Spectacular rip-off

Unmasked: The profit secrets of opticians

                                                             By Nick Louth                                           May 12^th 2006

The price of a pair of glasses is enough to make you squint.

Two thirds of the population wear spectacles, but while the cost of many consumer goods is stable or falling, the price of ‘face furniture’ has soared by 40% since 1999.

The average cost of a pair of specs is now £148.50, but it’s easy to spend at least twice that with specialist lenses or designer frames.  The industry isn’t keen for you to know what the actual costs are, and for good reason. Even accounting for the subsidised eye test, the consumer is getting a pretty raw deal.

Optical illusion

There is nothing in the actual manufacturing cost of spectacles to justify the prices charged. “Basically it is a bit of wire and glass made in 15 minutes or less on a machine, and which costs £3-£4, or up to £7 for the more complex ones. It is a complete rip-off, frankly,” said James Murray Wells, founder of Glasses Direct, which offers low-priced spectacles over the Internet.

The reason why prices are high is clear. Around 70% of this £2.4bn industry is controlled by just four firms:  Boots, Vision Express, Specsavers and Dollond & Aitchison. Independent opticians have been shrinking under the promotional onslaught of the high street giants.

Barriers to entry

“It is a very dominated market,” said Katy Child, a retail consultant for Mintel and author of a 2006 report on the industry. She said that there were considerable barriers to entry, particularly for smaller firms.

“The big four basically have the British market sewn-up,” Murray  Wells told me. “It's almost impossible for any new companies to get in.” The 23-year-old entrepreneur said that when his company started up one of the big four put pressure on his suppliers and succeeded in getting a frame company to boycott him.

Profits in the frame

The money isn’t being made by the labs, the firms which actually manufacture the glasses, but the big international optical groups which own most of the retailers, have the purchasing power, and have a lock on the lucrative market for frames.

Investors may make passes, at firms who make glasses

Perhaps it is time to get some of your money back by investing in these highly profitable firms? Well, that’s not so easy for several reasons. Trying to get the profit details of this lucrative trade, even where firms are publicly-traded and publish results, can be tough. Many of them are foreign owned or protected by trusts set up in tax havens. Others are entirely private. 

The most well-known player, Boots, may provide the detail but is hardly a pure play. Spectacles are less than 10% of this high street chain’s business, which is under huge price pressure from supermarkets such as Tesco and Asda as well as discount stores such as Superdrug. Boots is in the process of merging with pharmacy wholesaler Unichem, but whether this will solve its problems is far from certain. Worst of all, Boots managed to lose money in spectacles in 2005.

Dolland and Aitchison

Dolland & Aitchison is a pure play in spectacles, but buying shares in it means looking abroad. D&A is owned by Italy’s De Rigo SpA, which makes and sells glasses worldwide under the Police, Sting and Lozza brands as well as licensed-in brand names such as Chopard, Escard and La Perla.

How profitable is De Rigo? The latest results I could find, for the six months to September 2005, showed a slight fall in net profits to 18.8m euros on turnover of 267m. However, for those interested in the mark-up on spectacles the nearest indication you get is in De Rigo’s trading profit, which was 165m euros.

Very profitable, until you count the cost of David Beckham

This 62% profit margin is after  raw material, labour, manufacturing, property and distribution costs. However, it does not include commissions, advertising and other promotional costs (such as hiring David Beckham to wear Police sunglasses).

The company had a listing on the New York Stock Exchange until February, but if you wanted to buy shares in it you now have to ask your broker to look on the Milan exchange for you.

Vision Expresss

Vision Express’s ultimate owners are as well-shaded as any wearer  of sunglasses, but a little research gives you some hint.  The company is part of Europe’s largest optical retail group, GrandVision. This in turn is owned by a private investment company called HAL Holding, which is based in the Caribbean tax haven of the Dutch Antilles. However, you can buy shares in HAL Holding through HAL Trust, a company listed in Amsterdam. Clearly, if such a complex tax structure as this is required, it isn’t because profits are small! A hefty dividend yield of nearly 5% in HAL Trust underlines the point.

Specsavers

Something of an upstart in the industry, Specsavers was started by Doug and Mary Perkins in 1984, operating from a spare bedroom of their house in Guernsey with a table-tennis table as a desk. Once the government allowed opticians to advertise in the early 1980s,  expansion was made easier. The privately-owned company, still headquartered in Guernsey, now has 700 branches in Sweden, Norway, Denmark, the Netherlands and Ireland, as well as the UK.

Luxottica, the biggest of all

The real profit powerhouse in this industry is another Italian firm, Luxottica, which through its Sunglass Hut and Lenscrafter outlets has a dominant position in both North America and Asia. The company, which counts Ray-Ban and Vogue among its brands, racks up 4bn euros a year in sales. Consolidated net profits in 2005 were 342m, a 19% increase on 2004. Would-be investors should note the firm, listed in New York, sports a hefty P/E of 31 and is valued at $13.8bn. Earnings growth that is projected to average 17% per year over the next five years.

However, focusing on profits misses the point that the UK spectacles market has been going through a tough patch since 2005. High prices have caused consumers to defer spectacles purchases. Though there is still plenty of growth in contact lenses, when it comes to a new pair of specs, those who don’t have to have a new prescription have said “Let’s do it next year.”

Looking abroad for better deals

Irritated by high prices, many consumers have got around the UK market by buying when they are on holiday. While in Chennai, India in January, I bought a pair of glasses for less than half the price they would have been at the UK and had them delivered to my hotel within two hours of the eye test! Opticians in Cyprus are also said to offer  good deals.

The advent of supermarket competition is bringing extra pressure to bear on the sector. Firms like Specsavers, which runs its chain as a franchise, have been gaining market share by heavy marketing campaigns and special offers. This however, may be the first crack in the  market’s price discipline. “Once you have introduced low cost offers, there is no going back,” said Mintel’s Child.

For those struggling to afford their specs it seems there is light at the end of the tunnel. And it isn’t just the optician’s torch.  

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