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HomemitwocentsRumour, Speculation and the ‘Independent’ Supply Chain

Rumour, Speculation and the ‘Independent’ Supply Chain

Business consultant Michael Jacobs reflects on lessons learnt from a high profile career in optics, giving mivision his ‘two cents worth’ on the future for independent optometry, Australian-style. In this article he talks about the supply chain for independent optometry.

Independent optometry practice owners perennially speculate about the future direction of their suppliers. They probably feel the need to hypothesise because, unlike the big chains and franchises, they have little to no control over their suppliers. In the absence of control, they try to create their own reality through speculation. Besides, speculation is much more fun. Conspiracy theories, rumours of takeovers and mergers. How much fun is that? Only a few weeks of reading the online chatter and trade publications will confirm the level of creativity and conspiracy a good rumour can fuel.

In this article, written with no particular insight into any company or product, I would like to do a little speculation of my own. I would remind suppliers that this is an opinion piece, my opinion and nothing else but formed from 10 years’ experience in the optometric industry and 40 years’ experience in global supply chains spanning both Europe and Asia.

Let’s start with the latest news from the US – Essilor USA has purchased (pending regulatory approval) the 3,000 member retail franchise Vision Source (3,907 doctors and 3,177 locations), the second largest optical retailer in the United States. Why? Conspiracy theorists would tell you that it is Essilor’s plan for global domination and maybe that is true. Essilor is, after all, a huge global force in the industry and not just in lenses. Those same conspiracy theorists would tell you that Essilor ultimately wants to control the entire optical supply chain globally and as a result represents a major threat to independent optometry. The truth, methinks, may be a lot less obvious.

Essilor was left with little choice. They needed a strategy to defend and protect their market share

Managed Care Providers

The US is the largest single optical market in the world and Essilor is one of its major suppliers. However, the market in the US is not the same as the Australian market. Much of the market is controlled by insurers – ‘managed care providers’ in American speak. The power of managed care providers comes from their ability to control where their patients buy their eye care and eyewear. As a result of their ‘control’ of the patient, managed care providers can significantly influence the market, including setting prices that optometrists charge their managed care patients.

Two of the largest insurers in the US market are VSP and Luxottica. Luxottica is also the largest optical retailer in the US. Until recently, Essilor was the primary lens supplier to both VSP and Luxottica. These two companies represented a significant portion of Essilor’s US (and global) business. But are these two huge customers wed to Essilor? I suspect not! For example, VSP recently launched its own lens business and we also know that there were (failed) negotiations between Essilor and Luxottica for a global deal of some kind.

So, we now have a scenario in the US where VSP, one of Essilor USA’s biggest customers, has begun its own lens business and its other major customer, Luxottica, is the dominant player in the retail market. This leaves Essilor in a situation where it has little or no control over its customer base and thus its business.

Essilor was left with little choice. They needed a strategy to defend and protect their market share. Options could have included purchasing an insurance (managed care) business or purchasing a major retail chain. In truth it has done both with the purchase of Vision Source. Vision Source is not only a retailer – it has also developed a managed care initiative which in its own words “will disrupt existing solutions”. Simply put, this, in my opinion is just a defensive move by Essilor and inevitable under the circumstances.

A final word on Essilor; Essilor needs the independent market. Independents sell Essilor’s high end products. High end products have higher profit margins. This high end business is the pull though for Essilor’s research and development and R&D is the fuel that keeps a global company such as Essilor in a market leadership position well into the future.

Speculation Surrounds VSP

Another favourite subject of speculation is VSP, a major influence in the US optical market whose dominance is increasing through vertical integration. VSP is now a major frame wholesaler, lens wholesaler and managed care provider as well as provider of practice management systems, online retailing… the list goes on. Most independents will be aware of VSP’s presence in Australia as the owners of General Optical and Monkey Software (Optomate) – but is that where the company’s interests end? It is clear that VSP also has global ambitions. Thus I foresee a time in the not too distant future when VSP may, for example, do a deal with Australian health insurers to manage their optical portfolio for them – at a reduced cost of course. One can only speculate as to where that reduced cost might come from?

Frames and Frame Brands

Then there is the speculation about frames and frame brands. Developing a highly recognisable retail brand is an expensive exercise, thus brand owners will inevitably be driven to achieve maximum returns from their brand. When independent optometrists see their most popular frame brands being sold off to chains or corporates they should not be surprised. In fact, this is the very reason why independents should not become dependent on major brands even though they might currently be supplied by their favourite independent frame supplier. It will just be a matter of time before that brand joins all the other big brand names on the walls of the chains – their competitors. Money talks. The truth is that the smarter suppliers to the independent optometry market are adapting their strategy to have either long term licenses for their most successful brands, acquire lesser known quality brands or develop stronger house brands. As an independent optometrist you need to be vigilant. If your business is highly dependent on a particular brand, be aware of when the distributor’s brand licence expires and plan to exit that brand and replace it well before the expiry date. Better still, develop a strategy of not being dependent on any brand except your own. After all, isn’t that why you became an independent?

In summary, the one thing independent optometrists can speculate on with any degree of accuracy is that their suppliers will do whatever it takes to maximise profits. After all, isn’t that the primary role of almost every business – to maximise returns to their shareholders?

By the way, did you hear that…?

Michael Jacobs is a business consultant and columnist for mivision. He was the former Chief Executive Officer of Eyecare Plus for 10 years until early 2015.