Whether Coach and Michael Kors owners will merge will be determined by three crucial questions.

• This week, in a federal antitrust challenge, Tapestry, the owner of Coach, and Capri, the owner of Michael Kors, are both present in the courtroom.
• After announcing an $8.5 million acquisition last year, the companies are now attempting to merge into a single entity.
• In April, the FTC filed a lawsuit to prevent the deal from going through, arguing that it would result in increased prices for consumers.

In New York City, a federal judge will soon determine whether Coach's owner can expand its business into a major bag manufacturer, raising significant questions about the cost of goods and consumer choices in shopping.

This week, a courtroom in Manhattan has attracted numerous investors, lawyers, and reporters for an antitrust trial concerning a Federal Trade Commission lawsuit aimed at preventing the merger of Tapestry and The. If approved, the deal would result in six fashion brands being united under a single company: Tapestry's Coach, Kate Spade, and Stuart Weitzman, along with Capri's Versace, Jimmy Choo, and Michael Kors.

The FTC filed a lawsuit in April to block the $8.5 billion deal between Tapestry and Capri, arguing that the merger would reduce competition and negatively impact consumers' access to affordable handbag options and employees' pay and benefits.

The FTC's attorneys have contended that the merger between Coach and Michael Kors would negatively affect consumers by creating a monopoly in the market. Both brands offer similar products and frequently compete against each other, and they both sell directly to customers and through various retailers, including department stores and off-price retailers like TJ Maxx and outlet stores.

Tapestry and Capri have argued that the deal will enable them to remain competitive in the trend-driven industry where newer brands and changing consumer tastes pose a threat. When the companies announced the deal, Tapestry's CEO Joanne Crevoiserat stated that it would allow Tapestry to expand its customer base globally, particularly in the luxury and higher-end markets.

The antitrust case's result may influence the industry that produces bags, eyeglasses, and apparel that many Americans use nationwide. This occurs as Americans become more resistant to high prices following years of inflation, and the Biden administration focuses on preventing mergers in the grocery, technology, and apparel sectors.

The trial is closely being monitored by investors for its potential impact on Tapestry and Capri shares. While Tapestry's stock has risen over 13% this year, Capri's stock has fallen about 21%. Some of the key questions that have been asked during the first three days of the trial, along with highlights from the testimony, include:

How fierce is competition in the handbag industry?

Even for the largest handbag brands, competition is intense in today's fast-paced world, where a product's popularity can skyrocket from a TikTok video or celebrity endorsement.

Tapestry and Capri's executives believe that the brand could improve its competitiveness among consumers by offering a wider range of retailers and brands, including fast-fashion brands like Zara and H&M, as well as European luxury brands like Burberry and Louis Vuitton.

The debate in court has centered on whether Coach and Michael Kors are each other's primary competitors or if they compete with a diverse range of brands that undermine their sales. The FTC has classified the relevant market for these brands as "accessible luxury," a term that Tapestry has employed with its investors and board of directors to describe how it provides high-end fashion at a more affordable price.

Tapestry and Capri's attorneys have argued that the market for competitors is expanding to encompass a wider range of price points.

The maker of popular leggings and athletic apparel, known for its belt bags, has seen a hit with younger shoppers.

"What pains me about that is my daughter has one," she said. "They're a meaningful brand."

In her testimony, Crevoiserat stated that the competition isn't limited to handbag or fashion brands. Instead, the company is striving to attract consumers who have numerous options for spending their money.

"They have the option to purchase yoga pants or dine out. It's up to them."

In the trial, industry data from market research companies and internal documents, such as consumer surveys and research on the competition, were presented by attorneys. The research included not only Tapestry and Capri, but also other fashion brands, including Chanel and Rebecca Minkoff.

While attorneys for Tapestry and Capri contend that competition has increased due to shifting consumer preferences and new shopping methods, FTC attorneys argue that the merger would give the companies a dominant position in the "accessible luxury" market.

On Wednesday, Suwon Yang, Chanel's head of merchandising for accessories and leather goods, testified about the state of play in the industry. She stated that customers purchase from various brands, but Chanel focuses on its own research in comparison to European luxury lines such as Saint Laurent and Hermes. In her experience, Coach, Kate Spade, and Michael Kors have never been mentioned in customer surveys or company discussions regarding competition.

She also highlighted the intricacy of Chanel's handbag craftsmanship, which she said is the reason for the brand's high price points of around $5,000 to $11,000 or even more. The handbags are made in Italy and France, and it takes artisans a decade to create the company's top-tier handbags.

Would the deal hurt consumers?

The FTC contends that the proposed deal would result in increased sticker shock for American consumers, who are already facing higher prices on numerous items.

On Wednesday, Loren Smith, a key witness for the FTC and a consultant and former staff economist based in Washington, D.C., testified that the merger would result in a handbag giant that would increase prices for customers and have little incentive to improve styles or materials.

He outlined the financial models and methodology he employed to determine the market for Tapestry and Capri, specifically focusing on Coach and Michael Kors, which he categorized as "accessible luxury" competitors, even though consumers may shop with other cheaper and pricier brands. He concentrated on the handbag market in the U.S., including popular styles such as cross-body bags and totes, in his calculations.

He stated that the merger would result in significant competitive concerns, as his simulation showed an average price increase of 15% to 17% for the combined company's goods and a decrease in product quality.

If the two companies merged, he stated that the combined company would possess approximately 58% market share in the U.S. handbag market. He added that Tapestry could increase prices on Michael Kors handbags because it could regain lost sales by enticing enough of those same customers to purchase Coach and Kate Spade bags.

Even if Michael Kors' brand faced further challenges, he assured that there was no need for worry.

If Michael Kors continues to decline, some of that decline will benefit the Coach brand when they come together.

The handbag industry has margins of 60% to 80%, making it less significant for customers to switch to another brand or lose customers to other brands.

He estimated that the total annual harm to consumers from a combination of price increases and poorly made merchandise would be $365 million.

Tapestry and Capri's attorneys challenged the definition of competition, disputed the calculations, and argued that the analysis did not take into account the changing shopping habits of customers, such as the increasing popularity of buying luxury bags at lower prices through secondhand marketplaces.

The attorney for Tapestry and Capri pointed out that Smith has no experience in the handbag market, as he has only purchased one handbag and was instructed by his wife on what to buy.

Why did Tapestry want to buy Capri?

On Tuesday, Joanne Crevoiserat, CEO of Tapestry, stated her objective for the merger simply: Increasing the number of handbags in customers' possession.

On Monday, the trial began with attorneys for fashion brands presenting dozens of handbags from two companies and their competitors in the courtroom. Since then, executives and industry players have testified, including Capri CEO John Idol and Coach CEO Todd Kahn.

On Tuesday, Crevoiserat showcased a selection of handbags in her testimony, highlighting the differences between them and how they represent the diverse range of brands owned by Tapestry. She emphasized the advantages of having a diverse portfolio of brands that cater to customers with varying tastes and shopping needs.

Coach's Rogue, a maple-colored leather tote bag, was showcased by her. Additionally, she displayed a smaller green and white Kate Spade bag made of woven fabric, which has been featured in Netflix's "Emily in Paris."

Capri has its own distinctive brands too, she said.

Tapestry's internal documents were displayed in the courtroom, revealing emails and slide decks from the more than year-long process of searching for an acquisition target. The names of other potential targets were redacted, but the code name for Capri was "Comet."

Tapestry aims to expand all of its brands, particularly Capri, which has experienced weaker sales in recent periods, according to Crevoiserat's statement on Tuesday.

She stated that we could add more relevance and liveliness to the Capri brand.

Instead of functioning as a centralized company, Tapestry operates as a collection of independent brands, each with its own team responsible for selecting merchandise, setting prices, and shaping marketing strategies.

Tapestry's increased scale can lead to cost savings in manufacturing and transportation, which may offset any potential price increases resulting from the FTC's concerns.

She stated that the brand's financial support and creative freedom are necessary for the high price tag of Capri to make sense.

"If all brands couldn't expand, the deal wouldn't work out," she stated.

The antitrust trial against Tapestry and Capri continues on Thursday and is expected to last until early next week. The FTC's attorneys have suggested that more key witnesses, including executives from Tapestry and Capri and the founder of one of the top brands involved in the merger, Michael Kors, may testify.