Product recalls: How recalls damage your brand and bottom line

Food recalls occur when contaminated or potentially contaminated food finds its way to the consumer. In 2021 alone, cases have ranged from undeclared ingredients to bacterial contamination, improper packaging to parasites, and everything in between. Recalls can have a devastating effect on a company’s reputation, bottom line, and future prospects.

But more important than brand protection is the human risk. Cases like salmonella or listeria infection pose a severe and widespread threat to consumer safety. So in counting the true cost of recalls, the financial impact is only the tip of an iceberg that goes deeper than you might imagine. 

The cost of product recalls

Product recalls almost universally prioritize consumer safety (and rightly so). Whether it’s a batch of contaminated food or faulty smartphone batteries, harm reduction is always the ultimate goal. Once consumers are safe from risk, manufacturers can begin counting the actual cost of a food recall.

Reputation cost

Brand protection is a big piece of the recall puzzle. In the same study, which surveyed 36 food manufacturers including General Mills, Coca-Cola and Kellogg, 100% of respondents ranked company reputation among their most serious concerns after consumer safety.

Reputational risk carries a high and sustained cost. But reputation cost is also the hardest to quantify. This is because the manufacturer often faces hesitation from customers after a food contamination incident, which means a longer road to recovery as the producer earns back trust.

Food recalls don’t just affect consumer confidence. Suppliers and commercial customers – restaurants, supermarkets, wholesale suppliers, butchers, and fast food outlets, to name a few – all have skin in the game. One study found 55% of consumers would temporarily switch brands following a food recall, while 15% would never repurchase the product, both of which can hurt a retailer’s margin.

Understanding the influence of social media in a food recall can help manufacturers manage the process more effectively. So too can responding quickly, taking responsibility, and acting transparently to remedy the product recall.

Downtime and lost sales

Business interruptions can be acute or prolonged, depending on the scale and severity of the food contamination.

• Shutdown costs
• Cleaning the facility
• Cancelling logistics or transport contracts
• Laying off staff
• Breaching supply contracts
• Immediate and long-term lost sales
• Re-establishing operations
• Hiring and training employees

When independent investigators like the Food and Drug Administration (FDA) or Food Safety Inspection Service (FSIS) in the USA intervene to investigate the cause of chemical, biological or physical contamination, plants can stay closed for a long time. Restarting from these shutdowns takes time.

This is where transparency and a clear crisis plan can help food producers to re-start operations in a timely manner. By acting quickly, communicating openly and honestly, and working in good faith with affected stakeholders, the road to recovery can often be substantially shorter (and less costly).

2. Assuming risk

Taking out insurance against food recalls or paying the costs directly is another strategy for manufacturers. Although the capital burden can be high, producers who make amends properly may see brand protection benefits that help them get back online faster.

Individual organizations should find the most appropriate way to assume risk, for example by engaging specialized risk consultants.

Steps you might take to assume risk:

• Pay for the losses directly from a dedicated recall (or crisis) fund
• Carry insurance for food recalls
• Communicate transparently, being careful to stick to the facts
• Include recall clauses in supplier and customer contracts
• Clarify responsibility across the supply chain
• Keep clear insurance records

3. Transferring risk

Sharing risk with a third party – for example, a supplier or insurer – can reduce the burden on food manufacturers if the unthinkable occurs. Transferring risk requires significant trust going both directions, which can galvanize a mutually beneficial partnership over time.

Steps you might take to transfer risk:

• Work in good faith with suppliers and partners
• Inspect all incoming raw material, for example with Marel’s SensorX technology
• Address risk assumption and transfer when entering a supplier contract
• Be clear on cost recovery limits with suppliers and insurers
• Standardize contracts to avoid doubt
• Read up on dispute resolution processes and applicable laws in areas where you operate

Transforming food safety

Protein production is growing as the global population races towards 10 billion people. Unfortunately, that means the risk of food contamination also increases. For consumers, anxiety about food safety is also rising, and more than 50% of consumers believe food manufacturers bear the responsibility of improving food safety.

Food safety risks exist across the value chain. That’s why we at Marel, together with our customers and development partners, invest strongly in innovations to transform food processing. Last year alone, we invested more than €73 million to bring more than 30 innovations to market.

One reason we invest more every year into innovation is to help our customers find more reliable and efficient food safety solutions.

From traceability software to industry-leading bone detection equipment, water treatment solutions to automations that reduce manual labor, Marel is the full-line partner helping our partners avoid food recalls and produce high-quality, safe and affordable food for a growing population.