companies – already giants in the optical world – will benefit from economies of scale and reduced operating costs by combining design, manufacture and distribution from a single location, or, as will more likely be the case, the same processes from numerous locations around the world.’
However, Anderson questioned how the change in supply might impact the way practices order their frames and lenses.
She added: ‘Within such a huge company, it is my belief that many things will change and will impact on practices. I envisage questions such as these to emerge: Will minimum order quantities be revised? Will discount structures change? Will it increase choice? Or, as in the case of supermarkets in the UK, will choice be more limited? If EssilorLuxottica is the sole or main supplier to a practice, will prices go down? Will delivery times reduce if finished spectacles are dispatched? If practices don’t meet their quotas, will accounts be closed? Where will that leave a small independent practice? If practices exceed their quotas, will additional incentives be offered as they are now [such as retrospective discount]?
‘Nothing in this merger is by any means a “given” and on reflection I appear to have more questions than answers. I suppose like everyone else in the sector I will just have to wait and see what happens.’
High street impetus
Jonathan Foreman (pictured right), managing director of independent group Observatory Wardale Williams, meanwhile, was buoyant about the wider scope of the deal for high street optics.
He said: ‘I think it is potentially exciting. Think of what they could do for optics. They could develop integrated personalised eyewear with lenses and frames being custom made to order by 3D printing and CNC machining.
‘They have some of the best brands among the best designers and manufacturers in the world in optics. Imagine huge Lux boutiques along the lines of the Apple stores, or Nescafe stores in the best locations of the best cities. Not every patient will buy from them, however, they could be part of the inspiration that gets our customers to see eyewear as a more desirable and enjoyable purchase.
‘They will want to sell through distributors as there are still millions of people in the UK who don’t go to central locations. There will be those opticians that don’t meet their standards or won’t pay for them, or will decide Lux are not for them.’
He also pointed out the vast range of lens and frames products available to buy from other optical suppliers.
Foreman said: ‘This [the merger] would give those suppliers more impetus to continue to innovate. That could make it even easier for opticians to differentiate.
‘Both companies are very big, very European with a global plan and ambition, and both are very good at what they do. It may even be a sign that optics is a grown up business, this sort of merger makes sense for global suppliers, and has been normal in larger industries, such as food, cars, and of course defence. So it is not a surprise.’
Indeed, from Foreman’s perspective he would rather see the consolidation of two major optical players than the loss of niche business to other industries.
‘They are both proven optical companies, and this merger means they can compete with the likes of Amazon. I would rather have the Lux group as a power player in the world of optics rather than Amazon getting into that,’ he added.
Note of online caution
While the merger brings reason for hope on the high street, another senior industry figure was more concerned about the combined online prowess Essilor and Luxottica can boast.
The unnamed source told Optician: ‘I find this merger disturbing given the direction both Luxottica and Essilor have been travelling in recent years. Both companies are adopting direct to consumer strategies through the acquisition of retailers – mainly optical practices in the case of Luxottica, and online retailers in the case of Essilor.
‘I expect an online solution offering an online refraction and Essilor lenses in Luxottica frames to be launched somewhere in the world very soon, at which point it becomes available to any consumer with a credit card or a smartphone and will bypass the optician completely.’
The source added that although the group had best-selling brands, there were alternative products available ‘of equal if not better quality for the price’ and encouraged practitioners to shop around.
Also with the interests of independents close to heart, AIO chairman Peter Warren told Optician the combined entity might result in some savings in the first instance.
He said: ‘If history is anything to go by we would expect to see heavy discounting in the early days of a combined marketing strategy, but this of course would not be sustainable. It behoves practitioners to think in the longer term and perhaps exercise caution in being attracted to discounted offerings which may be short lived, but put existing suppliers under pressure in the meanwhile.
‘Ultimately it is good for independents that the wide range of quality suppliers that exists in the market today is sustained for many years to come.’
The AIO was also concerned direct internet supply routes stood to ‘disintermediate practices on the high street’.
Warren added: ‘It will not be lost on independents that any aggressive marketing to them by EssilorLuxottica might smack of the new conglomerate wanting its cake and eating it too.’
Analysts’ verdict: Further consolidation to follow?
There was a buoyant mood among analysts following the Essilor Luxottica merger announcement – as they licked their lips at the synergies and threw cold water on any potential competition issues.
A detailed analyst note obtained by Optician this week from HSBC Global Research expected the merger to be completed by the close of this year.
It said the deal had always been ‘a question of when, not if’, with the deal not only generating financial synergies, but increasing future merger and acquisition (M&A) potential and helping with management succession at both companies.
Indeed, further consolidation in the market was not ruled out as ‘natural M&A targets will continue to be small-sized lens manufacturers, processing labs, online players, frame brands and eyewear retail chains in emerging markets.’
This optimism was despite ‘the weakness of the US eyewear market’, which represented more than half of the combined sales of Essilor and Luxottica. A fifth of the new group’s sales would be in Western Europe, with mainland China representing 5% of revenue.
Further analysis of each business unit showed Essilor lenses being the largest chunk of sales, 38%, followed by Luxottica Retail, at 35%, and then Luxottica’s own frame brands, at 15% of the overall sales activity within the combined group.
The team at HSBC Global Research value Essilor at €23bn and Luxottica at €24bn, while the merger was expected to result in revenue and cost synergies ranging from €420m to €600m per annum. These synergies were expected to result from a fuller category mix, online penetration, insourcing, logistical efficiencies and laboratory network streamlining. It did not expect any streamlining of headquarters for now.
Analysts estimated the deal would boost the combined group’s net profit by 5% next year, 9% in 2019, 12% in 2020 and 15% in 2021.
‘From a consumer standpoint, the eyewear retailer and manufacturers, the act of purchasing a pair of glasses remains complicated. It involves an eye exam, then the combination of a frame and lenses. An Essilor Luxottica combination would certainly help simplify this process, benefitting the whole industry value chain,’ they added.
This week Luxottica released its annual financial results. While full year retail sales, which include Sunglass Hut and David Clulow chains, grew 6% to €5.6bn, global wholesale dipped 1.8% to €3.5bn. The Italian firm said Ray-Ban.com, Oakley.com and SunglassHut.com had ‘further established themselves as the consumer favourites for buying branded eyewear online’. There was no mention of the merger with Essilor, and Luxottica told Optician separately it was ‘too early to discuss any local benefits’ the merger may bring to the UK optical sector.