Rundown: Tapestry & Capri merge, companies rein in rewards & Amazon scales back private brands

0:06Hello and welcome to the Modern Retail Rundown. I'm your host, Gabby Barco, and I'm here with Editor-in-Chief Kale Guthrie Weissman. Hello, Kale. How are you today? Hello, Gabby. I'm doing great. How are you? I'm doing great. Yeah, I am excited. We have some more M &A this week. Who would have thought? It's the season. It's the year. It's the economy. We got it, baby. M &A is back. Yeah. Hot M &A summer or whatever. So today we are going to be talking about Tapestry's big acquisition of Capri, which owns Michael Kors, Versace, luxury fashion brands. And then we will talk about why rewards programs no longer feel so rewarding.

0:55And finally, we are going to discuss Amazon scrapping dozens of private label brands pretty quietly. if I say so myself, but it comes at an interesting time. So that'll be fun to dive into. But yeah, first up, let's talk about this$8.5 billion cash merger. This comes at a time when, of course, the fashion and luxury sector is just further and further consolidating. So it shouldn't really be a surprise, but it's still a really interesting, I think, kind of becoming like this little fashion uh group that's forming right now so for those of you who don't know tapestry is the owner of coach and kate spade so you know kind of fits into this middle range handbag uh space and it is buying as i previously mentioned capri which owns versace michael kors uh stort weitzman so yeah uh why don't you give us a little bit of a sense of why this is important for tapestry which actually has been on this turnaround plan for the last few years.

2:04Yeah. So it's interesting, maybe not totally surprising because as you said, Tapestry has been on a turnaround plan and it's been doing pretty well. Mostly, mostly thanks to Coach is my understanding is that Coach has been sort of on an upward swing and been resonating with customers. And as a result, Tapestry has been posting pretty great results. There's also been a bunch of other things in the background, digital transformation, the usual buzzwords, but supposedly it's working. Meanwhile, Capri has not. So Capri has been posting revenue declines for nearly all of its brands for the last at least couple of quarters.

2:43And so Capri clearly was in need of something to change, it seems like, or, you know, usually those companies announce turnaround plans, but what What is a greater turnaround plan than just being bought up by a competitor? The companies are both talking about quote unquote synergies. I hate to say that. That's a buzzword. You'll never see that word in a modern retail article. But that is what the executives are talking about. And so, you know, Tapestry wants to reach more of Europe. Capri wants to reach more of Asia. There are different things that they're saying will help. I imagine Tapestry's e-commerce presence, which is supposedly quite good, is probably one thing that will be very helpful to Capri.

3:29But all being said, it shows really that Tapestry is trying to become a luxury powerhouse. As you said, it's sort of in the middle. And there are other luxury powerhouses overseas that if you talk to any company that's based in the United States, they all say, we want to be the next LVMH. It seems like maybe this is an attempt to actually do that, you know? Yeah, yeah. I think the idea of an American luxury group or conglomerate or what you will is interesting. And I actually wanted to talk a little bit more about Tapestry's turnaround plan that started actually in late 2019 when their CEO came on.

4:13And so, as you mentioned, they really revamped and started focusing more on e-commerce. They closed down a bunch of stores. Coach specifically was starting to become just very diluted over the, it's sort of like maybe the 2010s. And they actually, what they did was go back to their roots, which is those like vintage Coach bags that you see hopefully at your local vintage store on Etsy. And those are really the sought after ones versus what they kind of started to go into more in more recent years. And yeah, they brought on celebrity influencers. So it's really helped them a lot with kind of going back to their roots, but also being, you know, moving more into digital.

4:55Same thing with Kate Spade. But on the other hand, I think with Versace and Michael Kors, some would argue that, you know, those have actually been on the decline. Not only, I mean, we see it in the numbers, but just even the cultural cachet. Yeah. Yeah. So it'll be interesting to see how they bridge that gap. I don't know. I mean, I assume they're going to be sharing resources and whatnot. Yeah. And I think that another thing that Tapestry seems to have been focused on is something that's very important with a lot of companies now, which is profitability. And so I was looking at our coverage.

5:31This was for the first quarter of 2023. but Tapestry's net income for that period was$330 million, which was up from the year ago. So it's clearly posting growth, at least in its bottom line. And I think that that's important to note when I get the sense that Capri's profitabilities have not been good, probably because it hasn't been able to build out its businesses and figure out ways it can cut the shaft. So yeah, it'll be interesting to see what it is. There's another point that I wanted to bring on, which was I was reading a great piece from our sibling publication, Glossy. You all should read it.

6:10You all should subscribe. But my colleague, Jill Manoff, wrote a nice little analysis about the tapestry Capri acquisition. And one thing that I think is very true that a lot of analysts are saying right now is that if you want to be a leader, especially in the luxury space, especially in the luxury house space, you can't rely on one brand to lead that way. There can't be just one leader. So with Tapestry, Coach was leading a lot of its gains, and it was clearly in the zeitgeist, but it's trying to have its other brands also come up and see sales growths be in the cultural zeitgeist. And I think with Capri, there are more options for Tapestry to try and revive a brand so that it can be a collection of many brands that are all ideally on the up and up and not just relying on one, you know, mono brand leader that will be able to, you know, you know, lead while the other ones sort of fall flat.

7:08Yeah. And we've seen this a lot, sort of like diversifying the portfolio and keeping a mix between, you know, high end, of course, the highest end, I guess you can get of luxury. We see this with LVMH and then, you know, going all the way down to beauty, which, of course, is like a little bit more accessible. But the idea is that, yeah, you want to be able to penetrate as many categories as possible. And now it even includes spirits, of course. But, yeah, with that said, I think, you know, as we always end our M &A segments, this is obviously a little bit different than a CPG or a startup acquisition.

7:48But it just goes to show that I guess it's a ripe market for M &A and we should be expecting more is what I'm hearing through the grapevine. Yeah, this is we are in a time of consolidation. It's very funny because we've talked about consolidation for years now that we're heading toward it. We're heading toward it. And then it never quite came. There would be a press release here and a press release there. But this summer is really it. A lot of companies that have been able to get by by the skin of their teeth are now realizing they either have to close up shop or find an acquirer. And so we're seeing that.

8:27There's almost certainly going to be more. If you know about any that are about to be announced, reach out to me or Gabby. We'd love to hear from you. But yeah, we're definitely seeing a new movement just in the overall funding and acquisition space. Yeah, it's all about extending the runway until we have that quote unquote soft landing, which I've become obsessed with the term. So we'll see if that actually happens. Yeah, next up, we are going to be talking about loyalty programs, probably one of my favorite topics also. But, you know, this is really interesting because for the last few years, I've written a lot about it seems like every retailer, every brand has revamped their loyalty program to, I don't know, I guess just attract more customers, you know, of course, recurrent purchases.

9:21purchases. But now in the last few months, I would say six to 12 months, we've seen that scale back, but in a very quiet, sneaky way, at least to the actual user. So yeah, if you haven't noticed, and you're a rewards program user at some retailer stores, you know, it ranges from Starbucks to to Urban Outfitters, to Sephora, you are getting those perks taken away very slowly. And there is reasoning behind it. It is really interesting, though, because this is also a time when these brands are supposedly trying to keep these customers around. So it's an interesting strategy. I don't think we've really seen it since the sort of rewards program renaissance started about a decade ago.

10:11Yeah, it's super interesting. We're seeing a lot of changes to loyalty programs. And it's funny because you see these one-offs and you get a press release that says, we're revamping our loyalty program. And unless you think critically about it and you compare it to what it was before, you don't realize that it's actually a reeling back of the resources that were there before or the perks that were there before. And there are examples that are very one-off. But then when you put them together en masse, it shows that these companies are all trying to not give away free things as much as they have before.

10:49And it's clearly because they're trying to make their balance sheets look better, shore up resources, prove that they can hit profits and cut as much fat as they possibly can. I do think that there are a few examples that there was a CNBC article that talked specifically about this. But the first example, which is the most obvious one, is that it's really hard to get elite status on an airline right now. And so it used to require a certain amount of points. American, Delta, United have all upped the number of points in order to reach status. And, you know, there are a few reasons. One thing, it'll probably make it, they don't want everyone to get an upgrade probably.

11:29And they also, and I've noticed this firsthand, the lounges are really full. I think everybody got credit cards over the pandemic, and they all gave lounge access. And so I think that they realize that they're not as elite as they once were. And so probably they're trying to cut back on that, which I think is very silly. But then those are just airlines. Airlines are always trying to figure out ways to, you know, not give as many perks as they say they're going to give. But retailers, as you mentioned, are also doing it. So some of that was with free returns. We have Urban, Abercrombie & Fitch, Nordstrom Rack, even Amazon have all started charging for returns.

12:10Then there are like birthday programs. Do you know about the birthday programs? You wrote about this, right? Oh, do I know about the birthday programs? Yes. Sephora earlier this year, well, my birthday was early in the year, so I managed to escape this. But they had a really, really huge backlash because they do this free birthday gift on your birthday month every year. And they essentially took that away. Now you have to use your points, which you accrue over time by purchasing to actually pick out a gift. And it's just one of, it's very emblematic because usually Sephora is known for giving out samples and just being very good to even the entry-level loyalty users.

12:59But I think the returns thing is really interesting to me because that is now being used. I mean, the fact that we think about it as a perk now as opposed to just a given is really interesting. But yeah, even Starbucks is now making it, you know, it takes longer for you to get a free cup of coffee when you, you know, purchase over time. But this is, I mean, this is maybe just like an aside theory of mine. But the fact that it takes you longer and that the restructuring of the points is essentially making it, you know, gamifying a longer turnaround for the reward is maybe a retention strategy that we maybe have connected the dots on or the customer usually doesn't.

13:42But at the end of the day, it's still gamified. You still open the app and you see the same, you know, interface. Yeah, I think you're totally right. And I also think it's a realization of the psychology at play with loyalty programs. I've not crunched these numbers. I've not done this analysis or psychological outreach. But I am sure the people who participate in loyalty programs are not keeping a close eye on them. They are just happy to be in them. And I also think that the people who do opt to be in loyalty programs are less likely to stop. They feel like they're getting a freebie no matter what.

14:21And so they might be slightly perturbed when the point system becomes a little bit more difficult. but also it's a much different churn rate, I'm guessing, than it is for a brand new customer who's not in a loyalty program. So it probably is really easy for a retailer to say, well, we're going to make it 25 points instead of 10 now. And maybe people will tweet about it, but they're still going to go back there because they were already in the system. They already were going to get that coffee or buy that product from Sephora. And so I imagine It's one of those things where the people who are already participating in that program are less likely to stop participating simply because they joined it because they were loyal to begin with, you know?

15:04And I can also like let's talk about the returns for a second because I'm currently dealing with hell with this right now with Amazon, which was the king of free returns. It was always easy. Sometimes you'd have to print out a label, but that would be it. But right now I have to go to a Whole Foods in order to not pay for my return. And then otherwise I would have to pay like$10 to$15, which is I don't think this is for every product. This might be a very singular example. But I have never had this much of an had to make this much of an effort in order to return something for a company that has tried to impress upon me that returns are free and it's really easy and all these different things.

15:46Yeah, because the whole, I mean, the biggest perk really is you go to a UPS store to return an Amazon product and they don't even ask, they actually ask you to take it at one time and they were like, you don't even have to put it in the package. You could just literally hand me a product, which if it's an embarrassing purchase is always a fun, awkward interaction. But with that said, I guess maybe it'll probably take time to figure out whether these are impacting purchase patterns or actual loyalty to the brands. Because like you said, if you already have the app on your phone, eventually you'll get there to your whatever freak perk.

16:23But it will take a lot longer. But it could also just be a symptom of this, yeah, tightening of the bell and the recession and just gives like the general vibe of that. Yeah, exactly. Speaking of cutting back, let's talk about Amazon cutting back on dozens of private brands. So it's a very controversial strategy by Amazon, like many of its strategies. But over the last few years, they had added, I mean, it feels like dozens. It is, right? It's about like 30, at least, apparel brands. And it's actually scrapping all of them. Even some furniture brands are going. This comes just a couple of years after the company has built out all of these so-called essentials lines.

17:12But the ones that are going are interesting, I think, because they don't have the name Amazon in them. So if you were just an innocent browser of the site, you probably wouldn't even realize that they're owned by Amazon, which is probably by design. But they're all going. And our guess is probably that. they're just not profitable or maybe they're just too much of a headache. Do you want to go into this? Yeah, the controversy of why Amazon launching these brands was a big deal to begin with? I mean, yeah, it was when it happened, it sent shivers down many a seller's spine because the question was always, is Amazon a retailer?

17:49Is Amazon a platform? And or is, you know, is Amazon a brand? And the answer, especially in regards to these private brands, Well, we're all three depending on what day you're asking us. And so, you know, there are a lot of brands who prided themselves on being only on Amazon and being able to get a badge like Amazon's Choice or getting the buy box and things like that. But when Amazon introduced its own brands, those seemed to be getting pretty preferential treatment, especially in search results. And so it seemed like Amazon itself was competing with a lot of these other brands that had built themselves up as trying to be Amazon-exclusive brands or brands that sold predominantly via that third-party marketplace.

18:37And so, you know, if you talk to Amazon, they would say we weren't competing with anyone. And also, you know, our brands comply with the same rules that other brands do. But it also, you know, created a kind of a chilling effect, especially for companies that were making things that were more value based. So if I were a brand that was making, I don't know, for example, a battery or something like that, and the idea was I was going to sell it on Amazon and ideally I would be able to get good search results, I would be able to get the Amazon's choice. Always in the back of my head, my fear would be, well, what if Amazon introduces a product that is very similar to mine and then I suddenly lose that placement?

19:17And that's been an issue that's been going on for years. And there have been lawsuits related to it. One of the big antitrust issues that Amazon is facing has to do with this. And that's probably one of the reasons why Amazon is cutting back on this, is that this is a way to look like it's appeasing regulators. But I think you're totally right that some of these did not seem to work as well as Amazon wanted to. If you look at analyses over the last few years of the various brands that Amazon has launched, they did not become as ubiquitous as I imagine the company thought it would. And so there are a lot of different elements at play, but in some ways, this could be pretty good news for third-party sellers, especially those that have been worried that Amazon was going to try to compete with them on the brand front.

20:04Mm-hmm. Yeah. And the statement they put out, the VP of private brands there, I think is really interesting. They said, we make the decisions based on our customer want. And basically admitted that the two to three brands that actually work are Amazon Basics and Amazon Essentials, which, surprise, are the ones most people do know are the sort of store-bought version of what you see on Amazon. And so they are going to be focusing on those and just doing away with all the others. Yeah, absolutely. It's super interesting. And I doubt it's getting rid of completely the private business, but it shows that it needs to be more selective with how it approaches it.

20:52Mm-hmm. One more thing I wanted to bring up is that I think it is interesting that it's the apparel specifically that's being largely impacted because this is such, you know, light grocery apparel is very hard for Amazon or has been very hard for Amazon to crack. They want to attract all these luxury brands, all these actual legit sellers. But at the same time, they have obviously just went on a rampage of introducing all of these apparel brands. So it's an interesting toggle back and forth between those. Yeah, and I think Amazon fashion, Amazon apparel has been the one area that it's been trying to continually rear its head.

21:36and it hasn't gone well. And so that it's scaling back on apparel brands makes sense given I don't think it's seen the results that it would like to. There's another data point that I want to look at or point out, which is Marketplace Pulse has really great analyses, especially about Amazon private brands. And it's been keeping an eye on its growth for years. One of its reports said that it expects that By 2022, so last year, it reached$25 billion in private label brands. Not sure when this was written. I need to find a date for this. But pretty much comparing that to Amazon's entire retail sales shows that it's just a drop in the bucket.

22:21So that's, you know, it's, you know, in the hundreds of billions of dollars is how much the company makes from online retail sales. tens of billions of dollars in terms of how much the third-party marketplace services are. So pretty much the fact that people have said that private brands would be a significant revenue driver has proven not to necessarily be the case. It's proven to be maybe overall something that brings up, looks good and helps the bottom line, but hasn't been a significant chunk of its business. So just something to think about and something to keep an eye on. Yeah, I'm really interested to hear from sellers.

23:04Like, is this a sigh of relief or is this just sort of like, oh, it's the latest move where the other shoe's about to drop. I don't know. Amazon always has something in the org. So we'll see what it actually means to third-party sellers. Yeah, absolutely. And like Amazon was very, very clear whenever anyone would ask about its private labels, it would always try to downplay it. it's told outlets in the past, you know, our private brands are 1 % of our business compared to other major retailers where it's as much as a quarter. So I think it's, you know, this is all in line with what Amazon's been trying to portray in terms of this area of the business.

23:41Anyway, sorry. Yeah. No, it's okay. And then, yeah, last but not least, we should mention that this, of course, is somewhat related to the tensions of how Amazon operates, given that they're going through some antitrust-related lawsuits that we talked about just a couple weeks ago. Yeah. So pretty much Amazon has been in the news a lot because antitrust regulators from multiple continents have been going at it for a variety of practices that they allege are anti-competitive. This is clearly a move to make concessions by Amazon and to show that it's willing to change parts of its business that many have seen to have an anti-competitive nature to it.

24:33And so, you know, I think it's important to note that, yes, this probably these various inquiries play a role in it. But also, as you mentioned, not every private brand is getting cut back. Many of them are. And so Amazon seems like it will still remain in this business and provide some competition to some sellers. So it's not like it's getting rid of it completely. But I do think it's important to mention that it's clear that all of these inquiries that are happening in the United States, in the EU, etc. I think that this is proof that Amazon is taking heed in those and trying to make changes so that it doesn't have to deal with that litigation down the line that could ultimately result in it being broken up.

25:15Yeah, exactly. We could wrap it up there. That is our show for this week. Please write and review us on Apple Podcasts, Spotify, or anywhere else you're listening to us. And don't forget to subscribe to the Modern Retail Podcast to hear interviews with industry leaders every Thursday, hosted by Kale. Kale, who do you have on next Thursday? I am talking with the head of Primark's US business, which was a really fun conversation. We talk about the cult brand that is Primark. Everybody in the UK loves it and maybe everyone in the US will soon. Very, very excited. Yeah, my favorite retailer to run into and buy a pair of socks when you're running around London with wet socks or something.

25:58Yeah, happened to me. Yeah, and then of course, come back on Saturdays for the Modern Retail Rundown, as always. Thank you for listening.