Target has dumped one of India’s biggest textile companies because of fake bed sheets

Target, America’s second-largest discount retailer, has decided to cut ties with Indian textiles manufacturer Welspun India because of fake Egyptian cotton sheets supplied by the Mumbai-headquartered company.

On Aug.19, the Minneapolis, Minnesota, retailer said that between 2014 and 2016, Welspun India supplied sheets saying they were made of Egyptian cotton, although they were not.

“After an extensive investigation, we recently confirmed that Welspun substituted another type of non-Egyptian cotton when producing these sheets between August 2014 and July 2016,” Target said in a statement. Target is contacting customers and offering a refund to those who bought these sheets, it said. The retailer has also removed the product—sold under the Fieldcrest label—from its stores.

“We have informed Welspun that, due to this conduct, we are in the process of terminating our relationship with them,” Target added. Some 750,000 such products were impacted over the two-year span, Molly Snyder, a Target spokesperson said in an email.

Welspun India is one of the world’s largest textile makers and typically caters to the US, UK and European markets. Target is Welspun India’s second largest customer, behind American retailer Bed, Bath and Beyond, Bloomberg reported. J. C. Penney, Macy’s, Costco, Home Depot and Walmart also buy from Welspun India.

The manufacturer also makes towels for the Wimbledon tennis tournament. Other products it makes include bath robes, bath rugs and mats, area rugs, carpets, bed sheets, utility bedding and fashion bedding.

Shares of Welspun India fell as much as 20% on the BSE Aug. 22, and hit the lower circuit. The company said in a statement (pdf) to stock exchanges that it has commissioned an audit.

“We have initiated immediate actions to investigate the root cause. We are appointing an external auditor (one of the Big Four) to audit our supply and processes,” said Welspun India, part of the $3 billion Welspun Group, adding the issue is of “highest priority.”

Important customers

The textile maker—and its shareholders—have reason to be worried because it has a huge exposure to the US market. “Every 5th towel sold in the US is manufactured by Welspun India,” according to its annual report (pdf). The company depends on exports for 95% of its revenue. It earned a total revenue of Rs4,961 crore for the 2015-16 financial year.

Future growth hinges on the US market where the company is targeting the hospitality sector, analysts have said. “Growth potential in the US hospitality and health care channels remains immense as Welspun sales from hospitality channel at $25-30 million (versus market size of $1.5 billion across both these segments). Welspun is in business development phase in its healthcare segment,” analysts Avi Mehta and Sameer Gupta of IIFL Institutional Equities, a brokerage, wrote in a July 27 research note.

Welspun India didn’t immediate reply to an email from Quartz inquiring on the specific business impact of Target’s decision.