With a number of its top buyers like Target Corp. and Wal-Mart Stores Inc. terminating their contracts with the company, and its aftermath wiping away 30% of its market capitalization, troubled Welspun India Ltd was already in the doghouse.
Now comes news of two class action lawsuits against it on grounds that the Indian manufacturer fraudulently labelled its bedsheets and towels as premium Egyptian cotton.
The woes of Welspun India don’t seem to be coming to an end any time soon.
Market analysts are divided on the potential impact of these setbacks on the company’s business.
Some have even suggested the initial reaction may be overdone. But regardless of whether other buyers follow suit and slash their dealings with it, there is no way around the massive trust deficit Welspun finds itself saddled with. What has taken a beating is the company’s “reputation capital”, described in a study by Jivas Chakravarthy of Chapman University, Ed deHaan of Stanford University and Shivaram Rajgopal of Emory University, as a genuine, if intangible, financial asset that is embedded in a company’s market value.
So is it all over for Welspun? Maybe not. There is good reason why the company rose to the top of its game in the first place. Several reasons, in fact.
Take a look at these testimonials before 22 August. The company was among the top three home textile manufacturers in the world, the largest home textile company in Asia and the leading home textile exporter to the US for four years in a row (2012-15). It is a vendor to 14 of top 30 global retailers and these include marquee names such as Bed Bath and Beyond Inc., Target, Macy’s Inc., Wal-Mart and JC Penney Co. Inc. For its exertions, the company was ranked No.1 for the last two years by US Home Textiles Today magazine in Top 15 Home Supplier Giants to USA. In 2015, it won the award for “highest direct to store delivery share” from Ikea AB, as well as the Green manufacturing excellence award from Frost & Sullivan.
But along with that, for over two years starting 2014, it was also allegedly cheating its prime customers. Of course, after the revelations of fraud by employees at Wells Fargo and Co., cheating customers appears to be a global phenomenon and companies seem to treat being caught out as par for the course.
Last November, a major investigation was launched into seven of Italy’s best-known olive oil companies for allegedly defrauding consumers by passing off inferior quality virgin olive oil as extra-virgin oil. And Big Auto and Big Pharma have been setting new standards in malfeasance.
But common as it is, what distinguishes survivors of corporate busts is how they react to such situations. And that’s where Welspun has a choice. It can abandon itself to the buffetings of its actions while emulating a Ranbaxy or a Kingfisher in looking for a quick exit for the promoters. Or it can take the blow on its chin and resolve to come back wiser from its mistakes and stronger for its ordeal. Pharma giant Johnson & Johnson’s swift response in 1982 to the scandal that erupted following the death of seven people after consuming its best-selling painkiller Tylenol, which had been deliberately contaminated with cyanide, is considered the gold standard in addressing a corporate crisis of this nature.
Already Welspun has gone into quiet introspection. Vitally it did not come out screaming its innocence and denying what happened. In a conference call with investors, it took the blame without any obfuscation with Rajesh Mandawewala, its managing director, stating: “There has been, let’s say, a failure on our part, so without any ambiguity the fault is on our side.” Welspun also appointed audit firm EY to review its processes.
Of course, it is a long haul back. In the textile business the supply chain typically lasts from six to eight months. And with the festival season in the West coming up, no large retailer will take a chance on Welspun any time soon. In a sense, it gives the company the time to go back to its basics and fix the errors that crept into its systems.
In the 1987 movie Wall Street, Hal Holbrook has a memorable dialogue: “Man looks in the abyss, there’s nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss.”
Welspun today is staring deep into the abyss. Can it find itself?
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week. To read more from The Corporate Outsider, click here