Josef Bogosian, Diego Flores, Sonali Galhotra, Mark Lee, Alex Lieu, Felipe Caro
The King of Eyewear: Luxottica
Based in Italy, Luxottica has a monopoly-like position in the global eyewear industry. Luxottica target markets are in fashion, luxury, and sports eyewear, and with a market share of 58% [1], Luxottica has a stake in every part of the market. It owns eyewear brands such as Ray-Bans, and has licensing agreements with fashion retailers such as Chanel. Eyewear is distributed through retail channels such as LensCrafters and Sunglass Hut, and Luxottica also operates its own vision insurance company. Luxottica recently strengthened its position in the industry by vertically integrating with the world’s largest lenses manufacturer, Essilor, in January 2017 [2]. Eyewear has long been a very high margin business, and Luxottica is estimated to markup frames between 10x - 25x from point of manufacture to point of sale, while Essilor sold lenses that were sold to retailers at 3x - 5x retail margin [3].
Luxottica maintains a warehouse in Atlanta and ships roughly 470k units of inventory each week - 300k to retail locations and 170k as wholesale to independent opticians and department stores. In most retail LensCrafters locations, prescriptions are written and the lenses are polished using machines located on-site, oftentimes within the same day. Though the majority of revenue comes through this traditional brick-and-mortar retail model, Luxottica also owns Frames-direct.com.
Luxottica has manufacturing facilities in five countries: Italy, China, India, United States and Brazil. It is a captive onshoring and offshoring model, with six facilities based in its home country of Italy, two in China, and one facility each for the US, India and Brazil. The US facility is mainly used for its Oakley brand while the small facilities in Brazil and India serve local markets. Luxottica presumably uses a dual sourcing and a base-surge strategy for some eyewear models with China being their low cost far away source for base supply and Italy being the close source to meet surges in demand. The manufacturing facilities produced a combined 93 million prescription frames and sunglasses in 2016. The group output by country is 41% in Italy, 46% in China and India, 10% in the US, and 3% in Brazil [4].
An Industry Newcomer: Warby Parker
Realizing the large margins in the eyewear industry, Warby Parker entered the eyewear industry in 2010 by disintermediating the traditional retail supply chain and providing prescription frames via the internet. Warby Parker targets consumers who are fashion oriented, but also value quality and accessibility of eyewear. With expected sales of $250 million in 2017, Warby Parker sales are projected to be split 50/50 between online and brick-and-mortar [5]. If purchasing glasses online, consumers are able to choose any five frames online to be delivered as part of their Home-Try-On (HTO) program. Consumers can then purchase at any time online by entering a prescription, and Warby Parker will send a new pair of glasses within 10-12 business days. Customers are expected to return the HTO frames within five days using a prepaid return label.
Warby Parker maintains a warehouse in New York, through which it fulfills orders and operates its HTO program. Manufacturing is outsourced to offshore factories in China. These factories are located in the same province within China. A potential issue with this single sourcing strategy is that it may leave Warby Parker vulnerable to supply chain disruptions from natural disasters, labor disputes, and shipping issues. This also leaves Warby Parker less able to meet demand fluctuations, compared to Luxottica’s base-surge strategy.
Warby Parker has found success through disintermediation by designing frames in-house (avoiding licensing fees), working directly with suppliers, and transferring value to consumers. In a margin comparison between a $200 frame of Ray-Bans and a $95 Warby Parker frame with lenses, Warby Parker transferred ~$97 in value to consumers by working directly with frame suppliers and building their own lenses thus having lower frames and lens costs than Luxottica (see Exhibit 1).
Exhibit 1: Margin analysis. Source: [2] and Alibaba.com.
Supply Chain Differences
Luxottica sources raw material and manufacture frames in Italy and China, from where they are shipped to Luxottica's assembly centre in Atlanta. Luxottica, unlike Warby Parker, has clear differentiation between sun-glass and eye-glass frames. Once assembled, these frames and lenses are shipped to retail locations worldwide using commercial air carriers making the supply chain model closer to the efficiency side in the efficient-versus-responsive spectrum (Exhibit 2).
Warby Parker also sources most of their raw material from a family-based firm in Italy. The raw acetate is shipped from Italy to China, where it is cut and assembled into frames. For the final step these frames are sent to labs in New York where frames are edged and inserted into frames. The type of lense being put in the frame - eyeglass lense or sunglass lense - depends on consumer demand. Therefore, Warby Parker has some level of flexibility at the last stage of their process, making their supply chain model more responsive. Once frames are inserted, the product is ready to ship (Exhibit 2).
Exhibit 2: supply chain comparison and location of the push-pull boundary.
The benefit of Warby Parker’s disintermediated supply chain model is illustrated by a comparison of inventory and sales (see Exhibit 3). By maintaining a limited number of retail stores, and pooling inventory at its New York-based warehouse, Warby Parker can deliver higher inventory turns. Luxottica kept 4.25 weeks of inventory at its warehouses in 2016. If we assume the same number for Warby Parker, then Warby Parker turned over frame inventory roughly 10x in 2016, compared to Luxottica at 7x. It is likely that Warby Parker will need more than 4.25 weeks of inventory at the warehouse to run the HTO program, but even if Warby Parker needs 6 weeks or so of inventory it would still have better inventory turns than Luxottica.
Exhibit 3: inventory turns (computed with unit sales). Source: [2], [6], and primary research including store visits.
Benefits from Inventory Pooling and Delayed Differentiation
By pooling inventory, Warby Parker can lower holding costs and maintain a high service level for all their SKUs. One notable feature of Warby Parker is that they also pool demand by having significant overlap between gendered frame offerings. For example, of the 203 men’s eyeglass SKUs (Frame-Color combinations) offered on WarbyParker.com, 199 of them are also available as women’s eyeglass frames. There are 61 unique women’s eyeglass SKUs. Within the HTO program, 70% of the available eyeglass SKUs are listed for both men and women.
In addition to many unisex frame offerings, Warby Parker also has frames that are available for both eyeglasses and sunglasses. As of June 2016, there were 26 SKUs available across men’s and women’s eye and sunglasses, as well as 12 SKUs available across both women’s eye and sunglasses. This flexibility gives Warby Parker an opportunity to do delayed differentiation – i.e., determine whether a given frame is used for sunglasses or eyeglasses after an order is placed. This can help reduce inventory levels and manage demand variability during season transitions.
Further Growth Opportunities
An obvious growth opportunity for Warby Parker is the expansion of its in-store optometry. This is an attractive low hanging fruit as Warby Parker already has the infrastructure and required regulatory clearance. This opportunity will be beneficial as it will allow for vertical integration and strategic price discrimination. The market size for this opportunity is estimated at $6.2bn, with an estimated annual growth of 2.7%.
It would also prove beneficial for Warby Parker to bring back its “Virtual Try-On” feature, especially in a mobile platform. This will provide valuable real time data insight regarding fashion trends, and styles customers are interested - which will provide better forecasting ability, allowing Warby Parker more time to react and adjust production and inventory levels ahead of time. Warby Parker will be able to anticipate future fashion trends as well by creating “dummy” frames for customers to try on. By creating “dummy” frames that are still in line with its modern American styling, Warby Parker will be able to minimize its design costs and collect demand information. Additionally, collecting facial data can be used to focus marketing or product offerings to customers depending on their facial features.
Warby Parker is currently working on a “Mobile Eye Exam” application. As of this writing, the application is still under development, but releasing this application will logically result in further vertical integration, and a long term disintermediation of optometrists, at least for simple eye exams, might be bound to happen.
[1] Based on online and retail eyeglass revenue figures from IBIS World and Luxottica 2016 United States sales
[2] Luxottica 2016 annual report, accessed July 20, 2017
[3] “Warby Parker: Vision of a ‘Good’ Fashion Brand” by Christopher Marquis & Laura Velez Villa, HBS Case Study
[4] http://www.luxottica.com/en/about-us/company-profile/luxottica-world, accessed July 20, 2017
[5] The Warby You Don’t Know by Tom Foster, accessed July 20, 2017
[6] Warby Parker Grew to $250 Million in Sales by Tom Foster, accessed July 20, 2017
Comments