Huddled inside Target Corp’s headquarters in downtown Minneapolis, a team of investigators spent the summer trying to answer what should have been a simple question: What were hundreds of thousands of the retailer’s sheets actually made of?
What they discovered has undermined trust in a global luxury product and set off a salvo of class-action lawsuits that have created a king-sized public relations challenge for the Indian textiles industry and the US companies it supplies.
Turns out that major American retailers, including Target and Wal-Mart Stores Inc, have been selling premium-priced sheets purportedly made of Egyptian cotton – a byword for luxury in linens – but that may in reality be woven with lower- quality cotton blends.
Three suits seeking to be certified as class-actions have been filed against supplier Welspun India Ltd – and a separate one was directed at Wal-Mart. That complaint, filed in New York by customer Dorothy Monahan, accuses the world’s largest retailer of questioning the fibre content of Welspun’s products as early as 2008, but not halting sales until after Target did so in August. Wal-Mart said it will “vigorously defend” itself.
The other lawsuits, all filed in the US against Welspun, allege the company fraudulently labelled its bed sheets as Egyptian cotton. Welspun declined to comment on the suits. Managing director Rajesh Mandawewala told analysts during a conference call in August that “the error is on our side so we have to take responsibility for it.” Target, meanwhile, hasn’t been sued.
“The marketing has created this image in our heads that high-quality cotton and Egypt are synonymous,” said Louis Rose, a Memphis, Tennessee-based cotton industry consultant. “Consumers should be sceptical of these marketing claims. They’ll be under a lot more scrutiny now.”
Target has cut ties and ended all of its $90mn in annual business with the Indian manufacturer, and Wal-Mart Stores has stopped selling Welspun sheets that had been labelled 100% Egyptian cotton. Bed Bath & Beyond Inc followed suit on November 14, sending Welspun’s stock 4.5% lower in Mumbai the following day. The shares have tumbled about 40% since August 19, when Target announced its decision.
“The issue was about traceability, not about quality,” said Welspun Group chairman Balkrishan Goenka at a briefing in Mumbai on November 15, adding that the company’s sales growth next fiscal year will be “muted” due to the controversy.
The fake Egyptian sheet episode came to light after exhaustive work by Target investigators who analysed sheet fibres under microscopes and tracked their journey through a global supply chain. The probe found that 750,000 of Target’s “Egyptian cotton” sheets, sold for as much as $75 a pop, didn’t contain any Egyptian cotton at all, but an amalgam of lower-quality fibres from cheaper sources. That July discovery touched off a scandal spanning from Minnesota to Mumbai and Cairo that threatens the future of Welspun, part of a $3bn conglomerate headed by Goenka. It may also hobble Indian textile manufacturers in the race to supply Western consumers with high-quality sheets and towels, creating an opening for competitors from China and elsewhere to grab the business, according to industry analysts.
The Welspun-made sheets Target examined were sold under the Fieldcrest brand. While it has interests in steel, energy, and infrastructure, textiles are the bread and butter for Welspun, which says it supplies one in five towels sold in America and posted revenue of about $900mn in the 2016 fiscal year. Tennis stars like Roger Federer mop their brows with Welspun towels at the Wimbledon championships – a fact the company highlights in investor presentations.
The sheets fiasco reflects a simple reality: There’s a scarcity of Egyptian cotton. It first became a key export product in the early 19th century, when it arrived in France and became sought after for its silky feel. Production has been falling since the 1990s, however, and last year Egypt’s post-revolutionary military government ended subsidies for cotton farmers to shore up the state budget. A gradual decline in output has since become a precipitous plunge. The US Department of Agriculture estimates there will be a 53% decrease in production this year, to an all-time low of 160,000 bales.
The system for certifying Egyptian cotton is administered from Cairo by the Cotton Egypt Association, an industry group that grants stamps of approval to suppliers of 100% Egyptian cotton products. To receive one, CEA executive director Khaled Schuman explained, a manufacturer pays an initial fee of $5,000 and submits records of Egyptian cotton purchases and product samples, which undergo DNA analysis to identify whether the fibres were grown in Egypt or elsewhere. The companies are charged an additional $3,000 annually for the certification, according to Schuman.
But once a certification is granted, producers are mostly left alone until they need to renew their label a year later. “You can’t put an employee from the association on each production line to inspect” every item being produced, said Mohamed Negm, who conducts testing of certification samples for the association to verify the fibres are Egyptian-grown. Typically, suppliers like Welspun purchase cotton in raw form from Egypt for import to Asia, where it’s turned into finished products for sale in the US and elsewhere, he said.
The highest-quality Egyptian material costs twice as much as the standard grade sourced from India, providing a powerful incentive to cheat. “Factories have mixed the Egyptian cotton with other low quality cottons to make profit, which has ruined the reputation of Egyptian cotton,” said Negm, adding that’s what the DNA testing and certification aim to curtail.
During the set-up of the CEA’s DNA testing programme, Negm said, it started analysing random samples taken from store shelves globally; 90% were fake, mixed with low-quality cottons from the likes of Sudan, Burkina Faso and Pakistan.
“It’s very easy to play it loose during the production process if you want,” said Liu Dang Dang, a foreign sales manager at Chinese manufacturer Jihua 3542 Textile Co. US retailers “should have realised how obvious it is,” he said, adding that his company, which supplies Egyptian cotton fabric to manufacturers in the US and Europe, doesn’t engage in the practice. “The price they want to pay for Egyptian cotton sheets is so low when the price of Egyptian cotton is so high.”
Blending is widespread in the industry and quietly tolerated by many retail chains, according to two executives at producers other than Welspun who asked not to be identified discussing the procedure. Sometimes that means mixing good-quality non-Egyptian cotton that maintains the same feel amid shortages of the real thing, but it also often includes using cheaper grades to save money, said the executives, citing their experience with cotton processing departments and export requirements for US retailers.
The CEA formally announced its DNA testing programme in April, saying the “gold seal” it would give manufacturers who passed would help “rid the supply chain of falsely labelled goods.” Awkwardly, the first company to receive a gold seal was Welspun, for bed linens as well as towels and bath rugs.
Target has decided not to rely on CEA certifications going forward, according to a person familiar with the retailer’s decisions who asked not to be identified discussing internal matters. Wal-Mart, by contrast, has said it will continue to rely on the CEA standard. Schuman said the organisation is “making good efforts to make the system tougher” to avoid future problems, for example by increasing the role of third-party auditors and monitoring suppliers’ inventories more closely.
After discovering problems with Welspun sheets, Target quickly decided to terminate its entire relationship with the company, citing “the trust that our guests place in us.” It also opted to offer refunds to customers who’d purchased them – even if they’d been sleeping on them for years. Wal-Mart has also offered refunds.
Although Welspun knew Target was investigating its products, its executives believed that, at worst, the retailer would drop only its Egyptian cotton sheets, according to a person privy to the discussions. Target didn’t warn Welspun beforehand about its August 19 announcement that it was ending all its business ties, the person said, which left the company blindsided.