A series of raids in Italy revealed the contrast between the glamorous world of Milan's catwalks and some of the realities of luxury goods production.
An investigation by the local prosecutor's office into working conditions at local factories found that the workshops for the production of handbags and other leather goods for Dior and Armani exploited the labor of foreign workers to produce the luxury accessories, the WSJ reported.
According to the documents examined as part of the inspection, Dior paid a supplier 53 euros each to assemble a bag, which is sold in stores at a price of 2,600 euros.
The Armani bags were sold to a supplier for €93, then resold for €250 and eventually reached stores for around €1,800, the investigation found.
Leather and other raw materials are not included in the cost price. The companies cover design, distribution and marketing costs separately.
Some of the factories searched, all of them in Italy, also made products for other fashion brands, prosecutors said.
"Why is the production of the product so cheap?" asked Fabio Roya, a Milan magistrate who is overseeing the investigation, adding that "brands should ask themselves this question."
In evidence to the inquiry, the luxury companies were criticized for failing to exercise adequate oversight of their supply chains, for which charges were brought. Some of the independent suppliers may face other charges of exploiting workers and hiring without proper documentation.
Dior, owned by luxury goods giant LVMH, declined to comment on the case.
The brand recently submitted a memorandum outlining measures to resolve problems in its supply chain, court documents show.
Armani said it had implemented "control and prevention measures to minimize abuse in the supply chain" and that it was "cooperating with the authorities with maximum transparency".
The Italian investigation highlights a contemporary problem in the luxury industry. While other sectors have moved production to China and low-wage countries, many luxury brands have kept production closer to home, believing it to be critical to their appeal.
But despite the "Made in Italy" label, prosecutors say some luxury goods were produced by foreign workers, many of them Chinese, under conditions that did not meet legal standards.
The investigation comes at a time when many aspiring buyers who have fueled the luxury goods boom in recent years are cutting back on high-end products, deterred by a tougher economic environment and rising prices.
Luxury goods retain their high prices largely because of the expectation that they are produced by skilled workers in artisan workshops.
Although brands retain their own product design and development, they often outsource manufacturing. Much of this process takes place in Italy, which is home to thousands of small manufacturers and produces about 50-55% of the world's luxury clothing and leather goods, according to consultancy Bain.
In recent years, many luxury brands have sought to better control their supply chain to reduce reputational risk, control quality and comply with new European regulations aimed at limiting the environmental impact of the fashion industry. One of the challenges is that suppliers often outsource work to third parties who themselves subcontract.
As a result of the Italian investigation, in June the judges placed Manufactures Dior SRL - a division of Dior, under the so-called judicial administration after they ruled that the supply chain involved Chinese firms in Italy that mistreated migrant workers. The same measure was taken against Armani in April and Alviero Martini, known for its card-print bags, in January.
Judicial administration is a legal provision that was originally designed to monitor companies infiltrated by organized crime groups. As part of this process, special commissioners are appointed to oversee operations and provide the court with up-to-date information on a company's progress in resolving issues.
Alviero Martini said she was "surprised and alarmed" by the inspection's findings, and that two of the more than 40 suppliers had illegally outsourced parts of the production to third parties without her knowledge.
The company said its production chain is extensive and fragmented, as is typical of the sector, making it difficult to directly control.
The Dior-related court ruling focused on four Milan-area companies in Dior's supply chain, two of which supplied directly to the brand. The production facilities employed dozens of workers, including at least two undocumented immigrants and seven employed illegally, prosecutors said.
Italian police inspections in March and April found that workers were subjected to "hygienic and health conditions that are below the minimum required by an ethical approach," the judges wrote in a 34-page ruling.
In addition, they operated machines without safety devices to increase productivity, which jeopardized labor safety, prosecutors said. The workers also lived, ate and slept in the workshop.
Electricity usage figures show that employees typically worked from dawn until after 9pm, including weekends and holidays.
When investigators arrived at one of the sites, three non-accounting workers attempted to escape by climbing a fence. They were quickly apprehended. At this and other workshops, investigators are examining documents showing the price brands pay suppliers for each product made.
The judgment against Armani stated how one of the company's subsidiaries, GA Operations, hired two subcontractors who in turn hired a number of Chinese-owned subcontractors in Italy.
Investigators interviewed workers who said they were paid just €2-3 an hour to work long days. That pay is far below the level stipulated in the collective bargaining agreement covering the sector, the court decision said.
Fabio Becceri, a marketing manager who spent 20 years working for Gucci and its owner Kering, said consumers are increasingly aware and that the use of allegedly unethical labor practices for high-end items can put them off buying.
"Customer expectations are really high, especially when you increase the price so aggressively," says Becheri.
Magistrate Fabio Roya is now working on a proposal for a program for fashion companies to strengthen checks on suppliers. "They must be responsible for the entire chain. This is the only way to stop this system that leads to the exploitation of workers," he added.