TGT Target Corp

By Sarah Nassauer in New York and Preetika Rana in New Delhi 

Wal-Mart Stores Inc., Target Corp. and other big U.S. retailers have become entangled in a controversy over whether one of India's biggest textile companies has been supplying their stores with phony "Egyptian cotton" sheets.

Egyptian cotton, which since colonial times has been prized for its softness and durability, is often touted by stores that charge a premium for bed sheets or bath towels made with the material. It is found in everything, from Ritz-Carlton hotel sheets to Brooks Brothers dress shirts.

Last Friday, Target said it was pulling thousands of items off its shelves and cutting ties with Welspun India Ltd. after an investigation determined Welspun had used non-Egyptian cotton for about two years.

Wal-Mart, J.C. Penney Co. and Bed Bath & Beyond Inc., three other big Welspun customers, said this week they were opening investigations into whether the company supplied them with authentic Egyptian-cotton products. "We will aggressively pursue our investigation and take appropriate action, if needed," Bed Bath & Beyond said on Wednesday.

Welspun says it has commissioned an accounting firm to review its supply chain. "We are taking this situation very seriously...We won't rest until this situation is resolved," the Indian company said on Wednesday.

Welspun's share price has been sliced by half since the Target allegations surfaced last Friday. Mumbai's stock exchange suspended trading in its shares Wednesday, as the stock fell to its maximum daily limit for a third-straight day.

Two-thirds of Welspun's $898 million in sales for the year ended March 31 came from American retailers. The textile maker also supplies towels for the Wimbledon tennis tournament and the Rugby World Cup. Welspun declined to say how it sources its Egyptian cotton, saying only that it would be covered as part of its audit.

Egypt produced less than 1% of the global cotton supply last year, according to the U.S. Department of Agriculture, and its output has suffered amid political and economic upheaval in recent years. Egypt's cotton production is estimated to be 320,000 bales in 2016, or a third of what Egypt produced in 2006 (975,000 bales), according to the USDA.

"There are a lot more Egyptian cotton goods than Egyptian cotton," said Jordan Lea, co-owner of Eastern Trading Co., a Greenville, S.C., cotton-trading firm. "It's impossible."

Like Cuban cigars or Champagne wines, the defining characteristic of Egyptian cotton isn't necessarily its quality but where it is grown. Any cotton harvested in Egypt -- there are roughly 10 varieties grown -- can carry the label. Long-fiber cotton sourced in Egypt is nearly indistinguishable from "long staple" cotton grown in other parts of the world once it becomes yarn or fabric, analysts say.

The Cotton Egypt Association, which licenses the trademark and certifies suppliers, estimates that 90% of products labeled "Egyptian cotton" are fakes but such public rebukes for mislabeling are rare. In October, the government-supported group said it had discovered the genomic fingerprint for Egyptian cotton and launched a crackdown to combat knockoffs using DNA testing.

Welspun was one of Cotton Egypt's certified suppliers, having received the "Egyptian Cotton Gold Seal" for its bed linens, bath rugs and towels in April this year. The Egyptian association didn't respond to a request for comment.

DNA testing, however, isn't widespread, said a spokesman for Cotton Inc., which represents U.S. cotton producers and importers. That has left manufactures and retailers mostly dependent on following the raw material through a complex supply chain. Each stage of a cotton product's production, from yarn making to fabric cutting, often happens in a different country.

A search for "Egyptian cotton sheets" on Amazon.com turns up more than 2 million results, while one on Walmart.com turns up more than 24,000 results. Both figures include items sold by third parties. Target.com now lists just six items.

A Target spokeswoman said about 750,000 sets of sheets in stores between August 2014 and July 2016 under the Fieldcrest brand were labeled as made with Egyptian cotton.

She declined to say what triggered the company's investigation into Welspun. The company said Welspun's conduct "was a clear violation" of its policies.

The discovery underscores the difficulties of policing a global supply chain, where large retailers assemble a sprawling network of suppliers in developing countries to produce their goods at cheaper cost.

Global retailers often complain of poor quality and weak compliance at factories in India and Bangladesh, but the tangled networks make it tough to assess blame when things go wrong.

Welspun is regarded as an Indian manufacturing success story, blossoming from a small yarn-spinning business in 1985 into one of Asia's largest textile makers. Large U.S. retailers flocked to the company as a relative safe haven from the production issues that have troubled some local firms in developing countries.

--Khadeeja Safdar contributed to this article.

Write to Sarah Nassauer at sarah.nassauer@wsj.com and Preetika Rana at preetika.rana@wsj.com

(END) Dow Jones Newswires

August 24, 2016 16:48 ET (20:48 GMT)

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