The US Federal Trade Commission has moved to block Tapestry’s acquisition of Capri, saying it would stifle competition and harm American consumers. Both luxury groups contest the FTC’s “unrealistic view” of the market, but it does raise questions about how suppliers will be affected if they become a ‘stronghold’.

Between them, luxury groups Capri and Tapestry make up a substantial part of the ‘accessible luxury’ sector and the announcement last summer that they would be merging in an $8.5 billion deal was not a big surprise to the market. Coach bought footwear brand Stuart Weitzman in 2015 and accessories maker Kate Spade in 2017, rebranding to Tapestry to demarcate it as a group. A similar story at Micheal Kors, which bought Jimmy Choo in 2017, then rebranded as Capri in 2019 after buying Versace. Tapestry chief executive Joanne Crevoiserat said of the deal: “The combination creates a new, powerful, global luxury house, unlocking a unique opportunity to drive enhanced value for our consumers, employees, communities and shareholders around the world.”

The combined group would represent $12 billion in annual sales, employing 33,000 worldwide. Their brands offer some similar products, from clothing to sunglasses, but it is in the mid-range handbag sector where there is the most crossover. And it is exactly this crossover that the US Federal Trade Commission (FTC) has an issue with.

This April, the FTC filed a lawsuit in a US federal court to block the proposed acquisition. If allowed, it said, the deal would give Tapestry a dominant share of the “accessible luxury” handbag market and eliminate the brands’ competition on price, innovation, design and marketing, affecting American consumers. “With the goal to become a serial acquirer, Tapestry seeks to acquire Capri to further entrench its stronghold in the fashion industry,” said Henry Liu, director of the FTC’s Bureau of Competition. “This deal threatens to deprive consumers of the competition for affordable handbags, while hourly workers stand to lose the benefits of higher wages and more favourable workplace conditions.”

Unsurprisingly, Tapestry and Capri do not agree. Far from stifling competition, the pairing will expand their reach and diversification, they said. More significantly, they accuse the FTC of having “an unrealistic view of the marketplace” and “ignoring the commercial realties of the industry”. “Even a quick department-store visit or online search shatters the image of such a narrow and artificial market,” said the groups’ lawyers, naming longstanding competitors such as Burberry, Gucci, Louis Vuitton and Tory Burch alongside multiple new brands, making up at least 150 competing in the same space. “A handbag purchase is far more emotional, multifaceted and discretionary than the FTC’s theory can tolerate. There is no definable captive consumer of fashion handbags who cannot readily switch from brand to brand, across price ranges. The FTC’s worldview comes from its experience litigating business tie-ups involving critical healthcare infrastructure, essential manufacturing inputs, or ubiquitous digital platforms, but those industries are far from this world of fashion.”

Sector specific

The groups also argued that it is wrong to class “accessible luxury” as a specific sector, as it was a term coined by Tapestry’s marketing teams several years ago to denote well-made products that were less expensive than ultra-high-end brands, but was never meant to define a sector in its own right. This was a key sticking point, with multiple pages addressing this in a filing. “The FTC failed to articulate how the subjective marketing term ‘accessible luxury’ could possibly describe a ‘distinct’ product market for antitrust purposes...are materials the determinate or is price? Or is it the location of manufacturing? Perhaps it is all three, but in what measure? The complaint is unclear.” Despite this assertion, the federal judge overseeing the case, Judge Jennifer Rochon in Manhattan, in May rejected the groups’ point, saying the FTC had provided enough information about the market in which they compete.

The groups also point out antitrust enforcers in China, Japan and Korea reviewed the merger and found no problem. The European Commission investigated competitors and customers and concluded the handbag industry is “constantly evolving and characterised by low barriers to entry and frequent entry of new players”.

The FTC’s assertion that the merger could affect workers was also denied, saying, “The FTC makes no effort to identify a relevant market of labourers that will be adversely affected by the merger, let alone show that Tapestry and Capri combined will have an undue concentration of any such market”. The groups do, however, admit the deal “will unlock opportunity for significant cost synergies of over $200 million within three years of closing” and it is commonplace for some job losses when companies combine similar roles. What else could these cost synergies mean? Fortune magazine quoted Coach CEO Todd Kahn as saying, “We want to have the power of a $12 billion enterprise when we’re procuring everything from toilet paper for our stores to negotiating leather supplies.” Could this be bad news for its tanners? Possibly moving to fewer suppliers, or pushing down the prices the combined group pays?

Flat sales

For the 12 months ending March 30, 2024, Capri reported full-year revenues of just under $5.2 billion, around 8% lower than the previous financial year. Michael Kors contributed the majority – $3.5 billion – towards the total, falling by 9.2% year on year. Its revival has been cited as one of the main reasons for the deal – its “star has fallen”, Capri admits.

Handbag sales have been in decline for a decade, with annual revenues down 38% since 2015. It is hoped Tapestry’s digital capabilities and international footprint will help reinvigorate consumer perception and drive sales. Revenues at Versace reached just over $1 billion, falling by 6.9%. At Jimmy Choo, total revenues for the year reached $618 million, down by 2.4%. Capri CEO John Idol said the results were disappointing, but that the performance was impacted by softening demand globally for fashion luxury goods.

Tapestry’s full year 2024 revenues have not yet been published, but third quarter sales of $1.48 billion were down on the $1.51 billion in the prior year period. Despite the dip, it said highlights in the three-month period included adding 1.2 million customers in North America and achieving international revenue growth of 3%. 

In Europe it is commonplace for groups to own multiple luxury brands – Kering has more than 10 fashion companies while LVMH owns 75. Despite the rebuttals, it is unclear how more “powerful global houses” will affect suppliers. If the brands grow, orders might grow; but fewer negotiators might mean lower prices paid overall, as Mr Kahn suggested. All eyes will be on the evidentiary hearing on September 25, when the leathergoods sector will be picked apart and its contents sifted through to see whether bigger groups could profit from a “stronghold” at the expense of consumers.

SIDE STORY: Tapestry highlights leather traceability with ISA

Tapestry has made special mention of its leather traceability efforts, in particular with long-time tannery partner ISA TanTec, in its recent Corporate Responsibility report.

ISA partnered with Applied DNA Sciences (ADNAS) to complete a traceability pilot that aimed to establish a verifiable way to confirm the origin of leather used in footwear. ISA sourced traceable hides through its Greener Pastures programme and applied a tracer provided by ADNAS to achieve fully traceable leather from farm to finished goods. Tapestry tested leather for tracers to confirm their presence and used the tagged leather in two Coach shoe styles, which were re-tested and verified. The results of the pilot are being reviewed for implementation in other supply chains.

Leather makes up more than 50% of its raw materials by weight and was a key focus area in the group’s strategy to reduce environmental impact. In 2023, 97% of its leather was from Leather Working Group gold and silver-rated tanneries.

SIDE STORY: Capri commits to regenerative practices

Last summer, Capri Holdings signed a "first of its kind",  three year partnership with the US-based National Fish and Wildlife Foundation (NFWF) to accelerated adoption of regenerative management and conservation practices in the US.

Expected to generate a $3 million “on-the-ground” conservation impact, Capri will fund the project with matching contributions through NFWF with the aim of improving 150,000 acres of US grasslands to drive a more sustainable future for the leather industry through advanced regenerative agriculture practices, restoring the health of critical grazing lands in the Northern Great Plains, Southern Great Plains and Rocky Mountain Rangelands.

Capri CEO John Idol, said: “We are proud to partner with NFWF to accelerate regenerative agriculture practices, improve biodiversity and drive positive environmental and social impacts in the leather supply chain.”  

PHOTO: Last year, Tapestry launched Coachtopia, a sub brand that uses waste materials and leather scraps for shoes and small leathergoods. Joon Silverstein, head of Coachtopia, called the brand “an agile start-up” and “discovery lab” that offers a “more open-source approach to creativity”.
Credit: Coachtopia / Kyrre Kristoffersen 

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