Tag Archives: monopoly

Eye Spy a Summer Buy

Do you want to own a business with a serious competitive advantage? You’re probably thinking of something with a name brand, preferably with cutting edge technology, that has a lot of market share. Maybe Apple. Or Google. Or if you’re a little older school, and just want the name brand without the tech, maybe Colgate, Procter & Gamble, and CocaCola.

But there’s a company that you may haven’t heard of in an industry you’ve probably never thought about that has incredible market share and profitability. That company is Italian eyeglass maker Luxottica (LUXTY).

Luxottica makes frames for many designers with whom it has contracts. The designers include Prada, Chanel, Dolce & Gabbana, Versace, Burberry, Ralph Lauren, Tiffany, Bulgari, Coach, DKNY, Armani, Kors, Oakley, and Ray-Ban. If you’ve ever wanted to own those brands, you can at least own a piece of all their eyeglass business if you own Luxottica.

But Luxottica’s advantage doesn’t end with its designer contracts. It also owns major eyeglass retail outlets such as Sunglass Hut, LensCrafters, Oliver Peoples, Pearle Vision and the optical departments at Target, Sears, JC Penney, and Macy’s. If you’re buying prescription glasses or sunglasses, it’s hard to avoid Luxottica. Making the product, and owning a major part of the distribution gives Luxottica a kind of vertical monopoly. In this 60-minutes expose, the firm estimated that nearly half a billion people around the world wore its eyeglasses.

Granted, Luxottica has rehabilitated at least one big brand it owns – Ray-Ban. The iconic sunglasses were originally made by Bauch & Lomb for the U.S. Army. But it had fallen on hard times, and Ray-Bans were available in drug stores for $29. Now, with some “brand rehabilitation,” Ray-Ban is the top-selling sunglass brand in the world, and many styles retail for more than $150.

But Luxottica doesn’t only do friendly rehabilitations. In a bare-knuckles battle with Oakley, another sunglass maker, Luxottica wound up buying Oakley after Oakley accused Luxottica of copying its styles and selling its knockoffs for less. When Luxottica bought Sunglass Hut, Luxottica threatened to drop Oakley from its stores, a move that could have destroyed Oakley’s business. Eventually Oakley had to sell out.

Here’s an exchange in the 60-Minutes segment with Lesley Stahl, Andrea Guerra of Luxottica, and Brett Arends, then of SmartMoney.

Brett Arends: Yeah, there was a dispute about pricing, and they dropped Oakley from the stores, and Oakley’s stock price collapsed. How is Oakley going to reach the consumer if they can’t get their sunglasses in Sunglass Hut?

Andrea Guerra: There were some issues between the two companies in the beginning of the 2000s. But both of them understood that it was better to go along.

Lesley Stahl: Better to let you buy them?

Andrea Guerra: I wouldn’t say this. We merged with Oakley in 2007.

Lesley Stahl: You bought Oakley. They tried to compete and they lost and then you bought them.

Andrea Guerra: I understand your theory, but they understood that life was better together.

All of this means Luxottica can sell a pair of eyeglasses that costs the firm $30 for ten times that or more. The result is that Luxottica has achieved consistent operating profit margins of 15% and returns on assets of 10%.

The firm isn’t cheap. It trades at an enterprise value/EBIT of around 20. But, then again, you’d expect that from a company with such a competitive advantage and the profitability to prove it. With a 2% dividend yield, at least investors are getting paid to wait. The recent merger with French lens-maker Essilor should help. Essilor owns 40% of the U.S. prescription lens market. There goes Luxottica again – tying up another player that can help it increase its dominance in this otherwise unremarkable, but necessary (at least for prescription lenses) product segment.

Own The Company That Dropped Its “Don’t Be Evil” Motto

Most investors know what the “FAANG” stocks are – Facebook, Apple, Amazon, Netflix, and Alphabet (parent of Google). These stocks have had big runs over the last few years, and they’ve struggled more than the market over the past few months. That’s typical behavior for growth or glamor stocks – higher than the market when it goes up, and lower when it goes down.

Of these stocks, which one has the best long-term prospects? If you had to own one for the next 10 or 15 years, which one would it be? I think all of them, except for possibly Netflix, have strong business models, but I would pick Alphabet (Google). Here’s why.

Although I’m not sure he means to, Jonathan Tepper lays out the case for owning Google in his recent book, The Myth of Capitalism: Monopolies and the Death of Competition. When I was reading this book, I found myself enraged at how the tech giants have managed to become monopolies, but also wondering how much of my money I could stuff into their stocks. Google stood out to me as being a particularly bad actor, but also one whose future profits the selfish part of me wanted to own.

Tepper begins his story about Google by reciting what the search juggernaut did to a firm called “Foundem.” Foundem gave users the ability to search for the best price on a desired product. Somehow, although Foundem enjoyed an initial wave of success with shoppers rushing to use the site, “suddenly, after the second day, users never came back,” as Tepper tells it. It turned out that by the second day Foundem had dropped 170 pages down when shoppers searched for it after being at the top of the search list initially. Google removed Foundem from its organic search results and also prevented Foundem from purchasing ad placements via Google AdWords. Google “disappeared” Foundem, the way people get disappeared in totalitarian regimes. Google had its own product search service that it wanted to promote, and Foundem presented unwanted competition.

Google has done similar things to other companies in its ambition to grow its basic search business through ancillary “verticals” or searches in specialized areas – real estate listings, local business directories, legal filings, price comparisons, images, etc…., according to Tepper. For example, Google noticed that searches like “where’s the best nearby steakhouse” were becoming popular, so it decided to appropriate Yelp’s reviews. That meant Google users could see the Yelp reviews on Google, and bypass Yelp entirely. Yelp complained, eventually to the F.T.C., but Google’s response was that Yelp’s only alternative was to remove its content from Google altogether, according to this NYTimes article.

Google did similar things to other review sites such as TripAdvisor, and Cityserach, and it also allegedly provided pressure on cellphone manufacturers Samsung and Motorola to prevent them from using a navigation system in their phones called Skyhook. Google also adjusted how it displayed images so that its users could see and download Getty Image’s photographs without going to Getty’s website. The Times article quoted Getty’s attorney, Yoko Miyashita, saying he received a response from Google to Getty’s complaint that basically argued, “’Well, if you don’t agree to these terms, we’ll just exclude you.’” Miyashita said that wasn’t really a choice because if you’re not on Google, you basically don’t exist.

Over the past decade, Tepper calculates that Google, Amazon, Apple, Facebook, and Microsoft have collectively purchased 436 companies, mostly without antitrust interference.  It’s possible that the tide is turning against Google, and that it won’t be able to do to rivals in the future what it has done to them in the past – buy them, appropriate their content, or prevent them from appearing in searches. But, according to Tepper, Google already controls nearly 90% of search advertising. Advertisers want to be there because that’s where search is happening. Searchers want to be there because that’s where they’ll find what their searching for.

So far, Google has managed the neat trick of censoring or manipulating what people search for without offending them or incurring the wrath of the Justice Department. At some point the firm gave up its “Don’t be Evil” motto, perhaps realizing it couldn’t live up to that. But that means if you want to bet on one FAANG stock for the next decade, and you can swallow your moralism, Google probably has the best shot at continuing to deliver high returns.