Tapestry Capri antitrust trial: Key questions about merger
Pedestrians walk past a Coach store and a Michael Kors store.
Scott Olson | Getty Images
Just a few miles from the birthplace of Coach in New York City, a federal judge will soon decide whether its owner Tapestry can become a bag behemoth — in a decision that will weigh big questions about how much consumers are paying for goods and the choices they have when they shop.
Investors, lawyers and reporters have flocked this week to a courtroom in Manhattan for an antitrust trial over a Federal Trade Commission lawsuit that seeks to stop the merger of Tapestry and Capri. The deal, if approved, would put six fashion brands under a single company: Tapestry’s Coach, Kate Spade and Stuart Weitzman with Capri’s Versace, Jimmy Choo and Michael Kors.
Tapestry and Capri announced the $8.5 billion deal more than a year ago, but the FTC sued to block it in April. It argued the combined companies would take away competition and leave consumers with fewer affordable handbag options and employees with worse pay and benefits.
Attorneys for the FTC have argued this week that the merger would harm consumers by putting Coach and Michael Kors — two brands it described as having similar prices and often competing head-to-head — under the same company. Both brands sell directly to customers on their websites and in stores, but also are carried by stores that cater to Americans across incomes including department stores Macy’s and Dillard’s, off-price retailers like T.J. Maxx and outlet stores.
Tapestry and Capri, on the other hand, have argued the deal will allow them to keep up in a trend-driven industry where newer brands and changing consumer tastes are a competitive threat. At the time when the companies announced the deal, Tapestry’s CEO Joanne Crevoiserat told CNBC that it’ll allow Tapestry to reach more customers across age groups and incomes across the global, especially in the luxury and higher-end markets.
The outcome of the antitrust case could shape the outlook for the industry that makes the bags, eyeglasses and apparel that many Americans carry and wear across the country. It comes as Americans increasingly balk at high prices after years of high inflation — and the Biden administration takes aim at mergers in the grocery, technology and apparel spaces.
Investors are watching the trial closely for how it could affect shares of Tapestry and Capri. Shares of Tapestry are up more than 13% this year. On the other hand, Capri’s stock has tumbled about 21% this year.
Here are key questions that have defined the first three days of the trial, including highlights from some of the testimony:
How fierce is competition in the handbag industry?
In a fast-moving world where a new product can become the “it” bag from a TikTok video or celebrity sighting, Tapestry and Capri have argued that competition is fierce — even for the biggest handbag players.
With the transaction, Tapestry and Capri’s executives have argued the brand could better compete with the wide variety of other retailers and brands that consumers choose from, ranging from fast-fashion brands like Zara and H&M to European luxury names like Burberry and LVMH‘s Louis Vuitton.
One of the major debates in court has surrounded who are Coach and Michael Kors’ true competitors. Are they each other’s main rivals, or do they compete with a vast mix of brands that steal away sales? The FTC has defined the relevant market for two brands as “accessible luxury,” a term that Tapestry has used with its investors and board of directors to describe how it offers higher-end fashion looks at a better value.
Yet attorneys for Tapestry and Capri have pushed back, saying that the field of rivals is growing to include more price points.
Crevoiserat said she’s seen that dynamic close to home. Lululemon, known for its popular leggings and other athletic apparel, is the maker of belt bags, a hands-free, fanny pack-like bag that can be wrapped around the waist or slung across the body. The bags have been a hit, especially with younger shoppers.
“What really pains me about that is my daughter has one,” she said. “They’re a meaningful brand.”
In her testimony, Crevoiserat said the competition isn’t just with other handbag or fashion brands. She said the company is fighting to woo consumers who have many ways that they could spend their dollars.
“They could go anywhere,” she said. “They could buy a pair of yoga pants or go out to dinner. It’s discretionary.”
During the trial, attorneys have showed off industry data from market research companies and internal documents, such as consumer surveys and research on the competition. The research has related to not only Tapestry and Capri, but also other fashion brands including Chanel and Rebecca Minkoff.
Attorneys for Tapestry and Capri have argued that competition has intensified, as consumers have new ways to shop and their style preferences change. On the other hand, attorneys for the FTC have said the combined companies would corner the “accessible luxury” market.
Some executives from other brands have also testified on the state of play in the industry. Suwon Yang, Chanel’s head of merchandising for accessories and leather goods, took the stand on Wednesday. She said customers buy from many brands, but Chanel in its own research focuses on how it stacks up against European luxury lines like Saint Laurent and Hermes. She said in her experience, Coach, Kate Spade and Michael Kors have never come up in customer surveys or company conversations about the competition.
She also described the rigor of the craftsmanship behind Chanel’s bags, which she said sets the brand apart and leads to its price points of about $5,000 to $11,000 or even higher. Handbags are made in Italy and France, and for artisans, it takes a decade to make the company’s highest level of handbag.
Would the deal hurt consumers?
The FTC argues the deal would bring more sticker shock for American consumers already facing higher prices on many items.
On Wednesday, economist Loren Smith, one of the FTC’s key witnesses, took the stand and contended that the merger would turn the combined companies into a handbag giant that would raise prices for shoppers and have little reason to invest in sharper styles or better materials. Smith is a Washington, D.C.-based consultant and former staff economist for the FTC.
He laid out financial models and methodology he used to define the market for Tapestry and Capri, and particularly Coach and Michael Kors, saying they primarily compete with other “accessible luxury” players even if its consumers shop with other cheaper and pricier brands. He zeroed in on the handbag market in the U.S., and included common styles like cross-body bags and totes in the calculations.
Ultimately, he said he found the merger raises “significant competitive concerns” and his simulation indicated that it would lead to an average price increase of 15% to 17% for the combined company’s goods and a decrease in the quality of products.
If the two companies became one, he said the combined company would have about 58% market share in the handbag market in the U.S. He said Tapestry could get away with raising prices on Michael Kors handbags since it could recapture lost sales by attracting enough of those same shoppers to Coach and Kate Spade bags.
And he said it wouldn’t need to worry as much, even if Michael Kors’ brand continued to be challenged.
“Once they come together, if Michael Kors continues to decline, some of that decline is going to benefit the Coach brand,” he said.
Plus, he said, the handbag industry has margins of 60% to 80%, a high number that makes the risk of diverting customers to another of their brands or losing customers to other brands less significant.
He estimated annual consumer harm would add up to $365 million per year from a combination of price increases and merchandise that wouldn’t be as well made.
Attorneys for Tapestry and Capri pushed back on how he defined the competition, questioned his calculations and said he did not account for shoppers’ newer habits, such as the ability to buy a Louis Vuitton or Prada bag at a lower price because of the rise of secondhand marketplaces.
They also argued Smith is out of touch on the handbag market. The attorney for Tapestry and Capri noted that he’s only bought one handbag before, and his wife instructed him what to buy.
Why did Tapestry want to buy Capri?
When Tapestry CEO Joanne Crevoiserat took the stand on Tuesday, she said her goal for the merger is straightforward: Putting more handbags in the hands of more customers.
Attorneys for the fashion brands rolled carts of dozens of handbags from the two companies and from competitors into the courtroom on Monday, the day the trial began. Since then, a mix of executives and industry players have taken the stand, including Capri CEO John Idol and Coach CEO Todd Kahn.
In her testimony on Tuesday, Crevoiserat held up a few of the handbags in the room. She spoke about their contrasts and how the bags illustrate the range of brands that Tapestry owns. She said Tapestry benefits from having a portfolio of distinct brands to cater to customers who shop for a variety of occasions and have different senses of style.
She showed off Coach’s Rogue, a maple colored leather tote bag that a customer might use to carry what she needs to the office. Then, she held up another bag, a more playful looking smaller green and white Kate Spade bag that’s made of woven fabric and has been featured in Netflix’s “Emily in Paris.”
Capri has its own distinctive brands too, she said.
Internal documents also flashed on the courtroom screen, showing some emails and slide decks from a more than year long process that Tapestry pursued as it looked for an acquisition target and deliberated whether to buy a still emerging brand or a more established player like Capri. The names of other acquisition targets were redacted, but the code name for Capri was “Comet.”
Crevoiserat said Tuesday that if the deal closes, Tapestry would want to grow all of its brands — especially those of Capri, which has had weaker sales in recent quarters.
“I believe we can inject more relevancy, more vibrancy into the Capri brands,” she said.
Instead of operating as a top-down company, Tapestry is a house of brands, Crevoiserat said. She added Coach, Kate Spade and Stuart Weitzman each have independent teams that select merchandise, set pricing and shape marketing.
As the FTC raises questions about whether the deal will raise prices, she said Tapestry as a whole offers cost-savings benefits that come from having more scale, such as manufacturing and transporting products at a lower price.
She said that way of operating wouldn’t change. She added the high price tag to acquire Capri only makes sense if Tapestry gives the brand both financial support and creative freedom.
“The deal simply wouldn’t pencil if all brands couldn’t grow,” she said.
The antitrust trial continues on Thursday and is expected to run through early next week. Attorneys for the FTC have hinted that other key witnesses are poised to testify, including more executives from Tapestry and Capri and the namesake of one of the top brands in the merger, American fashion designer Michael Kors.
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