When it comes to luxury, it isn’t easy competing against European giants like LVMH, Richemont and Kering. But the stress on American luxury brands has grown in recent years — with Louis Vuitton-owner LVMH pushing further into North America with its 2021 purchase of Tiffany & Co.

To compete, Tapestry (NYSE:TPR) — the owner of Coach — is acquiring the owner of Michael Kors and Jimmy Choo, Capri Holdings (NYSE:CPRI), for $8.5B.

• This combines Versace, Jimmy Choo, Michael Kors, Kate Spade and Coach under one parent company.
• Together, the two will have over $12B in revenue with a potential $200M in merger savings — but still just a fraction of LVMH’s 2022 revenue of $84B.

How a deal helps Tapestry compete: Bloomberg Columnist Andrea Felsted says, “Tapestry has a strong track record in reviving tired names.” They revamped Coach and Kate Spade’s image by reducing discounts, limiting product variety and collaborating with high-profile celebrities.

Both companies “mostly operate in the riskier premium part of the market, not at the very top echelons of luxury” — an area that’s under pressure…

Luxurious, but not quite luxury

In recent years, the luxury sector received a boost from a combination of built-up pandemic savings and post-pandemic spending. But strong returns in the industry could be harder to come by as consumer shopping normalizes.

• Luxury giants have been warning about slowing spending in two of the largest luxury markets this year, the US and China.
• “The global mood is not one of revenge buying like we saw in 2021 and 2022,” — per LVMH’s CFO Jean-Jacques Guiony (FT).

Just how much consumers tighten their purse strings will also depend on who these luxury brands cater to. Bain Partner Federica Levato sees some brands growing 30% and others falling 30% — with categories like streetwear, small bags and entry-level sneakers targeting “aspirational consumers” impacted more by inflation.

Then there are brands with long waiting lists like Hermès (OTC:HESAY) — which “blows the whole luxury goods industry out of the water” and hasn’t seen a decline in US sales (FT).