U.S. Court Rules to Block the Merger of Handbag Giants Tapestry and CAPRI

Introduction

In August 2023, luxury fashion group Tapestry Inc. (parent company for brands including Kate Spade, Stuart Weitzman, and Coach) concluded a deal to acquire Capri Holdings Limited (parent company of brands including Michael Kors, Jimmy Choo and Versace) for USD$8.5 billion. With Tapestry Inc.’s market capitalization at USD$11.41 billion and Capri Holding’s at USD$2.41 billion, the combined value of this merger would have had a combined market capitalization of USD$13.82 billion. The acquisition had already gained approval from Japan and the EU, but in September 2024 the United States Federal Trade Commission (FTC) sued Tapestry for antitrust violations regarding the merger. A U.S. court ruled on October 24^th, 2024, in favor of the U.S. FTC and formally blocked the deal. Tapestry and Capri Holdings are currently considering whether to appeal the decision or not.

Motivations to merge

According to Tapestry CEO, Joanne Crevoiserat, the goal of the acquisition was to create “a powerful global house of iconic luxury and fashion brands” that could operate over 75 countries and “unlock a unique opportunity to drive enhanced value for our consumers, employees, communities, and shareholders.” [1] These occupy the “accessible luxury market,” characterized by high-quality materials, high-frequency discounting, and distinctive customers; remaining between the mass market and true luxury. In recent years, this market has experienced a fallout as fewer consumers fit into the middle category, rather preferring high-end luxury brands or cheaper mass-market products.

The decrease in consumption has led to a struggle for both companies to re-establish their popularity and win back customers. In the past several years, Capri Holdings has struggled the most. In the first quarter of the fiscal year 2025, the company reported a 13.2% decline in revenue as compared to the previous year (amounting to USD$1.07 billion). Versace’s sales dropped 22%, Michael Kors’ fell 21 percent, and Jimmy Choo decreased by a single-digit deficit. In the face of possible brand fatigue, this merger was intended to revive the Michael Kors brand, but also strengthen this sector of fashion products in general.

‘Anti-competitive’ or ‘Anti-industry growth’?

Despite the claim by Tapestry that the merger would result in two separate entities to facilitate the two brands competing with one another, the FTC in the U.S. doubted the enforceability of such internal competition. The merger would allow Tapestry to occupy a 30% market share in the luxury handbag market, a proportion prohibited by the 2023 Merger Guidelines in the United States. The FTC further argued that following the merger, Tapestry could easily raise prices and unfairly control wages across brands, as it did with the Kate Spade brand in 2017. Further, the merger could set a precedent leading other large luxury brands to follow suit, creating an unfair environment for small businesses or new entrants into the sector. In the ruling, the judge cited Section 7 of the Clayton Act which prohibits mergers and acquisitions that could significantly lessen competition.

U.S. Antitrust Law is composed of two laws that prevent anticompetitive conduct and mergers that limit the benefits of competition for consumers and workers. [2] The first law is the Sherman Antitrust Act of 1890, which prohibited the monopolization of a market for products or services by fixing prices, rigging bids, or allocating customers, workers, or markets. The second, the Clayton Act of 1914 specified these laws to include anti-competitive practices including illegal mergers, tying agreements, predatory pricing, or sitting on the boards of two competing corporations. Both laws exist to create a fair marketplace where companies can compete for a fair market for labor and provide the best options at the best prices for consumers.

The presidential election in the United States also likely played a role in the FTC’s block of the merger of Tapestry and Capri Holdings as the Biden administration is taking any measures possible to avoid further inflationary prices for consumers before the election in November.

Those who support the decision, including the FTC who called it a “victory”, believe that the block will protect future entrants and ensure competition in the luxury market, ultimately favoring consumers and small businesses. The judge’s decision could prevent a landslide of mergers from taking place if Tapestry was successful, leading to true dysphoria between the luxury and accessibility markets.

Those opposing the decision, including Tapestry and Capri Holdings who are considering an appeal, feel that “accessibility” into the luxury market is in and of itself an oxymoron because the sector is characterized by its private and exclusive nature. Some feel that the rise in new forms of product placement via social media channels has made it easier than ever for new brands to compete so the merger of six brands wouldn’t constitute a financial trust competition issue. Furthermore, the block of this merger creates a new challenge for Capri Holdings to overcome as it already works to strengthen its brands despite popularity fatigue among consumers.

What does this mean for the Chinese consumer?

In March 2023, Capri Holdings executives attended meetings with the Capri China management team in the hopes of opening more stores for its brands. Capri CEO, John Idol, stated during the trip that “China is an important long-term growth opportunity for our three luxury houses, Versace, Jimmy Choo, and Michael Kors…We will continue to increase our strategic investments in the country, including new store openings and events.”[3] As of November 2023, Tapestry Inc. stated that it planned to open 60 more stores in China by the end of 2025.[4] However, as of August 2024, international media has been focused on the slowdown of the luxury market in China. Greater China sales were the largest drag on Tapestry’s 2024 performance, leading to a generation of only 15% of the company’s annual and quarterly revenues.[5]

In the wake of a decrease in discretionary spending and changing consumer habits in the United States, many brands initially turned their focus to Chinese consumers in the hopes that the nation’s post-pandemic re-opening would provide them with the rebound in spending they needed to boost revenues. However, this strategy hasn’t created the returns as originally hoped. Luxury labels are struggling in China as consumer spending has decreased in the face of an economic slowdown, leading many brands to slash prices to regain demand. This strategy also has negative effects because it threatens to undermine the exclusive image of these brands. Capri Holdings and Tapestry’s plans to expand further into China could be impacted by the block of their merger as it impacts the expected capital of either company.

Conclusion

Overall, this decision by the U.S. Court reflects the increasingly aggressive Federal Trade Commission in the United States under the Biden Administration. Since 2020, the FTC has blocked attempts at mergers including industry titans such as Google, Visa, and JetBlue. This consumer-first approach can be contrasted against that of the EU where large conglomerates such as LVMH and Kering are fostered to be strong national brands to compete internationally.

The block of the merger between Tapestry Inc. and Capri Holdings Limited also demonstrates the complexity of doing business in a global environment and the volatility of the future of luxury fashion. To operate in 75 countries, as this merger intended, required the consent of several governing bodies. Despite receiving the permission of the EU and Japan, the merger was ultimately blocked by the United States.

It remains to be seen if this ruling will increase the competition between the two brands as intended or will lead to the demise of one if it fails to regain its popularity in the sector.

[1] https://fashionunited.com/executive/management/tapestry-x-capri-merger-blocked-what-does-this-mean-for-the-accessible-fashion-market/2024102862570

[2] https://www.justice.gov/atr/antitrust-laws-and-you

[3] https://www.voguebusiness.com/consumers/capri-plots-post-lockdown-revival-in-china-starting-with-michael-kors#:~:text=China%20is%20a%20renewed%20focus,store%20openings%20for%20its%20brands.

[4] https://www.chinadaily.com.cn/a/202311/10/WS654e227ea31090682a5eda42.html

[5] https://www.forbes.com/sites/pamdanziger/2024/08/21/us-luxury-market-slows-lvmh-tapestry-capri-and-ralph-lauren-feel-it/