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The Federal Trade Commission (FTC) says a Tapestry-Capri merger would squash competition. Tapestry and Capri firmly disagree — and are now preparing to fight back as the case heads to trial in September.
The merger, announced last August, would create an American fashion conglomerate made up of six brands: Tapestry’s Coach, Kate Spade and Stuart Weitzman; and Capri brands Michael Kors, Jimmy Choo and Versace. In April of this year, the FTC sued to block the merger, claiming it would eliminate competition between the two companies’ brands and give the newly combined group a dominant share of the “accessible handbag” market.
On Tuesday, the two American companies filed an opposition to the FTC’s motion for a preliminary injunction in the US District Court in the Southern District of New York, ahead of the trial set to begin on 9 September (right in the midst of New York Fashion Week). The opposition outlines the companies’ argument against the block, which boils down to the FTC’s inability to define accessible luxury and what the market includes. It also disputes the FTC’s claim that the merger would reduce competition to the detriment of non-Tapestry and Capri brands. Tapestry shares rose 3 per cent on Wednesday after it filed its defence. Capri Holdings shares rose 6.5 per cent.
The US agency sued on Monday to block the $8.5 billion deal, which was due to close by the end of this year.
What happens next comes down to the way the FTC wants to define and act on antitrust laws, says Jeff Trexler, associate director of Fordham University’s Fashion Law Institute. “Under commissioner Lina Khan, the FTC has been taking a big-is-bad approach to assessing mergers and acquisitions with little regard for consumer welfare apart from the harm allegedly inherent in ‘bigness’ itself,” he says. For an FTC challenge to succeed, he says, Tapestry and Capri will need to demonstrate that the FTC’s interpretation of the market affected by the merger is incorrect, “or even incoherent to anyone well-acquainted with the market at issue”, Trexler says.
Below, Vogue Business breaks down the key points from Tapestry and Capri’s case.
If it was going to hurt other accessible luxury brands, they’d be speaking up
Tapestry’s lawyers flag that, if the deal was as much of a concern as the FTC is suggesting, third-party brands would be speaking up. Yet fashion brands outside of Tapestry and Capri have remained mum. The opposition reads: “If the market operated the way the plaintiff posits, third parties would be up in arms expressing concerns that the transaction will harm them… The only people who have expressed a view that this transaction is problematic are the plaintiff and its expert.”
It’s a fair point, says Neil Saunders, managing director and retail analyst at Globaldata, noting that the deal isn’t even on most brands’ radar. “It’s not something most brands are even thinking about.” Trexler agrees: “My sense is that the FTC’s concerns are greater than those of many brands.”
There are plenty of other brands at comparable price points
The filing listed Telfar, Brandon Blackwood, Senreve, Staud, Veronica Beard, Kurt Geiger and Lululemon as examples of accessible handbag brands not impacted by the merger. And this doesn’t even scratch the surface of bags in the sub-$1,000 range that are sold at comparable price points to the labels owned by Tapestry and Capri. The goal is to illustrate that the handbag market is vast, and six companies coming together would do little to reduce competition and limit consumer options.
“Plaintiff’s revisionist attempt to describe who competes in the ‘accessible luxury’ category defies common sense because it excludes competitors who are priced just below and above the defendants’ handbags, and even brands priced the same,” the filing read.
The idea that the deal causes competition concerns doesn’t hold, Saunders says. “The reality is that there is plenty of choice in the accessible handbag category and consumers will not be shortchanged by a merger between Tapestry and Capri. Back in the real world, there are very few concerns about this deal,” he says.
Tapestry will revive Michael Kors, creating positive competition
Many of the points made in the opposition come back to Tapestry’s planned turnaround for Michael Kors. (The reinvigoration of Capri brands was a hot discussion point during Tapestry earnings report last week.) “Tapestry’s turnaround plans will enhance the Michael Kors brand’s value and provide consumers a procompetitive benefit,” according to the company’s opposition document.
If Tapestry is able to pull off a revamp, the point holds, Saunders says. A revived Michael Kors would improve market competition. While he flags the revitalisation of Michael Kors under Tapestry is by no means a given, there’s a higher chance of a turnaround under Tapestry than if Capri remains a standalone, he says.
Tapestry won’t be merging the six brands
Part of the concern raised by the FTC is that, if Tapestry owns all of these brands, it’ll have the ability to eliminate the competition among them. But Tapestry rejects the antitrust issue because, it says, the brands will remain standalone — and therefore competitive. The filing said: “Tapestry has no incentive or plans to merge the brands, share pricing information between the brands, or to otherwise limit innovation.”
The FTC is arguing (based on past practices and general principle) that when these brands come under unified corporate control, their current competitiveness will give way to streamlined coordination, Trexler says. This is how the FTC can dispute Tapestry’s rebuttal. Trexler flags the mention of data gathering and artificial intelligence as factors contributing towards the reduction of competition as “a particularly interesting aspect of the FTC’s argument”.
What is an ‘accessible luxury handbag’, anyway?
This is perhaps the biggest red flag Tapestry raises in its opposition: so much of the discussion hinges on what the FTC calls the “accessible luxury handbag”, but the US agency fails to provide a solid definition for just what this is, and Tapestry has seized on the lack of clarity. “On the eve of trial, the plaintiff and its expert still cannot align on what an ‘accessible luxury handbag’ is, even though identifying what is in and out of the market is foundational to the plaintiff’s case…. Because the plaintiff’s market lacks discernable parameters, there are not clear answers to these basic questions.”
It’s a category that’s remained ambivalent, and a label fraught with tension. Analysts and designers have been unable to settle on a concrete definition for the term, and some shy away from it entirely because they don’t believe they fit within its ill-defined parameters. This lack of definition is indeed the most-criticised aspect of the case, Trexler says.
Saunders raises concerns with the FTC’s approach to defining markets. “It doesn’t seem to understand how the basics of retail work and is making definitions and delineations in some kind of theoretical way that bears no relation to reality,” he says. “Markets are a lot more fluid and wider than the FTC seems to imagine and there is lot of choice in a category like handbags — across all price levels. A combined Tapestry-Capri business would not have carte blanche to manipulate the market in any way, including on pricing.”
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