A Milan court just placed LVMH’s Christian Dior brand under judicial administration for a year after an investigation found two of its Chinese-owned subcontractors based outside Milan had exploited their workers. This followed a similar judgment in April against Giorgio Armani for “culpably failing” to oversee its suppliers, according to Reuters.
While Dior was not held criminally at fault, it found that Dior was negligent by failing to take “appropriate measures to check actual working conditions or technical capabilities of contracting companies.”
The court’s investigation also alleged that such unethical manufacturing practices are systemic throughout Italy, where thousands of small foreign-owned manufacturers supply luxury brands with goods that can claim the prized “Made in Italy” label but are produced at “Made in China” prices.
“It is not something sporadic that concerns single product lots, but a generalized and consolidated manufacturing method,” the filing stated, as luxury fashion brands seek to generate higher profits.
Reuters also reported that the supply chains of some dozen other fashion brands are under investigation as Italian law requires companies outsourcing production to carry out adequate oversight of their suppliers.
Luxury Industry, Heal Thyself
“Recent investigations in luxury fashion supply chains of both Armani and LVMH fashion brand Dior highlight the urgent need for industry leaders to address meaningful change. It can no longer be acceptable to have luxury fashion business models based on human rights violations,” said Scott Newton, managing partner of Thinking Dimensions Global Consulting, who is based in Asolo, Veneto Italy.
Newton says this ruling calls into question luxury brands’ much touted environmental, social and governance (ESP) policies. While claims that companies play fast and loose with sustainability issues are fairly common – called “green-washing” – environmental issues are an existential threat with potential impacts years off. However, human rights abuses are all too real, affecting people in the here and now. Dior did not respond to a request for comment.
Profits Before People
According to the 34-page filing, Italian police conducted inspections of Dior leather-goods contractors Pelletteria Elisabetta Yang SRL and Davide Albertario Milano SRL between March and April. The investigators found:
- Some workers were forced to sleep in the factory to have manpower available around the clock, 24 hours per day.
- Data mapping of electricity consumption showed “seamless day-night production cycles, including during holidays.”
- Manufacturing equipment safety devices had been forcibly removed to allow workers to operate faster.
- A number of workers were illegally immigrated into Italy and had no regular contracts.
These unethical practices allowed one manufacturer to supply a “Made in Italy” Dior-branded handbag (Dior model coded PO212YKY) for $57 (€53) that Dior then sold on for about $2,800 (€2,700), an obscene 48X markup.
While described as small manufacturers, Dior was billed a total of $1.6 million by both companies in the past year – €752,881 by Pelletteria Elisabetta Yan and €737,623 by Davide Albertario. That would amount to nearly $80 million at retail at a 48X markup.
Speaking to Reuters, the president of Milan’s court system Fabio Roia said “Business owners unfortunately don’t normally question why certain goods or services cost so little. They simply seize the chance to maximise profit. You’d think ultra-low prices would ring alarm bells.”
The court has sent a proposal to Italy’s Chamber of Fashion and other associations with guidelines to exert better control over the Italian supply chain.
Bain estimates Italy accounts for between 50% to 55% of global luxury goods production, so Italy has a major stake in eradicating human rights abuses and providing ethically sourced products to the global luxury market.
“The main problem is obviously people being mistreated: applying labour laws to health and safety, hours, pay. But there is also another huge problem: the unfair competition that pushes law-abiding firms off the market.
“If we managed to eradicate labour exploitation, profits would diminish, but there could be legal competition among businesses,” Roia continued.
Industry Leaders Should Lead
Regrettably, the judicial system has been forced to step in to clean house rather than the major luxury brands taking action to oversee their own supply chains. As the luxury industry leader, LVMH, of all companies, has the wherewithal to do so.
Dior is LVMH’s second largest fashion label after Louis Vuitton. And its Fashion and Leathergoods maisons brought in about half of LVMH’s total $92.5 billion (€86.2 billion) revenues last year.
LVMH also has a stellar ESG reputation to protect. In 2022, it was one of only 12 companies out of 15,000 companies scored to receive a triple “A” award by the non-profit Carbon Disclosure Project (CDP) for sustainability.
Claiming leadership in corporate transparency and performance related to environmental goals, LVMH’s responsibilities on the human-rights side is certainly no less important.
Industry-Wide Luxury Brand Reputations At Risk
According to business and marketing professor at ISTUD among others and luxury industry consultant Alessandro Balossini Volpe, unethical business practices among luxury brand contractors has been an open-secret for years.
“Of course, rumors are rumors, but they’ve been floating around since I joined the fashion-luxury industry about 30 years ago,” he shared, noting rumors of unhealthy working conditions, excessive working hours and underpaid illegal workers.
“These situations were reportedly more frequent in the leather goods supply chain, but not rare in the clothing supply chain either,” he continued.
He sees the potential fallout from the court judgment to profoundly impact Dior’s reputation and that of LVMH overall. Before the ruling, LMVH stock was trading around $830 per share and at closing on Friday, it was at $765.
But its impact could go much further than just Dior or LVMH. “This and similar cases could further undermine the credibility of the luxury fashion industry as a whole. Coupled with the growing sense of disappointment coming from the recent surging price increases from many brands, this news may lead some customers to simply stop believing in luxury brands as suppliers of superior quality products.
“All of the luxury fashion brands could fall under suspicion of collectively engaging in unethical and unsustainable business practices,” Balossini Volpe warns.
“This could be a very hard and hardly fixable blow, since it would mean questioning not only the tangible, intrinsic value of the products, but also their intangible value that includes their credibility and integrity,” he concludes.
See also:
