Fake Products Or Fake Quality Checks?

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Target dumps Welspun for delivering fake Egyptian cotton sheets for 2 years

– Sheets made from other cotton labeled and sold as Egyptian for two years

– Mumbai firm loses contract with its second largest customer

– Walmart, JC Penney, Bed & Bath begin investigations too

Last week, the industry was buzzing with the sensational news about Welspun losing its second largest customer, significantly eroding its market capitalization. After the initial shock, the talks have turned to how a company like Welspun could've continued to supply `fake' goods to a large US buyer like Target, for as long as two years. This case once again puts a question mark on the boastful claims of buyers and suppliers of following the most stringent quality controls and checks at every stage of sourcing and processing. If buyers claim to be working closely with their suppliers, then how could such oversight happen, assuming that Welspun is the only one here with a vested financial interest. And again, discussions have surfaced about buyers' demands for the highest quality products, at absurdly low prices. And this once again brings to fore the need for establishing reference or benchmark prices within the industry. Or it could also be a case of a business rival blowing the whistle.

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That aside, Target lost no time to terminate all business relations with Welspun, and Welspun is making all the right noises about investigating the case. It is clearly a case of being sorry not because you did it, but being sorry because you got caught.  As analysts at last week's conference call with Welspun report, Welspun officials were elusive, throwing up more questions than answers.

Now, Walmart, Bed, Bath & Beyond, and JC Penney have also begun investigations into Welspun products. Welspun India Ltd said it has appointed consultancy firm Ernst & Young to investigate after Target Corp. severed ties with the textile manufacturer, which the retailer said had passed off cheaper cotton sheets as premium Egyptian cotton for two years. Target said it discovered last month that some 750,000 sheets and pillowcases from Welspun had been mislabeled as Egyptian cotton. Target pulled the items, sold under the Fieldcrest label, from its stores and has offered customers refunds on the products, which were made between August 2014 and July 2016.

A "Big Four" accounting firm will be brought in to examine supply systems and processes, Mumbai-based Welspun said in a statement released through the Bombay Stock Exchange. "This is an issue of highest priority to us and we will take all necessary steps to address it," the Mumbai-based textile manufacturer said in its statement. Rajesh R. Mandawewala, managing director at Welspun India, told analysts that the company had been selling the same material to a "few other customers" as well. "We are actively engaged with our customers. Most of them have been supportive," he said, sharing that the product made up 3-6% of its overall sales.

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Target is Welspun's second largest customer, behind Bed Bath & Beyond Inc. 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. It also manufactures the towels for the Wimbledon tennis championships and the Rugby World Cup.

Phasing Out

Target said it is phasing out all of its products from Welspun, which it has used as a supplier for more than a decade, though the process will take time since some merchandise has already been shipped or paid for. The withdrawal only includes two lines of Egyptian cotton bedding, and not all of its Egyptian cotton sheets are affected. Wal-Mart Stores Inc, Welspun's third-biggest customer, is reviewing the company's cotton certification records, a report in the Wall Street Journal said. "We are currently reviewing Welspun cotton certification records and plan to have additional conversations with Welspun. If we discover an issue, we will handle it appropriately," a PTI report quoted a Walmart spokesperson as saying. The US retail giant accounts for about 8-9% of Welspun's revenues, according to analysts.

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Retail giant JC Penney too is conducting a probe into the company's products. A PTI report, quoted JC Penney spokesperson as saying that suppliers of private and exclusive brand products to the company are required to certify the quality compliance of any raw materials used.  

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