The Trials of Direct-to-Consumer. Or, why we own Essilor Luxottica and not Warby Parker.

Warby Parker, the direct-to-consumer (D2C) optical frame maker, recently listed on the NYSE at a valuation of +5 billion USD. The company’s frames are ubiquitous amongst a certain millennial milieu; even New York icon Fran Lebowitz collaborated with them on a version of her signature frames. Warby Parker, we think, is emblematic of the recent trend for direct to consumer (D2C) products. There’s Casper for mattresses, Great Jones for cookware in soothing shades pastel pink; Glossier for skincare; Harry’s for shaving, Dollar Shave Club for shaving, Ecosa for mattresses, Our Place for cookware, Equal Parts for cookware, Material for Cookware, Emma for mattresses, Winkl for mattresses, Bailey Nelson for optical frames -- is the pattern clear, yet?

Millennial-focused D2C companies tend to share a few characteristics. The New Yorker touches on the first in its piece on Great Jones[1], a cookware company.

A strange but increasingly familiar kind of illusion underlies the D.T.C. (D2C) model. What Great Jones sells has less to do with the functionality or provenance of its kitchenware than with fostering the customer’s sense of in-crowd belonging online. As Albert Burneko put it in Defector, the brand is for “people shopping for cookware that will make them feel like they are pals with Alison Roman”.

The first element, then, of the D2C model has nothing to do with the product and everything to do with the ‘thing’ the product implies. The second element is the aesthetic. The millennial product aesthetic is almost always “well” designed, has soft edges, soothing tones and a nod towards minimalism. Molly Fisher wrote that “[the] design is soft in its colors and in its lines, curved and unthreatening” in her piece in 2020. The second element is aesthetic. Warby Parker has this in spades, its hipster aesthetic is a sanitised version of the old hipster aesthetic of Vice-magazine c.2007. The third aspect of D2C is the actual selling of the product. It sells directly to the consumer. This may seem like stating the obvious -- yet that is the model. It is not particularly different to Avon selling products door-to-door in the 1970s; the internet is the salesman.

 The model has issues. Generally D2C products have razor-thin margins because of the number of competitors. Casper, for instance, is competing against all the other D2C mattress manufacturers and traditional manufacturers. The competition reduces margins and often the products are affordable -- this is the promise of the millennial D2C company. The affordable products mean they need to sell a lot of mattresses, or a lot of glasses, or a lot of pots & pans. Yet the biggest issue is the overwhelming similarity of the product offerings: local D2C firm Bailey Nelson makes frames that are more or less the same as Warby Parker’s own offerings.

 The D2C conundrum is acquiring new customers, quickly. If you are a company landing high-value contracts like another Elevation Capital Global Shares Fund holding, Palantir, then producing a bespoke model and wooing one client with charm and acumen for months is reasonable. A Palantir contract is often worth hundreds of millions. If you consider that a D2C business pitches a “contract” to a consumer (in the case of glasses or a mattress, we would argue that decision is a long-term decision in spite of the low cost of either) then it isn’t logical to spend months wooing a customer on a $100 pair of glasses. So a D2C must win a “contract” with little spend and fast, because volume is important in a low-margin business. How does a D2C with marked competition and little-to-no differentiation win the “contract”?

In other words, Warby Parker is up against a lot. It trades around 15x revenue, a princely sum to pay for a company with no key differentiator. The Elevation Capital Global Shares Fund owns shares in Essilor Luxottica, which trades at ~5x revenue, which is a far more reasonable price to pay for a company which has a virtual monopoly on the global optical industry.

Essilor Luxottica is the anti-Warby Parker. Warby Parker has no competitive advantage. Essilor Luxottica has the advantage of scale, and the advantage of a virtual global monopoly. It is really the vision of one titanic man who is referred to solely as “il Presidente” in the optical industry -- Leonardo Del Vecchio. Del Vecchio turned Luxottica into a global behemoth -- chances are, you’ve purchased glasses from them. Del Vecchio pioneered the idea of licensing fashion brands for frames and then expanded his reach to retail -- Sunglass Hut, OPSM and Oakley. In October 2018, Luxottica merged with the biggest lens maker in the world, Essilor. Del Vecchio in effect took control of the entire supply chain -- from manufacturing frames & lenses to the distribution of them and the sales of them. The entire model is vertically integrated. Essilor Luxottica also owns a number of D2C brands (Clearly, Smartbuyglasses, etc) which significantly undercut Warby Parker itself.

 This is why the Elevation Capital Global Shares Fund owns shares in Essilor Luxottica and why we did not invest in Warby Parker. Essilor Luxottica’s pricing power extends from manufacturer-to-consumer across multiple retail chains and brands. Essilor Luxottica offers the illusion of choice yet ultimately it owns it all. Warby Parker offers a low-cost, undifferentiated product against a sea of competitors.

 Elevation Capital’s earlier reports on Luxottica (pre-merger with Essilor) can be found below:

Elevation Capital - Luxottica Report - December 2016
Elevation Capital - Luxottica Presentation - December 2016
Manual of Ideas - Why Luxottica Remains an Attractive Long-Term Opportunity

[1] https://www.newyorker.com/culture/infinite-scroll/great-jones-cookware-and-the-illusion-of-the-millennial-aesthetic