Coach, Kate Spade and Stuart Weitzman brands owner Tapestry (TPR:NYSE) has agreed to buy Versace, Michael Kors and Jimmy Choo parent Capri (CPRI:NYSE) in an $8.5 billion (£6.7 billion) tie-up between the two American fashion houses.

Slated to close by the end of 2024, the mega-merger should create a stronger rival for the likes of Burberry (BRBY) and is an attempt to better compete with European luxury conglomerates including LVMH (MC:EPA), Hermès (RMS:EPA), Kering (KER:EPA) and Richemont (CFR:SWX). 

Whether Tapestry’s purchase of Capri can creates a serious rival to LVMH is questionable however, judging by the plunge in the share price since the deal was announced (10 August).

Though the timing of the merger seems counterintuitive given recent worries over luxury spending in the US and China, the deal may have merit on a long-term view. Both businesses are looking to overseas markets to help boost growth and according to Tapestry and Capri, the combined business will consist of ‘six highly complementary brands with global reach’.

Interestingly, Shore Capital highlights the enlarged company’s strategic focus on the entry level of the luxury space. And the broker believes this strategic positioning could ‘potentially create a unique value proposition, appealing to a broader consumer base that aspires to enter the world of luxury brands without the exclusivity and high price tags associated with traditional luxury names’.

Tapestry’s approach to targeting the entry level of luxury could disrupt the large European players by offering this wider customer base ‘a blend of American style and accessibility’. And with inflation cooling stateside, the new entity could ‘potentially benefit from a more stable economic environment, allowing it to focus on expanding its market presence and leveraging the appeal of affordable luxury,’ says the broker.

Shore Capital highlights two UK retailers with ‘strategic alignment with emerging trends in the luxury sector,’ namely high-end timepieces and jewellery purveyor Watches of Switzerland (WOSG) and Mike Ashley-controlled Frasers (FRAS), the FTSE 100 conglomerate behind Flannels and House of Fraser besides Sports Direct.

According to analysts Eleonora Dani and Clive Black, Watches of Switzerland’s robust sales growth in the US in a tougher first quarter to 30 July 2023 underscores the Rolex retailer’s ‘momentum and the aspirational nature of luxury timepieces’. Black and Dani also stress that Frasers could stand to gain from Tapestry’s strategy of focusing on the entry level of luxury.

‘A stronger entry-level offer aligns with Frasers’ Flannels stores’ positioning, potentially drawing more footfall and enhancing the overall shopping experience.’

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