BUSINESS MANAGEMENT
Who Will Survive the Shakeout?
Supply-side consolidation has the big players panning the optical waters looking for gems to acquire. EB uncovers the causes and affects, as well as the ways in which this market shift will affect optical retailers of all shapes and sizes.
By Erinn Morgan
Illustration by Paul Cozzolino

The fact of the matter is that the optical industry, due to a variety of factors, has only seen a sales growth rate of about two percent in the past two years. Couple this with an overabundance of suppliers, retailers, and labs in the industry and you�ve got a situation prime for a shakeout.

"It�s not the easiest time for anybody," says Ed Greene, president of Zeiss Optical USA. "The market mood is one of fear. Many people feel that if they haven�t sold their companies by now, they might not be worth as much money. People are beginning to scramble now."

A vast majority of the consolidation�in the form of mergers and acquisitions�has already taken place in certain sectors of the market. Just last month, Luxottica bought Sunglass Hut and Marcolin USA and Creative Optics merged.

Some say the shifts in retailing are now finished. "I think most consolidation has happened on the retail side," says Claudio Gottardi, president of S�filo USA. "The next step is that large retailers will diversify and be more flexible to the market they are in�an example is Cole Vision and its approach to Sears and Target."

Others say they see continuing problems and changes on the retail front. "The business is very tight in my view due to the significant increase both on the supply and retail side, while the market has remained flat at best," says Pierre Mermet-Marechal, president of Aria, a U.S. division of the French frame supplier Berthet-Bondet. "A number of major chains have a very hard time, while many independent operators are frustrated and worried."

Additionally, there has been much shifting of ownership in the lab arena within the past few years. "Most good labs are already taken and others are looking to sell," says Greene.

The next big shift, according to many industry experts, will take place on the frame supply side. Many of the initial tremors have already been felt, but the word is that the next few years will bring the real earth-shaking changes. "During the next two to five years we will see large changes on the supply side," says Stephen Rappoport, president of L�Amy, Inc. "I anticipate as many consolidations as we have seen on the retail side."

"It�s inevitable," agrees Mike Hundert, president of Rem Eyewear. "Whenever there�s a slowdown in an industry, and there has been in ours for several years, it must lead to consolidation. It has been happening for a few years and will continue in 2001."

Why is the wholesale side lagging behind other industry sectors on the consolidation front? "The only reason for a difference, if there is one," says Al Berg, co-president of Marchon, "is that retailers could be the tail wagging the dog." Thus, changes in retail structure are finally taking their toll on wholesale.

Some say the changes will be even more dramatic in five to 10 years. "We will see a lot fewer suppliers on the landscape," says Mermet-Marechal. "In the cosmetics and fragrance industry there are 10 companies doing 90 percent of the volume. Five of the 10 do 65 percent of the business. If you consider that the business of cosmetics and fragrance has a lot of similarities with us, it is very possible that in 10 years we will have a similar structure on the supply side. The retail side will enjoy some degree of protection due to the fact that dispensing eyewear requires a higher level of technical expertise and service than selling cosmetics. This is what the smart independent operators are building their futures on."

Gottardi agrees: "There will be a lot less suppliers in five years. Part of this is because the investments required today to survive are far more than what was necessary to be productive in the �90s. For example, to have a B to B site today, you�re talking about millions of dollars in investment and not thousands like it might have been years ago."

The Cause

One of the most pressing questions on people�s minds is: Why is the industry in general seeing slower growth? The reasons are many, according to the experts. An overabundance of competitors on the retail and supply side, the impact of laser surgery on eyewear sales, and newer outside forces, such as Internet sales in the plano sunwear and contact lens area, are all factors.

Everyone has an opinion as to the factor with the most impact. "The biggest is the effect of laser surgery marketing," says Zeiss� Greene. "It has people confused, and this affects the industry. Laser surgery bytes are telling consumers, �You don�t need glasses anymore.� This creates market noise and impacts sales." Greene purports that laser surgery won�t affect the industry�s health in the short term. But it could in the long range. "Ten years down the road it will have a dramatic affect."

Even retailers admit that laser surgery is an area they are moving into to ward off future problems. "Last year we embraced Lasik surgery," says Stephen Shubach, president of Standard Optical, a chain of 17 stores in Utah. "We did close to 750 or 800 patients, and that added a substantial amount of cash to our bottom line. We think laser vision correction is one of the things we now need to offer." Standard has opened a dedicated laser center and also a surgical site in one of their mall stores. Some of the procedures being done in the mall location are actually broadcast via television monitors in the mall itself�a marketing technique that seems to have worked. "Last Wednesday we did 30 procedures in the store in the mall," he says.

Sales in other market segments are also affecting frame sales and store traffic. "Contact lens business is becoming an even bigger issue for the retail enviroment," says Gottardi. "People are buying them from the Internet and via mail order. And when you don�t have people coming in, the stores lose a lot of traffic. So indirectly it�s affected eyewear sales."

The second question becomes: Why is the frame supply side experiencing such troubles right now? Again, the answers are varied. Many point to the fact that in the �90s, when the industry was at a peak and laser surgery was not as much of a concern, financial investors were descending upon the optical market. As the growth in sales has slowed and competition seems fiercer, investors have not been as easy to find. "When resources for investment get cut back it becomes a tighter market," says Hundert. "Couple with that an industry which has been stagnant, and outside investors will definitely see better opportunity elsewhere."

Funds for existing companies that were able to expand in leaps and bounds have suddenly dried up, and they do not have the investment needed to continue at the same pace. "The stronger companies with stronger capital got stronger," says S�filo�s Gottardi. "And the smaller companies that were not strong were poorly financed, and ended up having troubles finding new investors in this soft market."

The consensus is, however, that this course is a natural one for the industry and nothing will stop it from happening. "Everybody�s going to have to adjust," says Mermet-Marechal. "Obviously, we will have some casualties in the process."

Another factor cited for the slowdown in sales and troubles for eyeglass suppliers is that better-quality frames have reduced the replacement cycle for consumers. In their need to compete, frame manufacturers have refined the production process to the point where oftentimes even lower-priced product is of excellent quality. This may be the reason why more consumers may be replacing them every two to four years as opposed to every year or two. "Frame quality is better and they need to be replaced less frequently," says Mitch Barkley, COO of Viva International. "If the paint isn�t chipping off, and the lenses are better, people don�t need to replace them as often."

Rappoport agrees: "As the quality is improving, people will buy less often. If a consumer spends $300 on frames and lenses�which is quite easy to do these days�how soon will they be willing to do that again?"

New Non-optical Players

At a time when frame suppliers are having enough difficulties, it seems that at least one more large company may be poised to enter the industry. LVMH, the major fashion conglomerate which owns and operates companies like Louis Vuitton, Christian Dior, Prada, and Sephora (the international cosmetics and fragrance chain), seems to have set its sights on optical. LVMH recently acquired a five percent stake in the Italian frame manufacturer DeRigo.

Additionally, DeRigo has a joint venture with Prada for the manufacture of the Prada eyewear collection. Prada, which has strong ties with LVMH, has also taken somewhere between a six and 10 percent stake in DeRigo. Opinions are varied as to LVMH�s intent, but many believe they are testing the optical waters before they dive in deeper.

The company also owns Grand Optical�one of the largest chains of optical stores in Europe�so they already have experience in optical retailing. And they are delving into the eyewear retail business stateside as well. They opened a "test" sunglass store in Orlando under the name Solstice, and subsequently opened several others. More are planned.

What could this mean for the optical industry as smaller manufacturers struggle to stay in business and larger, more sophisticated, and better-financed giants enter the marketplace? At the very least, it will create increased competition.

The Effects

All the changing market factors are shifting the frame business in new directions which are enabling suppliers and manufacturers to better compete. One of the most noticeable changes is the move toward branded product.

"The move to branded product is the one thing keeping consumers spending money on glasses and lenses," says L�Amy�s Rappoport. "Eventually we will see brands even on $20 product."

Thus, the previous direction toward discounting on frames is taking a back seat. "Chains now seem to downplay �discount� image in favor of �quality,�" says Jim Hampel, president of Logo of the Americas. "Brand name recognition is definitely a spotlight. Consumers want a quality frame and lens, and they associate this with a brand. Frames have become a fashion statement." Hampel also says it is critical for suppliers in today�s market to search for the next "in-demand" brand name.

"It�s becoming increasingly tough if you do not have one of these names," adds Mermet-Marechal. "It is to the point that even a major name is not sufficient anymore. So many collections are available with a major name that the retailers and the consumers have the tendency to move for the latest big name available, at the expense of previously established collections.

"The largest manufacturers with the leading brand names have engaged in a race for market share," he continues. "In doing so, they leave open some segments of the market for smaller companies to capitalize on."

In a similar vein, many note a move to higher-end product as a potential direction to avoid some of the troubles the rest of the market is having. "It is easier for a high-end company," says Mermet-Marechal. "If you position yourself out of the scope of the big guys, you have some tranquility. But if you remain in their field of activity, then you stand a good chance to be counted among the casualties. Regardless of how big these guys are, there will be space left for a high-end frame supplier. There will always be a demand for more exclusive, more sophisticated product, and better service."

Many also believe there will be a shift to lower-cost manufacturing to increase margins to make up for lost sales. With the higher level quality of the product coming out of China today, it is from here that the experts say more and more product will emanate.

The survivors

"It�s now about the survival of the fittest," says Rem�s Hundert. "The companies structured to have the best vision will survive in the end�from the proper product portfolio to marketing to global distribution."

"Business is fragile�you have to control all the facets of it," adds Harvey Ross, president of Viva. "If not, you can get into all kinds of trouble, especially if you build a sizeable direct sales force. The major retailers are looking for companies they can rely on in terms of service and scheduled deliveries. There is a very small margin for error in today�s business."

Thus, the companies which have not built their business properly have had or will have difficulties because they are up against such fierce competition. "Certain companies expanded too quickly and spent their cash, and their cost of sales are through the roof," says Gottardi. "Cost of sales is not easy to manage. If you do manage that then the future will look very bright, especially if you have key brands."

The future will certainly map out a different landscape for everyone, including suppliers, labs, and retailers. But in this changing marketplace, at least one thing is for certain: Only the strong will survive. EB