Italian Sweatshop Probe Is a Wake Up Call for Luxury Brands

The luxury industry’s claims to operate responsibly are under fire from an Italian probe into labour exploitation that has so far entangled Armani and LVMH.

The investigation casts a spotlight on Italian supply chains that high-end brands have long used to burnish their image, using “made in Italy” as a short-hand for quality, craftsmanship and ethical manufacturing. But according to investigators, some of luxury’s biggest businesses are making thousand-dollar handbags in illegal sweatshops.

On Monday, a Milan court placed an LVMH subsidiary that makes bags for Dior under court administration for failing to ensure suppliers were meeting Italian labour standards. In April, similar measures were taken against an Armani unit. And the repercussions are unlikely to stop there. Milan prosecutors and Italian police are still investigating manufacturers linked to around a dozen more fashion brands, according to Reuters.

As sustainability advisor Caterina Ochio wrote in an op-ed this week, it’s a scandal that exposes “the myth of ethical luxury.”

Fashion’s most elite brands often present the industry’s worst environmental and social sins as a fast fashion problem, pitching their high prices and European supply chains as evidence of responsible practices. But luxury’s biggest players offer very little transparency about the way they operate and have spent years shifting towards high-margin mass production while continuing to market their products as exclusive and hand-crafted.

According to Italian police, factories manufacturing for Dior and Armani — in some cases directly and in some cases through subcontracting — were found to be operating without regard for health and safety or labour standards. Investigators found illegal and undocumented workers living and working in facilities where production went on unceasingly day and night and safety devices had been removed from machinery to allow them to operate faster, according to the contents of court documents detailed in media reports.

As a result, the suppliers were able to slash costs. The LVMH subsidiary sanctioned this week was paying as little as €53 ($57) per unit to procure handbags that retailed at €2,600 each, according to reports on the court’s findings. Armani bags that sell for €1,800 in store, were being made by a Chinese subcontractor for €93 a piece and sold onto the group by a middleman at €250 each, according to the media reports.

LVMH did not respond to a request for comment. Armani said it has always had controls in place to minimise the risk of abuses.

Though neither company is facing a criminal probe, both have been placed under court administration for failing to adequately monitor and prevent the abuses in their supply chains. They will be supervised by an external commissioner until magistrates decide they have adequately addressed the lapse.

The brands are lucky to get off so lightly. Under incoming EU due diligence rules, such lapses in oversight could soon come with penalties of up to five percent of global revenue.

The industry should take this as a wake up call to get supply chains and business practices in order. Even if regulators fail to strictly enforces new requirements, consumers — already suffering sticker shock from luxury’s fast-inflating prices — are unlikely to be willing to spend thousands of dollars on a handbag if they believe it was made for 50 bucks in a sweatshop.

Investing in supply chains in the midst of a slowdown is a tricky proposition. But failure to act could cost luxury labels their most precious asset: their good name.

THE NEWS IN BRIEF

FASHION, BUSINESS AND THE ECONOMY

Golden Goose targets $2 million valuation in IPO. The company and its owner, private equity firm Permira, plan to sell about 30 percent of its share capital for €9.50 to €10.50 ($10.20 to $11.28) each. Golden Goose is issuing about 10 million new shares, while Permira could sell as many as 43.6 million existing shares at the top of the price range.

Botswana says it’s in talks about increasing its stake in De Beers. The government would also play a central role in selecting a new investor to replace parent company Anglo at De Beers, according to Botswana President Mokgweetsi Masisi. Last year, the business made just $72 million as the diamond industry swings from boom to bust.

Stop Shein listing on FTSE, worker’s rights campaigners urge. The campaigners voiced their concerns after the British Fashion Council warned that Shein’s planned flotation on the London Stock Exchange was a “significant concern” to the industry. Shein is rumoured to be planning to release documents outlining plans to list on the London Stock Exchange imminently.

US Senator Marco Rubio calls on UK to vet Shein’s labour practices ahead of IPO. The letter sent to UK Chancellor Jeremy Hunt and the chief executive of the country’s Financial Conduct Authority underscore the hurdles that still stand between Shein, which has been dogged by allegations of labour abuses in its supply chain, and an IPO.

Shein hikes prices ahead of IPO. Average price hikes exceeded those of its rivals H&M and Zara, according to data from London-based research firm Edited, which compared prices on June 1 with a year earlier. Shein wants to show that it can sustain its recent growth and sell more higher-priced products ahead of its stock market listing, retail experts say.

Dior unit put under court administration in Italy over labour exploitation. A Milan court inquiry alleged it had sub-contracted work to Chinese companies that exploited workers. The company will be placed under judicial administration for one year.

Temu lures more repeat customers than eBay. An April survey of 1,000 consumers found that 34 percent of respondents buy something from Temu at least once a month, edging out eBay’s 29 percent. The top source of consumer dissatisfaction is pricing, suggesting that deals — not speedy delivery — have become a priority for inflation-battered consumers.

THE BUSINESS OF BEAUTY

Unilever Prestige CEO Vasiliki Petrou to step down. Petrou founded the division in 2014, overseeing the acquisition of 10 brands for a portfolio that saw €1.4 billion ($1.5 billion) of turnover in 2023. Her last day will be July 30; she plans to open her own investment fund.

PEOPLE

Swatch shakes up executive committee as luxury slowdown persists. Chief controlling officer Peter Steiger, a 35-year veteran of the Biel, Switzerland-based company, will retire and leave the group. Two executives — Damiano Casafina, chief executive officer of the company’s watch movement production company ETA, and Sylvain Dolla, CEO of the Tissot brand — have been elected to the executive group management board.

Gianluca Ena has been appointed senior vice president of Hearst Global Solutions. In this role, Ena will further HGS’s purpose of executing multi-market advertising campaigns. Ena will report to chief global revenue officer Lisa Ryan Howard and will assume the position July 1.

Compiled by Yola Mzizi.

Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.