Industry Profiles: Ophthalmic Goods

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Industry Profiles: Ophthalmic Goods

Overview

Relatively small compared to most industries, the $3.4 billion U.S. optical supplies sector consists of five main product segments: frames for eyeglasses, lenses for eyeglasses, contact lenses, sunglasses, and cleaning solutions and specialty products. When imports are considered, the net U.S. market for optical goods exceeds $4 billion, as a large share of U.S. purchases are of foreign-made goods. Approximately 500 U.S. companies produce optical goods but, in terms of sales volume, the industry is dominated by a few large companies. Contact lenses are the largest division by value, worth about a third of industry sales excluding solutions.

Of all the industry's segments, sunglasses are by far the most volatile because they are usually considered a convenience rather than a necessity. During the 1990s, sunglasses saw two declines in sales—first during the recession in 1992, when sales fell 45 percent, and again in 1997, when sales fell 13 percent.

History of the Industry

Until the 1960s, growth in the ophthalmic goods industry had occurred at a steady, predictable rate, largely dictated by the rate of population growth in the United States. During the 1960s, however, an increased demand for optical products elevated industry sales levels to unprecedented highs, prompted by greater availability of eye examinations and the development of contact lenses to be used in place of eyeglasses.

Contact lenses first became a viable alternative in the 1950s, but at that time they were considered by many to be uncomfortable and costly. A typical pair of contacts in the 1950s cost $200, which would equal well over $1,000 in 1998 dollars. Lenses in that period were very large, covering most of the exposed eyeball, and rigid. None were soft or disposable as would become common by the 1990s. As a result, even among the minority of people who purchased contacts, there was a 50-percent attrition rate of going back to glasses.

Despite such drawbacks the contact segment of the industry grew rapidly through the 1950s and 1960s. The 1960s ushered in a new generation of smaller, thinner contacts that made them much more palatable to consumers, and research was set in motion that would lead to soft lenses, which would come to dominate the market later. Improvements were also made to conventional eyeglasses in the 1960s, including the introduction of plastic and bifocal lenses, although neither achieved significant market share in that period. Overall sales in the 1960s were boosted by federal programs like Medicare and Medicaid, which helped pay for eye exams for the elderly and the poor.

In the 1970s Bausch & Lomb, one of two leading manufacturers of eyeglasses at the time, introduced the first mass-market soft contact lenses, and their use quickly spread. The next major innovation came from Johnson & Johnson in the late 1980s, when it launched disposable contacts. Disposables became one of the industry's fastest-growing product lines in the 1990s.

Significant Events Affecting the Industry

Pricing of corrective eyewear has been an ongoing concern for government regulators. Since the 1970s recurring investigations have been conducted by federal and state agencies to determine whether optical products were being priced fairly. In the 1970s a number of states prohibited the advertising of eyewear prices. A Federal Trade Commission (FTC) investigation found that in states with advertising bans, prices averaged 25 percent higher than in states with no restrictions. By the late 1970s the FTC moved to end all advertising restrictions in an effort to level out pricing practices. The measure succeeded to some extent, creating a more price-driven market for eyewear.

But pricing issues continued to surface into the 1990s. In 1994 Bausch & Lomb was known to market the same set of contacts under different brands because they were targeted for different lifestyles. The same physical product was marketed as "daily wear," "planned replacement," extended-wear disposables, and one-day disposables. The lenses were priced at $70, $15, $8, and $3, respectively. The only difference was in the marketing—Bausch was trying to attract different groups of consumers who were either value or convenience oriented. Two years later, in a similar practice, the company was accused by regulators in several states of marketing identical products under different labels and charging significantly different prices for some. The investigation resulted in a 1997 settlement of $1.7 million paid by Bausch & Lomb.

The successful development of lightweight, high-quality plastic lenses helped revolutionize the eyeglasses segment, particularly for consumers with stronger prescriptions. In the past, glass lenses tended to be heavy, and if a person's eyesight was worse than average, glass lenses quickly grew thick and were regarded by many as unaesthetic. Plastics, by nature lighter than glass, allowed a typical pair of glasses to be lighter and offered more dramatic reductions in weight and thickness for stronger prescription wearers. Plastic lenses could also be made to better resist breakage than glass and, when treated with coatings, could help reduce the glare associated with traditional glasses. These enhancements helped drive strong sales of the newer technologies, although in large part these sales came at the expense of reductions in demand for older materials.

Key Competitors

Most leading U.S. producers of optical goods are diversified along product and geographic lines, as the traditional eyewear market in the United States grows at a relatively slow pace, even allowing for growth trends such as the rising consumer preference for disposable contacts. In addition, they face significant competitors originating in other countries, notably from Europe.

Bausch & Lomb With some 13,000 employees, New York-based Bausch & Lomb Incorporated is the world's top ophthalmic goods company. Founded in 1853 by German immigrant John Jacob Bausch, the company was forecast to post sales of $2.4 billion in 1998, of which approximately half was derived from overseas markets. The company is perhaps best known for its premium sunglasses, which include the Ray-Ban and Killer Loop brands. The company has a strong line of soft contact lenses and is the world's third-largest manufacturer in that category. The company also makes personal health care products (contact lens solutions and oral care products); medical products (contact lenses and hearing aids); pharmaceuticals (glaucoma treatments); and optical products (binoculars, telescopes, and microscopes). Its lens care line, which includes the trade names Boston, ReNu, and Sensitive Eyes, holds the largest share of the world market for those products. Over the course of its history Bausch & Lomb has made significant contributions to the advancement of optical and ophthalmic technology, including the creation of Ray-Bans (originally developed in 1929 for the U.S. Army Air Corps), the Cinemascope lens, satellite and missile lens technology, and soft contact lenses.

Johnson & Johnson A diversified consumer products company, Johnson & Johnson participates in the ophthalmic goods industry through its production of disposable contact lenses and various other products. Its Acuvue and other brand disposables hold a world-leading market share for that category. The $10-billion company also produces a wide range of consumer goods such as shampoo, bandages, and dental products.

Allergan Also prominent in the ophthalmic goods industry is Allergan Inc., a leading producer of intraocular lenses (which are surgically implanted in the eye) and surgical products, lens care items, and pharmaceuticals. Allergan's research and development work is concentrated in five areas: cataracts, contact lens care, glaucoma, neuromuscular disorders, and receptor-selective retinoids. Established in 1950, the company's first product was an antihistamine eye drop called Allergan. The company adopted the name of the eye drop and in 1960 moved into the nascent contact lens market, specializing at first in contact lens solutions and later manufacturing its own lenses. After watching its sales leap from $100 million in 1980 to over $700 million in 1989, the company struggled through a difficult transition period in the early 1990s, and sales fell off from $897 million in 1992 to $857 million in 1993. By 1997 sales had edged up to $1.15 billion, and were expected to top $1.20 billion in 1998. In 1997 the company posted a hearty profit of 11 percent. Like Bausch & Lomb, Allergan pulled in about 60 percent of its 1997 revenues from outside the United States.

Sola International U.S.-based Sola International Inc. is a major producer of plastic lenses, commanding a market share of 25 percent of the world's plastic lenses. Sola is known for its Spectralite brand of lightweight poly-carbonate lenses, but it manufactures glass lenses as well. In the fiscal year ended March 1998 Sola posted sales of $548 million, of which the vast majority came from plastic lenses, and employed almost 8,000 workers. That year its profits registered at 8.6 percent of sales.

American Optical The privately held American Optical Corporation has lost a great deal of its market stature since the 1970s, when it, along with Bausch & Lomb, was a U.S. market leader in eyeglasses. With just an estimated $280 million in annual sales during the mid-1990s, American Optical was relegated to second-tier status behind the likes of its multibillion-dollar competitors Bausch, Johnson & Johnson, and Allergan.

Oakley Just shy of $200 million in 1997 sales, Oakley, Inc. is best known for its popular athletic sunglasses, although with the quiet backing of basketball's Michael Jordan it has also launched a line of athletic shoes. The publicly traded company's main product line is premium sunglasses, some of which cost in upwards of $250. In 1997 California-based Oakley posted $194 million in sales and employed 930 workers.

Global Presence

U.S. companies rank among some of the world's largest optical goods producers, and many obtain significant shares of their annual sales from abroad, but they face mounting competition from overseas competitors. Production of low-cost frames, and sometimes lenses, is increasingly more cost efficient in places like Asia, where lower wages translate into cost savings for producers. U.S. imports of low-tech eyewear typically dwarf exports. For example, in trade of plastic frames and mountings, in 1997 the value of U.S. imports were nearly four times that of exports, and in trade of other frames and mountings U.S. exports were just a tenth of imports. The United States also has trade deficits in sunglasses and plastic lenses. However, in the trade of contact lenses, which require greater technical sophistication to produce, U.S. exports totaled almost three times the value of imports.

Employment

The U.S. optical goods industry employs approximately 27,000 people, of whom about 62 percent are in non-management positions. The industry's annual domestic payroll is worth more than $756 million and represents just over 20 percent of annual revenues. Employment in the industry has been slowly declining since the early 1990s and,on average, production workers at optical goods businesses earn less than the average manufacturing wage.

Industry Projections

About half of the U.S. population requires some vision correction, but as much as 90 percent of those over age 45 need corrective eyewear. These demographics bode well for the industry in a country with a large number of baby boomers growing older and a rising share of the population living longer; the demand for corrective eyewear overall will continue to follow slow, steady growth into the 2000s. Although some proponents of various surgeries to permanently correct vision problems have predicted their services will eventually eliminate the need for corrective products, as of the late 1990s, optical goods had lost no significant market share to such operations.