Tapestry Inc. and Capri Holdings have amped up their efforts to defeat the Federal Trade Commission’s (“FTC”) bid to block their $8.5 billion merger, arguing in a new filing that the proposed deal will actually enhance competition and deliver significant consumer benefits, and that the consumer-focused agency’s allegations are based on flawed assumptions and economic models that do not reflect reality. In a lengthy brief that they filed with a New York federal court late last month, Tapestry and Capri contend that the FTC’s arguments “fail to accurately” model the realities of the handbag industry and are based on “incomplete third-party data sources” and “arbitrary and unscientific assumptions” leading to “erroneous conclusions.”
A Bit of Background: The merger between “accessible luxury” fashion giants Tapestry and Capri has faced scrutiny from the FTC. In particular, the regulator alleged in the complaint that it lodged with the U.S. District Court for the Southern District of New York in April (and in a corresponding administrative action) that Tapestry’s proposed acquisition of Capri – and its brands, Michael Kors, Versace, and Jimmy Choo – will lessen competition in the “accessible luxury” market. In response to the FTC’s actions, the two fashion groups have argued that “consumers face handbag choices everywhere they turn, and they have hundreds of choices in a highly competitive marketplace,” among other arguments that focus on the autonomy of their respective brands and the burgeoning might of the resale market.
Revitalizing Michael Kors & Co.
Fast forward to August 30, and Tapestry and Capri doubled down on these arguments by way of their proposed findings of fact and conclusions of law brief, asserting that the proposed merger will actually increase competition by revitalizing struggling brands – like Michael Kors – by revitalizing these companies via improved consumer engagement, product innovation, and brand management. Once a leader in the accessible luxury segment, Michael Kors has seen “handbag sales decline significantly in recent years,” per Tapestry and Capri. The brand has increasingly relied on discounts and off-price channels, which they argue has “harmed the brand’s image in the eyes of consumers and undermined its ability to create ‘brand heat,’” eroding consumer demand.
Additionally, the Tapestry and Capri argue that this revitalization will benefit not just Michael Kors but the entire handbag market. By strengthening a brand that has been losing ground, the merger could lead to more robust competition, particularly against other major players in the affordable luxury segment. They assert that Tapestry’s “modern consumer engagement platform,” which “powers iconic brands to move at the speed of the consumer,” will help Capri’s brands innovate and grow, and will ultimately benefit consumers through “better product and better experiences, and deliver more products to more customers globally.”
The Relevant Market Includes Resale
At the same time, Tapestry and Capri are looking to chip away at the FTC’s case by challenging its market definition and critiquing its economic analysis. For instance, at the core of their defense is their assertion that the U.S. handbag market is simply too competitive and too diverse for the merger to result in any meaningful anticompetitive effects. They describe the relevant market – the “accessible luxury” handbag market – as one where “hundreds and hundreds” of brands offer a vast array of products, ranging in style, design, and price. This, they argue in their filing, creates an environment where no single brand can dominate or exert excessive influence over market prices.
Consumers have access to “thousands” of handbag brands across a broad spectrum of styles that sell “at every potential price point,” Tapestry and Capri state, going on to emphasize that this diversity is evident across multiple retail channels, including online platforms, department stores, off-price retailers, and even the resale market.
Tapestry and Capri’s focus on resale and how it impacts the definition of the relevant market is especially interesting. The companies claim that the total amount of revenue generated from the resale of handbags in the U.S. is “difficult to calculate, but is substantial.” The companies assert that sales of pre-owned handbags from a redacted brand (presumably in their portfolio) in 2023, alone, were more than Tapestry’s sales of new Kate Spade bags.
Further delving into the secondary market, Tapestry and Capri argue that the FTC “has no evidence that Coach, Kate Spade, or Michael Kors views its competitive set as limited to only other so-called ‘accessible luxury’ brands.” And in fact, “the evidence is to the contrary,” they argue. In fact, in testimony that he provided in connection with the case, Michael Kors stated that competition for his eponymous label ranges from “Tumi, Telfar, [and] Coach” to Louis Vuitton and Hermès “at resale … because ‘we are all in the same game.’”
Moreover, the rise of e-commerce, which now drives a significant portion of handbag sales, has further intensified competition, Tapestry and Capri assert. “The rise of online handbag sales is an important and growing trend,” they state, noting that “the growing prominence of e-commerce and online shopping opportunities facilitates new entry by handbag brands” and allows consumers to “easily compare products and prices across various brands.”
“Analysts estimate that online sales are already 38 percent of all U.S. handbag sales and will grow to over 50 percent by 2025,” according to Tapestry and Coach. Handbags, they argue, are not homogenous goods; they vary widely in material, design, functionality, and emotional appeal. This differentiation makes it difficult for any single brand to monopolize the market or significantly raise prices without offering corresponding value. If a brand attempts to increase prices, consumers can easily switch to one of the many alternatives available.
The Realities of the Handbag Market
As for their critique of the economic analysis provided by the FTC, Tapestry and Capri zero in on the agency’s expert witness, Dr. Loren Smith, arguing that his models fail to “accurately model the realities of the handbag industry.” They claim that Smith’s analysis is “based on incomplete” data leading to “erroneous conclusions about the potential effects of this transaction.” One of these key criticisms is aimed at Smith’s use of the hypothetical monopolist test (“HMT”), a standard tool used to define relevant markets in antitrust cases.
Specifically, they argue that Smith’s application of the HMT is “highly flawed” and produces unrealistic results, suggesting a narrow market consisting of only the merging parties’ brands and excludes other competitors. This, they contend, does not reflect the commercial realities of the market, where consumers can easily switch to “numerous” other brands.
Tapestry and Capri also point out that Smith’s model relies on surveys conducted by Tapestry in 2021 and 2022 “for purposes other than how he tries to use them.” These surveys, they claim, were “not fit for Dr. Smith’s analysis” because “even Dr. Smith acknowledges because they (1) did not ask consumers which handbag brands they would switch to; and (2) did not ask consumers how they would respond to a price increase.” They were not designed to measure how consumers would respond to a price increase and therefore “do not accurately capture” the competitive pressures in the market. Furthermore, they claim that Smith “overestimated the margins” in the handbag industry, claiming that while margins may be high, this is due to “where degrees of differentiation cannot be quantified” rather than pricing power.”
The filing comes on the heels of Tapestry and Capri lodging an opposition brief, in which they urge the U.S. District Court for the Southern District of New York to shoot down the FTC’s bid for a preliminary injunction, arguing that the regulator has “built [its] case on theories and models that are completely divorced from the marketplace realities,” and that the case is “devoid of any focus on what matters most in an antitrust case: the options available to the consumer.”
The case is Federal Trade Commission v. Tapestry, Inc., 1:24-cv-03109 (SDNY).
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