2012 Recall Costs by o64e0bx


									The Economics of a Food
    Recall: What a Recall
Could Cost Your Business
                     Annette Dunlap, MBA
                   Agribusiness Developer
             Marketing Division, NCDA&CS
                          January 31, 2012
Three Things to Remember
Treat  recall prevention as a key business
 and customer retention strategy
Don’t underestimate the true cost of a
Use appropriate tools to reduce and
 manage your risk
2010 Surveillance Data on Foodborne
Disease Outbreaks
In the US, contaminated food causes:
 1,000 reported disease outbreaks
 Estimated 48M illnesses
 128,000 hospitalizations
 3,000 annual deaths
 $365 M Direct Annual Medical Expenditures

Source: CDC Vital Signs -http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6022a5.htm?s_cid=mm6022a5_w
Is Foodborne Disease Preventable?
      National decline of E.coli 0157 to less than 1
       reportable case/100,000
      Overall decline in 6 key foodborne illnesses
       by 23%

              YES, foodborne disease is preventable

Source: CDC Vital Signs - http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6022a5.htm?s_cid=mm6022a5_w
Where you find Disease Pathogens
     Healthy animals: they contaminate meat and poultry
      when animals are slaughtered and processed,
     Environments in which fruits, nuts, and vegetables
      are grown and processed.
     Exceptions are:
            Shigella, which lives in the intestines of ill persons and
            can contaminate food when persons do not wash their
            hands after defecating
           Vibrio, which lives in marine waters and healthy shellfish,
            especially oysters.
Source: CDC Vital Signs - http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6022a5.htm?s_cid=mm6022a5_w
Major Corporations Recognize Recalls
as Risk Factors
     Item 1A.Risk Factors The following are certain risk
      factors that could affect our business, financial
      condition, and results of operations. … The risks that
      have been highlighted here are not the only ones that
      we face. If any of the risks actually occur, our
      business, financial condition, or results of operations
      could be negatively affected. In that case, the trading
      price of our securities could decline, and you may
      lose all or part of your investment.
Source: J.M. Smucker Co., 2011 Annual Report
Damage to Our Reputation or Brand Name, Loss of Brand
  Relevance, Increase in Private Label Use by Customers or
  Consumers, or Product Quality or Safety Concerns Could
  Negatively Impact Us.
The food industry generally is subject to risks posed by food spoilage and contamination, product tampering,
                                                              we may be required to
      product recall, and consumer product liability claims. For instance,
      recall certain of our products should they be mislabeled,
      contaminated or damaged. We also may become involved in
      lawsuits and legal proceedings if it is alleged that the
      consumption of any of our products causes injury or
      illness. A product recall or an adverse result in any such
      litigation could cause consumers in our principal markets to
      lose confidence in the safety and quality of certain products
      or ingredients, and otherwise have a negative effect on our
      business and financial results. Negative publicity about these
      concerns, whether or not valid, may discourage consumers
      from buying our products or cause disruptions in production
      or distribution of our products and adversely affect our
      reputation or brands. Source: J.M. Smucker Co., 2011 Annual Report
Kellogg’s Case Study
Statement in Kellogg’s Annual Report
Selling food products involves a number of legal and other risks,
    including product contamination, spoilage, product
    tampering, allergens, or other adulteration. We may need to
    recall some of our products if they become adulterated or
    misbranded. We may also be liable if the consumption of any
    of our products causes injury, illness or death. A widespread
    product recall or market withdrawal could result in significant
    losses due to their costs, the destruction of product inventory,
    and lost sales due to the unavailability of product for a period
    of time.

Source: Kellogg’s., 2011 Annual Report
Statement continued…
We could also suffer losses from a significant product liability
   judgment against us. A significant product recall or product
   liability case could also result in adverse publicity, damage to
   our reputation, and a loss of consumer confidence in our food
   products, which could have a material adverse effect on our
   business results and the value of our brands. Moreover, even
   if a product liability or consumer fraud claim is meritless,
   does not prevail or is not pursued, the negative publicity
   surrounding assertions against our Company and our products
   or processes could adversely affect our reputation or brands.

Source: Kellogg’s., 2011 Annual Report
Discussion of the 2010 Recall
For example, in June 2010, we initiated a recall of
   certain ready-to-eat cereals due to an odor from
   waxy resins used to make package liner.
Our consolidated net sales were down 1% on both a
   reported and internal basis….
 We experienced supply chain disruptions in our
   waffle business and had a second quarter recall of
   select packages of breakfast cereals. As a result, we
   have increased investment in our supply chain to
   mitigate potential risks.
Source: Kellogg’s., 2011 Annual Report
The brands involved in the recall were
  the cornerstone of our back-to-
  school promotions in the third

Source: Kellogg’s., 2011 Annual Report
Kellogg’s Sales Performance
     Internal net sales for our North America
      operating segment declined 2%.
     Retail cereal’s internal net sales declined by
      5% on a full-year basis.
     Our consumption was negatively impacted by
      the impact of the cereal recall that occurred in
      the second quarter of 2010.

Source: Kellogg’s., 2011 Annual Report
Cost of the Recall

 Source: Kellogg’s., 2011 Annual Report
Additional Note to the Financials

  Source: Kellogg’s., 2011 Annual Report
     Monitoring Your Supply Chain

Spices &
are potential
Consumer Confidence has gone done
   Reduced consumer confidence in the safety of
    the food supply means that consumers are
    becoming hyper-vigilant about the quality and
    safety of what they eat
   Do not assume because you are “local” that
    you are “off the hook”!
Your Hidden Financial Costs
 Business interruption (lost revenue)
 Employee turnover/retraining
 Higher insurance premiums
 Liability-related expenses (such as
 medical bills for the sick customer(s))
 Reduced commodity supplies ->
 higher prices
Qualitative Business Costs
          costs: to you as the owner; to your
 Emotional
 employees; to the family

 Publicrelations: repairing a damaged
What can you do?
 Treat   recalls strategically
   check   reliable websites routinely
   keep good records
   know your suppliers
   know your co-packer
   have a plan in place

 Use available and sensible risk management tools
 such as product liability insurance and business
 interruption insurance
What can you do?

   Practice proper sanitation

Contact Information

         Annette Dunlap, MBA
          Phone: 919.707.3117
    E-mail: annette.dunlap@ncagr.gov

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