October 29, 2024
Photo by Gabrielle Henderson on Unsplash
Should Tapestry and Capri Holdings Be Allowed To Merge?
A proposed merger between Tapestry, the parent company of Coach, and Capri Holdings, owner of Michael Kors, has been halted by a federal judge. The ruling, issued by the U.S. District Court for the Southern District of New York, follows a brief trial conducted last month, although detailed reasons for the decision have not been disclosed.
The merger aimed to unite several luxury brands, including Tapestry’s Coach, Kate Spade, and Stuart Weitzman with Capri’s Versace, Jimmy Choo, and Michael Kors. However, the Federal Trade Commission (FTC) raised concerns that such a consolidation could harm consumers. Since the $8.5 billion merger announcement last year, it has faced substantial regulatory challenges, culminating in the FTC’s lawsuit to block it.
In response to the ruling, both Tapestry and Capri Holdings have announced their intention to appeal. Capri, which boasts a portfolio of prestigious brands, stated its commitment to luxury and innovation while expressing disappointment in the court’s decision. Tapestry released a statement as well, arguing that the merger would be beneficial for competition, highlighting the dynamic nature of the luxury fashion industry, which is marked by both established and emerging players.
“Tapestry and Capri operate in an industry that is intensely competitive and dynamic, constantly expanding, and highly fragmented among both established players and new entrants,” Tapestry stated. “We face competitive pressures from both lower- and higher-priced products and continue to believe this transaction is pro-competitive and pro-consumer. We intend to appeal the decision, consistent with our obligations under the merger agreement.”
Both companies remain steadfast in their belief that the merger would promote consumer interests and enhance their competitive positioning in the market.
According to Fashion United, the merger, which was originally announced in August 2023, aimed to create a major luxury fashion group operating in 75 countries, and it received initial approvals in Japan and the EU. The companies hoped to finalize the deal by the end of 2024, but the U.S. did not grant antitrust approval.
The FTC argued that the merger could harm competition, leading to higher prices and reduced employee benefits, as the combined market share would exceed 30%. The agency also raised concerns about Tapestry’s potential to limit discounting, referencing past practices post-acquisition of Kate Spade in 2017.
Conversely, Tapestry contended that competitive pressures from various price points were being overlooked and that the luxury market was dynamic. During the trial last month, designer Michael Kors acknowledged challenges with brand fatigue, and Capri and Tapestry emphasized that the brands would maintain separate identities to ensure ongoing competition.
Vogue Business reported that the recent ruling blocking the merger between Tapestry and Capri has dealt a significant blow to both companies’ growth strategies. Oliver Chen, managing director of TD Cowen, expressed concerns about Tapestry’s future growth potential, stating that the halted transaction raises doubts about its platform’s expansion capabilities.
Regarding the appeal, Chen also stated, “We do not see a high likelihood of Tapestry and Capri’s intended appeal being granted as the appeal would need to argue that the judge’s decision was incorrect in fact or law, which is not a small feat. Additionally, there is added pressure of the February 2025 expiration of the bonds intended for the transaction.”
The ruling against the merger also raises broader questions about the future dynamics of the luxury market. As both companies navigate this setback, industry observers may wonder whether they can innovate independently or if the pressure of regulatory scrutiny will reshape their competitive approaches in an increasingly fragmented landscape.
Furthermore, speculation is growing around a possible sale of Versace, which Capri Holdings has owned since 2019, as substantial sales declines are heavily impacting the group’s overall performance. According to NSS Magazine, Versace’s revenue decline may be among the reasons Capri is pushing to complete its acquisition. In Q1 2024, Versace’s sales dropped 15.4%, contributing to Capri’s overall revenue dip of 13.2%.
BrainTrust
Gary Sankary
Retail Industry Strategy, Esri
Carol Spieckerman
President, Spieckerman Retail
David Biernbaum
Founder & President, David Biernbaum & Associates LLC
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Discussion Questions
How might the halted merger between Tapestry and Capri redefine competition in the luxury retail sector regarding brand identity and consumer loyalty?
What impact could regulatory challenges like those faced by Tapestry and Capri have on future mergers in retail and the potential for market consolidation?
As luxury brands face scrutiny over market strategies, how can they balance innovation with competitive pricing and employee welfare in a post-merger landscape?
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There is no logical or economic reason that this merger should not go ahead. As a combined entity, Tapestry and Capri would not dominate the handbag market. Even a cursory examination online and in stores shows that there are a stack of other brands in the premium and accessible luxury space. A merged company would not have carte blanche to shift pricing. On top of this, the handbag market is discretionary. That means it competes with a whole host of other non-handbag products and activities for spending. Again, this acts as a competitive check and balance. In my view, the FTC has completely misjudged and misread the market, and it is impeding legitimate business activity. That said, the ruling has to be respected, and it leaves both companies in a tough spot. Especially Capri which is now left with an underperforming business that management will need to try and correct or sell to another party.
Everything you said, Neil.
It’s not as if these two companies would dominate any market. The Albertson’s / Kroger merger, however, is a completely different story.
Any resistance to this merger is overkill, pure and simple. At this point, Tapestry and Capri are brand marketing companies that have learned how to diversify and that understand portfolio power. Portraying the potential deal as a “luxury” play is also misguided. Combined, Capri and Tapestry equates to a 6-brand “good,” and “better,” with a splash of “best” portfolio. Lighten up and let this one go.
This has been a head scratcher for me since the beginning! Cathy, 100%, Alberton’s/Kroger, now that’s one that shouldn’t go through!
It is difficult for me to disagree with Tapestry’s view of the law and facts underlying the decision. Since the merger was Capri’s lifeline, the FDC’s ruling will reduce competition, and how ironic is that?
In the luxury sector, it has been challenging to sell a wide variety of products over the past year. Louis Vuitton, Dior, and Fendi all posted weaker numbers in the third quarter. Since the beginning of the year, Capri has been facing deep financial difficulties.
In all irony, the FDC does not understand the business world very well. Because of this, the government needs to step back from making decisions about mergers in the private sector.
The joint FTC-DOJ Merger Guidelines of December 2023 introduced several categories of competitive harms that M&A transactions must navigate. Specific to Tapestry and Capri, four harms were asserted: (1) elimination of significant head-to-head competition in handbag brands; (2) significantly increase concentration beyond 30 percent in the “accessible luxury” handbag segment in the U.S.; (3) detrimental effects on the merged employees’ wages, benefits, and working conditions; (4) history of Tapestry’s “anticompetitive pattern and strategy for acquisitions.” All four claimed harms are part of the new Merger Guidelines.
Tapestry and Capri’s appeal will be onerous, as they must demonstrate that the transaction is “pro-competitive and pro-consumer.” The FTC applied Tapestry’s definition of the “accessible luxury” handbag to argue for the transaction’s competitive harms. Moreover, all five members of the FTC voted to block the merger.
All good points about the policy background for the FTC’s decision. I’m still not convinced that the merger would hinder competition.
I’m scratching my head, trying to understand the objections of the FTC. This isn’t an essential business by any stretch, and neither brand, even together, dominates their market. This feels like an overreach on the government’s part.
Blocking the Tapestry and Capri merger is a very shortsighted decision, as the combined entity wouldn’t even come close to dominating the luxury or aspirational luxury handbag market. Announced in August 2023, the deal, which would have created one of the world’s largest luxury fashion houses, hit a regulatory roadblock in April this year as the Federal Trade Commission moved to block the merger, citing antitrust concerns. The FTC raised concerns about how the merger could impact competition in the “accessible luxury” handbag market, encompassing brands like Michael Kors and Coach and others like Rebecca Minkoff and Longchamp.
The Tapestry and Capri merger would have been an $8.5B acquisition if it had gone through. While this would have changed the aspirational luxury landscape with this more substantial presence, consider that LVMH has generated nearly 47% of its $53 billion revenue from its fashion and leather goods division, including luxury accessories such as handbags. Additionally, Kering remains a strong competitor, with major brands, including Gucci, Saint Laurent, and Balenciaga, contributing to its over $15 billion in revenue.
With the merger being blocked by the FTC both companies are in a difficult position and lost the following competitive advantages:
- Through Capri, Tapestry would have gained customer reach, including in Europe and among the “attractive” higher-level luxury segment
- Tapestry leveraging Capri’s capabilities in lifestyle categories, which its Coach and Kate Spade businesses see as growth opportunities
- Capri benefiting from Tapestry’s comparatively stronger presence in Asia and higher sales penetration in direct sales channels
The Federal Trade Commission should find real problems to solve and not create a problem to solve as they are doing with this lawsuit. What does a Federal Judge know about luxury apparel?
The merger should happen and the market will decide whether it is/was a good idea or not.
Completely agree. It’s government overreach of the highest order!
The merger blocking is quizzical given the health competition in the market, the number of new upstarts in the categories, and the fact that many of these brands are declining and even at risk. To ensure long-term investment in the space, we need more liquidity and deal making. Ironically, these type of draconian blockages disincentivize investment to create more competitive markets for consumers.
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There is no logical or economic reason that this merger should not go ahead. As a combined entity, Tapestry and Capri would not dominate the handbag market. Even a cursory examination online and in stores shows that there are a stack of other brands in the premium and accessible luxury space. A merged company would not have carte blanche to shift pricing. On top of this, the handbag market is discretionary. That means it competes with a whole host of other non-handbag products and activities for spending. Again, this acts as a competitive check and balance. In my view, the FTC has completely misjudged and misread the market, and it is impeding legitimate business activity. That said, the ruling has to be respected, and it leaves both companies in a tough spot. Especially Capri which is now left with an underperforming business that management will need to try and correct or sell to another party.
Everything you said, Neil.
It’s not as if these two companies would dominate any market. The Albertson’s / Kroger merger, however, is a completely different story.
Any resistance to this merger is overkill, pure and simple. At this point, Tapestry and Capri are brand marketing companies that have learned how to diversify and that understand portfolio power. Portraying the potential deal as a “luxury” play is also misguided. Combined, Capri and Tapestry equates to a 6-brand “good,” and “better,” with a splash of “best” portfolio. Lighten up and let this one go.
This has been a head scratcher for me since the beginning! Cathy, 100%, Alberton’s/Kroger, now that’s one that shouldn’t go through!
It is difficult for me to disagree with Tapestry’s view of the law and facts underlying the decision. Since the merger was Capri’s lifeline, the FDC’s ruling will reduce competition, and how ironic is that?
In the luxury sector, it has been challenging to sell a wide variety of products over the past year. Louis Vuitton, Dior, and Fendi all posted weaker numbers in the third quarter. Since the beginning of the year, Capri has been facing deep financial difficulties.
In all irony, the FDC does not understand the business world very well. Because of this, the government needs to step back from making decisions about mergers in the private sector.
The joint FTC-DOJ Merger Guidelines of December 2023 introduced several categories of competitive harms that M&A transactions must navigate. Specific to Tapestry and Capri, four harms were asserted: (1) elimination of significant head-to-head competition in handbag brands; (2) significantly increase concentration beyond 30 percent in the “accessible luxury” handbag segment in the U.S.; (3) detrimental effects on the merged employees’ wages, benefits, and working conditions; (4) history of Tapestry’s “anticompetitive pattern and strategy for acquisitions.” All four claimed harms are part of the new Merger Guidelines.
Tapestry and Capri’s appeal will be onerous, as they must demonstrate that the transaction is “pro-competitive and pro-consumer.” The FTC applied Tapestry’s definition of the “accessible luxury” handbag to argue for the transaction’s competitive harms. Moreover, all five members of the FTC voted to block the merger.
All good points about the policy background for the FTC’s decision. I’m still not convinced that the merger would hinder competition.
I’m scratching my head, trying to understand the objections of the FTC. This isn’t an essential business by any stretch, and neither brand, even together, dominates their market. This feels like an overreach on the government’s part.
Blocking the Tapestry and Capri merger is a very shortsighted decision, as the combined entity wouldn’t even come close to dominating the luxury or aspirational luxury handbag market. Announced in August 2023, the deal, which would have created one of the world’s largest luxury fashion houses, hit a regulatory roadblock in April this year as the Federal Trade Commission moved to block the merger, citing antitrust concerns. The FTC raised concerns about how the merger could impact competition in the “accessible luxury” handbag market, encompassing brands like Michael Kors and Coach and others like Rebecca Minkoff and Longchamp.
The Tapestry and Capri merger would have been an $8.5B acquisition if it had gone through. While this would have changed the aspirational luxury landscape with this more substantial presence, consider that LVMH has generated nearly 47% of its $53 billion revenue from its fashion and leather goods division, including luxury accessories such as handbags. Additionally, Kering remains a strong competitor, with major brands, including Gucci, Saint Laurent, and Balenciaga, contributing to its over $15 billion in revenue.
With the merger being blocked by the FTC both companies are in a difficult position and lost the following competitive advantages:
The Federal Trade Commission should find real problems to solve and not create a problem to solve as they are doing with this lawsuit. What does a Federal Judge know about luxury apparel?
The merger should happen and the market will decide whether it is/was a good idea or not.
Completely agree. It’s government overreach of the highest order!
The merger blocking is quizzical given the health competition in the market, the number of new upstarts in the categories, and the fact that many of these brands are declining and even at risk. To ensure long-term investment in the space, we need more liquidity and deal making. Ironically, these type of draconian blockages disincentivize investment to create more competitive markets for consumers.