Are You Prepared For The High Cost Of A Food Recall?

By Sam Lewis

As the complexity and global nature of the food supply chain continues to grow, so does the number of food product recalls.

Of course every food processor and manufacturer is going to say they apply high safety and quality standards on every product leaving their facilities, all with the overarching goal of protecting their customers.

Well, duh.

But, even with the most-stringent quality standards, recalls still happen. And when they do, you, as the food manufacturer or processer, are affected in three ways: the direct costs of the recall, lost sales, and damage to your brand and consumer loyalty.

Direct Costs
It’s known industrywide that, on average, the direct cost of a recall to a food company is $10 million. That’s a lot of “cheddar” going out the door to notify regulating bodies, every member of your supply chain, and consumers as to the details of the event. Next, the affected product must be retrieved, properly stored, destroyed, and then the cause of the event must be found. That average $10 million cost also assumes no one falls ill, is injured, or dies from the affected product. Should any of those unfortunate outcomes occur, at-fault food makers are going to feel their wallets becoming a lot lighter due to the high cost of litigation. In fact, ConAgra is currently feeling this pain. The company recently agreed to pay a record–setting $11.2 million  to settle allegations that the company shipped peanut butter contaminated with salmonella under its Peter Pan brand and Walmart’s Great Value label several years ago.

Lost Sales
All of that product you have to destroy due to a recall obviously equates to lost sales. Ultimately, the final cost is going to be dependent on the volume of affected product. But whatever number you come up with, it’s generally not a situation that makes CFOs smile.

To compound the issue of lost sales, production may need to be brought to a halt at affected manufacturing and processing facilities, furthering losses. Take for instance Columbus, OH-based Jeni’s Splendid Ice Creams. In late April, pints of the company’s ice cream were determined to have listeria monocytogenes, spawning a recall across all Jeni’s products, totaling 265 tons of ice cream. All production came to a stop due to the recall. It took more than three weeks after the recall for the company’s ice cream boutiques to reopen. However, retail sales at locations around the U.S. aren’t expected to resume until summer months, placing big restraints on how profitable Jeni’s can be.

Damaged Reputation And Consumer Confidence
While it’s easy to quantify the cost of lost sales, calculating the damage done to your brand or consumer loyalty is much more complicated. Today’s consumers have instant and all-day access to media coverage and social networks, which means  food makers will feel the impact of a recall almost immediately and even long after affected products have cleared shelves.

According to a Harris poll on food recalls and consumer confidence, more than half of surveyed consumers say they would at least temporarily switch food product brands after hearing of a recall. Further, nearly 20 percent state they wouldn’t purchase any brand made by the affected company. But, how long will consumers feel this way? According to a 2010 Grocery Supplier survey, in the year after the nation’s largest spinach recall, nearly three out of four consumers didn’t purchase the product due to safety concerns. The trend of unease settled the next year, with only one in four consumers not purchasing the affected product. Still, that’s a big number of consumers not trusting a product.

Needless to say, the potential damage to brands and consumer confidence from a recall can wreak havoc on a company long term. Combining the direct costs of a recall and lost sales with damaged brand reputation and lost consumer confidence could spell B-A-N-K-R-U-P-T-C-Y for some food makers.

In my mind, when it comes to food safety, the old adage, “an ounce of prevention is worth a pound of cure” is a great place to start. Food companies can reduce the chances of a recall by having a solid foundation of food safety management practices. Within these, you should:

• Perform regular and comprehensive cleaning and sanitation procedures on equipment.
• Enforce strict personal hygiene and hand washing policies for employees.
• Train employees of policy and procedures, especially when reporting contamination issues.
• Uphold HACCP and HARPC programs.
• Implement pathogen detection and product inspection technologies.
• Document all occurrences within the facility. If it’s not documented, it didn’t happen.