The FTC's fight against an $8.5 billion takeover of the American fashion industry

Michael Kors presented his latest collection last Tuesday at New York Fashion Week in front of a star-studded crowd, including Vogue's Anna Wintour. Just blocks away, the curtain rose on a very different spectacle involving the brand.

In a Lower Manhattan court, the owners of Michael Kors and Coach fought for approval of a multi-billion dollar merger that would bring several well-known fashion brands under one roof.

Tapestry – which owns Coach, Kate Spade and Stuart Weitzman – agreed to acquire Capri – the owner of Michael Kors, Versace and Jimmy Choo – last year as many fashion brands suffered a slump in sales as a result of the pandemic-related shopping frenzy.

But the proposed deal for Capri has been in limbo since the Federal Trade Commission filed suit five months ago to block the $8.5 billion merger. The trial in Manhattan this month will help decide whether the acquisition can go ahead as planned.

Experts believe this is the first major antitrust dispute in the fashion industry, a sector known for its changing trends and revenues. If regulators succeed in blocking the merger, it could have devastating consequences for fashion houses worldwide and prevent serial takeovers like those that have built up European giants such as LVMH and Kering.

Any client interested in buying an obvious competitor – even if there are many others in the market – would face significant regulatory risk, says George Paul, a partner at White & Case.

“If your documents contain language like that, no matter what product market you're in, you have to expect to be sued,” he said if the regulator wins the case. “Because as long as they're close substitutes, the FTC seems to be ignoring the consumer's ability to actually switch to other brands.”

Regulators are basing their argument on a part of the market they define as “affordable luxury”: handbags that are relatively affordable but high-quality and typically cost between $100 and $1,000. They argue that the merger would result in higher prices for consumers and lower quality products, which would “create undue concentration and a presumption of illegality,” according to court documents, because some of the brands compete directly with each other.

Still, the companies insist that today's handbag market is full of competition. Their witnesses have testified that not only are there hundreds of other brands, but shoppers with different incomes buy bags at a wide range of prices. Coach and Michael Kors aren't just competing with other companies in their price range for sales – they're competing with everyone else, from luxury brand Celine to eBay.

While the trial is a precursor to further official proceedings, the court's decision is expected to be crucial because the merger must be completed by February. Final testimony wrapped up this week, and both sides will make closing arguments on Sept. 30. U.S. District Judge Jennifer Rochon, who is hearing the case, will make a decision sometime in the next few months on whether to freeze the deal.

Since Lina Khan took over the helm of the FTC in 2021, the agency has not shied away from blocking big deals. For example, it vehemently opposed mergers between Nvidia and chip designer Arm, grocery giants Kroger and Albertsons, biotech company Illumina and cancer screening start-up Grail.

“The law does not distinguish between markets that deserve competition and markets that deserve innovation,” says Lee Hepner, senior staff attorney at the American Economic Liberties Project think tank.

If the FTC succeeds in blocking the deal, “this could have interesting consequences for the fashion industry itself, but in reality these consequences, as well as the preservation of competition and innovation, will have ripple effects across all markets and industries,” he added.

While Tapestry and Capri are at the heart of the case, they are not the only ones appearing in the proceedings. Other global fashion brands such as Prada, Chanel and athletic brand Lululemon have also been brought into the proceedings, and many of them have been subpoenaed to provide documents, expert testimony or both.

Joanne Crevoiserat, Tapestry's chief executive, testified for nearly three hours last week before a packed courtroom. Next to the witness stand were beige carts filled with dozens of handbags that were used as evidence.

A lawyer for the company asked Crevoiserat to demonstrate some of the company's products in court to illustrate the differences. She showed the Coach Rogue bag, which sells for $1,095, and a white and green checked handbag from Kate Spade. “Maybe I could sell some handbags today,” she joked.

Crevoiserat said competition between the brands would remain even if they came under the same ownership. “The deal simply wouldn't be profitable if all the brands couldn't grow,” she added.

The case has also put a spotlight on the ever-changing nature of the handbag market, as even wealthy consumers embrace popular, affordable options like Trader Joe's $2.99 ​​mini tote or Lululemon's $38 “belt bag.” Social media — where new entrants can sell directly to consumers — and the resale market have also dramatically changed the landscape.

“What really pains me is that even my own daughter carries one,” Crevoiserat said of the Lululemon bag.

Although there are many competitors, regulators are trying to prove that Michael Kors, Kate Spade and Coach together dominate the market, accounting for “well over 50 percent of sales of 'affordable luxury' handbags in the United States.”

But figuring out exactly how consumers buy fashion accessories will prove a major hurdle. “It's obviously very difficult to determine the extent to which brands compete with each other,” said a former federal antitrust official. “Consumer tastes are very complex and fashions change. So this is a case that really doesn't fit the binary logic of market definitions.”

Because both companies are publicly traded, their share prices throughout the process reflect investor confidence that the deal will go through. Tapestry would buy Capri for $57 per share – a premium of about 40 percent to the current price. Shares of both companies have risen since the process began.

Michael Kors, founded in 1981, is an example of a brand that struggled to keep up. In some antitrust cases, companies argue that one of the companies needs to merge to survive. This is called the “failing firm defense.”

Even though Michael Kors is not in a bad financial situation, Tapestry and Capri's lawyers argue that the company's historical strength has dried up recently.

“This market is so competitive that [Michael Kors] is simply not competitively relevant in any unique way,” said a consultant close to Tapestry's thinking. “And there's no sign that will change any time soon.”

Michael Kors himself testified earlier this week about how the brand has evolved since its founding more than four decades ago and where it stands today. He said the company has suffered from “brand fatigue” recently and its attempts to re-engage consumers have “stalled at this point.”

“When you've been a designer for 45 years, it's a very cyclical business,” Kors said of the industry as a whole. “Sometimes you're the hottest trend, sometimes you're lukewarm, and sometimes you're cold.”