Opticians in the UK are enjoying favourable competitive forces, but they should beware of potential new entrants who could do them some real damage, says Tony Grundy
This article was first published in the September 2015 international edition of Accounting and Business magazine.
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The optical industry is typically profitable, but patterns of competition are changing. It is geared partially to dealing with physically related issues and thus health, while also sharing the characteristics of the fiercely competitive world of retailers.
When I first started to wear glasses some decades ago, opticians were either independent retailers or low-profile chains. It was a fragmented market, which normally generates greater competition but in this case this was restrained by an informal understanding that avoiding pricing competition was in the best interests of all (which I like to call a ‘tacit oligopoly’). The UK high street pharmacy chain Boots entered the market and demonstrated that a branded and bigger chain could be an attractive proposition.
Then, according to the story, the wife of the founder of Vision Express came home in tears after she felt that an optician had not dealt with her as ethically as they should have. He decided to simplify, make the deals on offer more transparent, offer a one-hour faster service and compete on price. Vision Express grew rapidly and became very profitable. (It has been a carefully guarded secret that the manufacturing cost of frames and lenses are a relatively small proportion of the total price, so sales margins are high.)
Of course that mini-monopoly position owned by Vision Express and Boots wasn’t to last, and Specsavers came along with a similar model but a different positioning: cheaper prices and some cunning marketing (‘You should have gone to Specsavers’ became quite a catchphrase in the UK). This made it the number one player. Asda and Tesco later entered the market, so we now had a number of powerful players, with the top four accounting for an estimated 70% of the market. Since then, the market has been quite static as a a result of economic austerity, although that is slowly changing.
Having addressed one of Michael Porter’s five forces – threat of new entrants (see above) – let’s analyse the industry with regard to some of the rest: bargaining power of suppliers; bargaining power of customers; intensity of competitive rivalry; and threat of substitute products or services.
While customers have an apparently wide choice of optician and there are lots of deals around, buying spectacles is an emotional decision: glasses are part of a person’s look and identity, and this offers opportunities for opticians to reduce and maybe manipulate buyers’ bargaining power.
There is a lot of discussion on the internet around pricing and cost behaviour in the sector and the dynamics between the chains and the independents. But there’s no substitute for real-life experience. The buy-one-get-another-pair-half-price offers abound and are heavily promoted by the salespeople in the stores. In fact when you purchase new glasses you often need to argue quite hard if you don’t want to do so under this deal. This kind of anticompetitive behaviour is used by some players to create temporary superior returns. But I doubt whether this is sustainable longer term and I believe this leaves some players exposed to new forms of competition. In addition, confusing pricing structures and processes leave the industry potentially exposed.
In my view, supermarket opticians could take huge advantage of this confusing market, not only by offering more transparency but by being more direct and aggressive in their marketing (Boots, for example, simplified its pricing structure in 2014).
Competitive rivalry has led to a proliferation of offers, which are replicated by many opticians without much innovation, so the competition hasn’t differentiated itself and offers are predictable, which undermines their impact.
Threat of substitutes
Other models – or ‘substitutes’ – are not really possible, other than the internet for supplies of contact lenses, for example.
Entry barriers are a bit of a concern, as these seem to be more financial than about competences or brand. It would be easy to come up with an equally if not sexier brand than Vision Express or Specsavers, especially with the vulnerabilities that I have identified in terms of customer service, pricing and sales process. A new upstart could do some real damage to the existing players, especially if it had a new business model that was difficult for others to imitate.
So we have seen that while opticians in the UK have reasonable profits on the back of generally favourable competitive forces, this could change with new entrants with a new positioning, business model and mindset. Watch out!
Postscript: I just did a final Google search and found that an alien ship had already landed – Glasses Direct, an internet business that supplies cheaper frames and lenses to anyone with a prescription. There you go.
Tony Grundy is an independent consultant, trainer and lectures at Henley Business School
CPD technical article
"Buying spectacles is an emotional decision, offering opticians the chance to reduce buyers’ bargaining power"