The Future of ‘Made in Italy’: ‘Many Factories Will Disappear’

Italy is the epicentre of luxury’s supply chain: many of the world’s biggest luxury brands rely on thousands of workshops across the country to make their best-selling products, which arrive in glittering stores emblazoned with the prestigious “Made in Italy” stamp.

But across Italy’s manufacturing sector, a crisis is playing out that threatens this critical lynchpin of the luxury ecosystem.

More than 2,000 factories making clothing, textiles and leather goods closed in the first three quarters of 2024, according to the portal for Italy’s business register, InfoCamere. Industrial output for the sector ranked among the country’s worst performing for much of last year.

The situation is the immediate result of a stinging downturn in the market that’s been compounded by inflation, scandal and incoming regulatory demands. But it also lays bare structural challenges and power imbalances the industry has danced around for years, as brands cut costs and grew profit margins, often at the expense of their suppliers, while simultaneously promoting their commitment to artisanal craft and quality.

Now, the skilled suppliers they depend on to deliver on those promises are facing an existential crisis at a time when consumers are increasingly questioning whether luxury goods are still worth their fast-rising price tags.

“Maybe in the next year many factories will disappear,” said Flavio Sciuccati, a senior partner and director of the fashion unit at consultancy and think tank The European House – Ambrosetti. “This is a problem; this is know-how.”

A Long-Brewing Crisis

Roughly half of all luxury goods are produced in Italy, according to consultancy Bain & Co. But Italian manufacturing’s dominant position has been under threat for decades, making the country a highly prized but highly precarious production hub.

While luxury brands have continued to burnish their image with marketing claims that emphasise craft, they’ve also sought out cheaper manufacturing in other countries to help seize the high-growth opportunities afforded by mass-market globalisation over the last 30 years. Rising labour and energy costs have made it harder for Italian suppliers to compete in an increasingly global market, especially with a local talent pool that has dwindled, despite the establishment of new training schools backed by major luxury players.

In Italy, the demand for lower-priced, more agile production has also given rise to a deeply embedded shadow economy of cut-price manufacturers. These operate with little regard for the country’s labour laws, exploiting a largely migrant workforce who are often employed under the table to work long hours for minimal wages.

Between 2010 and 2023, the number of textile, apparel and leather goods manufacturing businesses registered with InfoCamere fell by 27 percent. Much of that decline took place while luxury sales were booming. A boom in luxury sales during the pandemic helped temporarily paper over many of these cracks, filling factories with a stream of orders, but the downturn that has followed has proved brutal and come at a moment of intense uncertainty for suppliers. Over the last few years, the pace of closures has accelerated.

Meanwhile, new pressures are coming to bear. The sector’s seedy underbelly has been exposed by an Italian investigation that’s so far linked brands including Armani and Dior to sweatshops operating outside of Milan, threatening the very fabric of the “Made in Italy” cultural cachet. The brands say they are committed to operating responsibly.

Trump’s election in the US has raised the spectre of new tariffs that could drastically reshape sourcing strategies, as brands look to manage the prospect of hefty charges to import goods made outside America into the world’s largest fashion market. And incoming European regulations intended to improve the fashion industry’s treatment of workers and reduce its environmental footprint are introducing costly and time-consuming new requirements to suppliers already under strain.

“The mood is desperation in Italy,” said Alberto Candiani, the owner and president of Italian denim producer Candiani Denim. The company, which was founded by Candiani’s great grandfather in 1938, has survived by elevating its offering and leaning into innovation and sustainability as points of differentiation. But it’s still been challenging to get by. At €6.25 ($6.44), the average price per metre of Candiani denim is roughly double what a mill in Turkey would charge.

In recent years, price hikes at top luxury brands have far outpaced inflation helping to boost their profit margins, but that has rarely trickled down to manufacturers. In the five years between 2018 and 2022, price increases helped average luxury EBITDA margins grow to above 30 percent, while manufacturers navigated much thinner margins of 10 percent or less and saw profitability decline, according to analysis by The European House – Ambrosetti. Those meagre margins make it very difficult to invest in the innovation, training and growth needed to remain competitive, Sciuccati said.

Increasingly transactional contracts for small volumes on tight timelines that reflect fashion’s shift to a more “drop-based” selling culture in recent years has added to the pressure on European suppliers, a 2023 report by labour advocacy groups Fair Trade Advocacy Office and Clean Clothes Campaign found.

“Factories need to be running 24 hours a day, seven days a week; you need quantity, not just turnover,” said Ercole Botto Poala, CEO of Italian merino wool textile manufacturer Reda. “It’s not possible that shoes that cost €20 [to produce] are going to be in the store for €3,000.”

New Demands and New Models

The crisis isn’t just a challenge for suppliers. It’s a looming liability for luxury brands, who are under growing pressure from regulators to demonstrate their supply chains are free of labour abuses and from consumers to deliver on promises of craft and quality that brands use to help justify increasingly eye-watering prices.

Brands have also tightened up demands that suppliers control subcontracting and companies from LVMH and Kering to Prada and Zegna have snapped up strategic suppliers in recent years to secure access to critical skills. Ensuring know-how is passed down through generations is a “fundamental” issue, “necessary to protect the image and future of Made in Italy,” Prada head of corporate social responsibility and chief marketing officer Lorenzo Bertelli said in an emailed statement.

But outsourcing gives brands flexibility to ratchet up volumes when times are good, without carrying the costs of excess capacity when things get tough. “Either [brands] integrate upstream, or they risk losing pieces of their supply chain,” said Bernstein analyst Luca Solca. Still, companies are unlikely to sacrifice the risk-free flexibility they get from the current system of outsourcing unless they are forced to do so, he added.

Some analysts and suppliers fear that the shifting market dynamics will finally crush the small and medium-sized ateliers that have long characterised Italy’s luxury manufacturing sector. Larger, more consolidated players are better positioned to streamline costs, navigate volatility, ensure supply-chain transparency and invest in digital and sustainability initiatives. But such changes also risk something elemental and essential, carrying the threat that the cultural lure of Italian manufacturing that allows brands to spin stories burnishing their craftsmanship credentials will be given over to corporate efficiency and offshoring.

“If we lose ‘Made in Italy,’ it’s because we forgot what it means,” said Botto Poala. “We need to invest in the intangible things that are part of our value as a country.”

Private-equity backed manufacturer Gruppo Florence is trying to find a new model to navigate the competing market forces while preserving a sense of tradition. The company was founded in 2020 by a group of investors led by former Bulgari CEO Francesco Trapani’s Vam Investments. It works with 130 brands, including most of luxury’s biggest players.

The company operates somewhat like a cooperative, with the nearly 40 suppliers it’s acquired so far owning minority shares in their parent. Each manufacturer is able to operate independently, but plugs into centralised systems to support digitisation, audits and innovation. The diverse portfolio and streamlined operating system allows the company to elevate the service it provides brands while also offering factories a greater degree of stability against a downturn. It generated more than €800 million in turnover in 2023, the last year for which numbers are available.

“We needed to create a project where we still defend these [“Made in Italy”] qualities, but improve what the market is asking for,” said CEO Attila Kiss. “We’ve tried to put together an innovative organisation where we still… conserve the identity of these companies.”