Luxury Briefing: Does the FTC have enough to block the Tapestry-Capri deal?

On Monday, the Federal Trade Commission officially filed a lawsuit against Tapestry in an attempt to block the deal. The lawsuit was rumored last week. The FTC alleges that the acquisition would be anticompetitive and give Tapestry a “dominant share of the ‘accessible luxury’ handbag market.”

According to Henry Liu, director of the FTC’s Bureau of Competition, the deal threatens to “deprive consumers of the competition for affordable handbags, while hourly workers stand to lose the benefits of higher wages and more favorable workplace conditions.”

The FTC also takes issue with Tapestry’s stated plan to acquire more brands in the accessible luxury space, which it says indicates a broader strategy of consolidating competition.

“With the goal to become a serial acquirer, Tapestry seeks to acquire Capri to further entrench its stronghold in the fashion industry,” Liu said.

But Tapestry, obviously, takes issue with that characterization. A public statement released by Tapestry said that the company faces stiff competition in its category of affordable luxury and that merging would not significantly lessen consumers’ options.

“The bottom line is that Tapestry and Capri face competitive pressures from both lower- and higher-priced products,” the statement read. “In bringing this case, the FTC has chosen to ignore the reality of today’s dynamic and expanding $200 billion global luxury industry.”

Tapestry does face competition from similarly priced handbag brands. Coach, one of Tapestry’s brands, sells bags in the $300-$800 price range, which puts it on par with brands like Coperni, Isabel Marant, Jacquemus, Luar and Rag & Bone.

“They also compete for consumers who are cross-shopping a wide range of channels and brands along a vast pricing spectrum when considering what to purchase,” Tapestry’s statement read. “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.”

Among legal experts, the FTC’s case was a surprising one, mostly for its novelty, and may be on shaky legal grounds.

“The U.S. government has never taken action against LVMH or Kering, arguably the largest luxury retailers on earth that do, in fact, control a major segment of the market and can define price,” said Jonathan Lazarow, a corporate lawyer and founding partner of the law firm Ambrose, Hills & Lazarow.

The European luxury conglomerates like LVMH and Kering have been allowed to grow far more dominant in the luxury industry than Tapestry would be if the deal is blocked. LVMH makes over $90 billion a year with around 75 luxury brands in its portfolio. By comparison, Tapestry’s revenue is under $7 billion and, if the deal went through, it would own just seven major luxury brands.

If the deal were approved, it would make Tapestry the closest thing to an American equivalent of conglomerates like LVMH or Richemont. Other regulators including the E.U. have already approved the deal, but the FTC is the last holdout. Lazarow said the decision could set a precedent that American luxury brands will be under deeper scrutiny, which will in turn affect the strategic decisions they make.

“The larger companies have to [consider] whether the FTC may be concerned that they can create or shift markets,” Lazarow said. “I can see an issue in certain industries. For example, if I am a luxury brand wanting to sell a larger conglomerate or strategic, we now have to wonder whether that brand will be the tipping point in an FTC decision.”

Luxury’s downbeat earnings week

Judging by luxury companies’ earnings reports this week, things are not going good for the sector. Many brands are struggling with reduced sales across the board with particular losses in Asia.

Kering reported that it expects a 40-45% decline in income in the first half of 2024 compared to the same period last year. François-Henri Pinault, Kering’s CEO, said that, at the beginning of the year, he expected lowered sales, but things have considerably worsened since then. He pointed to slow sales in China, in particular, as having a major impact on the company.

For its part, Gucci saw its sales drop 18%. This comes at the six-month mark since new creative director Sabato de Sarno took over following the departure of Alessandro Michele.

Zegna also reported struggles. As reported on Tuesday, Zegna saw a 5% drop in first-quarter revenue, bringing its total to under $500 million. Like Kering, the drop in sales was focused on one brand in particular: Zegna’s newly acquired Thom Browne idrug the rest of the company’s financial figures down. Sales at Thom Browne fell 35% in the quarter. Also like Kering, the bulk of the company’s lost sales came from declines in China specifically and Asia more broadly.

But Prada managed to buck the trend. On Wednesday, Prada announced a 16% increase in net revenue and an 18% increase in sales through its retail stores. The company called out Miu Miu as a standout brand in its portfolio, with the brand seeing an 89% boost in retail sales. Meanwhile, Prada is having a much different experience in Asia than its contemporaries, reporting an 18% increase in sales in the region. Sales in Japan grew by 46% in the quarter, plus European sales climbed 18%.

“Sharpness of positioning, creativity and communication will be critical this year; while the industry is experiencing new dynamics, we retain our ambition to deliver solid, sustainable and above-market growth,” said the group’s CEO, Andrea Guerra, in a press statement.

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