Pedestrians walk past a Coach store and a Michael Kors store.
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Just a few miles from Coach's hometown of New York City, a federal judge will soon decide whether its owner texture Apple could become a handbag giant — in a decision that would raise big questions about 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 over a lawsuit brought by the Federal Trade Commission seeking to halt the merger of Tapestry and capri. If approved, the deal would put six fashion brands under one company: Coach, Kate Spade and Stuart Weitzman of Tapestry with Versace, Jimmy Choo and Michael Kors of Capri.
Tapestry and Capri announced the $8.5 billion deal more than a year ago, but the Federal Trade Commission filed a lawsuit to block it in April. The FTC alleged that the combined companies would deprive consumers of less affordable handbag options and deprive employees of worse pay and benefits.
Federal Trade Commission lawyers argued this week that the merger would harm consumers by putting Coach and Michael Kors — two brands the commission said have similar prices and often compete head-to-head — under the same company. Both brands sell directly to customers on their websites and in stores, but they are also sold by retailers that cater to Americans of all incomes, including department stores. Maisie and Dillarddiscount retailers like TJ Max And shops.
On the other hand, Tapestry and Capri argued that the deal would allow them to keep up with a trend-driven industry where new brands and changing consumer tastes pose a competitive threat. At the time the companies announced the deal, Tapestry CEO Joanne Krevoisier told CNBC that the deal would allow Tapestry to reach more customers across age groups and income levels around the world, particularly in the luxury and high-end markets.
The outcome of the antitrust case could shape the outlook for the industry that makes the handbags, eyewear and clothing carried and worn by many Americans across the country. It comes as Americans increasingly balk at higher prices after years of high inflation — and the Biden administration is targeting mergers in grocery, technology and apparel.
Investors are watching the trial closely to see how it will affect Tapestry and Capri stocks. Tapestry shares are up more than 13% this year. Capri shares, on the other hand, are down about 21% this year.
Here are some of the key questions that defined the first three days of the trial, including highlights from some of the testimony:
How fierce is the competition in the handbag industry?
In a fast-moving world where a new product can become a favorite bag from a TikTok video or a celebrity sighting, Tapestry and Capri claim competition is fierce — even for the biggest handbag manufacturers.
With the deal, Tapestry and Capri executives argued that the brand could better compete with a wider range of other retailers and brands that consumers choose, from fast-fashion brands like Zara and H&M to European luxury names like Burberry and LVMHLouis Vuitton.
One of the key arguments in court was who Coach and Michael Kors’ real competitors were. Are they each other’s primary competitors, or are they competing with a vast mix of brands that are stealing sales? The FTC defined the relevant market for both brands as “affordable luxury,” a term that Tapestry and its investors and board used to describe how it offers high-end fashion at better prices.
However, lawyers for Tapestry and Capri pushed back, saying the field of competitors was growing to include more price points.
Krevoyser said she's seen this dynamic close to home. lululemonNike is known for its leggings and other athletic apparel, but it also makes belt bags, which are fanny packs that can be wrapped around your waist or hung across your body. These bags have been a huge hit, especially among younger shoppers.
“What really hurts me about this is that my daughter has one,” she said. “It’s a meaningful brand.”
In her testimony, Crevoisier said the competition is not limited to other handbag or fashion brands. She added that the company is struggling to attract consumers who have many ways to spend their money.
“They can go anywhere. They can buy yoga pants or go out to dinner. It's optional,” she added.
During the trial, lawyers reviewed industry data from market research firms and internal documents, such as consumer surveys and research on competitors. The research related not only to Tapestry and Capri, but also to other fashion brands including Chanel and Rebecca Minkoff.
Attorneys for Tapestry and Capri argued that competition had intensified as consumers had new ways to shop and their style preferences had changed. FTC attorneys, on the other hand, said the combined companies would monopolize the “luxury goods market.”
Executives from other brands also weighed in on the current state of the industry. Soon Yang, Chanel’s head of accessories and leather goods marketing, testified Wednesday. She said customers buy from many brands, but Chanel focuses its own research on how it compares to European luxury brands like Saint Laurent and Hermès. In her experience, she said, Coach, Kate Spade and Michael Kors have never been mentioned in customer surveys or company conversations about competition.
She also described the rigor of craftsmanship behind Chanel bags, which she said sets the brand apart and leads to its price points of around $5,000 to $11,000 or more. The handbags are made in Italy and France, and it takes artisans a decade to make the company’s highest-end handbags.
Will the deal hurt consumers?
The US Federal Trade Commission says the deal would be a bigger shock to American consumers who already face higher prices on many goods.
On Wednesday, economist Loren Smith, a key witness for the FTC, took the stand and argued that the merger would turn the two companies into a handbag giant that would raise prices for shoppers who would see no reason to invest in sharper styles or better materials. Smith is a Washington, D.C.-based consultant and former FTC economist.
He laid out the financial models and methodology he used to define the market for Tapestry and Capri, and especially Coach and Michael Kors, saying they compete primarily with other “affordable luxury” companies even if their consumers shop at other, cheaper, more expensive brands. He focused on the U.S. handbag market, including popular styles like cross-body bags and totes in the calculations.
Ultimately, he said he found the merger raised “significant competitive concerns,” and his simulations indicated that it would lead to an average price increase of 15% to 17% for the combined company's goods and a decrease in product quality.
If the two companies became one, the combined company would have about 58% of the U.S. handbag market, he said. Tapestry could survive the price hikes on Michael Kors handbags, he said, because it could recoup lost sales by luring enough of those same shoppers to Coach and Kate Spade bags.
He said there would be no cause for concern, even if the challenges facing the Michael Kors brand continued.
“Once they come together, if Michael Kors continues to decline, some of that decline will benefit Coach,” he added.
He added that the margins of the handbag industry range between 60% and 80%, a high number that makes the risk of customers switching to another brand or losing customers to other brands less significant.
The annual damage to consumers is estimated at $365 million a year due to a combination of price increases and goods that are not well made.
Tapestry and Capri lawyers have made flimsy arguments about his definition of competition, questioning his calculations and saying he did not take into account new shopper habits, such as the ability to buy a Louis Vuitton or Prada bag for less because of the rise of second-hand markets.
They also alleged that Smith was unfamiliar with the handbag market. The lawyer for Tapestry and Capri noted that he had only ever bought one handbag before, and that his wife had given him instructions on what to buy.
Why did Tapestry want to buy Capri?
When Tapestry CEO Joanne Crevoisrat took the stage Tuesday, she said her goal with the merger was clear: to put more handbags in the hands of more customers.
On Monday, the day the trial began, fashion brand lawyers wheeled carts filled with dozens of handbags from both companies and rivals into the courtroom. Since then, a string of executives and industry players have taken up positions, including Capri CEO John Idol and Coach CEO Todd Kahn.
In her testimony Tuesday, Krevoisier held up some of the handbags in the room. She talked about the contrasts between them and how the bags illustrate the range of brands Tapestry has. She said Tapestry benefits from having a range of distinct brands to cater to customers who shop for a variety of occasions and have a different sense of style.
She showed off Coach’s Rogue, a maple-colored leather bag that a client could use to carry her essentials to the office. Then she showed off another bag, a smaller, more playful Kate Spade bag in green and white, made of woven fabric and featured in Netflix’s “Emily in Paris.”
She added that Capri also has its own distinctive brands.
Also on display in the courtroom were internal documents that showed some emails and slides from a process that lasted more than a year, in which Tapestry sought an acquisition target and deliberated over whether to buy an emerging brand or a more established player like Capri. The names of the other acquisition targets were redacted, but Capri’s code name was “Comet.”
If the deal closes, Tapestry would want to grow all of its brands — especially Capri, which has seen weaker sales in recent quarters, Krevois said Tuesday.
“I think we can bring more relevance and vitality to the brands in Capri,” she said.
Tapestry is a house of brands, not a top-down company, Krevoysrat said. Coach, Kate Spade and Stuart Weitzman have independent teams that select merchandise, set pricing and shape marketing, she added.
While the FTC raises questions about whether the deal will lead to higher prices, it said Tapestry as a whole offers the cost-saving benefits that come from having more volume, such as manufacturing and transporting products at a lower cost.
She said that this way of working will not change. She added that the high cost of buying Capri would only make sense if Tapestry gave the brand financial support and creative freedom.
“The deal won't work if all the brands can't grow,” she added.
The antitrust trial continues Thursday and is expected to wrap up early next week. FTC lawyers have indicated that other key witnesses are ready to testify, including more executives from Tapestry and Capri and one of the major brands involved in the merger, American fashion designer Michael Kors.
