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Wal-Mart Stores, Inc. (WMT), Luxottica Group SpA (ADR) (LUX): Investing in a Near-Monopoly

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!

Luxottica Group SpA (ADR) (LUX)

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.

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.

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