Milan probes into Dior suppliers’ illegal labour unsettle luxury sector

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The Dior leather bag supplier Milan investigators long had their eyes on was located close to the Via del Lavoro in the suburban city of Opera — or labour street. But behind its doors they uncovered employment practices of another age.

They found evidence of illegally hired workers, forced to sleep inside the factory and work long hours, including nights and holidays, in an unsafe environment, according to a statement from the Milan prosecutor’s office.

The Chinese-owned supplier would sell bags to Dior for €53 apiece, investigators said. A few kilometres away on Milan’s ritzy Via Monte Napoleone, the same finished accessories cost more than €2,000 by the French brand, which is owned by LVMH.

As a result, an Italy-based Dior subsidiary — Manufactures Dior — was placed under court administration this month for failing to carry out appropriate due diligence and supervise its suppliers.

The sanction means it will be run by a court-appointed manager for one year in order to fix the shortfalls. Milanese prosecutors also alleged another Chinese-owned Dior supplier, based in the town of Cesano Maderno north of the city, was exploiting illegal workers.

The development has shone a light on practices in the supply chains of the luxury sector, an area hitherto regarded as problematic more for fast fashion than producers of expensive goods.

The Milan prosecutor’s action against the supplier follows two other similar actions against upmarket accessories maker Alviero Martini and a Giorgio Armani subsidiary earlier this year. Such examples could be the tip of the iceberg for the luxury fashion industry, investigation insiders warn.

As investor scrutiny of environmental, social and governance considerations increases, the revelations could not have come at a worse moment.

Jean-Philippe Bertschy, managing director and head of Swiss equity research at Vontobel, said one of the most concerning aspects of the Italian cases was the fact that the brands are “very high end and considered as exemplary in the ESG field”.

Years of unprecedented growth for the luxury sector have put pressure on their supply chains.

Italian supply chains account for at least half of global luxury goods production, according to Bain & Company. While a manufacturing exodus from the late 1980s saw many fashion businesses shift production to low-cost countries such as China, many companies subsequently moved their operations back after the move threatened their ability to brand their goods as “made in Italy” — viewed as a marker of the highest quality and craftsmanship, and earning them prestige in the eyes of customers.

But demand has since exploded thanks to post-pandemic spending and new classes of affluent consumers across the world. In response, companies have stepped up their marketing efforts while simultaneously releasing new collections on a frequent basis. Skilled artisanal workers are in high demand, especially as younger people have moved away from manual and vocational professions.

The increased pace of production has necessitated speed and efficiency, said Claudia D’Arpizio, a partner at Bain.

“To cover the peaks of production or specific manufacturing phases, brands need to rely on external suppliers and these suppliers often rely on other sub-suppliers.” 

“It’s a very complex thing to control with the time to market and the level of newness required. But that’s not an excuse,” she added. 

Others go further, saying changes in the industry are not conducive to human rights. According to people close to the matter, Milanese prosecutors may be looking at several other luxury labels and their suppliers, suggesting such issues may have become an industry-wide problem. 

“When you are buying an item for €50 and selling it for more than €2,500, like in Dior’s handbags case, you may not know your Chinese supplier is exploiting workers, but you are very aware you are making an enormous profit on each piece and evidently that’s the priority so you don’t ask the other questions,” said a fashion industry investor speaking on condition of anonymity.

The Milan prosecutor declined to comment. Dior, which is not under investigation, declined to comment.  

Earlier this year Alviero Martini and a Giorgio Armani-owned company were also placed under court administration for allegedly failing to oversee their suppliers. The parent fashion houses are not under investigation.

Alviero Martini, owned by Rome-based Final Group, said in January its suppliers had illegally hired subcontractors, violating the terms of their supply contracts, which forbid it. Armani said in April it had always sought to “minimise abuses in the supply chain” and it would fully co-operate with the court. 

Beyond Italy, other luxury companies have faced criticism for alleged shortcomings in how they source materials. A BBC investigation in May linked ingredients used by high-end perfumers, including L’Oréal-owned Lancôme and Estée Lauder’s Aerin Beauty, to child labour in Egypt.

At the time, both companies maintained that they had zero tolerance for exploitation and had contacted their suppliers.

Luxury cashmere brand Loro Piana has recently come under fire following a media report alleging that it was not paying indigenous workers in Peru fairly for wool that ended up in sweaters sold for thousands of dollars.

US congressman Robert Garcia, a Democrat from California who was born in Peru, wrote to the company asking about its sourcing. In response the company said it had worked for decades to help preserve the population of the vicuña while also increasing its investments in irrigation, education and infrastructure in the country. 

“We often view the low prices and resultant labour rights abuse as baked into the fast fashion model but those problems are more pervasive than that,” says Natalie Swan, labour rights programme manager at the Business and Human Rights Resource Centre. “There’s the expectation that if you are buying something luxury it is very bespoke and has been created closer to home. Often, that’s not the case.”

She warned that in the face of uncertain consumer and demand and rising raw materials costs, “it might mean a doubling down of the worst elements of the business model, which is to put the price and cost of these changes on to the workers and the upstream supply chain rather than impact profit margins”. 

Vontobel’s Bertschy added: “For many companies it’s still very difficult to track the whole supply chain, especially when they are in foreign countries [and] even when trying to buy from some certified suppliers, there are still loopholes and issues.”

Several luxury groups, including Chanel, Prada, Zegna and Burberry, have been acquiring or investing in their strategic suppliers in order to control more of the supply chain.

Hermès, which remains committed to traditional manufacturing methods, has taken a different approach and shunned mass production in favour of training workers to stitch its leather bags by hand. Last February, the company said it would reward all employees with a €4,000 bonus following a successful year.

When the Financial Times visited the Dior supplier in Opera, it appeared to be business as usual: lights were on and vehicles, including a Porsche and a Tesla, were parked in the driveway. The FT was not granted access when the entry buzzer was pushed.

Bain’s D’Arpizio said increased public scrutiny may serve as a turning point for the industry. “In luxury, [exploitation] should not happen. This is an industry of excellence and craftsmanship is a key component of it. You cannot really compromise on that aspect,” she said.

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