Inside Luxury’s Italian Sweatshops Problem

MILAN, Italy — A 40 minute drive from the luxury flagships on Via Monte Napoleone, Milan’s handsome boulevards give way to strip malls and industrial parks. Here, in a nondescript building with bars covering the windows in the suburban municipality of Pieve Emanuele, workers allegedly toiled long hours under exploitative conditions to package bags for Armani, according to an ongoing investigation by the Milan Public Prosecutor’s Office that has linked luxury brands to sweatshop labour. Twenty minutes away, in a leafier part of town, another factory assembled Dior bags that retailed at €2,600 ($2,865) for €53 a piece, the probe found.

The brands named in the probe have painted the incidents as an aberration, a glitch in the matrix of careful controls they say they have put in place to ensure operations they contract out live up to the expectations of high-quality, ethical craftsmanship that come with their high price points.

“We had no idea about this situation,” Jean-Jacques Guiony, chief financial officer of Dior-owner LVMH, told analysts on an earnings call in July. “We thought we were doing quite a lot already. Apparently, it’s not enough,” he added, referring to the company’s efforts to police its supply chain. Dior disputes some elements of the case.

Prosecutors say the issues are systemic and entrenched: they are not a bug, but a feature in a luxury system designed to prioritise maximising profits over worker welfare. “In the course of the investigation, an illegal practice has emerged so entrenched and proven [that it could] be considered part of a broader business policy exclusively aimed at increasing profit,” Milan’s public prosecutor said in court documents reviewed by The Business of Fashion.

Manufacturing units for both companies have been placed under the supervision of court-appointed commissioners to ensure they establish better controls, but neither Dior nor Armani is facing charges related to the findings. Both companies said they are cooperating with the authorities. Still, the PR risks are significant. And close to a dozen more brands could still be ensnared in the probe, with more cases expected later this year.

Big luxury brands trade on a carefully constructed marketing image, underpinned by artful references to Europe’s history of artisanal craft. This romanticised picture helps to project an unassailable confidence in the industry’s standards so strong that LVMH head of image and environment, Antoine Arnault, has claimed that luxury is “sustainable by nature.”

How, then, have luxury brands’ sourcing practices diverged so radically from the marketing mythology they have spent decades — and billions of dollars — constructing? A blend of wilful ignorance, corporate greed and structural inertia, according to a months-long investigation by BoF that spanned more than two dozen industry executives, supply-chain experts and people familiar with the Italian probe.

“Everybody is aware of the situation,” said Hakan Karaosman, associate professor at Cardiff University who wrote his PhD on luxury supply chains. “People don’t want to ask questions, because if they do, they open Pandora’s box.”

But like it or not, more questions are being asked, amid increased regulatory scrutiny, a market slowdown and growing debate on social media over whether luxury brands are really worth it. And for the first time, luxury labels are being taken to task in court, even if the consequences — so far — amount to little more than a slap on the wrist.

Turning a Blind Eye

In mid-February, Milanese police raided a single-room factory where Chinese workers were assembling handbags for Armani for €75 a piece, according to a court document. Workers, some employed under the table, appeared to be living in adjoining rooms, operating machinery with the safety mechanisms disabled. One told police he was being paid a little over €6 an hour. Italy doesn’t have a minimum wage; instead, base salary levels are set through sector-specific collective bargaining agreements. The minimum hourly wage agreed for leather workers is €9.82, according to the Italian General Confederation of Labour, a national trade union.

Armani had not contracted directly with the factory, but its presence in the brands’ supply chain was no mystery; when police arrived, an employee of the luxury label’s manufacturing division was visiting, according to the court document. He told the officers that he’d been at the factory every month for the last six to check that glue being used in the bags was up to snuff, but that his focus was quality control and he wasn’t qualified to assess working conditions. He didn’t know if Armani’s production arm even had such capabilities, the document said. Armani has said it has always had measures in place to minimise the risk of supply-chain abuses. The company said it could not comment further because it is collaborating with authorities in an ongoing legal proceeding.

For its part, LVMH has sought to distance its operations from the scandal. In July, CFO Guiony told analysts that the issues occurred at “suppliers of suppliers.” Milanese investigators disagreed; two of the four businesses police linked to Dior had direct relationships with a unit of the luxury giant, they said in another court document. Another was an accredited subcontractor, though in reality it was little more than a shell company with no ostensible manufacturing capabilities, according to the investigation. Dior said the findings don’t reflect its commitment to ethical standards and that suppliers succeeded in hiding illegal practices despite its auditing efforts. The company said it is working to strengthen its internal procedures with the support of Italian authorities.

Like most luxury companies, both Armani and LVMH have established codes of ethical conduct suppliers must commit to follow. To check compliance, they carry out periodic inspections, often conducted by third-party contractors. But according to Italian prosecutors, these systems proved totally inadequate, failing to identify key issues in their supply chains. “There is a corporate culture seriously lacking even minimal control of the production chain,” court documents said of Armani.

In the course of the investigation, an illegal practice has emerged so entrenched and proven [that it could] be considered part of a broader business policy exclusively aimed at increasing profit.

Human rights groups have long criticised the fashion industry’s reliance on such social auditing tools, arguing they do little more than provide brands with a veneer of deniability when allegations of supply-chain misconduct arise.

These largely privatised systems of inspection are riddled with conflicts of interest and highly subject to corruption, they say. Third-party inspectors, who are paid by the brands, have little incentive to flag issues that might prove disruptive to their suppliers and may even be reprimanded for including too much detail in their reports, according to one industry veteran who has spent decades monitoring big brands’ supply chains and who declined to speak on the record because they’re still involved in the work.

In Italy, suppliers typically get a heads up before an inspection takes place, giving them time to hide evidence of any infractions, industry insiders say. Scrutiny is often limited to direct contractors only. Sourcing teams regularly ignore or delay addressing red flags in the interest of convenience and cost, according to people with direct knowledge of luxury’s sourcing practices. Within brands, chronically under-sourced sustainability and social compliance teams are left chasing shadows no one really wants found.

“This is something [the luxury brands] are very careful to touch because they run the risk of reducing the marginality of the product,” said an executive who has worked in the C-suite in Italy’s luxury sector and who declined to be named because they still work in the industry. “If you look in reality at what’s the effectiveness of all the controls [the brands] are doing, it seems that from time to time they turn the eye not to see where the big problems are.”

One former sustainability lead at a brand owned by a major luxury group, who also spoke on condition of anonymity because of ongoing links to the sector, described pouring resources into mapping the company’s Italian supply base, uncovering widespread unauthorised subcontracting in the process. “There were many concerns around health and safety, undocumented migrant workers … and issues of blatantly not paying the minimum wage,” the executive said. But even with documented evidence of persistent misdemeanours, efforts to remove problematic suppliers were routinely derailed by sourcing managers who said they couldn’t meet volume or margin targets without them.

“We were getting evidence of sites that didn’t meet our code of conduct, and in some cases even legal standards,” the executive said. “The production team routinely said ‘We can’t phase suppliers out until next year.’ We would say ‘We can’t live with that for a year.’ And then it would get buried.”

Most brands didn’t look that closely at what was going on beyond their direct suppliers, the executive said. They “just didn’t want to know.”

Even infractions for which there is normally “zero-tolerance,” typically spanning things like child labour or forced labour, may be allowed to slide in the interest of maintaining a steady pace of supply, especially for core products, said Michael Beutler, an industry veteran who has held leadership roles on sustainability teams at several major luxury companies. At many brands, such decisions ultimately rest with the C-suite, regardless of the requirements of internal sustainability policies, Beutler said, referring to general practices within the industry. “Executives have been known to prioritise getting products on shelves,” he added. “Brands are focused on sales, sales, sales.”

From Craftsmanship to Corporate Greed

Klajdi Koci started working in Italy’s leather sector when he was still a teenager, eventually helping to expand his family’s business to operate as a subcontractor making bags for some of luxury’s most prestigious brands. The idea that the Italian investigation has revealed a dark and previously hidden corner of the market “is like a joke,” he said.

“It’s ‘Pulcinella’s secret,’” Koci said, referencing a character in the Commedia dell’Arte famed for never shutting up — a common Italian touchpoint to describe something everybody knows.

Though the “Made in Italy” label is a lynchpin of the luxury trade, its cultural cachet long serving as shorthand for top-notch production, the reality is darker and more complicated.

Roughly half of the world’s luxury clothing and leather goods are made in Italy by thousands of small manufacturers, according to consultancy Bain. Brands typically work directly with just a handful, with most work subcontracted out through complex, shifting networks of outsourcing that are fiendishly difficult to keep track of and manage. The convoluted system serves to obscure unsavoury practices that have become embedded in the industry’s operating model as it’s adjusted to globalisation and the rise of fast fashion over the last 30 years.

The shift dates back to the 1990s, when the first significant wave of Chinese immigrants arrived in the industrial zone around Prato, a city to the northwest of Florence with a 1,000-year history of textile and clothes manufacturing.

Profits in the sector were already shrinking as fashion brands took advantage of loosening trade agreements to move production to lower-cost regions. The new Chinese arrivals found ready work in roles abandoned by young Italians, who saw more opportunity elsewhere. Soon they were setting up their own small textile businesses, importing cheap cloth from China that they turned into “pronto moda,” or fast fashion. Over time, their position in the market expanded to provide services to mid-tier and luxury fashion houses as well. Often the factories cut costs in other ways, too, employing illegal migrant workers under the table and disregarding regulations on wages, working hours, and health and safety. In doing so, they undercut competitors.

By 2020, suppliers were saying it was “impossible” to find alternative subcontractors for certain manufacturing processes, according to an internal memo written at the time by the large luxury group’s sustainability lead and reviewed by BoF. These Chinese-owned factories offered good quality products with extremely flexible lead times and prices about 20 percent under wider market rates “specifically because they don’t respect the Italian law,” the memo said.

Companies just got hooked on this growth and profit train … it switched from craftsmanship to greed.

Meanwhile, luxury had changed too, adapting in its own way to the competitive pressures and opportunities created by an expanding and accelerating luxury fashion market. The traditional model of seasonal collections with long lead times broke down under pressure from fast fashion players, who could knock off cheaper versions of runway looks and get them to market before their creators could sell a single product. The trend solidified over the last decade, buoyed by demand from newly wealthy Chinese consumers, social-media-paced hype cycles and streetwear-influenced drop culture. Increasingly, brands built on an image of exclusivity found they could make much more money selling mass-produced luxury goods by the millions to aspirational shoppers, all the while maintaining the perception of rarified desirability.

As luxury volumes grew, executives looked for ways to drive down manufacturing costs, speed goods to market and boost profit margins without sacrificing their “Made in Italy” marketing halo. Some luxury labels quietly added production in Asia and Eastern Europe where manufacturing was cheaper, often only finishing products in Italy. And as brands pushed Italian suppliers for lower prices and quicker turnarounds, they didn’t always peer too deeply into where — and under what conditions — their products were being made.

The result was a tacitly accepted tangling of high luxury and poor working conditions to the point where “the industry only functions on the basis that the price of ‘Made in Italy’ has been kept down by cheap Chinese labour,” said one expert in luxury supply chains who declined to speak on the record because they still work in the industry.

Against this backdrop, the luxury sector has enjoyed a period of staggering growth. Between 2014 and 2023, Gucci-owner Kering’s revenue doubled while its net profit more than tripled. Rival LVMH saw sales at its fashion and leather goods vertical increase fourfold over the same period. The division’s operating profit grew even faster to hit €16.8 billion last year, five times its level in 2014. The explosive growth has helped make LVMH owner Bernard Arnault one of the world’s richest men. Meanwhile, profit margins among Italian manufacturers — already a fraction of those brands enjoy — have declined, said Flavio Sciuccati, a senior partner and director of the fashion unit at consultancy and think tank The European House – Ambrosetti.

“At a certain point the mentality switched,” said Beutler. “Companies just got hooked on this growth and profit train … it switched from craftsmanship to greed.”

Manufacturers say the issues start with the prices brands are willing to pay and the timelines they demand. A statement issued by the United Nations Working Group on Business and Human Rights following a visit to Italy in 2021 came to a similar conclusion. “Grave abuses and exploitation” in the country’s garment and textile sector “are facilitated by unfair purchasing practices of contracting companies and fashion brands,” it said.

Koci said he is looking to pivot his family’s business in a new direction, rather than continuing to try and compete with unscrupulous players in a down market. The company has expanded into 3D printing components, opening up the opportunity to move into industries he believes are more inclined to innovation and transparency than luxury.

“The system is broken,” said Koci. “You cannot have luxury if you rush artisans to make the product in the fastest way at the smallest cost.”

Dream Merchants

Days after Guiony addressed the Dior scandal with analysts this summer, LVMH launched a blockbuster marketing blitz at the Olympics.

The luxury giant spent a reported €150 million to secure a spot as a premium sponsor of the games, a mega deal geared towards expanding the group’s cultural clout. At the opening ceremony, French athletes wore LVMH brand Berluti, dancers spun Louis Vuitton trunks along the banks of the Seine and performers, including Lady Gaga, Aya Nakamura and Celine Dion, wore Dior. Throughout the games, Moët & Chandon champagne and Hennessy cognac flowed freely at VIP bars and the medals, designed by LVMH-owned jewellery brand Chaumet, were presented in Louis Vuitton medal trays.

The razzle dazzle drowned out, at least for a time, online grumbling about rising prices, declining quality and questionable labour practices in the luxury sector. Instead, it projected a heady mix of glamour, power and French savoir faire.

Such myth-making marketing muscle has enabled the luxury industry to ignore, deny and obfuscate links to scandals and practices it would prefer remained fixed in consumer, investor and regulator minds as a fast-fashion problem.

“Italian brands are always very smart in trying to present the luxury supply chain as differently organised than the rest,” said Alessandra Mezzadri, a feminist political economist of global development at SOAS who has written extensively about exploitation in fashion’s supply chains. “This is entirely bullshit.”

The companies wield high prices and claims of Italian and French manufacturing as guarantees of responsible practices, while disclosing far less about where their products are actually made than many lower-priced peers. But increasingly, that’s making the dream harder to sell, drawing criticism from some investors and weakening the foundations of luxury’s precious brand image.

Europe’s top asset manager Amundi called out LVMH for a lack of “fundamental due diligence efforts” and failure to ensure purchasing practices protect workers in its supply chain in its latest engagement report. “For a company of LVMH’s size, scale [and] relative prestige, this is even more critical, as suppliers might be forced to prioritise doing business with LVMH over fair wages/working conditions,” it said. LVMH declined to comment.

Meanwhile, a vocal tribe of online critics is already stoking questions about the sector’s value proposition, calling out punchy price increases that have far outpaced inflation amid reports of declining quality and lacklustre product offerings. The jarring disconnect between big brands’ elevated price points and alleged low manufacturing costs revealed by the Italian investigation has only amplified this conversation.

“Are people getting temporarily disillusioned with luxury, or is the illusion getting broken for good?” cult fashion Instagram account Diet Prada asked in a July post that highlighted reactions to reports that Dior’s thousand-dollar handbags cost just tens of euros to make. Luxury and luxury-adjacent forums on the social network Reddit were filled with users expressing “existential feelings over the curtain being pulled back on luxury markups,” Diet Prada said.

Dior said the allegations made about the production of its handbags are “blatantly inaccurate and false.” The suppliers targeted by the Italian investigation were not producing women’s handbags, but partially assembling men’s leather goods, the company said.

Nonetheless, the scandal has exposed a seedy underbelly the luxury industry would rather not acknowledge at a precarious moment for the sector.

After a years-long boom, growth at many of luxury’s biggest brands has cooled as a post-Covid consumer splurge has given way to a gloomy economy and more cautious spending. Sales at LVMH rose just 1 percent in its most recent quarter, while Kering’s revenue fell 11 percent. The slowdown is hurting Italy’s manufacturing sector even more.

Amid the downturn, many brands are pursuing elevation strategies that lean heavily on heritage and craft to justify hefty price tags, amplifying the risks of controversy, said Claudia D’Arpizio, head of Bain’s luxury goods practice.

To be sure, the industry has shrugged off such reputational black eyes in the past. But regulators are also paying more attention than they ever have before. “The legal context has completely changed,” said Matilde Rota, a partner in the Milan team at the law firm Withers.

In what is arguably the most direct assault on luxury’s marketing myth to date, Italy’s Competition Authority announced it was investigating whether Dior and Armani misled consumers with claims of ethical and artisanal manufacturing in July. That puts the brands in a bracket alongside fast-fashion companies like Boohoo and Asos that have faced similar investigations in the UK for greenwashing. Possible penalties of €5,000 to €10 million are small, but the reputational stakes are high. Armani has previously said it believes the probe “has no merit.” Dior declined to comment.

Future lapses in supply-chain controls could result in much more severe fines. Under incoming EU due diligence rules, companies that fail to adequately monitor and prevent labour abuses in their supply chains could be hit with penalties of up to five percent of global revenue.

The industry says it is making moves to tighten up monitoring processes and crackdown on subcontracting in response to the scandal. But companies that sell themselves on the pursuit of perfection still fumble basic points of supply-chain compliance.

Until July, Dior was years behind on publishing supply chain disclosures required by UK law. Though the rule is poorly enforced, under the Modern Slavery Act of 2015, large companies operating in the UK must publish annual statements detailing how they are addressing risks of forced labour in their supply chains. Dior’s statement dated from 2020 until an inquiry from Reuters this summer prompted a hasty update. However, the statement currently available on Louis Vuitton’s website is from 2022. Armani and Kering-owned Balenciaga and Bottega Veneta haven’t updated the information on their sites since 2019. Other LVMH brands, including Givenchy, Loewe, Kenzo and Marc Jacobs either had no publication available at all or even more dated information.

Kering said it publishes a group-level modern slavery statement that covers all its brands. Armani said it provides updates about its approach to supply-chain management in annual sustainability reports. LVMH declined to comment.

Many of the efforts the industry has undertaken so far, address the symptoms, not the cause of the issues. More structural changes that create real accountability and more equal partnership between brands and their suppliers require effort, time and money. The real pressure to change may only come if the industry feels the impact on its bottom line.

“This has persisted because it is very convenient; it is very convenient to have cheap labour available and great margins … [but] for an industry as rich as luxury fashion, paying workers fairly is something that is just an imperative,” said Bernstein analyst Luca Solca, who first warned about labour issues in Italy’s supply chains 15 years ago. “It’s down to the regulators and … the overall community around the luxury and fashion industry, including investors, to make sure that we’ve evolved from that approach.”

Simone Stern contributed to this story.

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.