Luxury’s Italian Sweatshops Problem

0:07Hello and welcome to The Debrief from the Business of Fashion, where each week we explore our most popular BOF professional stories with the correspondents who created them. I'm senior correspondent Sheena Butler-Young. This year, Italian investigators have linked companies including Dior and Armani to sweatshops outside Milan. They've alleged companies are making thousand-dollar handbags in factories that are operating illegally and exploiting workers. The companies say the allegations don't reflect their commitments to ethical practices, and Dior has contested some of the facts, particularly around how its goods are priced.

0:41But prosecutors say that what they've uncovered are systemic and entrenched issues deeply embedded in the way the luxury system as a whole operates in Italy. With us is BOF Sustainability Editor Sarah Kent, who has covered this investigation in depth. Hi, Sarah. Welcome to the Debrief Podcast. Hi, Sheena. Thanks so much for having me. So, Sarah, I want to start with a brief overview of this investigation. And by investigation, I mean the one carried out by the Milan Public Prosecutor's Office, but also your additional insights in your very riveting report. Can you walk us through that? So this has been kind of a slow burn that started at the beginning of the year with an investigation that the Milan Public Prosecutor's Office bought against a company called Alvearro Martini, which is an Italian bag brand.

1:25And what investigators alleged in that case was that the company had been subcontracting out work to factories in and around Milan that were operating like sweatshops or that weren't operating within the bounds of the law. Then a few months later, they made similar allegations in relation to Armani. And a few months after that, there were more allegations, but this time in relation to Dior. These factories, which we described as sweatshops, that they were paying workers below minimum wage, imposing excessive hours, and neglecting basic safety protections, according to the investigators. Often investigators allege that people were being employed under the table, they weren't getting the appropriate kind of health benefits they were meant to get, and generally the factories just weren't operating in the way one would assume factories that supply major luxury brands might operate.

2:17And these allegations really painted a stark picture of systemic exploitation within the luxury supply chain. And then building on those revelations, BOF conducted its own investigation to explore just how such practices could exist in an industry that's meant to be synonymous with craftsmanship and the made in Italy label. And we uncovered how complex, fragmented supply chains really enable these abuses to persist. Brands often rely on layers of subcontractors, which makes it easier to turn a blind eye to bad practices. And court documents alleged startling cost disparities, such as the Dior handbag retailing for thousands of euros that was allegedly produced for just 53.

2:58It is a widespread practice. This is not something that just a few companies are subject to. I've been talking about it like this is a really kind of insidious thing companies are doing. It's more complicated than that, because the industry has evolved in a way that structurally it's actually quite hard to avoid working with factories that fall into this category. And indeed, you know, in some cases, there are processes in Italy where you sort of can't complete them using factories that are operating fully legally. They just don't exist anymore. Sarah, I love the analogy one of your sources used, Polcinella's Secret.

3:39It's a really acute way of describing what's playing out in real time. For listeners who haven't read the article yet, What does that mean? So Pochinelli's secret, Pochinelli is a character from a sort of form of comedy entertainment from the 17th century, Commedia dell 'arte. And he's a character who's known for having a really big mouth. So don't tell Pochinelli something you don't want people to know, because everyone's going to know it really, really quickly. And so this is an Italian idiom for an open secret. And people were saying this to me time and time again, and I'd never heard it before.

4:13And so it may seem shocking and surprising to those outside of the industry. But in the world of Italian manufacturing, you know, everyone knows this is going on. It's an open secret. You said this earlier, this started with one particular company that was connecting brands or people with suppliers. But what would initially trigger off an investigation beyond that one example into something that is so widespread? What kind of thing happens that suddenly a prosecutor's office is looking into this? Well, so this is actually part of a much wider investigation that has been ongoing in Milan for years that has nothing to do with the fashion industry and has everything to do with trying to weed out illegal employment practices and specifically sort of exploitation of migrant workers.

5:02So this investigation into the fashion industry is just a continuation of that work that has been ongoing. And prosecutors chose this moment to turn their attention to this industry because it is a big challenge within Italy. I want to talk about the 53 euro Dior bag seen all over the world. This bag came up on my Instagram feed, like separate and apart from the work that I do at BOF. It was everywhere. It's a bag that retails for roughly 2 ,600 euros. And then this investigation sort of laid bare the fact that it's actually made at about 53 euros, which is a stark contrast to what people pay and what they expect a brand like Dior to pay to have it made.

5:46Talk to me a little bit about that and how that all came to the fore on social media, in fact. Yeah, I mean, I thought this was really interesting, too. So within the documents that we were able to get hold of that unpacked what investigators have found during the course of their investigation, one of the very interesting things that became public was the price companies were paying for manufacturing and the price some of these bags were retailing at. And the one that obviously caught everyone's attention was this Dior bag. And I think what that speaks to is consumers don't want to feel ripped off.

6:22And it's interesting that what captured the imagination of people on social media more than sort of the idea that these products were being made, it were exploiting people in their manufacturing, was that the shopper was getting a raw deal. which I kind of get because that makes it personal to you rather than something that's happening to someone else. I also thought what was interesting was obviously when we were writing the story, we reached out to all of the companies for comments. And the thing that Dior really contested was how accurate this presentation of their costs were. First of all, they said that it wasn't accurate that this handbag was being made in the facility as it was alleged to be.

7:07They said the factory was only doing like a small degree of the work. They weren't actually making women's handbags at all. And they made the point that there's a lot that goes into pricing a bag. It's not just sort of what it takes to make it. So we have Dior and Armani, which you've just mentioned, but these are not just any names. You've got those two big luxury players, but there's a few others that are also probably being pursued here. Can you tell us a few of the other big brands that are being mentioned in this investigation or that are being hinted at being mentioned in investigations in the future?

7:42So others haven't been named so far. But what prosecutors have said is that there's at least another roughly dozen brands that they are looking at or whose supply chains they are looking at. So you think about who that could be if it's still in the luxury space. It's not that many candidates. I mean, you would think that the industry at large would be on notice having been told that. So I want to talk a little bit more, Sarah, about the how here, right? In your reporting, you described luxury brand supply chain practices as a blend of willful ignorance, corporate greed, and structural inertia.

8:21That's a stark contrast to the polished image, that myth-making that they present to customers. I want to zero in on the willful ignorance part. These issues are systemic. They're deeply entrenched. A key phrase in the reporting is this idea of a supplier of suppliers. What does that mean? Because a lot of the brands claim not to be in direct contact with these factories that are putting together these products that they sell. One of the points that came up as kind of a defense for how this was happening, and that comes up consistently within the industry when brands get challenged as to why labor issues persist, is that you're dealing with really complex, fragmented supply chains, and it's very hard to monitor them.

9:08So a brand may contract with a handful of suppliers, but they will then subcontract to many more. And as you go down the train, it gets much more difficult to keep track of what's going on where, because also the brands don't have direct relationships. I think what was interesting about what this case revealed was that in some cases where Brands said they were supplier of suppliers, the investigators just disagreed and contended that in certain instances, these issues were happening at direct contractors. And in others, as in the case of Armani, where there was an issue at a subcontractor, there was actually an Armani employee in the factory when the police turned up to raid it.

9:50Wasn't that employee checking the glue or something, making sure the glue was up to snuff? It was a quality controller and their role was to check, yeah, if the glue was of the right quality. But the point being that this person was in the factory regularly and whilst their job was not to check compliance with the company's labor requirements, that the company can't turn around and say they didn't know they were using this factory because they had someone in there. So I guess it speaks to where priorities lie. So you have this Armani employee that is at the factory checking for quality controls.

10:28There's obviously other kinds of controls around, you know, low wages, the poor working conditions or working conditions. What do brands say they have in place at these kinds of factories, the ones that they are in contact with or are not? What do they have in place preventing sweatshop practices, if you will? Right. So I think, you know, the companies involved all sort of say they have controls in place to prevent bad practices in their supply chains. And typically what these involve are a mix of codes of conduct that suppliers have to sign before they're allowed to be part of a brand supply chain.

11:06Often there'll be a prohibition on subcontracting or only to approved subcontractors. And the brands will put in place auditing systems where they'll often send out third parties to go and inspect factories and check that they are operating in the way they claim to be operating, all designed to ensure that everything is above board. The problem is that, you know, time and again across the industry, these systems have proven to be flawed or easily gamed. And so even when these systems are in place, issues can still arise. We'll be back with more of The Debrief right after this.

11:56there was a point in your story where you talked about the fact that there is gaming the system and then there's you find something actually wrong at a factory and you just turn the other way because it's not advantageous for a brand or the controls that they put in place to surface those issues so this was sort of one of the key things we kind of uncovered in the course this investigation. I spoke to a lot of people who'd operated within brands and within the monitoring space about what it was they experienced. And, you know, they talked a lot about the challenges of ensuring that everything is as it should be and structural issues.

12:35And it is a complicated, difficult thing to do. But they also said, fundamentally, when they did find issues in supply chain, often their findings were deprioritized compared to the business need to get a product from factory to shelf. And so it would be common for a member of the sustainability or compliance team to document evidence of practices that run contrary to a brand's code of conduct or even illegal, take that to the sourcing team and for the sourcing team to sort of say, okay, well, can we deal with that next season or we'll put in place a corrective action plan, but that would just continue to roll and roll and roll, even if the issues weren't addressed because you got to get those products to market.

13:24And that was the priority. It reminds me a lot of the diversity, equity, and inclusion pledges that were put in place in these data gathering and trying to get after whether there is a problem and then the magnitude of the problem. And then when you see the data, it's like, actually, can we hide that problem, please? We don't actually want to put that forward. We'd rather not know. And is this in the case of brands, on its surface, we're thinking profit margins, right? You want to have these low production costs so that you can make a bigger profit. Is it that? And then what else do they hope to gain by turning a blind eye to these things?

14:02Yes, it's margin. Often it's also speed and agility because, you know, we're living in a world where the fashion cycle is getting faster and faster and you want to hit that sweet spot where a product is going to be at its most desirable. And the design process isn't always super efficient. It's a creative process. It's, never going to be super efficient. And changes get made late in the day. And often to accommodate those, you end up having to get a bit creative with the supply chain. There's also just fundamentally been a shift in the way the fashion industry works over the last 20, 30, 40 years.

14:44Just the industry has grown so much and individual companies are producing such volume, which means that doing it across really, really big supply chains and those are difficult to keep track of. And that means that it makes it harder to check and prevent bad practices from slipping in. And as you said also in your reporting, Sarah, luxury brands, Dior and Armani, which were named, have so far only gotten a quote slap on the wrist. What does that mean? What is a slap on the wrist when you are found complicit in some of these labor abuse practices? So the way this all came out was the Italian prosecutors applied to have sort of an external administrator put in place to supervise aspects of the manufacturing subsidiaries involved in these cases at both companies.

15:37And so in the case of that application, all of these court documents were not made public, but were sort of members of the press were able to get hold of them. This was how this all came out. But essentially what happened was the court said, OK, you companies, we've linked your supply chains to this problematic behavior. And so we don't think that you are managing or monitoring them appropriately. So we're going to put a grown up in the room with you to make sure you've got the monitoring and oversight conditions we think necessary in place. And so that was kind of the slap on the wrist. They've had someone external, no fines, just someone come in to help them restructure their monitoring practices.

16:18Could the consequences get more severe? Do you have a sense of how much further things could go with the prosecutor's office or beyond in terms of punishment consequences for brands? So, I mean, I think what's interesting about this is that the consequences in a few years' time could look quite different. And that's because the EU has passed a new due diligence legislation that is not yet enforced, but will be in just a couple of years. And under that piece of regulation, brands are ultimately accountable for things going wrong in their supply chain. And they need to be able to show that they've taken proper steps to prevent labor abuses, environmental destruction, and appropriately address them when they do arise.

17:08And under the legislation, as it's written, the penalty or the maximum possible penalty would be around 5 % of your global revenue. So there's still quite a lot of questions around how that's going to be enforced and what that might actually mean. But that is a chunky piece of change for any big company. Oh, absolutely. I want to talk about the consumer a little bit. The Made in Italy label has been long synonymous with quality and craftsmanship. It's why people purchase a Dior or an Amani. The 53 euro, true or false, whatever the real figure is per Dior, we'll leave that for another day. But that was an example of, I think, how consumers can get this information and feel a word that we've used, duped.

17:54It's why dupes are rising now. Do you think an investigation like this could impact the reputation of luxury goods and that label made in Italy? Yes, of course it could in the ways that it breeds consumer distrust of the inherent value of a brand. And given to your point, there's so many options now out there, there are dupes out there. So if a brand is no longer considered valuable to a consumer, they don't feel emotionally connected to it, that is very dangerous. I should add here that Dior officially said in terms of the allegations about the pricing and production of its handbags that they were blatantly inaccurate and false.

18:36So it really is pushing back against this. I think we should make that clear that the company is denying the way this has been framed. That being said, I think the way it has been portrayed on social media is still damaging to the brand image. But I would also layer on top of that, our attention spans are very short these days. There's a lot going on. It's easy to distract people. And I don't think that, noisy though it was at the time, I don't think the sort of attention that was shone on this a few months ago penetrated that deeply, particularly with Dior's core consumer, who I don't think are necessarily the most socially activist.

19:19among us, though maybe some of them are. It also, the news came out within a couple of weeks, we had the Olympics, which was this massive marketing moment for LVMH in particular, which owns Dior. And that drowned out a whole lot of news. I think that's correct. I also believe we're at a time where there's a confluence of factors that are taking aim at the relevance and prestige of some of these traditional luxury brands. There's already been this luxury slowdown, but there's also, you know, concerns from this consumer that says they care about, you know, where their products come from and supply chain transparency and then dupe culture.

20:00Italian brands really try to present their luxury supply chain as differently organized than these other brands that are maybe competing with them. Are they that much different? It's a complicated question, I think, because there are definitely differences. But you could also argue that there are fundamental similarities in that you're dealing with large supply chains that the companies struggle to keep track of that enables bad practices to sneak through. And that in almost all cases, they operate under purchasing practices that make it almost inevitable that there will be some problems within the supply chain.

20:43And by that, I mean in terms of the pricing pressure they'll put on suppliers, the speed and agility they will demand, and the volumes they're producing. I think it's very hard to really keep strong controls under those conditions. I think it's this idea that the luxury industry often positions itself as sort of sustainable by nature or just above these issues because, you know, high prices means that obviously we're doing everything above board because that's what justifies our high prices. I think what this has revealed is that that could be true in a utopian world, but the reality is that it's not.

21:27And I think the industry should get more questions about how it is supporting those claims and should be asked to back them up. And hopefully that will raise the bar for everyone. Absolutely. Well, short of a utopian world, what do you think in the next year or so supply chain transparency can look like? And is it attainable in the next, not year, but probably five to 10 years? I don't think we'll ever get to a point where there's full transparency and nothing ever goes wrong because that's just not life. But I do think we'll get to a point where there's much more transparency and issues a better address when they occur.

22:08I think there's a number of things that's driving that. Chief among that is regulation. There are regulations coming in, not just the due diligence, one I mentioned previously, that are going to require companies to have much, much visibility over their supply chain in order to be able to meet environmental goals, to meet disclosure requirements, to be able to just import products and prove that they are in line with what governments are going to require. You've seen that with the US's ban on cotton from China that's prompted a lot of action around cotton supply chains. The EU has a deforestation rule coming in that's going to make companies have much more visibility over where products like palm oil and leather come from to prove that they weren't linked to deforestation.

22:55So that's one big driver that's really forcing companies to get on top of this supply chain traceability, which before was voluntary. And I think technology is helping too. there's new digital tools that can make it easier to trace where things come from. You know, they've still got a long way to go. It takes a lot of time to adopt this stuff in the industry. But within the next 10 years, I do think they'll penetrate. And I do think that will make life easier. So regulation, super important. Technology, also super important. And if I had to put my money on it, though, I think that 5 % of global revenue fine is really going to move the needle.

23:29That's a scary number. That's a scary number. But I think it's an appropriate place to wrap up today's conversation, Sarah. Thank you so much for joining us and sharing such critical insights about your really riveting report on luxury sweatshops. Thank you so much for having me, Sheena. Be sure to check out Sarah's article, Inside Luxury's Italian Sweatshops Problem, available at Business of Fashion. You've been listening to The Debrief, produced and edited by Olivia Davies, mixed and mastered by Eric Bria. I'm Sheena Butler-Young, and we'll be back next week with another episode. Be sure to follow us wherever you get your podcasts.