Tapestry fights on two legal fronts with FTC and Gap/Old Navy

Two legal battles are shaking up Tapestry, which owns the Coach, Kate Spade and Stuart Weitzman brands. One is a more or less routine trademark dispute against Gap.
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And that Old Navy brand. The other is a battle for the future of the company and its ability to compete effectively in the luxury goods market.

Earlier this week, Federal Trade Commission filed an administrative complaint authorizing a federal lawsuit to block Tapestry’s proposed $8.5 billion acquisition of Capri Holdings and its Michael Kors, Versace and Jimmy Choo brands.

Tapestry, which ended the second quarter with sales up 3% to $2.1 billion and operating income up 7%, had a positive outlook for the rest of the year, but is currently facing a number of acquisitions already scheduled. We are facing legal bills that far exceed our budget.

Tapestry stock started at just under $50 a share, but has fallen sharply following the FTC lawsuit and now trades around $40. Capri stock has fallen as well, from trading at just over $45 on April 1 to around $35 a share today.

“Accessible Luxury” trial underway

The FTC took action against the acquisition on anticompetitive grounds. They argue that the deal would eliminate direct competition between the companies’ brands, negatively impacting consumers and the combined company’s workforce, which would have approximately 33,000 employees worldwide if the deal were to go through. are doing.

“Tapestry is seeking to acquire Capri to further strengthen its hold on the fashion industry, with the goal of becoming a serial acquirer,” said Henry Liu, director of the FTC’s Bureau of Competition. “This agreement threatens to deprive consumers of competition for affordable handbags, while hourly workers lose out on wages and the benefits of more favorable work conditions.”

The crux of the anti-competition allegations hinges on the definition of the “accessible luxury” handbag market. The FTC alleges that if Tapestry were to acquire Capri, it would gain overwhelming market share and “dwarf other competitors.”

But unlike other product categories, where the definition is very clear, it’s difficult to define what constitutes an “accessible luxury” handbag. In terms of price, Coach handbags can cost up to $10,000, with many over $500, but comparable leather handbags are widely available for under $200, so they’re not too out of reach.

Michael Kors bags range from $50 to $300 and are often on sale, making them much more mass market than luxury goods.

Neil Saunders of GlobalData said: Inside retail Coach and Michael Kors are “fishing from different pools” when it comes to the consumer market. “For many people, a Michael Kors bag is not a direct replacement for a Coach bag,” he says. As a consumer, I agree.

Competition is and will continue to be fierce.

“The bottom line is that Tapestry and Capri face competitive pressure from both lower- and higher-priced products.” Tapestry said In a statement. Added Capri Island “Consumers have hundreds of handbag options across every channel and at every price point, and the barrier to entry is low,” another statement said.

Tapestry makes a strong case that consumers have a wide range of choices across price points, brands and retailers when purchasing handbags, footwear, apparel and other fashion accessories. No single brand or company can maintain monopoly power across nearly $200 billion. US women’s fashion market.

“The FTC fundamentally misunderstands both the market and the way consumers shop,” Tapestry said. “Tapestry and Capri operate in a highly competitive and fragmented industry alongside hundreds of rival brands, including both established players and new entrants.”

“This transaction does not limit, reduce or constrain competition,” Capri said in a statement. On the contrary, it is pro-competitive, as combining the two companies will give Tapestry a stronger competitor in the nearly $400 billion global luxury goods market.

FTC opposes M&A

In addition to blocking the Tapestry-Capri deal on anticompetitive grounds, the FTC is also suing Tapestry as a serial acquirer.

“Tapestry has been engaged in an M&A strategy for 10 years through a series of acquisitions to realize its dream of becoming America’s leading fashion conglomerate. The acquisition of Capri will further strengthen Tapestry’s stronghold. ”, indicating that he is not favorable to future acquisitions.

“This transaction is unlikely to be Tapestry’s last, as the acquisition of Capri gives Tapestry additional leverage to make further acquisitions in the future,” the FTC said.

Although the FTC’s stated purpose is to “promote competition,” the opposite is actually true. The merger could strengthen Tapestry’s competitiveness in the global luxury goods market and encourage other U.S. fashion brands to step up to offer consumers more of what they want. They say, “Iron sharpens iron.”

The FTC correctly states, “The FTC doesn’t decide who wins and who loses in the marketplace; consumers decide.” And we should merge these companies and give consumers the opportunity to vote with their money.

coach confusion

In another legal battleground, Tapestry is challenging Gap’s Old Navy brand for using its trademarked “Coach” label on T-shirts. $14.9 billion Gap Inc.. The $8.2 billion Old Navy brand and the much smaller $5 billion Coach brand. Neither company responded to requests for comment.

The suit is california central district Old Navy used the “goodwill” associated with Coach’s trademark name, which the complaint alleges is “some of its most valuable assets,” to cause confusion in the marketplace, resulting in trademark infringement, unfair business practices, and It alleges that the company engaged in unfair competition and caused confusion in the market.

Similar to the FTC case where confusion pervades the definition of “accessible luxury,” Coach argues that Old Navy can confuse consumers about collaborations and partnerships between brands. There is. There is some basis for that claim.

Milton Springett, a trademark attorney and partner at the Moses Singer law firm, observes that there is a long history of luxury brands partnering with mass-market brands. H&M, Target
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And even Gap has made this kind of high-level and low-level collaboration standard practice.

“Consumers may be confused and think these shirts are part of a similar collaboration with Coach,” he observed.

Springett said Gap only used the term “coach” on clothing in a decorative and general sense in the context of sports coaching, and “not to suggest an affiliation with a luxury brand, but rather to create a theme.” I predict that he will claim that he used it solely for the purpose of communicating.

He believes the evidence disclosed during discovery will be a “game changer,” especially if references are uncovered that refer to coach brands rather than basic research into sports-themed messages. . One wonders if Old Navy could have avoided all the fuss if it had simply added “The” to its T-shirts.

Nevertheless, Springett said, “Consumer confusion is the standard by which infringement claims are evaluated, so consumer confusion could strengthen Coach’s infringement case.”

three rules

There is a well-known superstition that says bad things happen three times. It is so widespread that it has its official name, “Trifilia”, the belief that when something bad happens, it happens three times.

Two Tapestries have been hits, so a third could be coming soon. Tapestry may not report third-quarter earnings until May 9, as all signs point to a slowdown in the luxury goods market. Or maybe it will come sooner, but for Trifilia believers, it will come.

See also:

More from ForbesFTC halts Tapestry-Capri merger, could lose competitiveness in luxury goods marketby Pamela N. Danziger