Luxury’s Italian Supply Chain Reckoning Isn’t Over

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0:45Hello and welcome to The Debrief from the business of fashion, where each week we delve into our most popular BOF professional stories with the correspondents who created them. I'm senior correspondent Sheena Butler-Young.

1:00In November 2024, here at BOF, we examined a scandal that challenged one of luxury's biggest selling points, the promise of craftsmanship and quality behind the Made in Italy label. Investigators in Milan had uncovered exploitative conditions at factories supplying some of fashion's biggest names. Workers were reportedly earning just a few euros an hour. In some places, safety protocols were removed to speed up production. And in others, laborers were putting in 15-hour workdays while living in degraded conditions. The revelations raise questions not only about individual factories, but also about the way luxury brands manage their Italian supply chains.

1:37Nearly two years later, the industry has taken some steps, but the story is far from over. Joining me is BOF Global Markets Editor, Sarah Kent, who co-wrote our latest report and joined us for that original conversation. Sarah, welcome back to The Debrief. Thanks so much for having me, Sheena. It's great to be back. And it's great to be back from maternity leave also. Congratulations. We're so happy you're back. I'm happy to be back, too. It's been a while. I'm sorry if I'm a bit rusty. No, I'm sure you're fine. I want to, before we get into what has happened in the last two years to supposedly write the course, I want to go back to the investigation that first brought a lot of these things into public view.

2:17So take us back to 2024. What was that investigation? What were the top line revelations? So back in early 2024, a prosecutor in Milan began bringing cases against fashion brands. And the first one kind of went under the radar because it targeted a brand that is known in Italy, but didn't have such a big international footprint. And then the second brand he went after was Armani. And that really got people to sit up. And then the third brand was Dior. And suddenly everyone was like, oh, my God, what's happening? And what the investigations had revealed were that these very, very prominent brands who are considered some of the most elite in the industry had buried in their supply chains factories that were essentially functioning much like you would imagine a sweatshop.

3:13And these factories were not in far-fung places. They were in Italy. They were on the outskirts of Milan in, you know, the backyard for these brands in terms of high-end manufacturing. And this had happened, the brand said, without them being aware of it. So it raised a number of different issues. One, were the brands culpable for this? Two, if they weren't, how was it happening that these factories were showing up in their supply chains without them knowing? And three, if these factories were in their supply chains, were the products that they were selling for such high prices? And remember that in 2024, we're at a point of peak inflation for luxury products.

3:58Were they really worth it? So it created this kind of perfect storm for the luxury industry around how they operate, how these big brands operate. One of the phrases that I remember from that time was this whole thing of like supplier of supplier. You mentioned that these conditions were at factories that were deep in the supply chain. Can you talk a little bit about this, I guess, a lack of visibility that the brands seem to have, which to your point about whether or not they were culpable, like it's kind of, I mean, I think that's interesting that you can say you don't know. And therefore, like, I think that's just as problematic, but maybe you help us understand.

4:35Well, so the luxury supply chain is really complex. One of Italy's great strengths as a luxury manufacturer is you have an extreme concentration of all of the expertise you need to make these incredibly high-end products. But one of the complexities of this is that that expertise, in many cases, is distributed in lots and lots of micro-suppliers. And so you end up with this very complicated supply chain where a brand may work with one large manufacturer, but that manufacturer will be sending out to many other smaller factories for part of the work. And sometimes this work can be, you know, very specialized, like attaching the brass buckles to a handbag, for instance, that may happen in one specific location.

5:26And then the handbag will be sent back to a more central location to be assembled in other ways. Within this, it is, you know, you can see how it would be easy for companies to lose track of where their supply chain begins and where it ends. The other thing we spoke about this investigation two years ago was you described the exploitation in Italian manufacturing as an open secret. What did you mean by that? And I know this is sort of like the the tension here as to to what extent is it a bug in the system? Is the system working as designed? Is this a bug or working as intended? So I remember when I first started reporting this, and I think I raised this last time, too.

6:07I learned this phrase that I'd never heard before. It's an Italian phrase, a pulcinella secret. And it kind of references this character in, you know, traditional Italian Renaissance comedy who was known for being a big mouse. You don't tell this person a secret because it's not going to be a secret for very long. And I speak to people in the Italian supply chain and they were like, yeah, the fact that these factories exist is a pulcinella secret. Everyone knows, no one tells, because it is convenient to have them exist. And it's for a variety of reasons, partly just the way the supply chain has evolved over time.

6:44But at its heart, when you really press people, they say it's because of the price brands are willing to pay for products and the speed and flexibility at which they want them produced. And that puts a degree of pressure down the supply chain where, you know, you may end up in a situation in a pinch where you need a supplier who can do things cheaply and quickly. And so you quietly do what is convenient. And that may not be a supplier that a luxury brand would normally want to work with. But and I also don't want to totally excuse the luxury brands. If you look at the investigations as they've come out, there are instances where it appears as though there really was some willful blindness, like where you have had representatives from a luxury brand in the factories that investigators have later identified as operating illegally.

7:39But they've been there to check quality control and just haven't really paid attention to the working conditions. So, you know, the brands knew they were working with this specific factory. They just weren't paying attention to what was happening in that factory beyond the quality of the product it was producing. And then let's talk a little bit about what that investigation yielded in terms of consequences for brands. I think step one for a lot of them was this sort of heightened oversight. Like they had supervision over some of how they were doing business. And then before the end of that supervision period, a couple of those brands had it lifted, right?

8:13So let's talk a little bit about what they were expected to do and how much they progressed on that. Yeah. So I think what is interesting is that a number of brands have now been put through this process of judicial administration. That does not mean that they have been found culpable for what has happened. What it means is that the judge has said they did not have the correct controls in place, and therefore they are going to have an outside overseer come in to make sure they put them in place. They were given a year to do that in most cases, and in almost all cases. In fact, I think in all cases, they put in place controls that satisfied that external arbitrator well before that 12-month period had gone by.

9:03And then in the couple of years that have followed, or maybe the year since that 12-year period for a lot of them, there's been other sort of longer term measures, right? Like, let's talk a little bit about what's happened over the last couple of years. One of the big ones are the audits. Talk a little bit about what those, how those work and what they're intended to do. And then we'll get into why maybe at times that might fall short. Right. I think, you know, for the brands that were caught up directly in these probes and went through judicial oversight, they've had to do quite a lot of administrative work internally.

9:35But for the industry as a whole, I think quite intentionally, prosecutors, I mean, I think they've said quite explicitly, you know, consider this a warning shot. Get your house in order. We're looking at all of you. Just because we haven't come for you yet doesn't mean we think that your house is in order. And so brands have kind of been looking for ways to make sure that their systems of controls are all buttoned up, whether or not they'd be through this judicial oversight process. So what that's often looked like is brands conducting more audits than they were before. So sending out inspectors to go and visit factories and also consolidating the suppliers they work with and sending down directives saying, you know, you cannot subcontract.

10:20Like if you are working with us, you are working with us. You cannot then go out and give this work to someone else. So they've really tightened up their processes on that front. The interesting thing I saw in your story, you and Eric's story, was that the audits have sort of been disproportionately difficult for some brands. Like they are expensive to do because it's basically you're holding yourself internally to a standard that you pay to make happen, right? Right. So the problem with what is happening with the because it sounds good, right? Like we're sending out inspectors where, you know, we're doing the things.

10:53That sounds great. And I'm not I'm not saying, you know, don't audit. But the problem with the system as it sprung out, people on the ground are saying to me is that every single brand has a different auditing system. So if you're a manufacturer and you are operating already on tight margins and you are dealing with an energy crisis because of what's happening in Russia and the Middle East, so your costs are rising. And you're dealing with a luxury downturn, so your orders are probably down as well. And on top of that, maybe you work with 20 different clients and each one of them is sending a different auditor and asking you to answer a separate set of questions.

11:30and when they send an auditor, you have to figure out time in the factory for you to walk around and show this auditor around and then you're not working. That is costly. And then on top of that, after the audit, each brand or customer is going to come back and say, hey, you know what, you're mostly doing what we need you to do, but could you do this thing a little bit differently to meet our standards and the next brand is going to have a different thing they want you to do? So it's just a time cost, a financial cost, and a big burden to have this quite diversified system of audits that's heading supplies at the moment.

12:10And what about, what of those universal standards that we all wish could be in place? Like, why has it been so difficult to have just a concise and coherent set of standards across the board? Why is that difficult for us to establish as an industry? Well, so the industry has, of course, as a result of all this, got together and sat down at a roundtable to try and come up with a universal set of standards. And I think in most, you know, you can look at 85 % of these different audits that are in place and they'll be very similar. And it will just be the kind of 15 % that's different, but that can make all the difference.

12:47I think part of it is that, you know, there's a degree of ego in some of these companies. there's there's kind of institutional inertia in the sense that like if you've been doing something one way it's quite hard to get an institution to change and do things another way and all with all the will in the world and there's a degree to which it's not just aligning on the what but also on the how and getting everyone to implement things in the same way is tricky because you know think about within a single company it can be hard to get several different teams to work in the same way. This is across different companies.

13:26So I'm not saying it's not a challenging thing to do. What I do find quite interesting, though, is that the industry seemed like it had not already been working on this. Obviously, in 2024, these scandals hit Italy. But there had been plenty of talk in the run-up to that time of European level regulation coming in that was going to require this kind of action anyway. So it's quite interesting to me that barring a few pioneering companies, it seems like the industry had not really been trying to hit the ground running on that piece of work. Why do you think the industry wasn't jumping on, hitting the ground running?

14:21Why was it wrong-footed? Yes. What I think is that the industry wasn't really preparing for these regulations. And honestly, if you look at what has happened in the years since, where a lot of regulatory efforts in the EU have been slow walked or watered down. So, you know, maybe they were prescient. But it is very interesting to me that for luxury in particular, which has long spoken about issues of labor abuse or environmental degradation as being a fast fashion issue, to have such apparent blind spots when it came to its own supply chain, because how can you know? How can you say that with credibility if you aren't doing this work to know.

15:07We'll be back with more of The Debrief right after this.

15:32another format and then three quarters of those have switched app mid-story to do it they're not picking a format they're picking whatever best fits the moment they're in ACAST's latest research in podcast pulse 2026 maps four of these moments and what each one gives back to a brand get the full report at acast.com slash pulse can we talk a little bit about how the demands of luxury brands on price and the speed and the flexibility contribute to this problem in the long term. Like, yes, there are things that we do now and that you can make a factory promise not to hire more subcontractors or make them sign off on that, give them some kind of legal whatever.

16:13But if you don't change the rest of how you do business and what you demand to be able to do business at the profit margins that you have, how realistic is any of this? Yeah, I mean, I think what we're wading into is kind of the crux of what has become you know, quite fundamental debate around how business operates and who bears responsibility. So on the one hand, I think you have an argument that, you know, if you are a company, you have your direct business partners, you have a relationship with them, that gives you some leverage. And that's kind of where your responsibility lies. And that's kind of, I guess, the pro-business industry argument.

16:54And then on the other side, you have the more kind of pro-labor advocate argument, which is if you are a company at the top of a food chain and you are the company as a result that is probably making the most money in the most margin, you have a lot of control all the way down that food chain. And the way in which you conduct business has a huge impact all the way down. And therefore your business strategies are fundamentally responsible for what happens and you should be accountable for all of it, which is a very long winded way of answering your question about business practices, because it sort of depends who you ask.

17:35So if you ask a labor advocate or many people, I think on the manufacturing side in Italy, they would say the business practices haven't changed at all. We're still being squeezed. It's more and more difficult because there's also external difficult economic factors. And it's a very hard business environment at the moment. And then I think if you ask many brands, what they might say off the record is, look, we're doing a lot of work. We really value our core suppliers. We operate fairly. And, you know, a lot of this is just an attempt to try and squeeze more money out of us. what is the Milan protocol by the way there was there was one solution that uh was mentioned in your you and Eric's reporting that was sort of I think you described it as like one of the more the most extensive and maybe maybe the implication was like maybe a more optimistic route but I think one of the glitches there was like the voluntary nature of some element of talk a little bit about that as one of the things that exists on an ongoing basis as a potential solution and what the downsides might be?

18:43Yeah, so I guess the big shiny thing that the industry has come up with to try and address this is a proposal to establish a database of good suppliers. So basically, brands would be able to go to this database and they would, you know, on it, suppliers would have uploaded documentation that shows they're acting responsibly. And therefore, brands can then work with them confidently without worrying about having to do their own checks. And were they to use this database, I think the ultimate idea would be that were any issues to be found in their supply chain, they would be able to say that they had taken reasonable steps to ensure that they were working with responsible actors.

19:27There are a bunch of issues with this. One is that although there are ambitions to make this a national level database at the moment, It is only focused on the region around Milan. It is voluntary to participate. And it is a model that has been used in other industries in Italy with very limited success in that only a small proportion of players have joined these databases. And if everyone's not on it and everyone's not using it and they don't have to be on it and they don't have to use it, how useful is it? I think the other piece that is kind of interesting about it is there's not, there's kind of a subtext that there will be incentives for suppliers to be on it.

20:14And that if you're, the idea being that you get on it and people, you know, you'll get more business because brands will come to you because you're on this database. Again, I don't think that's necessarily how that's worked out with things in the past. So what, what are the incentives for anyone to be on this thing? And this is a question that's not in your reporting, but just as like an expert giving an opinion on this on this bit, if you if you would oblige me here. But how confident are you when there is like a rubric or a standard that brands or factories have to meet that people won't find ways to circumvent the system?

20:50Like I'm picturing an audit where we know when they come, we just have to make this look like this and this and then we get the checkmark. because there's a lot of performative things that happen with a lot of like certifications. And you made our list of best suppliers in the world, but really it's just a brand or a supplier or a factory just kind of like bringing the system to appear a certain way to pass the test. Yeah, I mean, that is kind of how it works, right? Like if you know what the test is, you're going to try and optimize to pass the test. One thing that I think I hear is happening more is blind audits where factories are not give an advance notice that an auditor is coming.

21:30So in that sense, you do kind of circumvent the ability to kind of, I guess, put lipstick on a pig as it were. But yeah, I mean, none of these systems of control are fail safe. They're just risk mitigation tools. Does that mean they're not valuable? No. But I think that just needs to be an acknowledgement. This does not mean that everything is working perfectly just because you have these things in place. And to be clear, I think that exists in almost anything that you can certify or any tests you can pass. It's definitely not specific to luxury brands or their suppliers. What about the government role?

22:08Like we talk a lot about legislation on these things. When I described earlier, you know, the degraded conditions in factories, the, you know, the couple of euros an hour or a day that people receive, where does oversight on the governments that come into play here. Yeah, I mean, you would think it would kind of play quite well. This has become a pretty political issue in Italy. And it burst onto the scene in a pretty spicy way last year, because Diego Dele Valle, who is the chairman of Tod's, responded to an investigation targeting his company by clapping back at the prosecutor and essentially saying that this prosecutor and massively overstepped, that he was pursuing brands for his own political aims.

22:58And that, you know, really, it's not reasonable. You know, first of all, that Todd absolutely controls its own supply chain, but also the idea that brands should be responsible for everything that happens all the way down the supply chain isn't reasonable. And this then got elevated to the political stage with one of the Italian ministers, the minister of Maine in Italy, which is an actual ministry in Italy, proposing his own rules, his own version of the Milan protocol on a national level to try and address all of this. And left-wing politicians and labor groups became very angry because they said that it was being proposed as a sort of shield that would mean companies were not held accountable for issues.

23:48and it ended up getting dropped from the bill that it was in. And so this is an ongoing conversation. It's very politically live. And so I guess that is a very long-winded way of saying government and regulation does play a role, but what it is and what the democratic part of Italy wants it to be isn't clear yet. And to that end, at this stage, and understanding that you haven't been on the ground in Milan recently. Yeah, not what I spent my maternity leave doing. No, I imagine you had bigger responsibilities for sure. What evidence is there that conditions have improved for workers, or rather in the absence of evidence since you're not there?

24:36Maybe what you're hearing or just you're as an expert on this. It's just, you know, obviously at BOF, been leading our coverage of it for a very long time. What do you think is happening? Do you think anything is better, even if just a little bit?

24:53From what I understand from labor groups, there is not a sense that a huge amount has changed on the ground. And I think that's partly because it's quite a complex situation that isn't only linked to luxury supply chains. And also, the market is bad. It's a bad market. Therefore, orders are down. Therefore, business is bad. Therefore, that's not going to be good for workers. So I think there are a lot of external factors that are affecting actual on the ground conditions. But ultimately, you know, the argument I hear again and again from people in the labor space is fundamentally, there has not been a change the way the structure of the business works.

25:42And without a change to that structure, things aren't really going to get better. I'm really reaching for a positive note to end on but I don't think I don't think there always has to be is there is there a what's next what do you think happens next does what what does it take to turn a corner on this next well to me I think what is interesting is what happens with these investigations if they continue or if they don't because it's quite possible that this is an issue that could fade from people's consciousness because it's, you know, without continuous evolution and what is happening, people move on to the next thing.

26:25So to me, the big question mark is, will there be opportunities to continue to shed a spotlight on what is happening on the ground? We're certainly going to continue to try to do that. And if that continues to happen, then I think in time, change is possible. These things don't happen overnight. It takes a long time for industries to change, but it can happen. It can happen. And we're so happy you're back. You'll keep us posted and honest on what's taking place and whether these investigations continue and if they yield actual, meaningful and long-term progress. Thanks so much for joining me, Sarah.

27:04Welcome back. Thank you so much for having me. It's great to be back. please be sure to check out Sarah and Eric Silver's article has fashion fixed Italian supply chain problems at business of fashion.com this and other stories are available to BOF professional subscribers only and you can find the links in the episode notes you've been listening to the debrief produced and edited by Olivia Davies and Angel Nemov I'm Sheena Butler Young we'll be back next week with a new episode thanks so much for joining us and be sure to follow us wherever you get your podcasts

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