Photo: Business Wire
Tapestry, the parent company of Coach, Kate Spade, and Stuart Weitzman, has further cemented itself as a luxury powerhouse through the acquisition of Capri Holdings, parent company of Versace, Jimmy Choo, and Michael Kors. The $8.5 billion deal values Capri at $57 per share and would create a company with more than $12 billion in annual sales across 75 countries.
The deal is expected to close in 2024, subject to regulatory approval and other customary closing conditions. The boards of both companies have already unanimously approved the transaction.
Tapestry’s interest in Capri isn’t necessarily a surprise. McKinsey noted in 2020 that the uncertainty created by the COVID-19 pandemic impacted the very foundations of the luxury industry, creating opportunities for major acquisitions in the future. Luxury was already a space undergoing wildly varying growth patterns, with different companies at the same price points experiencing anywhere from 40% sales growth to annual losses.
The trend recorded by McKinsey played out in this deal. Capri reported a 10.5% year-over-year revenue decrease for Q4 2023, which ended on April 1, and a 3% decline for fiscal 2023 as a whole. In comparison, Tapestry reported 5% revenue growth for its Q3 2023, which likewise ended April 1.
Now, Tapestry is aiming to apply its consumer-centric strategy to the storied brands it has acquired from Capri. One of the luxury retailer’s stated goals is to leverage its own direct-to-consumer model to improve Capri’s performance in this area. Additionally, Capri’s brands bring expertise in the footwear and ready-to-wear categories where Tapestry’s banners have less penetration, which will deepen the company’s reach into multiple lifestyle categories and diversify its portfolio.
The combined company can also stand against, or potentially become involved in, the rising tide of luxury resale.
The secondhand luxury goods market reached €43 billion ($46.9 billion) in sales in 2022, up 28% year-over-year — about 1.3 times the growth rate for new luxury products, according to a study by Bain & Company. While the growth ratio is down from 3.4 times in 2018, secondhand sales are already worth slightly more than 10% of the overall €353 billion ($384.9 billion) personal luxury goods market.
For now, luxury juggernauts like Tapestry are in a good spot. Bain noted that spending on luxury goods grew approximately 20% in 2022, and it’s expected to rise even higher in 2023, which shows that a strong brand can thrive even during times of economic turmoil. The combination of six storied brands under one roof could create a luxury giant that defines the shape of the category for years to come.
BrainTrust
Katie Riddle
Global Retail Strategist, Verizon
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Ken Morris
Managing Partner Cambridge Retail Advisors
Discussion Questions
DISCUSSION QUESTIONS: What advantages and/or synergies will the combined Tapestry and Capri have above and beyond what either company could do alone? Do you expect secondhand luxury to continue gaining ground against new luxury products?
Poll
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Bringing Tapestry and Capri together provides benefits. Improved economies of scale allow synergistic savings and make ventures like international expansion easier. That said, there are some things a merger does not do. First, it does not resolve all of the issues around Michael Kors – which is by far the biggest part of Capri. Tapestry is going to have to work hard to bring more discipline and better distribution capability to that brand. Tapestry has already been through this with Coach and Kate Spade, so it has relevant experience – though Michael Kors is much more of a Gordian Knot. The second thing is the deal does not allow Tapestry to compete more strongly with European luxury houses. LVHM remains miles bigger and Kering and Chanel will also have higher sales. But, more importantly, all these groups play more strongly in the high-end luxury market. Tapestry and its brands are much more about accessible luxury and, although Versace and Jimmy Choo help move the dial, they form a small part of the overall business. Finally, Tapestry is paying a big premium for Capri, and it will be interested to see how finances in the new business play out in the short term.
The advantages are the economies of scale that can be derived. However, the brands should be kept whole in case Tapestry wants to sell one or more of them individually in the future. The biggest challenge I see with this acquisition is servicing a huge debt. Is there any room for one or more of these entities to falter and still be able to avoid bankruptcy?
I don’t think the merger allows Tapestry and Capri a strong position against European houses like Kering and LVMH. Tapestry and Capri represent a more “beginners luxury” segment, so perhaps there’s a niche for them there, but I don’t see them as competing in the same class as Gucci or Hermes.
Some of the brands in the combined entity are true luxury, others are what I would describe as “near luxuty.” (I would put Michael Kors into the second category.) The merger certainly provides more leverage with key retail accounts, as well as offering more direct-to-consumer synergy. Perhaps more than anything, the merger gives Tapestry a bigger footprint in a landscape still dominated by LVMH.
If you have read me regularly, you know I’m not a big fan of big M&A. These deals fail to add to shareholder value about eighty percent of the time. They produce dis-synergy more often than they produce benefits.
This combination does have a chance to succeed if they follow the LVMH playbook and operate the brands uniquely. The success will be in the sharing of marketing talent and not in cost savings. Forecasted cost savings rarely materialize.
Luxury mergers over the past 20 years have generated positive results. I’m going to guess that Tapestry’s superior IT team can drive new business and improved results.
No introduction needed for Versace, Jimmy Choo, and Michael Kors, that’s for sure. I think any time you have a profitable player acquiring a struggling group in the same category, you should bet on a big win. Tapestry has a proven track record of seamlessly integrating acquisitions, too, as they have done with Kate Spade and Stuart Weismann. They are very good at harmonizing the people, the process, and the technology to quickly generate synergy between the brands, and I expect no less here. Locking up these brands under the Tapestry umbrella creates a potential luxury resale portal that will have major impact.
As for the growing resale market, Tapestry will be in an even better position to control which way it goes, and have more power behind any moves it makes. Resale’s glow of sustainability can be a positive across all of Tapestry’s brands. The trick will be, of course, to find ways to maintain sales and profitability at full retail while leveraging resale as well.
These kinds of deals always look like they provide systems, process and financial synergies and efficiencies. That’s a good start. They don’t easily or quickly solve customer facing issues such as merchandising, design and marketing. That’s a much slower fix. The opportunities for intra-brand listening and learning are abundant. This merger could have a very solid outcome.
The combined Tapestry and Capri entities can leverage a diverse portfolio of luxury brands like Coach, Versace, and Michael Kors, expanding their global presence and customer base. The synergy could lead to enhanced innovation, shared resources, and broader market reach.
Yes, the trend of secondhand luxury gaining ground against new luxury products is likely to continue. Factors such as sustainability awareness, cost-consciousness, and the rise of online marketplaces have contributed to the appeal of pre-owned luxury items.