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Welspun Target Debacle: Wake-up Call for Emerging Market Firms

CASE STUDY, STRATEGY
IMT Ghaziabad, 8 Pages
AUTHOR(S) : Dr. Shalini Rahul Tiwari, Associate Professor, IMT, Ghaziabad and Parish Goyal, Student PGDM Program, IMT Ghaziabad

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Welspun Target Debacle: Wake-up Call for Emerging Market Firms

 

As of mid-August 2016, all was going well with Welspun India Ltd (WIL). Its Chairman, Balkrishan Goenka (Goenka), had just celebrated his fiftieth birthday at a five-star hotel in Mumbai. The home textile business of his conglomerate had reported a revenue of $900 million and profit of $106 million (Exhibit VII) for the year 2015-16. WIL had a market capitalization of $1,490 million (INR 10,000 crores) and was the largest supplier of terry towels in Asia, having the privilege of supplying towels to the  Wimbledon as well. Besides towels, the group also manufactured sheets and pillow-cases. The largest customer of these products being the US. While WIL has  registered a CAGR of 25%5 in revenue terms during 2005-2017 and its shares were trading at a P/E ratio of 14 and a RoE of 20%6; Mr. Goenka had also announced a goal of becoming a zero-debt and a $2 billion company by 2020..........

The Welspun Group

In 1985, Welspun Winilon Silk Mills Pvt. Ltd was established in Mumbai to produce Polyester Filament Yarn (PFY) and Polyester Texturized Yarn (PTY). The name was subsequently changed to Welspun Polyster Ltd., and it became Welspun India Ltd., in 1995.

As of July 2017, the Welspun Group was a $2.3 billion diversified conglomerate and was one of the fastest growing companies in India. It had grown at a CAGR of 30% in the last decade, having significant presence across sectors such as pipes, plates and coils, home textiles, steel, infrastructure and energy. The group employed over 24,000 people and had more than 100,000 shareholders..............

The Global Home Textile Market

The global home textile market in 2016 was estimated to be around $96 billion, of which the market of US alone was $45 billion. Experts believed that the home textile market would continue to grow at a rate of 5% due to the growing fashion trends in the home textile market and the expected housing boom in many emerging Asian nations.............

The Egyptian Cotton Fiasco

On August 19th 2016, Target, issued a press release announcing the termination of a decade old relationship with WIL (Exhibit II). WIL received 10% of its revenues from Target. Target said that they had conducted a thorough investigation of bed-sheets procured from WIL and found the sheets to be having non-Egyptian cotton in them. Target used to sell these sheets and pillow cases under their label Fieldcrest; it decided to recall 750,000 bedsheets and pillow cases sold over the last two years under this label. Target in its press release mentioned that, “This was a clear violation of both Target’s Code of Conduct and our Standards of Vendor Engagement, and............

Egyptian Cotton – Growth Trends and Implications

Egyptian Cotton was considered to be a luxury and commands a premium because of its fine denier, extra-long staple (i.e. the length of the fiber is longer), durability, strength and lighter weight and was acclaimed as being the best in the world. The production of such grade of cotton hadn’t been strong enough to meet global demand which gave it exclusivity and therefore it was being used for higher-end clothing. Though countries such as USA and Australia also produced large quantities of high-end cotton, the produce coming from Egypt commandeds prestige because of its long history to growing cotton..........

WIL’s Response to Fiasco

As per the US Textile Act and Rules as enforced by the Federal Trade commission (FTC), improper labeling of cotton products including clothing and bedding was considered to be a violation; hence two class action lawsuits had been filed against WIL in US federal courts. One of the cases, filed with the US District Court for the Eastern District of Missouri, charged WIL of violating Missouri’s consumer fraud statutes and other laws through deception, fraud, false pretense, false promise, misrepresentation, unfair practices or disguise, suppression, breach of warranty and/or omission of material facts among other things.............

The Road Ahead

WIL believed that the road ahead was all about innovation. It had filed global patents for 27 of its products mostly over the last three years, of which 9 have been granted. Some of its latest products had used innovative fibres such as Hygrocotton, Nanocore and Drylon fibres, and had been received well by the consumers. One of its acquired brands Christy’s (acquired in 2006) had been repositioned to give it more youth-friendly appeal. The company has introduced a range of sheets for children which have story tale embedded in them, the stories come to life when seen through a virtual reality app.............

Assignment Questions

I. What were the reasons behind Target severing its ties with WIL?
II. How did WIL rectify the damage caused by Target’s actions?
III. ................

Exhibits

Exhibit I (A): WIL’s Major Customers

Exhibit I (B): Profiles of Some Major Customers of WIL

Exhibit II: The Press Release by Target Corp.

Exhibit III: Declining Cotton Production in Egypt

Exhibit IV: Gold Seal Certificate

Exhibit V: Share Price of Welspun India Ltd.

Exhibit VI: US Imports of Cotton Home Textile

Exhibit VII: Financial Performance Welspun India Pvt. Ltd. 9M (April-December)

Teaching Note Preview

Welspun Target Debacle: Wake-up Call for Emerging Market Firms

 

Synopsis

The case describes the situation that occurred in August 2016 when Target (one of the largest US retailers) severed its retail ties with Welspun India Limited (WIL) after having discovered that the bedsheets supplied by WIL were of inferior quality, though the label mentioned that they had been produced from the finest Egyptian cotton. The other retailers also expressed their intention to severe ties; WIL not only lost its market capitalization but its reputation as well. However, by June 2017, WIL’s share price had started rising once again and retailers other than Target, were doing business with WIL. The case attempts to understand how WIL was able to control the damage and spring back into action. The case also serves an objective of understanding how firms from emerging markets manage business relationships with firms developed nation – risks involved in doing business, response of firms to crisis, and strategic options available for firms.

Pre-requisite Conceptual Understanding/Before the Classroom Discussion

Since the case is more suited to Post-graduate students or Executive Education participants, it is required that they should have undergone a basic course in Strategic Management, so as to identify and analyze the issues in greater detail and offer strategic options. The following readings can be assigned to the participants along with the case as pre-reads:

1. Khanna T. and Palepu K.G. “Chapter 6-Emerging giants: Going global”, in Winning in Emerging Markets – A Roadmap for Strategy and Execution, Harvard Business Review, 978-1-4221-4389-6, 2011, Pages 165-201.
2. Rugman A.M. and Nguyen Q.T.K. “Chapter 4-Modern international business theory and emerging market multinational companies”, in Understanding Multinationals from Emerging Markets eds. Alvaro Cuervo-Cazurra and Ravi Ramamurti, Cambridge University Press, 978-1-107-69832-1,2015, Pages 53-80.
3. Athreye S. “Chapter 7-Value chain configurations of Indian EMNEs”, in The competitive advanatage of emerging market multinations, eds. Williamson P., Ramamurti R., Fleury A. and Fluery, MTL Cambridge University Press, 978-1-107-65941-4,2013, Pages 132-173.
4. Cazurra A., Newburry W. and Park S.H. “Chapter 6- Operation”, in Emerging Market Multinationals – Managing Operational Challenges for sustained international growth, Cambridge University Press, 978-1-107-42152-3,2016, Pages 109-140.

Case Positioning/Setting

This case can be taught for the courses – Strategies in Emerging Markets and Strategic Management. It can be taken up for postgraduate students (PGDM and MBA), as well as Executive Education programmes. Any program that has a module dealing with emerging markets finds a good fit for this case.

Assignment Questions

The following questions can be given to the class –
I. What were the reasons behind Target severing its ties with WIL?
II. How did WIL rectify the damage caused by Target’s actions?
III..............

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Abstract

The case describes the situation that occurred in August 2016 when Target (one of the largest US retailers) severed its retail ties with Welspun India Limited (WIL) after having discovered that the bedsheets supplied by WIL were of inferior quality, though the label mentioned that they had been produced from the finest Egyptian cotton. Target offered to compensate its customers who had bought these sheets in the last two years. The other retailers also expressed their intention to severe ties and pulled off all merchandise of WIL from their shelves. WIL not only lost its market capitalization but its reputation as well. However, by June 2017, WIL’s share price had started rising once again and retailers other than Target, were doing business with WIL. The case attempts to understand how WIL was able to control the damage and spring back into action. The case serves an important objective of understanding how firms from emerging markets that are used to operating in ‘institutional voids’ manage business relationships with firms from developed nations. Insightful lessons are drawn for the firms from emerging markets (EMNEs) to understand risks involved in doing business, response to crisis situations, and developing and exercising strategic options to sustain growth and profitability.



Pedagogical Objectives

  • To highlight issues such as - firm’s response to external shocks which cause a loss in valuation; and charting out future growth options after analyzing the current situation and trends.
  • To understand the importance of stakeholder management in strategy formulation.
  • To highlight the importance of the fact that emerging market firms are operating in global markets, so they have to understand the challenges of operating in such markets; meeting stakeholder expectations; resolving conflicts; and charting a future strategy to mitigate such risks.

Case Positioning and Setting

The case can be used in courses such as Strategic Management and Strategies for Emerging Markets. Concepts such as Trends affecting the growth of firms, firms’ response to crisis, operating in developed markets, stakeholder management, and developing options for growth; can be covered through this case.



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