Raids find luxury handbags being made by exploited workers in Italy

An investigation by Milan prosecutors into working conditions at local factories found workshops making handbags and other leather goods for Dior and Armani used exploited foreign labor to produce the high-end products at a fraction of their retail price.

Dior paid a supplier €53 apiece, roughly $57, to assemble a handbag that it sells in stores for €2,600, or about $2,780, according to documents examined as part of the probe. Armani bags, meanwhile, were sold to a supplier for €93, then resold to Armani for €250, and ultimately priced at around €1,800 in stores, the probe found. The cost prices don’t include leather or other raw materials. The companies separately cover the costs of design, distribution and marketing.

Some of the raided workshops, all of which were in Italy, were also making products for other fashion brands, prosecutors said.

“Why does it cost so little to manufacture the product?" said Fabio Roia, president of Milan’s court system, which has overseen the probe. “The brands need to ask themselves this question."

Court rulings stemming from the investigation criticized the luxury companies for failing to adequately oversee their supply chains. The companies don’t face charges related to these findings. Some of the independently owned suppliers, however, could face charges for worker exploitation and employing workers without proper documentation.

Dior, owned by luxury giant LVMH, declined to comment. The brand recently submitted a memorandum outlining measures to resolve issues in its supply chain, court documents show.

Armani said it had “control and prevention measures in place to minimize abuses in the supply chain," and that it was “collaborating with the utmost transparency" with authorities.

The Italian investigation highlights a distinctly modern issue in the luxury industry. While other sectors have moved manufacturing to China and other low-wage countries, many luxury brands kept production closer to home, believing it was crucial to their appeal. But despite being stamped with the “Made in Italy" label, prosecutors allege that some luxury goods are made by foreign workers, many of whom are Chinese, under conditions that fall far short of legal standards.

The probe comes as many aspirational shoppers—who have driven a luxury boom in recent years—cool spending on high-end products, deterred by a tougher economic environment and rising prices.

Luxury goods are able to command high price tags in part because of an expectation that they are made by skilled workers in artisanal workshops. In reality, while brands keep product design and development in-house, they often outsource production to suppliers.

Much of that happens in Italy, which is home to thousands of small manufacturers and produces some 50% to 55% of the world’s luxury clothing and leather goods, according to consulting firm Bain.

In recent years, many luxury brands have worked to better control their supply chain to mitigate reputational risk, control quality and abide by new European regulations intended to curb the fashion industry’s impact on the environment. One challenge is that suppliers often contract work to third parties, who sometimes subcontract themselves.

As a result of the Italian investigation, judges in June placed Manufactures Dior SRL—a unit of Dior—under so-called court administration after ruling that its supply chain included Chinese-owned firms in Italy that mistreated migrant workers. The same measure was taken against Armani in April and Alviero Martini, known for its map-print bags and other items, in January.

Court administration is a legal provision originally intended as a way to monitor companies infiltrated by organized crime groups. Under the process, special commissioners are appointed to oversee operations and provide updates to the court on a company’s progress on resolving issues.

Alviero Martini said it was “surprised and disturbed" to learn the findings of the probe, and that two of more than 40 suppliers had illegitimately outsourced parts of the production to third parties without its knowledge.

The company said that its production chain is vast and fragmented, as is typical of the sector, making it a challenge to directly control.

The court ruling related to Dior focused on four Milan-area companies in Dior’s supply chain, two of which directly supplied the brand. The workshops producing the goods employed dozens of workers, including at least two illegal immigrants and seven who were employed off the books, prosecutors said.

Inspections by Italian police in March and April found workers subject to “hygiene and health conditions that are below the minimum required by an ethical approach," the judges wrote in a 34-page court order.

Workers often operated machines from which safety devices had been removed to increase productivity, compromising safety, prosecutors said. Workers also lived, ate and slept at the workshop. Electricity consumption data indicated that employees typically worked from dawn until after 9 p.m., including on weekends and holidays.

When investigators arrived at one facility, prosecutors said three off-the-books workers attempted to escape by climbing over a fence. They were quickly apprehended. At that workshop and at others, investigators examined documents showing the price brands paid suppliers for each product made.

The court ruling against Armani lays out how one of its subsidiaries, GA Operations, hired two subcontractors, which in turn hired a number of Chinese-owned subcontractors in Italy. Investigators interviewed workers who said they were paid as little as €2-€3 an hour to work long days. That wage is far lower than the level stipulated by the collective bargaining agreement covering the sector, the court ruling said.

Fabio Becheri, a marketing executive who previously worked at Gucci and its owner Kering for almost 20 years, said consumers are increasingly well-informed, and that the use of allegedly unethical labor practices to make a high-end item could be a turn off for them.

“The customer expectation is really high, especially when you are increasing the price so aggressively," Becheri said.

Roia, the president of Milan’s court system, said he is working on a proposed program for fashion brands to beef up checks on suppliers.

“They have to be responsible for the entire chain," Roia said. “That’s the only way we can stop this system that leads to the exploitation of workers."

Write to Nick Kostov at nick.kostov@dowjones.com