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)