Written by Jonathan Rubin, Partner and Co-Founder of MoginRubin LLP
The Federal Trade Commission (FTC) on April 22, 2024, filed an administrative complaint to block Tapestry, Inc.'s acquisition of Capri Holdings Limited, a deal valued at $8.5 billion. The proposed merger would combine three major fashion brands: Coach and Kate Spade from Tapestry, and Michael Kors from Capri.
The FTC alleges that the deal would stifle competition in the "accessible luxury" handbag market, a term coined by Tapestry to describe high-quality leather handbags at affordable prices. The agency argues that by eliminating direct competition between these brands, consumers could face higher prices, fewer choices, and reduced innovation. The Commission also alleges the deal would adversely impact hourly workers who could lose the benefits of higher wages and more favorable workplace conditions.
The complaint explains that its chosen market definition distinguishes “accessible luxury” handbags “from both the mass-market products that are made in bulk in China from lower-quality materials and sold at lower prices, and the high-end luxury handbags crafted predominantly in Europe that sell at significantly higher prices.” This market definition suggests that the Commission may have strong evidence that the deal is likely to harm an identifiable sub-set of consumers of women’s fashion accessories.
In addition to saying the government doesn’t understand the handbag market, the companies counter that this is a “pro-consumer” deal. "The reality is that consumers have a host of choices when shopping for luxury handbags and accessories, footwear, and apparel, and they are exercising them," the parties said in a statement.
Head-to-Head Competition on Hold
Within the accessible luxury accessory market, the FTC's complaint highlights the intense competition between Tapestry and Capri, particularly between their handbag brands – Coach, Kate Spade, and Michael Kors. These brands reportedly monitor each other's pricing, promotions, and design strategies, leading to a more competitive landscape for consumers.
The FTC argues that the merger would eliminate this "head-to-head competition" in several ways, including:
Market Domination and Serial Acquisitions
The FTC also raises concerns about Tapestry's acquisition history of absorbing other brands, suggesting the Capri deal is part of a larger strategy to dominate the market. Allowing Tapestry to continue as a serial acquirer could harm competition and also erect barriers to entry that make it more difficult for new brands to enter and compete.
Potential Impact on Employees
The complaint also considers the potential impact on employees. With a combined workforce of roughly 33,000, the FTC suggests that the merger could lead to job losses or reduced wages and benefits for employees.
Tapestry's Response
Tapestry responded to the suit via press statement: “There is no question that this is a pro-competitive, pro-consumer deal and that the FTC fundamentally misunderstands both the marketplace and the way in which consumers shop. Tapestry and Capri operate in an intensely competitive and highly fragmented industry alongside hundreds of rival brands, including both established players and new entrants.”
The company says it competes for customers who are “cross-shopping a wide range of channels and brands along a vast pricing spectrum” when making buying decisions. "The reality is that consumers have a host of choices when shopping for luxury handbags and accessories, footwear, and apparel, and they are exercising them.” Tapestry and Capri face competitive pressures from both lower- and higher-priced products, the statement continues, adding that the Commission ignores the reality of the “dynamic and expanding $200 billion global luxury industry.”
The Potential Significance of a Particular Class of Consumer
In light of the market definition, we strongly suspect that the Commission has identified a specific cohort of consumers likely to be harmed by this transaction. Thus, in spite of the seemingly endless variety of women's accessories, the Commission may be justifiably concerned about consumers who aspire to a true luxury accessory but can't afford it, such as a Hermes or Chanel handbag, prices for which can be as high as several hundred thousand dollars, while at the same time they will not purchase an off-label or down-market item.
The ability to allege that an antitrust violation will harm a particular group of consumers can be decisive in the proper definition of the relevant antitrust market. Competition from the perspective of the supplier can appear "broad" or "intense," with many rivals vying for piece of a large customer base. But on the demand side, there may be discrimination between groups of those consumers such that one or more groups of those consumers may really only have limited choices.
For example, US Foods Inc. and Sysco Corp. both sell and deliver cases of canned peas, but so do many other businesses, such as grocery delivery services, online bulk sellers, and local food distributors. But large institutions, such as hotels, hospitals, and other hospitality facilities will not shop at these other outlets because they require a full-line (or, “broadline”) distributor from whom they can efficiently order a very broad range of products. After the federal court in Washington, D.C., enjoined the deal pending the Commission's administrative complaint, the firms abandoned their transaction. See FTC v. Sysco Corp., 113 F.Supp.3d 1, (D.D.C. June 26, 2015).
As the Sysco court explained it, application of the Supreme Court’s Brown Shoe decision (370 U.S. 294 (1962)) often requires an analysis of “distinct customers, distinct prices, the existence of special classes of customers who desire particular products and services, ‘industry or public recognition’ of a separate market, and how the defendants’ own materials portray the ‘business reality’ of the market.” 113 F.Supp.3d at 23.
Thus, if the FTC can identify a substantial number of consumers in a "sweet spot" between consumers of true luxury brands and consumers of down-market accessories, for whose dollars the merging parties directly compete, the Tapestry-Capri deal may not be as "pro-consumer" as the parties claim and the Commission may have a good case for blocking it in court.
Edited by Tom Hagy. Photo by Chris Mac on Unsplash