Fashion is used to the spotlight — from Wall Street to the runway.
But the Federal Trade Commission’s challenge to Tapestry Inc.’s buyout of Capri Holdings has cast an unfamiliar hue on the business of getting the world dressed.
So far, the five-month-old case has:
- produced seven days of testimony at a make-or-break hearing that could halt the $8.5 billion deal;
- revealed the private and sometimes scathing thoughts of chief executive officers for some of the industry’s top brands;
- underscored just how badly Capri’s Michael Kors is struggling with out-the-door prices on its bags, which averaged just $92 last year, and
- and given some sense of what antitrust in fashion might look like going forward.
It’s been a chance for the fashion and antitrust crowds to mingle and maybe, kinda sorta, understand each other a little better.
Bridging the Divide
Fiona Scott Morton, a Yale professor and formerly the chief economist of the Justice Department’s antitrust division, testified as an expert for Tapestry and Capri and described the competitive dynamic in fashion like this:
“I think of it as a school of fish, they are hundreds or thousands of them and they’re all trying to follow these trends — zip, zip.”
Fair enough.
Scott Morton’s appearance on behalf of the companies also came with some intrigue as some experts were surprised to see her testify given her former role in enforcement. But she said “the evidence is very good” and that the government’s economic argument took too many shortcuts, like relying on wholesale data from NPD to determine the entire market.
The case also brought to federal court much discussion over exactly what sits in the “bridge category,” something designer Michael Kors dismissed as a “vintage term” that belonged in 1989. There was also an examination by the court of novelty Kate Spade bags, one that looked like a packet of Heinz ketchup and another that resembled a shaggy dog.
The shaggy dog remained a steady presence, sitting atop a Michael Kors bag on a cart filled with other exhibits, looking over the shoulder of witnesses as they offered nuanced economic testimony or reread years-old text exchanges with their colleagues.
A Work in Progress
So far, the result is unclear.
“It’s the fashion world. Here today, gone tomorrow,” said antitrust attorney Barry Barnett, a partner at Susman Godfrey, referring to Tapestry’s expansion plans. “They’re trying to build a business that will last longer than a season or three seasons, build this concept that’s going last. Maybe it was hubris to try to do it. They were tripped up by trying to build this durable segment within the fashion business and we’ll find out from the judge about whether they crossed that line.”
That the FTC brought the case at all has signaled a new willingness on the part of the government to dig deep into fashion cases, define markets narrowly and to step up and challenge them if a merger could give any set of brands too much pricing power.
That on its own could give dealmakers pause as they look to acquire their next brand — and that hesitation will only grow if the government wins the case.
The early read of testimony at the hearing from at least two of the financial types following the case in court was that the FTC had never won with an economic argument so shaky, and that it had never lost with documents so favorable. The case produced 4 million documents from the parties, including many reports comparing the relative positions of Coach, Kate Spade and Michael Kors, as well as Tory Burch and Marc Jacobs.
Executives and experts said the companies compete with brands up and down the spectrum, but an unfiltered text from then-Kate Spade CEO Liz Fraser to Coach CEO Todd Kahn in 2021 showed a little more distance.
“We may think we’re competing against [Louis Vuitton] and Gucci, but I can assure you they are not competing with us,” Fraser wrote, clarifying in court that she was talking about unusual run up in luxury prices during the COVID-19 era.
The Michael Kors Business
The hearing also painted a dire picture of the Michael Kors business, which worked for the defense’s case because it downplays the competition that currently exists in the market.
Fraser, who left Kate Spade earlier this month, said the Michael Kors brand has been in a tough spot for a while and that “we look at them less and less” from a competitive perspective. (She also had a measured take on the brand she used to run, saying: “Kate Spade for quite a while has been an over discounted brand in North America. It’s difficult to work your way out of that.”)
Michael Kors’ own CEO Cedric Wilmotte said the business he runs was “very challenged” when he took charge in April 2023.
That month, he vented in an email to his wife that was shown in court: “U.S. is a disaster and this is all because of JI trying to maintain top line with discounting all day long versus refocusing on creating brand heat,” Wilmotte wrote, with “JI” seemingly referring to Capri CEO John Idol.
Currently, key parts of Michael Kors’ revamp are stalled with store remodels postponed, a rebranding of Michael Michael Kors pushed back and marketing cut back this year due to budgetary restrictions.
And Wilmotte acknowledged that Tapestry is now better positioned than Capri to turn the business around.
Whether Tapestry will ever get the chance to do that, rests with the court. Judge Jennifer Rochon will hear closing arguments on Sept. 30 and then decide whether or not to block the deal with a preliminary injunction. That decision will likely be the final word for the deal one way or the other, although the case could go on still.
What Is Accessible Luxury?
But whatever happens, the case marks the FTC’s first serious challenge to the business of buying competing fashion brands in at least a generation.
It’s unusual in that the government is targeting a market as narrow as accessible luxury handbags.
Joanne Crevoiserat, CEO of Tapestry, told the court that accessible luxury is “a term we’ve used with investors to describe how we compete,” not a pitch to consumers.
Nonetheless, the government argued that combining Tapestry’s Coach and Kate with Micahel Kors would give the company a commanding 58 percent market share in the accessible luxury market.
According to the FTC’s economic analysis, that kind of market power would let Tapestry raise prices by 17 percent — hurting consumers to the tune of $365 million annually.
“This case is about the working and middle class American woman,” Nicole Lindquist said for the FTC in opening arguments. “These women go to the outlet or Macy’s looking for their favorite American brand. She’s looking for something nice…that’s not going to break the bank.”
While the case revolves around the accessible luxury handbag market and how much Tapestry could dominate it with the help of Michael Kors, ears attuned to the fashion industry could still not quite make out a practical definition of that market after more than a week in court.
According to the government, the accessible luxury handbag category consists of crossbody bags, satchels, shoulder bags and totes/shoppers that are roughly in the $100 to $1,000 range, although the category is not technically bound by price. The bags are also typically leather and higher quality and sold to households with incomes of $75,000 to $80,000.
That zeros in some, but sits more comfortably in an economic analysis than the actual fashion industry.
As Kors observed: “There’s no logic to me. Backpacks and tote bags serve the same end use.”
Heard in Court
The FTC vs. Tapestry case has brought plenty of fascinating figures to the fore.
- Half of the consumers buying Coach and Michael Kors bags come from households with annual incomes of less than $70,000.
- The average out-the-door price for a Michael Kors handbag last year was $92.
- It pays to be an expert witness — $900 per hour for Jeff Gennette, former Macy’s Inc. CEO, and $1,250 per hour for Scott Morton.
- Coach and Kate Spade together make 45 million handbags annually.
- Coach, Kate Spade and Michael Kors control 58 percent of the U.S. accessible luxury handbag market, according to the FTC.
The Bottom Line is a business analysis column written by Evan Clark, deputy managing editor, who has covered the fashion industry since 2000. It appears every other Thursday.
