Pedestrians pass a Coach store and a Michael Kors store.
Scott Olson | Getty Images
Just a few miles from Coach’s birthplace, New York City, a federal court has ruled that its owner Tapestry The company could become a giant in the bag industry, and its decision will force a consideration of big questions: how much consumers are paying for goods and what choices they have when they shop.
Investors, lawyers and reporters flocked to a Manhattan courtroom this week to discuss Tapestry and Capri. If the deal is approved, six fashion brands — Tapestry Coach, Kate Spade, Stuart Weitzman and Capri Versace, Jimmy Choo and Michael Kors — will come under one company.
Tapestry and Capri announced their $8.5 billion merger more than a year ago, but the FTC filed suit in April to block the deal, arguing that the merger would eliminate competition, give consumers fewer affordable handbag options, and result in worse pay and benefits for employees.
FTC lawyers argued this week that the merger would harm consumers by combining two similarly priced and often head-to-head competing brands — Coach and Michael Kors — into the same company. Both brands sell directly to customers through websites and stores, but also in department stores and other outlets that cater to Americans of all income levels. Macy’s and Dillard’ssuch as off-price retailers TJ Maxx There is also an outlet store.
Tapestry and Capri, meanwhile, argue the deal will help them keep up in a trend-driven industry where new brands and changing consumer tastes pose competitive threats. At the time the companies announced the deal, Tapestry CEO Joan Crevoiserat told CNBC that the deal would enable Tapestry to reach more customers around the world across a range of ages and income levels, particularly in the luxury and high-end markets.
The outcome of the antitrust case could affect the outlook for the industry that makes the bags, glasses and clothing that many Americans carry and wear across the country. It comes as years of high inflation have left Americans increasingly resistant to high prices and as the Biden administration targets mergers in the grocery, technology and clothing sectors.
Investors are watching to see how the lawsuit will affect Tapestry and Capri stock prices, which have risen more than 13% this year, while Capri shares have fallen about 21% so far this year.
Below are the key questions that characterized the first three days of the trial, including highlights of testimony.
How competitive is the handbag industry?
In a fast-changing world where a new product can become the “it” bag based on a TikTok video or a celebrity sighting, Tapestry and Capri argue that competition is fierce even for the biggest handbag companies.
Tapestry and Capri executives argue the deal will enable them to better compete with a wider range of retailers and brands consumers choose from, from fast-fashion brands such as Zara and H&M to European luxury brands such as Burberry and Adidas. LVMHLouis Vuitton.
One of the main issues in court is who Coach and Michael Kors’ real competitors are: Are they each other’s main rivals, or do they compete with a variety of other brands vying for sales? The FTC has defined the brands’ relevant market as “affordable luxury,” a term Tapestry uses to explain to investors and its board of directors that it offers higher-end fashion at better prices.
But lawyers for Tapestry and Capri argue that their competitors have expanded and offer a wider range of prices.
Crevoiserat said he’s seen this phenomenon close to home. LululemonThe company, known for its popular leggings and other activewear, is also the maker of belt bags, hands-free, waist-pouch-like bags that can be worn around the waist or across the body, which have proven especially popular among younger shoppers.
“What’s really painful is that my daughter has them,” she said. “They’re a meaningful brand.”
In her testimony, Ms. Crevoisella said the company isn’t just competing with other handbag and fashion brands: It’s battling to attract consumers who have many ways to spend their money, she said.
“They can go anywhere they want,” she said. “They can buy yoga pants, they can go out to eat. It’s freedom.”
During the trial, lawyers presented industry data from market research firms and internal company documents, including consumer and competitive studies that related not only to Tapestry and Capri but also other fashion brands such as Chanel and Rebecca Minkoff.
Lawyers for Tapestry and Capri argue that new ways of shopping and changing style preferences are increasing competition, while FTC lawyers say the combined companies would dominate the “affordable luxury” market.
Executives from other brands also testified about the state of the industry. Suwon Yang, Chanel’s head of merchandising for accessories and leather goods, who took the stand Wednesday, said that while customers buy from many brands, Chanel compares its competitive position with European luxury brands such as Saint Laurent and Hermes in its own research. In his experience, he said, Coach, Kate Spade and Michael Kors have never come up in customer surveys or in internal competitive conversations.
She also explained the rigorous craftsmanship behind Chanel bags, which she said sets them apart and leads to a price range that ranges from about $5,000 to $11,000 or more. Handbags are made in Italy and France, and it takes artisans 10 years to create the company’s highest-level handbags.
Will this deal harm consumers?
The FTC argues that the deal will further shock American consumers, who are already facing higher prices on many items.
One of the FTC’s main witnesses, economist Lauren Smith, took the stand Wednesday to argue that the merger would create a handbag giant that would drive up prices for consumers and give them little reason to invest in fancier designs and better materials. Smith is a Washington, D.C.-based consultant and former staff economist at the FTC.
He explained the financial models and methodologies he used to define the markets for Tapestry and Capri, and especially Coach and Michael Kors, noting that these brands primarily compete with other “affordable luxury” companies, even though consumers do shop at other cheaper and more expensive brands. He narrowed his focus to the U.S. handbag market, including common styles like crossbody bags and tote bags in his calculations.
Ultimately, he ruled that the merger would raise “significant competitive concerns” and said simulations showed the average prices of the combined company’s products would increase by 15 to 17 percent and the quality of those products would decline.
He said if the two companies were to combine, the combined company would have about 58% of the U.S. handbag market, and that Tapestry would have no problem raising prices on Michael Kors handbags because it could recoup lost sales by attracting enough of the same shoppers to Coach and Kate Spade bags.
And he said that even if the Michael Kors brand continues to face challenges, it’s not something to be too worried about.
“If the two companies were to combine, and Michael Kors continues to underperform, some of that would benefit the Coach brand,” he said.
Plus, profit margins in the handbag industry are high — between 60 percent and 80 percent — so there’s less risk of a brand losing customers to another brand or losing them to another brand, he said.
He estimated that rising prices and declining quality of goods could cost consumers $365 million a year.
Lawyers for Tapestry and Capri disputed his definition of competition and questioned his calculations, arguing he failed to take into account new shopper habits, such as the rise of the second-hand market, which allows buyers to buy Louis Vuitton and Prada bags for cheaper.
Tapestry and Capri’s lawyers also argued that Smith was ignorant of the handbag market: He had only ever bought one handbag before, and that his wife had only told him what to buy.
Why did Tapestry want to acquire Capri?
Tapestry CEO Joan Crevoiserat, taking the witness stand Tuesday, said the goal of the merger was simple: “To get more handbags to more customers.”
Lawyers for the fashion brands wheeled dozens of handbags from both companies and rivals into the courtroom on carts when the trial began on Monday, and a range of executives and industry figures, including Capri CEO John Idol and Coach CEO Todd Kahn, have taken the stand since then.
During her testimony Tuesday, Crevoiserat pointed to some of the handbags in the room and said the contrast between them and how the bags really illustrated the range of brands Tapestry owns. She said Tapestry benefits from having a portfolio of distinct brands to cater to the needs of customers who shop for different occasions and have different senses of style.
She showed off the Coach Rogue, a maple-colored leather tote that a client might use to lug around office essentials, then she showed off another bag, a more playful, smaller green-and-white Kate Spade bag in woven fabric that was featured in Netflix’s “Emily in Paris.”
Capri also has its own distinctive brand, she said.
Internal documents were also played on screens in the courtroom, including emails and slides from a process that took more than a year as Tapestry scouted for acquisition targets, considering whether to buy a fledgling brand or a more established company like Capri, whose code name for the other target was “Comet” was withheld.
Crevoiserat said Tuesday that if the deal goes through, Tapestry wants to grow all of its brands, particularly Capri, which has seen sales stagnate in recent quarters.
“We believe we can inject even more relevance and vibrancy into the Capri brand,” she said.
Crevoisella said Tapestry is a collection of brands rather than a top-down company, adding that Coach, Kate Spade and Stuart Weitzman each have separate teams that select products, set pricing and develop marketing.
While the FTC has questioned whether the deal will result in higher prices, she said Tapestry overall offers the cost-saving benefits of scale, including manufacturing and shipping products at lower prices.
She said the way it will be operated will not change, adding that the big price tag would only be used to buy Capri if Tapestry gives the brand both financial backing and creative freedom.
“If all the brands couldn’t grow, this deal wouldn’t happen,” she said.
The antitrust trial continues Thursday and is expected to drag on into early next week, with FTC lawyers indicating that other key witnesses are also due to testify, including executives from Tapestry and Capri, as well as the namesake of American fashion designer Michael Kors, whose top brand emerged from the merger.
