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- Italian police raided some of LVMH's Dior suppliers that make luxury handbags.
- Italian prosecutors found Dior paid $57 to produce bags retailing for $2,780.
- Judges placed Dior and Armani units under judicial administration for one year.
Two Italian luxury giants pay just a small amount to produce handbags that retail for thousands of dollars, according to documents in a sweeping investigation of subcontractors.
Italian prosecutors in Milan investigated LVMH subsidiary Dior's use of third-party suppliers in recent months. Prosectors said these companies exploited workers to pump out bags for a small fraction of their store price.
According to documents examined by authorities, Dior paid a supplier $57 to produce bags that retail for about $2,780, Reuters reported last month. The costs do not include raw materials like leather.
The relevant unit of Dior did not adopt "appropriate measures to check the actual working conditions or the technical capabilities of the contracting companies," a prosecution document said, per Reuters.
In probes through March and April, investigators found evidence that workers were sleeping in the facility so bags could be produced around the clock, Reuters reported. They also tracked electricity consumption data, which showed work was being carried out during nights and holidays, per Reuters.
The subcontractors were Chinese-owned firms, prosecutors said. Most of the workers were from China. Two were illegal immigrants, while another seven worked without required documentation.
The probe also said that safety devices on gluing or brushing machines were removed so that workers could operate them faster.
LVMH did not immediately respond to Business Insider's request for comment sent outside regular business hours. Court documents showed that Dior, a subsidiary of LVMH, submitted a memo highlighting its supply chain improvements, the Wall Street Journal reported Tuesday.
The probe also extended to Giorgio Armani contractors, and the luxury company was accused of not properly overseeing its suppliers.
Armani paid contractors $99 per bag for products that sold for over $1,900 in stores, according to documents seen by Reuters. The company did not immediately respond to BI's request for comment.
Judges in Milan have ordered units of both companies to be placed under judicial administration for one year. They will be allowed to operate during the period, Reuters reported earlier this year.
A regular manufacturing practice
The prosecution said that violation of labor rules is a common industry practice that luxury giants rely on for higher profits.
"It's not something sporadic that concerns single production lots, but a generalized and consolidated manufacturing method," said court documents seen by Reuters about the decision to place Dior under administration.
"The main problem is obviously people being mistreated: applying labour laws, so health and safety, hours, pay," Milan Court President Fabio Roia told Reuters earlier this year. "But there is also another huge problem: the unfair competition that pushes law-abiding firms off the market."
Last year, LVMH had 2,062 suppliers and subcontractors and undertook 1,725 audits, per its 2023 environmental and social responsibility report.
LVMH CEO Bernard Arnault is the world's third richest person, per the Bloomberg Billionaires Index. His daughter Delphine is the CEO of Dior.