Warby Parker vs Luxottica | Getting Vertical | 2

0:28Hey, Business Wars fans, have you heard?

0:34It's March 2010, and in Philadelphia, the four panicked founders of Warby Parker are grappling with a problem they never imagined, being too successful. Their online glasses store launched a month ago. At the same time, the brand was featured in GQ and Vogue, and then all hell broke loose. The magazine features sparked an avalanche of orders. Within just three weeks, they hit their sales target for the entire year. They started selling out of styles, only to realize their hastily assembled website doesn't have the functionality to add a sold-out sign, and it'll take their Chinese suppliers months to produce and ship new stock.

1:18Now, they're looking at a backlog of 20 ,000 customers, wanting to know why the frames they ordered and paid for are going to take weeks to arrive. In the Philadelphia apartment that doubles as their headquarters, the founders are working frantically. David Gilboa is on the phone to the website's developer trying to get a sold-out tag sorted quickly. We need it like yesterday. Can we move any faster than that? Orders are still coming in. Nearby, co-founders Andy Hunt and Jeffrey Rader have enlisted as many friends and family as they can to help pack boxes with glasses and ship them out as quickly as possible.

1:57Warby Parker's fourth founder, Neil Blumenthal, hunches over his laptop, responding to the nonstop emails coming in from disappointed customers. His cell phone vibrates on the desk. He doesn't recognize this number. Hello? Hi, is this Warby Parker? Uh, yeah. Sorry, yes, yes it is. I'm Neil Blumenthal, one of the founders. How can I help you? Well, I just got your email that one of the styles I ordered is going to take longer to arrive. Yes, I'm really sorry about that. We've just launched and... See, the thing is, I don't have time to wait. I noticed you're based in Philadelphia. What about I just come to you and try on some of the other styles?

2:42Blumenthal's eyes widen in panic as he looks around his apartment. Boxes are piled up to the ceiling. The remnants of fast food orders, beer bottles, coffee cups are littered everywhere. Debris from their struggle to push through the long days and nights. Uh, well, we're actually an online company, so we don't really have a headquarters as such. But it doesn't need to be fancy. I just need the glasses and a mirror. Please? Well, I guess you can come to my apartment. That's kind of where we're based at at the moment. You got a pen? I'll give you the address. One hour later, there's a knock at the door.

3:22Blumenthal scans the room one last time. After he hung up, the sense of panic in the apartment became more frenzied as everyone rushed around cleaning and clearing up as much as they could. Now, Blumenthal's dining table is covered in neat rows of folded glass frames with a mirror sitting in front. Yeah, hi. You must be the man who called earlier? The man at the door is wearing hospital scrubs. Yeah, sorry to barge in, but I'm a doctor at the hospital around the corner. I just need a new pair of glasses I can get real fast without paying an arm and a leg for them. Hey, thanks so much for doing this.

3:58I really appreciate it. The doctor notices the rows of glasses and eagerly heads over to the dining table. Blumenthal holds the mirror and all four friends get involved in helping the doctor pick out his frames. Having found the perfect glasses, he looks around the room with a smile. So, you guys literally just launched? Yep, this is it, warts and all. Well, I think it's a great idea. I've never understood why glasses cost so much, and these frames look great. Hey, thanks for helping me out, too. I'll be sure to recommend you. Well, thanks. Although, maybe wait till we get our new inventory in.

4:40Over the next few weeks, Blumenthal notices something odd. Lots of orders are coming in from people at the same hospital where the doctor works. Warby Parker might be an online business, but by going out of its way to provide great customer service and offering a place to try on their frames, they've just secured hundreds more customers. Blumenthal wonders which was really more important to the doctor, the service, or physically trying on the styles. He wonders if they could be missing out by being online only. He files this thought away to ponder later. Right now, none of them have the time to do anything beyond trying to keep up with online demand.

5:25They need more inventory, and they need to prove their overnight success isn't just a gimmick. But the idea that their business might need to think beyond the online world will eventually take root and reshape Orby Parker's attempt to challenge the market giant, Luxonica.

5:49Police in Irvine, California are investigating the double murder of a young couple in the parking lot of their apartment complex. A double homicide grabs the public's attention by the throat. We have identified Christopher Dorner as a suspect in this double homicide. A former cop and still on the loose. Considered armed and extremely dangerous. And scariest of all, he left something behind. A particular interest is a multi-page manifesto. This manifesto on Facebook is 11 pages long. Trace, this manifesto from this suspect who's targeting cops, it's stunning. Listen to the show The New Yorker calls one of the best podcasts of the summer, Dan Taberski's manifesto.

6:30And I tell you, this manifesto, it scares the hell out of me. Listen to Dan Taberski's manifesto wherever you get your podcasts or binge the entire series right now, only with Audible.

6:50From Audible Originals, I'm David Brown, and this is Business Wars.

7:18In the last episode, Luxottica founder Leonardo Del Vecchio aggressively built a global eyewear empire by refashioning Ray-Bans, seizing Sunglass Hut by force, and beating Oakley into submission. But as its control over every part of the eyewear business grew, so did the prices consumers paid. And that inspired four business school students to try undercutting Luxottica by setting up an online store, Warby Parker. Now, the four are struggling to keep up with demand for their stylish yet low-priced frames. Their challenge is to find a way to build on that rapid early success and become a real threat.

8:07This is Episode 2, Getting Vertical.

8:15It's 2013, three years since Warby Parker launched. The early issues are gone. Its first investment round reaped an impressive$12 million, and Warby Parker is currently running TV ads promoting itself as the online disruptor of eyewear retail. Looking for a new pair of glasses, are we? Seek no further than the Internet. There you'll find us, Warby Parker, designers of superlative eyewear as worn by these stylish citizens. We offer our glasses for$95 per pair, including prescription lenses, by cutting out the greedy middleman. Co-founders Andy Hunt and Jeffrey Rader have stepped back from operations to explore other business interests, leaving David Gilboa and Neil Blumenthal to run the company as co-CEOs.

9:08And they are looking to take the business to the next level. They want Warby Parker to be one of the best e-commerce stores out there. Their plans include a webcam app where people can upload images of their face and have styles suggested for them. There'll also be a social media integration so people can share those photos with friends to get their opinions. But their boldest plan yet is moving into brick-and-mortar stores. It's a plan that makes Gilboa nervous. Warby Parker has pitched itself to customers and investors as an online disruptor, disruptor signing long-term leases on stores when their business is just three years old terrifies him.

9:51But that early encounter with the doctor at his apartment has stuck with Blumenthal. People might be willing to shop online for cheaper glasses, but they still prefer trying them on in person. To test the waters, they move into an office in Soho, New York, and turn a quarter of the floor space into a pop-up store that showcases all their different designs. What they didn't expect was this store would soon be tracking around$3 million in annual turnover. Encouraged by this development, they open up more pop-ups and convert a big yellow school bus into a mobile store so it can tour the country and test whether the concept will work outside Manhattan.

10:34The results are clear. Both the pop-ups and school bus beat sales expectations. All of this has convinced Blumenthal that thinking of digital as new is actually old-school thinking. He believes the marketplace has moved beyond being a binary choice of online or physical. The future, as he sees it, is blended, or as he calls it, omnichannel. And that's a future Luxottica still has to adapt to.

11:12It's June 2014, and at Luxottica's headquarters in Milan, Italy, CEO Andrea Guerra does a double-take upon seeing the arrival of the company's retired founder and majority shareholder, Leonardo Delvecchio. Delvecchio is almost 80, but he's still slim and sharp-suited. He stepped back 10 years ago to make way for Guerra. Since then, the company has increased its strength in terms of size, global reach, and profitability. But recent board meetings have been tense. Delvecchio has criticized Guerra as too corporate and process-driven and has berated him openly for not innovating digitally. Guerra knows this visit is unlikely to be a social one.

11:58He ushers Delvecchio into one of the lounge chairs in his office. Delvecchio looks disapprovingly at the soccer ball lying in the corner. Guerra usually has time to hide it away. Well, this is unexpected. What can I do for you, Mr. Delvecchio? Delvecchio hits him with a steely gaze. I've just seen the latest designs for Google Glass. Guerra resists the temptation to roll his eyes. In response to Delvecchio's demands to embrace digital technology, Guerra partnered with Google to create a groundbreaking pair of smart glasses. But Google Glass has already become a punchline. The original prototype has been widely ridiculed with Guerra's nicknamed Glass Holes.

12:41And Delvecchio is not impressed with the progress Luxottica has made so far. You have taken none of my suggestions on board. I would never wear these glasses. They look ridiculous. And how much do they cost to produce? We have made some significant design changes, but we're restricted with how the technology works. How much do you plan on spending on this fiasco? When I said we needed to be more digital, I meant in our approach. You've made this company too bureaucratic. We're not adapting fast enough. Look at Warby Parker. CNBC is calling them one of the top disruptors in retail. And who do you think they're disrupting?

13:24Us. With respect, sir, they barely register in the U.S. market. We cannot and should not try to copy every startup around the world. They are digital. They understand customer experience. And now they're beginning to understand the value of vertical integration. They've opened eight stores already. Five years ago, they didn't even exist. Wait, you aren't seriously comparing the two companies. They are tiny. Delvecchio leans forward, eyes narrowed. Luxottica was tiny when I started it. Delvecchio holds his gaze for a moment, then switches the subject. Where are we on the merger with Essilor? Essilor is a huge French company and the world's leading manufacturer of eyewear lenses.

14:14For Delvecchio, Essilor is the last piece in his vertical integration puzzle. If the merger of Essilor and Luxottica goes ahead, the resulting company will own and control every part in the journey of a pair of eyeglasses, from design to manufacturing to retail sale. But Essilor is resisting the merger. It doesn't want to be bought, and the company refuses to see itself as the junior partner in any merger. The negotiations have dragged on for more than two years, with no resolution in sight. Privately, Wera thinks this deal won't happen in the end. The two companies have completely different cultures.

14:57Essilor started as a cooperative for eyewear craftsmen. The company prides itself on that structure and its cutting-edge scientific and medical research too. while Luxottica behaves like a luxury fashion house and is dominated by its dictatorial founder. Vera delivers the same update he's been giving Delvecchio for months. We're still deadlocked over the issue of how many shares you will have in the merge company. Delvecchio presses his lips together in a thin line. Perhaps if you spent more time coming up with solutions and less time splashed on the front of newspapers, things would move more quickly.

15:36Hmm? Guerra lowers his eyes. He's become interested in politics and has made some passionate speeches at election rallies for the center-left. Many are now touting him as a candidate for a ministerial position, but Delvecchio regards such ambitions as a betrayal of Luxottica. This company comes first and foremost. Nothing else should matter to you. If you cannot understand this one simple fact, then perhaps I should return to being more involved. Are you saying you no longer need me? Delvecchio stands and buttons his suit jacket. I'm simply making the point that you are distracted and need reminding of your priorities.

16:23He leaves without saying goodbye.

16:32It's a few months later. On the banks of Lake Como in northern Italy, Luxottica is holding its annual summer party. On a crisp green lawn, executives, employees, and clients have gathered in their best clothes. Champagne glasses clink, children play. Canapes on silver platters weave between the crowd as laughter and chatter spill into the air. Guerra is there too, shaking hands and chatting to clients and employees. In the distance, he sees Delvecchio doing the same, accompanied by his wife and his grown children from his previous marriage. The two don't get an opportunity to speak, but that's not surprising.

17:14These events are always exhausting with too many people to talk to. And as the sun begins to drop and the shadows lengthen across the rippled water of the lake, Guerra thinks about calling it a night. As if on cue, one of Delvecchio's assistants appears and hands him a heavyweight envelope. Inside is a gilt-edged card with a single line, thank you for everything. Guerra looks up, confused, but the assistant is already gone. So are Delvecchio and his family. Guerra struggles to process the meaning of all this. He knows Del Vecchio is unhappy with some of his decisions, but there's nothing in the company's financial performance to justify his firing either.

18:03In the following weeks, it soon becomes clear that note was indeed his goodbye. The 80-year-old Del Vecchio announces he will be returning to take the reins of his beloved company once more, and he's already proven that his ruthless streak hasn't been dimmed by age.

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20:13It's May 2015, and on the veranda of a luxurious villa on the French Riviera, Leonardo Del Vecchio is having lunch with Hubert Sañer, the CEO of the world's biggest lens maker, Essilor. Since returning as CEO, Delvecchio has restarted merger discussions with Essilor. But while Saniere can see the advantages, the French company is too proud to be bought. Even so, the two have managed to find common ground around the idea that if the merger did happen, there would need to be a three-year transition period during which they would both stay on to ensure things go smoothly. Delvecchio pours more cold white wine into Sagnier's glass.

20:58And which of us will command the business after the three years? I will. I see. I am the younger man, and Essilor's manufacturing process is far more scientific and complex than that of making frames. Yes, that is true. You know, part of the reason I want this merger to happen is that I'm worried about succession planning. about what happens after I'm gone. This is a remarkable admission. Delvecchio has never been one to show weakness, not to competitors, not to his own executives. Sagnier studies him carefully to see if this is genuine. Delvecchio is 80 years old. Maybe he really is thinking about his legacy now, about building something that outlasts him.

21:47And if that's true, than Saniere's being offered exactly what Esselor has demanded all along, a path to leadership in the combined company. He allows himself a cautious smile. But the reality is, Delvecchio has no intention of surrendering his company to anyone but his most trusted lieutenants. His admission of vulnerability is a negotiating tactic and a devastatingly effective one.

22:25It's just over a year and a half later, on January 16, 2017. Luxottica and Essilor announce their mega-merger. The combined company will be worth more than$48 billion and boast annual revenues of nearly$16 billion. It's the culmination of Delvecchio's lifelong vertical integration dream. The result is a corporate behemoth that will control every aspect of iframes and lenses. As the details of the deal emerge, some of Delvecchio's faithful employees and journalists who know him well are shocked. Delvecchio seems to have given in to all of Essilor's demands. The new company will be headquartered in France, not in Italy, and it will be listed on the Paris Stock Exchange.

23:17He's even swapped out his 62 % stake in Luxottica for a 38 % share of the new company. For the first time, Delvecchio does not have majority control over the company he founded. There will also be a strict power-sharing arrangement for the first three years of the merger to allow a smooth transition. But the issue of who will become chief executive after that time remains unresolved. The creation of this new colossus also sparks fear among other eyewear companies. Together, Essilor Luxottica will control around 16 % of the global market. Just want to say something here about vertical integration.

24:02It sounds like business school jargon, but it's really about controlling as many links in the supply chain as possible. And that's what Delvecchio's always wanted to do. If you make it, move it, and sell it, you have fewer people taking a cut along the way. The upside is efficiency and leverage. the downside? Well, when a giant gets this integrated, smaller competitors often have to invent entirely different and unexpected ways to compete. And Delvecchio's mania for vertical integration is catching on.

24:44Over at Warby Parker, the company's founders are making their own version of the same bet by opening physical stores. Across America, Warby Parker's stores are popping up in neighborhoods like Hayes Valley in San Francisco, designed to be oases for shoppers. Inside, a wooden parquet floor stretches down a long, narrow hallway. The walls feature murals painted by local artists. Banquette seating invites people to sit while rows upon rows of backlit glasses line the walls alongside shelves of books from indie publishers. The vibe is that of a stylish library. At a time when traditional retailers are closing stores and scaling back, Warby Parker is going in the opposite direction.

25:32And that's because it has discovered that physical stores are driving its profits in sales. People tend to spend more in stores than they do online. and each time the company opens a new store, it drives up online sales in that area as well. Funny how quickly the conventional wisdom has changed. You know, not that long ago, everyone said the future belonged to online-only businesses. Now, companies that grew up on the internet are opening stores of their own or using bricks and mortar to complement their online presence. Bonobos started as an online menswear brand and now runs dozens of guide shops.

26:12Casper went from selling mattresses on the internet to opening sleep stores across the country. Here's the thing. A website is convenient, but a physical store, that builds trust, lets customers touch the product, gives you the advantage of a local presence. The new conventional wisdom? Physical stores as compliments to e-commerce, not competitors. Now, Warby Parker wants to go even further. Eventually, co-CEOs David Gilboa and Neil Blumenthal will want to open 900 stores in the U.S. and Canada. The goal is for these stores to offer customers everything in one place, including eye exams and optical labs.