Morningstar | EssilorLuxottica Well Positioned as Market Leader in a Fragmented Growing Market
We think EssilorLuxottica will benefit from intangible assets (strong brands, distribution channel access, and research and development platforms) and cost advantage, enabling it to generate economic profits well into the future. We see the merger as moat-reinforcing and assign the combined company a wide moat rating.In our view, access and control over distribution in a very fragmented industry give the company a competitive edge that is not easily replicated. Wide distribution channels are attractive for in-house brands such as Ray-Ban and luxury brand licensing partners, giving them much bigger scale for an entry-level product than they can achieve solo (Luxottica has around 9,000 retail locations, versus 450-500 for the biggest luxury brands). In lenses, Essilor serves some 400,000 independent eye-care professionals globally (small shops account for around half of optical glass distribution in developed markets such as the U.S. and Europe). Independent shops don’t have the same level of purchasing power with suppliers and are inclined to pursue a value strategy rather than a volume strategy, which benefits manufacturers’ pricing.Despite the trend toward consolidation of distribution channels on a global basis, this process can take time. Additionally, EssilorLuxottica is tightening its grip on distribution (buying up local optical chains, setting up brand flagships, and expanding own e-commerce channels at a double-digit rate). EssilorLuxottica can lower its manufacturing costs further through lens insourcing in its own stores, better capacity utilization at the finishing lab/distribution centre level, and improved inventory management at the store level. This would make the company a cost-competitive partner for the bigger distributors and at its own online or physical store level.EssilorLuxottica is operating in a structurally growing industry supported by macroeconomic trends such as an ageing population, a growing middle class in emerging markets, and awareness of the health and aesthetic benefits of wearing sunglasses, as well as fashion trends.Essilor International (Compagnie Generale d'Optique) designs, manufactures and sells ophthalmic lenses, ophthalmic optical instruments and equipment. Co.'s activities are divided into three segments: Lenses and Optical Instruments (Co. designs, manufactures and customizes corrective lenses such as: Varilux (progressive lenses); anti-reflective, smudge-proof and anti-static lenses (Crizal); Nikon lenses, Transitions variable-tint lenses and Kodak lenses under agreements; polarized lenses (Xperio) and fog-proof lenses (Optifog)), Equipment (Co. produces, distributes and sells equipment and consumables used by prescription laboratories) and Readers (Co. designs and sells reading glasses).
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