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Tuscan specialist leather suppliers lay off workers

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Demand from big brands slows after post-pandemic boom

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Fashion groups take more work in-house

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Fear of loss of small suppliers that symbolise "Made in

Italy"

By Silvia Ognibene, Elisa Anzolin and Valentina Za

FLORENCE, Italy, April 24 (Reuters) - Waning Chinese

demand for luxury goods has compounded the problems of Tuscany's

traditional leather companies as the big fashion houses they

supply reshape their strategies, leading to painful layoffs that

could be just the start.

Kering's warning of a 40-45% drop in first half

operating profit on Tuesday, as its Gucci brand suffers

particularly in Asia, has called time on a post-pandemic surge

in demand for designer bags and shoes.

LVMH, the world's largest luxury group, last week

reported Asia revenues fell 6% in the first quarter.

Many of the biggest luxury groups, which like Gucci base

their leather goods production in Tuscany, had increased orders

to respond to the post-pandemic boom. The subsequent slowdown

has left warehouses full and suppliers sidelined.

Marco Carraresi, who runs the Yobel leather goods company

and employs around 60 people making handbags and wallets, has

felt the full force.

"We were very exposed, 50% of our capacity was taken up with

work for a big Italian brand that cancelled its orders as of

last September," he told Reuters.

"From early February, half of our workers have been

temporarily laid off. We tried everything we could to avoid

this," added Carraresi, whose company is based in Figline

Valdarno, close to Florence.

CENTURIES OF SKILL UNDER EXISTENTIAL THREAT

Tuscany has been a centre for leather goods production for

centuries, developing a reputation for skilled craftsmanship

that helps luxury brands to command premium prices.

More than a short-term blip, locals say this downturn

reflects fundamental changes in the way big brands operate.

"The subcontracting chain used to go down to a fourth and

even fifth level, but in the last four of five years it has been

greatly shortened, and today the brands accept a maximum of two

levels of subcontracting," said Simone Balducci, who represents

Florence's leather goods manufacturers with the CNA trade

association.

"After COVID, production doubled, but the market did not

absorb it: now the warehouses are full....In the meantime,

brands have acquired numerous suppliers and taken employees in

house," he added.

The figures back him up.

Last year, 428 small Tuscan leather goods producers

furloughed 4,531 workers. In January alone, another 112

companies temporarily laid off 1,373 workers, official data

showed.

As the six-month furlough schemes expire, producers face an

existential threat, with brands relying less on outside

suppliers as they produce fewer and more exclusive items.

A 3%-4% growth in global sales of leather goods in 2023 was

driven solely by higher prices, while volumes shrank for the

first time in a decade, a study by Bain-Altagamma showed,

pointing to "heightened demand for ... more exclusive investment

pieces".

Many of the businesses impacted are small and with thin

profit margins. They do not have the capacity to weather sudden

changes in volumes, or sustain the investments that would allow

them to adjust to new consumer trends.

"Manufacturers' margins have declined particularly in recent

years, partly as a result of increasing internalisation by

brands," said Flavio Sciuccati, senior partner at consultancy

The European House - Ambrosetti Group.

Production costs are much higher when brands manufacture

in-house.

"Brands tend to keep in-house everything that has more added

value, such as the design and product development, and to

outsource the parts with less added value," Sciuccati added.

When relying on external manufacturers, production costs

typically total just 10%-15% of a luxury handbag's retail price

and only a portion of those costs is the compensation received

by third-party producers, industry sources say.

BEYOND THE BIG BRANDS

Some specialist suppliers have turned their back on the big

fashion houses to focus on producing limited edition products

for niche markets.

Sapaf Atelier, founded 70 years ago and based among the many

leather suppliers in the Florence suburb of Scandicci, has

benefited from making such a break a decade ago.

"We are small, we are independent, we are a family business,

and we don't work for brands, but for small emerging labels,"

owner Andrea Calistri said.

"The target customer is the one who wants to be the only one

to own that particular bag in a big city, for example," he

added, saying his workshop had hired three staff this year to

take its total to 22.

Adapting to a rising trend for sustainable fashion, they are

also working on a bag made from cacti, with pure gold trim for a

small U.S. brand - price to end customer $20,000.

By contrast, the suppliers still reliant on the big brands

are struggling to implement the transformations necessary to

respond to growing consumer sensitivity to social and

environmental issues.

At the same time, the big fashion houses are seeking to

protect themselves.

Highlighting the risks they face in relation to their

suppliers, a Milan court in April appointed an administrator to

run a Giorgio Armani company following allegations it indirectly

outsourced production to local Chinese-owned firms accused of

exploiting workers.

Armani Group said in a statement it had "always had control

and prevention measures in place to minimise abuses in the

supply chain," adding it would work with the authorities to

clarify its position.

In this climate, the fear in Tuscany is the permanent loss

of some of the unique skills that define the "Made in Italy"

appeal.

"If special measures are not taken, in the best case, these

workshops will make people redundant, and in the worst-case

scenario they will close down," said Paolo Brogi, Tuscan

regional president for leather goods for CNA.