August 23 2016
Target Supplier Welspun Falls Most in Decade After Cotton Dispute
- Manufacturer will review supply chain and audit process
- Issue is about “fiber provenance” not quality, company says
Welspun India shares fell 20 percent, the most in a decade, after Target Corp. said it’s terminating business with the Indian manufacturer over cheaper cotton sheets being passed off as premium Egyptian cotton.
The company said it will review its supply chain and expects an audit to be completed within six to eight weeks. “There has been a failure on our part, without an ambiguity,” said Welspun managing director Rajesh Mandawewala on a conference call Monday. “The error is on our side so we have to take responsibility for it.”
Target on Aug. 19 said it discovered 750,000 sheets and pillowcases supplied by the textile manufacturer were mislabeled as Egyptian cotton between August 2014 and July 2016. The company pulled the items from its shelves, will offer customers refunds and is phasing out all Welspun products. The issue was of “fiber provenance” and not about quality, said Mandawewala.
Welspun said it’s “actively engaged” with other customers. Target is Welspun’s second-biggest customer, behind Bed Bath & Beyond Inc., according to data compiled by Bloomberg. Welspun makes towels, sheets, rugs and carpets for 18 of the top 30 global retailers. Other major clients include Wal-Mart Stores Inc., J.C. Penney Co. and Macy’s Inc.
Sales to Target amounted to $90 million in the fiscal year that ended in March, accounting for about 10 percent of the company’s revenue, according to Mandawewala. A “Big Four” accounting firm will be brought in to examine supply systems and processes, Welspun said Saturday.
Welspun shares fell by the daily 20 percent limit to 82.30 rupees in Mumbai trading, poised for its biggest loss since May 2006. The decline cut the company’s market value to $1.2 billion and erased gains this year.
“This is a big setback for the company,” said Sumant Kumar, a Mumbai-based analyst at Elara Securities India Pvt. “This incident will not only hit the company’s goodwill and image but will also raise questions about India’s brand image as home textile was emerging as one of the top sectors for exports.”
Bed Bath & Beyond and Wal-Mart also carry Welspun Egyptian cotton sheets. Both retailers carried the company’s 500 and 800-thread count sheets online, labeled as Crowning Touch. They retailed for as much as $175 a set.
Kumar said investors are concerned about other Welspun customer relationships. “There is likely to be a bigger problem for the company if other customers too start raising questions,” he said.
Egyptian cotton, which has a longer fiber that creates a softer thread than other cotton, often carries a higher price because shoppers consider it to be higher quality.
Yantai Pacific Home Fashion, a Chinese supplier of Egyptian cotton bed linen based in Shandong province, said the incident presents an opportunity for other players in the industry.
“India companies have usually been offering lower prices than Chinese companies and that’s why the American retailers chose them,” said company representative Jack Yang. “It’s better if customers go for quality over low prices.”