Coach’s Owner Tapestry Faces Antitrust Trial Over $8.5 Billion Deal to Buy Michael Kors’ Parent Company
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. This decision carries significant weight, raising critical questions about how much consumers are paying for goods and the choices they have when they shop.
Key Takeaways
- The Federal Trade Commission (FTC) is suing to block Tapestry’s $8.5 billion acquisition of Capri Holdings, arguing that the merger would reduce competition and lead to higher prices for consumers.
- The FTC contends that the combined company would control a significant portion of the "accessible luxury" handbag market, giving it the power to raise prices without facing significant repercussions.
- Tapestry and Capri argue that the deal will allow them to compete more effectively in a rapidly evolving market, where new brands and changing consumer preferences are constant challenges.
- The trial has involved testimony from executives, economists, and even designers, who have provided insights into the competitive landscape of the handbag industry.
- The outcome of the case could impact the future of the fashion industry, particularly as consumers grapple with rising prices and companies explore consolidation as a way to gain a competitive advantage.
How Fierce Is Competition in the Handbag Industry?
The trial has centered on a crucial question: Just how fierce is the competition in the handbag industry? Tapestry and Capri maintain that the market is highly competitive, citing the wide range of brands available to consumers, from fast-fashion giants like Zara and H&M to high-end European names like Burberry and LVMH’s Louis Vuitton.
One of the central debates has revolved around defining Coach and Michael Kors’ true competitors. The FTC argues that they primarily compete with each other and other brands in the "accessible luxury" category. However, Tapestry and Capri contend that their rivals extend beyond this specific segment, encompassing a broader spectrum of brands at different price points.
Tapestry CEO Joanne Crevoiserat testified that even brands like Lululemon, known for their athletic apparel, are competing with them for consumers’ discretionary spending by offering products like belt bags.
The evidence presented in court includes market research data, internal documents, and testimony from executives of other brands. Chanel’s head of merchandising, Suwon Yang, testified that while her company focuses on competing with other European luxury brands like Saint Laurent and Hermes, they haven’t observed Coach, Kate Spade, or Michael Kors as major rivals in their research.
It’s clear that the intensity of competition in the handbag industry is a complex and nuanced issue. The trial is shedding light on how brands perceive their competition and how consumers navigate the vast array of options available to them.
Would the Deal Hurt Consumers?
The FTC asserts that the merger would result in higher prices for consumers, who are already dealing with rising costs. FTC economist Loren Smith testified that the combined company could leverage its expanded market share to raise prices without facing significant competition.
Smith’s analysis suggests that the merger could lead to a 15% to 17% price increase for the combined company’s goods and a decline in the quality of products. He estimated that the annual consumer harm from price increases and lower quality goods would amount to $365 million per year.
Tapestry and Capri’s lawyers challenged Smith’s methodology and his definition of the market, arguing that he didn’t fully account for the influence of secondhand marketplaces and other factors affecting consumer choices.
The FTC also points to the high profit margins in the handbag industry, suggesting that the combined company would have ample opportunity to increase prices. Tapestry and Capri countered that their higher margins are a product of the high cost of materials and production, not a sign of potential price gouging.
Why Did Tapestry Want to Buy Capri?
Tapestry CEO Joanne Crevoiserat testified that the acquisition of Capri is driven by a simple objective: to reach more customers with more handbags. She highlighted Tapestry’s "house of brands" model, which allows it to cater to different customer segments with its diverse portfolio of brands.
Crevoiserat emphasized that the deal would allow Tapestry to inject "more relevancy and vibrancy" into the Capri brands, which have experienced weaker sales in recent quarters.
Tapestry’s strategy hinges on leveraging its scale to achieve cost savings in areas like manufacturing and transportation. This, Crevoiserat argues, would allow them to offer products at more competitive prices while maintaining the creative autonomy of each brand.
The evidence presented during the trial reveals that Tapestry pursued multiple acquisition targets before settling on Capri, showcasing their strategic vision for expanding their presence in the handbag market. Whether their vision translates into a reality for Tapestry, however, will ultimately be decided by the court.
What’s Next?
The antitrust trial is ongoing and is expected to continue through early next week. The testimony of additional key witnesses, including Michael Kors himself, is expected to shed further light on the motivations behind the merger and its potential impact on the market.
The outcome of this trial holds significant implications for the fashion industry, as it could reshape the landscape of mergers and acquisitions and set new precedents for how antitrust law is applied to the retail sector.
One thing is certain: The fate of Tapestry’s acquisition of Capri will likely have a ripple effect on the handbag industry and beyond. It will be interesting to see how the court weighs the competing evidence and ultimately decides whether the merger will be allowed to proceed.
