FTC blocks Tapestry-Capri merger as Tapestry promises to fight it, calling it “consumer-friendly.”

The US District Court in the Southern District of New York just blocked Tapestry's acquisition of Capri Holdings in a Federal Trade Commission (FTC) lawsuit challenging the $8.5 billion deal.

Judge Jennifer Rochon supported the FTC in its claims that Tapestry's Coach and Kate Spade brands, along with Capri's Michael Kors, gave Tapestry a dominant share of the “accessible luxury” handbag market.

Tapestry immediately responded by claiming that the decision was “legally and factually wrong” and said it would appeal the ruling. Tapestry claims the proposed merger is both pro-competition and consumer-friendly.

Tapestry needs to act quickly as there is a February 2025 deadline for the expiry of the bonds included in the deal, TD Cowen's Oliver Chen reported in a research update.

“We do not see a high likelihood that Tapestry and Capri's proposed appeal will be granted, as the appeal would have to argue that the judge's decision was factually or legally wrong, which is no small matter,” he wrote.

FTC is taking a victory lap

The FTC claimed in a statement that the merger would deprive American consumers of the “benefits of direct competition between Tapestry and Capri, which includes competition on prices, discounts and promotions, innovation, design, marketing and advertising.”

Potential negative impacts on the over 30,000 employees affected by the merger have also been questioned.

Director of the FTC's Bureau of Competition, Henry Liu, said: “With the goal of becoming a serial buyer, Tapestry wants to acquire Capri to further consolidate its strength in the fashion industry.”

“This deal threatens to deprive consumers of competition for affordable handbags, while hourly workers lose the benefits of higher wages and more favorable working conditions.”

No serial purchasers are allowed

In fact, the FTC questioned Tapestry's intention to become a serial buyer – a business strategy that has worked well with European luxury groups such as LVMH, Kering and Richemont. The decision significantly impacts Tapestry's ability to compete in the increasingly global luxury market.

In addition to Michael Kors, Capri also owns Italian-founded luxury brands Versace and London-based Jimmy Choo, meaning Tapestry loses broader access to the global luxury market that generated just over a third of its $6.7 billion in fiscal 2024 .

Capri, on the other hand, generates just under half of its $5.2 billion in sales abroad, with two-thirds of Versace's $1 billion and 72% of Jimmy Choo's $618 million coming from abroad . In contrast, Michael Kors only generates 35% of its $3.5 billion in sales worldwide.

Chen points out that this decision could have far-reaching implications for all other businesses, potentially jeopardizing direct head-to-head competition. “This decision sets a significant precedent for future antitrust litigation across all industries.”

Bloomberg Law reported that the Biden administration's FTC and Justice Department antitrust divisions set merger enforcement records in 2022 with a total of 24 and 26 activities, respectively, according to the latest figures available. The total 50 merger challenges are the most since the government required antitrust review before a merger in 1976.

Perhaps Tapestry will wait to see how the next election unfolds to pursue further acquisitions, as the timing of this acquisition is unfortunate given the deadline for the settlement and the possibility of a lawsuit from Capri.

Chen expects Tapestry to pursue potential acquisitions in outerwear, jewelry or beauty and wellness that would cause less trouble for the FTC.

“This deal is unlikely to be Tapestry's last, as the acquisition of Capri will give Tapestry additional leverage to make even more acquisitions in the future,” the FTC stated.

Definition of “barrier-free luxury” vague

The facts underlying the court's decision were based on the FTC's expert witness, Dr. Loren Smith, and his analysis of competition in the market for “accessible luxury handbags,” defined as bags priced from $100 to $1,000.

Tapestry argued that there is no recognized, accessible luxury market and that what is accessible to one consumer may be inaccessible to another. Furthermore, the three proposed handbag brands – Coach, Kate Spade and Michael Kors – would have little control of the market if consumers have hundreds of brands and price ranges to choose from.

Additionally, industry insiders were skeptical of Smith's analysis, which is based on 2021 third-party NPD data that is both outdated and does not cover the entire handbag market at all price points. Data from many retailers, direct-to-consumer brands and liquidators has been excluded. The NPD is now part of Circana.

Chen pointed out that Dr. Smith's analysis “failed the natural experiment test (i.e. not all 'missed' Michael Kors sales were captured by Coach).”

In the decision, the court found that the merger would give Tapestry a 59% market share in the accessible luxury handbag market, well above the FTC threshold of 30% when the “presumption of anticompetitive effects” applies.

This 59% market share seems far-fetched. Yes, Coach, Kate Spade and Michael Kors are big, but this big?

Coach generated $5.1 billion last year and Kate Spade earned $1.3 billion, but the company does not report brand sales in the U.S. market. Michael Kors had sales of $2.3 billion in the United States. Additionally, neither company reports handbag sales alone. In addition, they offer a wide selection of fashion and other accessories.

According to the Bureau of Economic Analysis, Americans spent $45 billion on luggage and related products (such as handbags) last year.

A better Michael Kors benefits consumers

Designer Michael Kors said during the eight-day test that the brand had reached the “point of brand fatigue,” and the numbers prove it. The Michael Kors brand suffered a loss of $766 million in sales in the United States in the fiscal year 2019 to 2024.

One of the main reasons for the merger is that Tapestry and its team, led by Joanne Crevoiserat, want to revive the brand and make it trendy again. She joined the company in 2019 and was quickly named CEO in August 2020. Since then, Tapestry's revenue has increased 11%, from $6 billion to $6.7 billion.

Increasing Michael Kors' design quotient to make it more desirable, modern and relevant would not only benefit consumers but also help “raise the tide that lifts all boats” across the handbag industry.

Anti-business versus pro-consumer

Before the trial began, Neil Saunders, retail analyst at GlobalData, said in a LinkedIn post that it was “downright ridiculous” that the FTC gave the Tapestry-Capri deal more than a passing glance.

He acknowledged that the Kroger-Albertsons merger would require scrutiny, but believed that the merger in the highly discretionary handbag category would not. With discretionary purchases, the market corrects itself when it is allowed to function naturally and consumers decide winners and losers.

Saunders argued that there are “countless” stores and brands from which to buy handbags and that even if a merger were to occur, Tapestry would be “far from dominating” the market.

In a post after the verdict, Saunders put an exclamation point:

“Tapestry’s blocking of the takeover of Capri is absurd. It does not reflect the reality of the market. It treats highly discretionary goods as if they were some kind of essential commodity. And it shows a high level of economic illiteracy.”

See also:

Forbes“Accessible Luxury” Is in Court as the FTC Tries to Stop Tapestry from Acquiring CapriFrom Pamela N. Danziger