Avoid Brand Destruction due to Product Recalls
It’s the news no CEO or business owner ever wants to hear:
A consumer is seeking compensation for injuries or property damages caused by a faulty product.
Some ingredient found contaminated by the producer with Escherichia coli bacteria.
The tomato sauce label fails to declare milk ingredients.
In May 2011, the e-coli outbreak in Germany caused 50 deaths, and well over 3,200 infections linked to contaminated vegetables. Of the infected, more than 800 were diagnosed with a severe form of intestinal illness, with possible long-term health effects.
While food safety officials struggled to identify the precise source of the contamination, suspicion had fallen on organic cucumbers imported from Spain and the Netherlands. Spain though refused to take the blame, arguing that the affected cucumbers may have been contaminated after leaving Spain.
The problem with identifying the source of the contamination is a serious one. A wholesaler may work with 10 different suppliers and mix unbranded fresh fruit and vegetables together for grocery shop shelves. Likewise a manufacturer’s supply chain isn’t always traceable. This makes recalls particularly difficult to manage and providing customer reassurance even more difficult.
That was the second major food scare for German consumers in one year. In January, the highly toxic cancer-causing chemical dioxin was found in egg, poultry, and pork products. The latest food scare has increased the focus on food industries to be accountable to stricter regulation and risk management standards.
E-coli outbreaks are not new. In 1996, 12 people died and more than 9,000 fell ill after consuming e-coli-tainted radish sprouts in Japan. In the most recent virulent outbreak, bean sprouts originating from the Lower Saxony region in Germany were determined to be the source. Sprouts, a staple diet in parts of Asia, have been linked to 30 food poisoning outbreaks in the last 15 years and they are not the only source of food contamination or infections.
The volume and severity of food recalls in recent years are enough to scare any consumer away from grocery aisles and frighten any food manufacturer into thinking that its product might be next. The industry got a taste of that reality with the massive recall of Salmonella-contaminated products made with peanuts originating from the Peanut Corporation of America (PCA). By March 2009, the recall included more than 3,200 products, with the number rising daily. Then, just as the dust seemed to settle, a separate recall of Salmonella-tainted pistachio products hit the market.
Of course, recalls aren’t unique to the nut industry. In the last quarter of 2008, the U.S. Food and Drug Administration’s website listed 33 Class I food recalls and safety alerts—those posing the most serious health risks to consumers—and the U.S. Department of Agriculture reported 18 recalls related to meat and poultry. Some of those highly publicized recalls included cocoa with a possible melamine contamination, tomato sauce with a label that did not declare milk ingredients, and several beef products with possible E. coli contamination.
These cases should set off an internal warning alarm for any food industry executive.
Indeed, a 2008 AMR Research survey of 251 food and beverage supply chain decision makers in the U.S. and Europe showed that more than half had participated in a health and safety recall in 2007. with more than half of the losses associated with those recalls exceeding $10 million. In fact, the study found that 40 percent of respondents had incurred losses of at least $20 million in 2007. This is despite the fact that traceability processes and systems can make many of these recalls avoidable.
On top of that, companies face the risk of lingering consumer backlash from recalls. According to separate surveys conducted by Deloitte Consulting LLP and Gallup Inc. in 2008, about 60% of Americans have avoided certain foods or brands because of a recall. By February of 2010, sales of peanut butter were down 25% for all brands, whether or not they had been involved with the recall. Contributing to consumer and industry unrest is the fact that many recalls are slow to get started, take a long time to perform, and produce incomplete results.
The study reveals that, on average, it takes food and beverage companies 14 days to sense the need for a recall and 34 days to enact it. By that time, less than 40 percent of the affected product can be collected because the rest either has already been consumed or thrown out, respondents said.
Despite a perception among food companies that they’re doing a good job managing product quality, the staggering cost of recalls proves ‘business-as-usual’ isn’t working. In fact food producers can be much more proactive in managing food safety to improve product quality and reduce supply chain risk.
While the food and beverage industry has been slow to adopt modern traceability software, many companies appear to recognize it may be time to change. More than three in four companies surveyed plan to spend money to improve their time to sense a quality issue and enact a recall. An equal share of respondents plan to invest in the improvement of supply chain traceability this year.
Food and beverage manufacturers have always faced the threat of food safety issues and recalls. But the potential for recalling products that contain contaminated, noncompliant, or improperly labeled ingredients has elevated as the complexity of the food and beverage industry has increased. Growing regulations—especially those across a global supply chain—and intensified customer requirements are placing new demands on those designing, labeling, and manufacturing products.
Where Food and Beverage Companies Fall Short
As the demands for product quality and compliance increase, so do the requirements for managing the entire product lifecycle. Unfortunately, many companies lack the necessary product development, production, and management practices to sufficiently protect their brands. Specifically, they don’t have the systems, processes, and policies in place to prevent error-based product recalls from occurring. They also lack the tools to locate contaminated ingredients from a supplier, quickly identify their exposure, and mitigate the situation to minimize impact to the brand.
The recent scandal over horse meat sold as beef leading to an alert over 50,000 tons of meat sold across Europe and an earlier recall of a product in Britain containing a veterinary drug banned from the human food chain is a good testament.
Regulators are responding appropriately to the threats and the food safety landscape is undergoing a seismic change.
Following the footsteps of the US and EU food and product safety laws, many countries have enacted or are enacting tougher product safety laws, as well as product recall regulations and procedures. Every year, thousands of safety recalls are announced and instigated by companies and regulatory agencies around the globe. Recall costs for the food industry are estimated to be well over US$1 billion per annum. Food product recalls have reached unprecedented levels and are having a major impact on the profitability of many companies.
Further, short-term revenue is lost because of recalled/destroyed product, and in the long term, in some cases, the damage done to branded products may take years to repair. You may even go bankrupt, or out of business altogether.
However a well-managed recall can have the opposite effect, although the costs involved to manage the incident and restore the standing of the business will be high.
The direct costs of a product recall include costs incurred in removing the product from the market and then destroying it, contacting distributors, retailers, and customers who may have purchased it, legal proceedings, liability for testing and inspections, and product replacements. Indirect costs can include damage to reputation and brand, long-term losses to a product category, marketing and advertising costs to recover market share, and increased product liability insurance costs, among others.
One key aspect of proactive risk management is planning for a crisis before it happens and protecting the company by purchasing the appropriate levels of insurance coverage and capacity. Besides compelling manufacturers to have a robust product recall plan, insurance will also prompt them to have the will to recognize and act on the need for a recall when it emerges.
In addition to covering against the expenses incurred in recalling and replacing products, as well as the legal liabilities, insurance can be purchased to cover short-term costs such as crisis management, media relations, plant cleanup costs, and loss of gross income such as the loss of a contract, arising from a recall.
Product recall insurance coverage protects entities for costs incurred on a first party and third party basis. The insurance should provide the ability to recover costs for recalling products, as well as all third party costs involving compensation of retailers and wholesalers.
Planning to respond to a worse case scenario can be the difference between a company’s survival and its collapse.
To the end consumer, it can be the difference between life and death.
EXL Consulting offers a wide range of risk consulting and insurance services to assist food companies plan, manage, and mitigate exposures relating to products manufactured and distributed across the globe. Our specialist risk consulting services include the design and rollout of recall and crisis management plans, business continuity plans, and product security risk mapping. We also advise and assist large food companies in creating and structuring comprehensive product recall insurance covers.
Product liability insurance is not a substitute for product recall coverage. Product liability insurance only comes into play if the product has entered the supply chain and causes physical damage or bodily injury. Various extensions are available to this coverage, but they only cover direct recall expenses.
Product recall insurance protects the company’s revenue, balance sheet and contracts with customers, and therefore provides support to the company’s reputation and its brand at an absorbable cost.