Pedestrians walked 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 owners tapestry It could become a handbag giant — a decision that will weigh big issues like how much consumers pay for goods and the choices they have when shopping.
Investors, lawyers and reporters flocked to a Manhattan courtroom this week for an antitrust trial in a Federal Trade Commission lawsuit seeking to block Tapestry and Capri. The deal, if approved, would bring six fashion brands under one company: Tapestry’s Coach, Kate Spade and Stuart Weitzman and Capri’s Versace, Jimmy Choo and Michael Kors.
Tapestry and Capri announced the $8.5 billion deal more than a year ago, but the Federal Trade Commission (FTC) filed a lawsuit in April to block the deal. The company argued that the combined company would eliminate competition, leave consumers with fewer affordable handbag options and offer employees worse pay and benefits.
Lawyers for the Federal Trade Commission argued this week that the merger would harm consumers by bringing the Coach and Michael Kors brands, which they say have similar prices and often compete head-on, into the same company. Both brands sell directly to customers on their websites and in stores, but are also sold by stores that cater to Americans of all incomes, including department stores. macy’s department store and Dillard’sdiscount retailers, e.g. TJ Max and outlet stores.
Tapestry and Capri, on the other hand, believe the deal will allow them to keep up with a trend-driven industry where newer brands and changing consumer tastes pose competitive threats. Tapestry CEO Joanne Crevoiserat told CNBC when the two companies announced the deal It will allow Tapestry to reach more customers of different age groups and incomes around the world, especially in the luxury and high-end markets.
The outcome of the antitrust case could affect the future of manufacturing the bags, eyewear and clothing that many Americans carry and wear across the country. It comes as Americans become increasingly reluctant to accept higher prices after years of high inflation and the Biden administration targets consolidation in groceries, technology and apparel.
Investors are closely watching the trial’s impact on Tapestry and Capri’s share prices. Tapestry’s shares are up more than 13% this year. Capri’s shares, on the other hand, have fallen about 21% this year.
Here are the key issues from the first three days of the trial, including highlights from some of the testimony:
How fierce is the competition in the handbag industry?
Tapestry and Capri believe that in a fast-changing world where a new product could become a “hot” bag in a TikTok video or celebrity sighting, competition is fierce even for the largest handbag makers.
Tapestry and Capri executives believe the deal will allow the brand to better compete with the variety of other retailers and brands consumers choose from, from fast-fashion labels like Zara and H&M to European luxury brands like Burberry and Burberry. LVMHIt’s Louis Vuitton.
One of the main arguments in court revolved around who Coach and Michael Kors are real competitors. Are they each other’s main competitors, or do they compete with other companies? Massive brand portfolio taking away sales? The U.S. Federal Trade Commission (FTC) defines the relevant market for both brands as “accessible luxury,” a term Tapestry uses with its investors and board of directors to describe how it offers high-end fashion styling at a higher value.
However, lawyers for Tapestry and Capri countered that the competitors’ field is expanding to include more price points.
Crevoiserat said she sees this dynamic close to home. lululemonBest known for its popular leggings and other athletic apparel, is the maker of the fanny pack, a hands-free fanny pack-style bag that can be wrapped around the waist or worn cross-body. The bags are popular, especially among younger shoppers.
“What really pains me is that my daughter has one,” she said. “They are a meaningful brand.”
The competition isn’t just with other handbag or fashion brands, Crevoiserat said in testimony. She said the company is working hard to appeal to consumers, who have multiple ways to spend.
“They can go anywhere,” she said. “They can buy a pair of yoga pants or go out to eat. It’s discretionary.”
During the trial, attorneys presented industry data and internal documents from market research firms, such as consumer surveys and competition studies. The research involves not only Tapestry and Capri, but also other fashion brands including Chanel and Rebecca Minkoff.
Lawyers for Tapestry and Capri argue competition has intensified as consumers find new ways to shop and their style preferences change. On the other hand, FTC lawyers said the combined company would have a monopoly on the “accessible luxury goods” market.
A number of senior executives from other brands also testified about the current state of the industry. Suwon Yang, Chanel’s head of sales for accessories and leather goods, took the stand on Wednesday. She said customers buy from many brands, but Chanel focuses in its own research on how it competes with European luxury brands Such as Saint Laurent and Hermès. In her experience, she said, Coach, Kate Spade and Michael Kors have never shown up in customer surveys or company conversations about competitors.
She also described the exquisite craftsmanship behind Chanel bags, which she said sets the brand apart and results in prices ranging from about $5,000 to $11,000 or more. The bags are made in Italy and France, and it takes ten years for the craftsmen to create the company’s highest caliber bags.
Will this deal hurt consumers?
The FTC believes the deal will bring additional price shocks to U.S. consumers who are already facing rising prices for many goods.
On Wednesday, one of the FTC’s key witnesses, economist Loren Smith, took the stand and argued The merger would make the combined company a handbag giant, which would raise prices for shoppers and leave little reason to invest in sharper styles or better materials. Smith is a consultant in Washington, D.C., and a former economist at the Federal Trade Commission.
He laid out the financial models and methods he used to define the market for Tapestry and Capri, specifically Coach and Michael Kors, saying they compete primarily with other “accessible luxury” brands, even as their consumers shop with other brands. Cheaper and more expensive brands. He targeted the U.S. handbag market and included common styles such as cross-body bags and tote bags.
Ultimately, he said he found the merger raised “significant competitive issues” and that his simulations suggested it would lead to a 15% to 17% average price increase for the merged company’s goods and a decrease in product quality.
He said that if the two companies merged into one, the combined company would account for about 58% of the U.S. handbag market. Enough handbags to recapture lost sales.
Even if Michael Kors’ brand continues to be challenged, he said, there’s no need to worry too much.
“Once they come together, if Michael Kors continues to decline, some of that decline will benefit the Coach brand,” he said.
Furthermore, he said the handbag industry has profit margins of 60% to 80%, a high figure that makes the risk of shifting customers to another brand or losing customers to other brands less serious.
He estimates that the annual cost to consumers due to rising prices and poor quality of goods will be as high as $365 million.
Lawyers for Tapestry and Capri pushed back against his definition of competition, questioning his calculations and saying he failed to take into account new habits among shoppers, such as being able to buy Louis Vuitton or Prada bags at lower prices due to the rise of consumers .
They also believed Smith was out of touch with the handbag market. Lawyers for Tapestry and Capri noted that he had only ever purchased a handbag before and that his wife directed him what to buy.
Why did Tapestry acquire Capri?
When Tapestry CEO Joanne Crevoiserat took the stand on Tuesday, she said the goal of the merger was simple: get more bags into the hands of more customers.
Lawyers for the two fashion brands pushed dozens of handbags from both companies and competitors into the courtroom on Monday, the day the trial began. Since then, many senior executives and industry figures have testified, including Capri CEO John Idol and Coach CEO Todd Kahn.
During Tuesday’s testimony, Krevoirat held up several handbags in the room. She talked about how they contrast and how the bags showcase the range of brands Tapestry has. Tapestry benefits from having a unique portfolio of brands that cater to customers shopping for different occasions and with different style tastes, she said.
She showed off Coach’s Rogue, a maple leather tote that a customer can use to carry what she needs to the office. Then she held up another bag, a more playful-looking green and white little Kate Spade bag made of a woven fabric that appeared in Netflix’s “Emily in Paris.”
Capri also has its own unique brand, she said.
Internal documents also flashed across the courtroom screen, showing emails and slides from the more than year-long process Tapestry pursued as it searched for acquisition targets and considered whether to acquire an emerging brand or an established business like Capri. The names of other acquisition targets have been changed, but Capri’s codename is “Comet.”
Crevoiserat said on Tuesday that if the deal closes, Tapestry will look to grow all of its brands, especially Capri’s, which has seen weak sales in recent quarters.
“I believe we can bring more relevance and energy to the Capri brand,” she said.
Crevoiserat said Tapestry is not a top-down company but a house of brands. Coach, Kate Spade and Stuart Weitzman all have separate teams that select merchandise, set pricing and shape marketing, she added.
She said when the FTC questioned whether the deal would raise prices Tapestry as a whole can generate cost savings through increased scale, such as manufacturing and shipping products at a lower price.
She said the way things work won’t change. She added that the high price tag for Capri only made sense if Tapestry provided the brand with financial support and creative freedom.
“If all the brands can’t grow, this deal simply won’t work,” she said.
The antitrust trial will continue on Thursday and is expected to end early next week. FTC lawyers have suggested that other key witnesses are also preparing 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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