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Costly Food Contamination Recalls Unavoidable

Adam Parsons - Divisional Director of Product Recall

Food manufacturers’ economic and brand loyalty issues are the propellers of profitability and market scale. Corporate investment and oversight attuned to the safety and security of the manufacturing and distribution processes are paramount. While it takes years to establish a respected reputation, food recalls due to contamination and safety concerns can damage that reputation virtually overnight. With due diligence and corporate governance in place, companies within the food industry cannot completely remove the risk of human error, product tampering, product extortion or other influencing factors that trigger a product recall event.

Trending increases in the number of ingestible food product recalls now average 25 to 30 incidents per week on a global basis. In 2015, the U.S. government issued recalls for more than 18 million pounds of beef, pork and poultry, which was more than double the number since 2002, according to a report by Food Safety News. Companies face an average direct cost of $10 million (USD) for a product recall, in addition to brand damage, business interruption costs and lost sales, according to a joint study by the Food Marketing Institute and Grocery Manufacturing Association.  Associate expenses for the industry’s larger brands are significantly higher.  Product recall costs for Class I recall actions can reach into the hundreds of millions of dollars. The Food and Drug Administration (FDA) Class I food product recalls are classified as: “Dangerous or defective products that predictably could cause serious health problems or death.”  In the U.S. alone, more than 48 million people became ill from food contamination, according to Fortune.  It is not surprising, therefore, that food recall events pose the food industry’s greatest threat to profitability.

Several recent high profile scenarios illuminate collateral damage implications of food production malfeasance. In late April 2016, one of the world’s largest poultry manufacturers recalled more than 4.5 million pounds of chicken nuggets suspected of containing erroneous materials involving 22 products packaged from August 2014 to March 2016. Just two weeks later, a food “recall extension” was ordered for an additional 5.2 million pounds of fully cooked chicken for seven packaged products that were thought to be contaminated by extraneous metal materials produced from May through December 2015, as issued by the U.S. Department of Agriculture’s Food Safety and Inspection Service (FSIS).  A recent Canadian recall of a frozen fruit product directly impacted the highly respected country retail chain that sold the brand. The grocery retailer was hit with unexpected restitution expenses to rebuild consumer confidence, by offering free vaccinations to consumers as a response to curb a Hepatitis A outbreak traced to the frozen organic fruit product.

Costly expenses of food recall events cannot be underestimated. Expensive recall actions are far reaching from product withdrawal and shelf replacement, overhaul re-packaging of mislabeled brands, business interruption throughout the supply chain, consumer notification protocol and reputational loss. Food recall actions can often sway consumer buying behavior. According to a recent Harris Interactive Poll, consumers indicated that “55% would switch brands temporarily following a food product recall, 21% would avoid purchasing any brand made by the manufacturer, and 15% would never purchase the recalled product again.”

Insurance offers a risk transfer strategy to mitigate the immediate and longer term implications of a food recall occurrence. Insurance coverage programs are available to address consequential risk exposure within the food manufacturing and distribution sector.  Policies can protect against rehabilitation costs and loss of income to protect the company’s cash flow and resolve product reinstatement satisfactorily within the wholesale and consumer marketplace.

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