More than money: What a recall truly costs
While manufacturers are likely to spend millions, they also need to preserve consumer trust
A joint industry study by the Food Marketing Institute and Grocery Manufacturers Association estimated the average cost of a recall for food companies to be $10 million in direct costs, plus brand damage and lost sales.
But according to a 2013 Bloomberg report about the most expensive product recalls, those numbers could increase drastically.
- Peanut Corporation of America, salmonella-tainted peanut butter (2009) - Estimated $1 billion in lost production and sales for U.S. peanut producers, according to the head of the Georgia Peanut Commission.
- Cadbury Schweppes, salmonella-tainted chocolate bars (2006) – About £20 million (close to $26 million), plus chocolate sales tumbled about 14%.
- Westland-Hallmark Meats, beef from abused animals (2008) – After working through one of the largest beef recalls in U.S. history, the company settled with the federal government for nearly $500 million.
The total costs of a recall range depending on the problem, product and other logistics, but the types of costs tend to remain consistent.
Direct costs of a recall
The direct costs of the actual recall generally include:
- Notifying retailers and regulatory bodies
- Pulling products, also known as reverse logistics
- Storing and disposing of contaminated or mislabeled products
- Any additional labor needed to carry out these tasks and investigate the source of the problem
“Interestingly enough, that typically ends up being the smallest cost out of all of them in many cases,” Kevin Pollack, SVP of marketing, inside sales and commercial operations at Stericycle Solutions.
If someone sues the company over a recalled product or organizes a class action suit against them, the costs of litigation can add up quickly. That’s especially true if the case drags on for years. Attorneys and court fees, as well as settlements from manufacturers make these expenses pile up.
Similar to litigation costs, manufacturers could face government fines for any criminal charges a manufacturer or executive incurs. Last May, ConAgra agreed to settle a federal criminal charge through an $11.2 million payment, including $8 million for criminal fines and $3.2 million for forfeitures to the U.S. government.
Any recalled products a manufacturer has to pull from shelves represent lost revenue opportunities. Retailers might shut off entire SKUs if manufacturers aren’t yet sure which batches are impacted, which could mean extra and unnecessary lost sales opportunities. And if the manufacturer shuts down production, regardless of whether it's voluntarily or by mandate, the shutdown leads to still more missed revenue opportunities.
Sometimes manufacturers and regulators can pinpoint a specific plant where the contamination occurred, so they only have to stop production in one place. But other times, contamination is more widespread or the company isn’t sure of the source. Out of an abundance of caution, they shut down all of their plants until they can test, clean and otherwise reboot the facilities.
Blue Bell experienced firsthand how this particular recall cost can scale. During its listeria-related ice cream recall last year, the company shut down all three of its plants, laid off employees and spent months cleaning and determining how to get the plants all back online.
Pollack said that lost sales and brand equity are often the most expensive costs of a recall.
Damaged brand or reputation
While this cost may be the hardest to quantify, it’s clear that a recall could damage a brand or company’s reputation and level of trust in the eyes of consumers. If a manufacturer is fully transparent and proactive about handling the recall, that can minimize the damage.
“Consumers are obviously going to vote with their buying capital,” said Pollack. “If they're concerned about the quality or safety of the product, where they don't feel that a manufacturer has handled the recall appropriately, that could have the longest tail.”
If a manufacturer doesn’t handle a recall well in consumers’ minds, that sentiment could drag on, impacting sales for weeks, months or years, if not permanently. A Harris Interactive poll found that 55% of consumers would switch brands temporarily following a recall. About 15% would never buy the recalled product, and 21% would go one step further and never buy any brand made by the recalled product’s manufacturer.
“We've looked at some market data, and we've seen certain companies have had their sales bounce back within a quarter and been right back on track, because consumers didn't feel that the recall was handled poorly," Pollack said. They felt like it was addressed very well. The company was on top of it, and they still trusted that company and valued the products it was providing.”
“In other cases, if they feel like it was handled poorly, you could stretch into multiple quarters or even several years,” Pollack continued. “Then there are some products that may never come back, depending on its severity. It may do enough damage in lost sales to where the company struggles to recover at all.”
It’s all about scale and scope
When it comes to consumers’ reactions to a recall and perceptions of a brand or company afterwards, no data sets can exactly predict how high these recall costs might climb. Instead, Pollack said, it’s more about the scale and scope of the recall that will have the most lasting impact in the minds of consumers.
Pollack outlines three key factors that influence how quickly a brand and its sales might bounce back after a recall:
- How large the recall was.
- Whether the company made multiple announcements because the recall started small but continued to expand (like the General Mills flour recall).
- The product category and whether consumers are concerned about it, particularly if the recall involved products for children, the elderly and pets.
“The downside is if you have a children's product and it's perceived that you didn't do a good job of managing the recall, obviously parents are not going to be that forgiving,” said Pollack. “They're obviously going to be concerned that, is this product safe on an ongoing basis?”
How to manage the costs of a recall
With advance preparation, manufacturers can reduce a recall's scale and the length of time it takes to resolve, which drive the costs of the recall itself and any residual impact on the brand and sales going forward.
“That's where that timeline can vary quite a bit,” said Pollack. “Impact can go from somewhat minimal to catastrophic for a company, to where it materially affects sales for quite a bit of time.”
To best manage a recall, manufacturers can put in place a FSMA-compliant recall plan that addresses the five obstacles to recovery the Grocery Manufacturers Association outlined in a report:
- Time, effort and expense of recovery.
- Brand protection.
- Supplier relationships.
- Multiple insurance policies may apply.
- Limited recall claims experience and resources.
GMA also outlines several key factors manufacturers should consider to maximize their financial recovery following a recall. The organization recommends having a plan that includes cost-recovery procedures, a broad recovery team that works parallel to the recall team, and a cost-recovery leader. GMA also suggests that before a recall ever happens, manufacturers communicate with insurers and outside service providers like brokers, forensic accountants or lawyers experienced in this area.
All planning aside, what is equally important about recall management is being completely transparent from the time of the first announcement. If consumers feel a manufacturer is transparent and proactive in taking care of the recall, it can lessen the impact a recall might have on sales in the long term, regardless of the direct costs in the short term.