The Economic Impact of Recalls

A recent thesis from the University of Guelph in Canada assessed the economic impact of a Canadian recall involving RTE meat products contaminated with Listeria monocytogenes that resulted in 57 confirmed illnesses and 22 deaths across the country. Within the first seven trading days of the initial recall announcement, the firm’s stock price had dropped 27%.

Another Canadian firm reported that their large-scale recall in 2007 resulted in a loss of about $42 million – just on the recalled products. This was due to an adulterated ingredient purchased from an importer. This figure does not include ancillary costs related to the recall.

In another case, a U.S. company purchased one ingredient from a domestic company – it was later determined the ingredient was possibly contaminated and had been used in the production of their snack product.  The snack recall resulted in a recall cost of $75 million.

It was reported in 2007 that the legal settlement of a Class Action lawsuit involving a toy recall was $50 million with civil penalties of $2.3 million, in addition to a $12 million settlement with 39 states and other payouts. The settlement also included the costs of future medical testing of users of the toys. None of these charges included the resulting attorney fees or product costs.

A medical device company has been in the press recently reporting the impacts of recalls on their bottom lines. In January 2011, Johnson & Johnson announced a 12% year-over-year decline in profit for the 4th quarter. This included after-tax charges of $922 million in litigation settlements and other costs related to the hip replacement device recall.

The value of the Toyota Brand was impacted by a 16% drop in the past year due to the safety issue alleged with their cars. The impact upon their Lexus brand was even greater with a reported loss of 19% in the value of the brand.

So what does this mean for your company? Consider these facts.

In the U.S. in 2010, two mass recalls of products containing contaminated ingredients involved over 100 companies and several hundred individual products. Likewise, in 2009 three ingredient-related mass recalls accounted for almost 64% of total FDA food recall events. The advances we have seen in food epidemiology investigations along with the use of CDC’s PulseNet DNA technology and the impact of the new FDA Food Safety Modernization Act of 2010 the food industry can expect the recent increase in food recalls to continue.  To protect your brand and the financial health of your firm requires a review of your current operations and the products you are producing. Challenge your current efforts to ensure there is the appropriate amount of attention given to building product safety into your product. The up-front expenditures on product safety are, by far, a better investment than the cost spent on a recall or repair of brand damage after an event.

Share This