FTC Makes a $365 Million Argument Against Tapestry’s Deal to Buy Capri

The Federal Trade Commission sued to stop Tapestry Inc.’s $8.5 billion deal to buy Capri Holdings, in large part on the grounds that putting Coach , Kate Spade and Michael Kors all under one roof would be bad for American consumers .

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On Wednesday, the federal court hearing for a preliminary injunction that’s expected to determine whether the deal can go forward or not, put a number on that concern — $365 million.

That’s the “loss of consumer welfare” annually that was attributable to potential price increases that could result from the deal, according to the merger analysis of economist Loren Smith, who reviewed the transaction for the FTC and testified before Judge Jennifer Rochon.

Smith said that Tapestry, which owns Coach, Kate Spade and Stuart Weitzman, would have a big incentive to raise prices or cut the value of the products it sells after buying Capri and its brands, Michael Kors , Versace and Jimmy Choo.

The economist said that the accessible luxury brands at the core of the case — Michael Kors, Coach and Kate Spade — can not currently raise prices without also boosting the value they give to consumers given the competitive environment. In that, he echoed a point made by Joanne Crevoiserat, Tapestry’s chief executive officer, on the stand on Tuesday.

But Smith said the pricing dynamic would change once the deal is done.

That’s because his analysis of data in the case — including internal branding research produced in discovery — suggested that if Michael Kors lost customers by raising prices, those customers would likely turn to either Coach or Kate Spade (and vice versa).

“If I own the brands, I don’t care so much that just happened,” Smith said.

Smith’s merger simulation showed that Coach could raise its average price on a handbag from $145 before the merger to $159 after. Kate Spade could go from $108 to $122 and Michael Kors could push its $103 average up to $133.

Combined, that would be a 17 percent hike in price, or a commensurate decline in value for the same prices.

All together, that works out to $365 million annually.

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Tapestry’s legal team drilled Smith with questions that sought to undermine his understanding of the consumer dynamic in the market, his use of consumer surveys to reach conclusions and more.

The FTC’s case is unusual in that it seeks to stop a merger not of a broad category like fashion or accessories retailing, but the accessible luxury handbag market.

Coach coined the term “accessible luxury” ahead of its 2000 IPO, but while it’s used regularly among industry insiders and analysts, it’s always been a squishy turn of phrase.

Smith said the market was made up of “a collection of mid-tier brands, called accessible luxury by the parties, that constitute a relevant market.”

In all, the economist said there were more than 200 brands that fit the bill.

Last year, Coach led the pack with 29.4 percent of the accessible luxury handbag market, followed by Michael Kors at 17.5 percent and Kate Spade at 11.4 percent, according to Smith’s work. (The other significant players in the market were Tory Burch, with a market share of 10 percent, and Marc Jacobs at 8.3 percent.)

Counsel for Tapestry pressed Smith on the data he used to define the market — some of which came from the NPD Group, which tracks the wholesale market only. That data set included what NPD considered to be bridge and contemporary bags, but not active — a sector that would include Lululemon bags that Crevoiserat earlier cited as a competitive threat.

The economist was also asked if knowing that a handbag cost $175, was made of nylon and assembled in France by a company that identified itself as a purveyor of accessible luxury was enough to define it as accessible luxury. He said no.

In the legal world of merger analysis, the case might yet solidify some understanding of just what accessible luxury is. But on the ground in the fashion world, it’s still sounding pretty squishy.

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