As an investor there is nothing I hate more than competition. Not only do I hate competition, but I despite it! I want the companies I invest in to have the ability to crowd-out would-be competitors and raises prices on consumers as high as humanly possible… and for them to raise them even higher the next year. I want monopolies!
Unfortunately for us investors (but fortunately for us consumers), competition will tend to prevent this sort of monopolistic behavior from happening. But competition can allow for near-monopolistic behavior, which would be an accurate description of the Milan-based Luxottica Group SpA (ADR) (NYSE:LUX). Luxottica is the world’s largest eyewear company (and the largest by far!). There is very little that happens in the eyewear industry without Luxottica being involved in one form or another.
Design, Manufacture, and Distribution
Quick question: What is your preferred brand of sunglasses or prescription frames? Is it Ray-Ban, Oakley, Brooks Brothers, Chanel, or maybe Prada? Whatever brand you prefer, each and every of the above mentioned brands are designed, manufactured, and distributed by Luxottica. The company brand portfolio includes their 12 fully-owned house brands (including the aforementioned Ray-Ban and Oakley) and 22 brands licensed from many of the world’s most popular fashion houses.
Luxottica has a firm grip on the major eyewear brands. Let’s take Luxottica Group SpA (ADR) (NYSE:LUX)’s nearest competitor as an example, the world’s No. 2 eyewear company and fellow Italian, Safilo Group. Luxottica pulls in over 4 times the wholesale sales of Safilo, and will continue to take away significant market share this year. In 2011, Safilo was devastated by the loss of their Armani Group licensing contract (ending in 2012). In 2010, the Armani eyewear business contributed €165 million ($211 million USD) in sales, or 15% of Safilo’s total company sales. As you may have already guessed, Luxottica was awarded that contract, taking control of the Armani eyewear brand on January 1, 2013.
Retail
Luxottica retail business is comprised of over 7,000 worldwide retail locations. These stores include 2,295 Sunglass Hut locations (the world’s largest sunglass retailer), 1,155 LensCrafters locations, 824 Sear Optical locations, 726 Pearle Vision locations, 322 Target Optical locations and nearly 2,000 other stores under many other retail banners.
What makes Luxottica Group SpA (ADR) (NYSE:LUX) such a retail powerhouse is not just the sheer number of locations, but their business model of having a doctor of optometry inside or next to most of their prescription eyewear locations. This allows the optometrist to prescribe eyewear made by Luxottica and offer discounts on combined optometry service and prescriptions frame purchases. Luxottica’s business model makes it difficult for a standalone optometrist or a standalone eyewear retailer to compete head-to-head with Luxottica.
Luxottica is not without significant competition in the retail area though. Competitors include Costco Wholesale Corporation (NASDAQ:COST), the internet start-up company Warby Parker, and most notably the world’s largest retailer, Wal-Mart Stores, Inc. (NYSE:WMT). As the second largest provider of eyewear in the United States, Wal-Mart operates more than 3,000 Wal-Mart Vision Centers and Sam’s Club Optical Centers. Much like Luxottica’s business model, Wal-Mart has an optometrist office inside of their Vision Center and Optical Center locations (operating a business within a business within a business). Even with major retail competition from the world’s largest retailer, it is not as worrisome as it may seem on the surface. Wal-Mart Stores, Inc. (NYSE:WMT) sells many of the most popular sunglass and prescription frames, which including Luxottica Group SpA (ADR) (NYSE:LUX)’s numerous brands. Even strong competition on the retail side ends up benefiting Luxottica’s wholesale business in the end.
Insurance
Luxottica’s eyewear dominance is demonstrated in one final way: insurance. Luxottica’s owns EyeMed Vision Care, one of the largest providers of vision care insurance in the United States. EyeMed Vision Care provides vision care insurance to over 33 million fully-funded members and 100 million discount members for other membership and managed care organizations. EyeMed’s insurance network includes Luxottica’s own retail locations, other large non-Luxottica retailers such as J.C. Penney Optical, and hundreds of independent optometrists, ophthalmologists and opticians. By providing insurance, Luxottica is able to fund its own wholesale and retail operations.
Innovation
One of the problems with monopolies (or near-monopolies) is that tends to breed complacency. Why try something new and innovative when you can just rest on your laurels as the undisputed king of your industry? That, however, is not a mistake Luxottica Group SpA (ADR) (NYSE:LUX) seems willing to make.
Google Inc (NASDAQ:GOOG) has been making tech headlines for over a year with their latest and ambitious endeavor to develop smartglasses technology. Named Google Glass, the smartglasses technology aims to combine the functionality of a smartphone with the technology to display that information directly onto a user’s glasses. Set to be released later this year, Google Glass has the potential to change how we interact with our technology in an increasingly internet-connected world.
Although Google Inc (NASDAQ:GOOG) has been the company making the headlines, Luxottica is never a company to be left out in the cold when eyewear is involved. Luxottica has been developing the technology behind smartglasses display optics for nearly 15 years (about as long as Google has been a company). Luxottica has many patents in this area. Unlike Google though, Luxottica Group SpA (ADR) (NYSE:LUX) already has a product on the market. Late last year, Luxottica’s Oakley brand introduced the Oakley Airwave goggles. These high tech ski goggles include integrated GPS, preloaded ski slope maps, Bluetooth, iPhone and Android smartphone connectivity and a heads-up display built into the goggles.
While ski goggles have a limited, but profitable, niche market, Luxottica also has a number of options for smartglasses in the traditional glasses segment. The company has expressed a desire to either license their parents to other companies or release their own smartglasses to go head-to-head with the Google Glass. And with Luxottica’s size, scale and experience in the eyewear industry, they are not a company to be underestimated, even up against a tech giant like Google.
Foolish Bottom Line
Monopolies are great (for investors)! The problem with monopolies is that competition can often put an end to a good thing. The next best thing to investing in a monopoly is to invest in a near-monopoly. And with a firm grip on the eyewear industry’s design, manufacture, distribution, retail, and insurance businesses, Luxottica Group SpA (ADR) (NYSE:LUX) is just that, a near- monopoly.
The article Investing in a Near-Monopoly originally appeared on Fool.com and is written by Matthew Luke.
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