An Italian subsidiary of French luxury giant LVMH that makes Dior-branded handbags was placed under court administration on Monday, after a probe alleged it had sub-contracted work to Chinese-owned firms that mistreated workers.
This is the third such decision this year by the Milan court in charge of pre-emptive measures, which in April named a commissioner to run a company owned by Giorgio Armani due to accusations the fashion group was "culpably failing" to adequately oversee its suppliers. Armani Group said at the time it had always sought to "minimise abuses in the supply chain."
The court said in a copy of Monday's decision which was seen by Reuters that prosecutors alleged that the violation of rules was not a one-off among fashion companies with manufacturing capacity in Italy, but systematic due to the need to pursue higher profits.
"It's not something sporadic that concerns single production lots, but a generalised and consolidated manufacturing method," the document said.
The luxury industry's supply chain has come under increased scrutiny by consumers and investors in recent years. To reduce reputation risks fashion labels have curbed the number of sub-contractors and internalised production, in a blow to Italy's leather goods industry, which is mostly based in Tuscany and comprises many firms founded by Chinese immigrants.
Italy is home to thousands of small manufacturers that cover 50% to 55% of the global luxury goods production, consultancy Bain calculated.
The Milan court ordered Manufactures Dior SRL, fully owned by Christian Dior Italia SRL, be placed under judicial administration for one year, the document seen by Reuters showed.
The company will continue to operate during the period.
The Dior investigation focused on four suppliers employing 32 staff who worked in the surroundings of Milan, two of whom were immigrants in the country illegally while another seven worked without the required documentation.
Between March and April, Italian police carried out inspections at the suppliers, named Pelletteria Elisabetta Yang SRL, New Leather Italy SRLS, AZ Operations SRLS, Albertario Milano SRL, the document said.
Pelletteria Elisabetta Yang and Albertario Milano were direct suppliers of Manufactures Dior SRL, the document said.
The staff lived and worked "in hygiene and health conditions that are below the minimum required by an ethical approach," it added.
Representatives for LVMH had no immediate comment. Shares in LVMH extended earlier losses on news of the court's decision to hit a session low. They closed down 2.2%.
Delphine Arnault, whose family controls a 42% stake in LVMH, is chair and CEO of Dior, LVMH's second largest fashion label. She is the eldest child of Bernard Arnault, who runs the LVMH empire and is among the world's wealthiest people.
'24 HOURS A DAY'
In the 34-page ruling, the judges said the workers were made to sleep in the workplace in order to have "manpower available 24 hours a day".
Data mapping electricity consumption showed "seamless day-night production cycles, including during the holidays."
In addition, safety devices had been removed from the machinery to allow them to operate faster, according to the document.
This allowed contractors to rein in costs and charge Dior as little as 53 euros to supply a handbag, the document said, citing as an example a Dior model coded PO312YKY, which the fashion house then retailed in shops at 2,600 euros.
The Dior unit did not adopt "appropriate measures to check the actual working conditions or the technical capabilities of the contracting companies," failing to carry out periodic audits of its suppliers over the years, it added.
The owners of the contracting and subcontracting companies are under investigation by Milan prosecutors for exploiting workers and employing people off the books, while Dior itself faces no criminal probe.
The Armani investigation also unveiled that suppliers of the Italian brand included Chinese-owned manufacturers in Italy that violated worker protection laws.