The cost of product recalls to food businesses

Food product recalls are a major threat to food businesses. They result in disruption to operations while managing the recall, direct cost of recalling stock, the associated activities and indirect costs caused by the knock-on effects, mainly reputational damage. The loss of consumer confidence can result in significant long term financial losses for a company from loss of sales.

Food recalls cost companies an average of $10 million in direct costs alone, according to a study by the Food Marketing Institute and the Grocery Manufacturers Association (GMA) in the US. A separate GMA sponsored a survey found 5% of companies incurred over $100m in direct and indirect costs.

The effect on consumers is possibly the most significant factor. A survey by Harris Interactive found that 15% of consumers would never buy that product again and 21% of people affected by a recall would not buy any product from the same manufacturer.

Product recalls are increasing

In both the US and the UK the numbers of products recalled have increased in the last few years (see chart below). In a survey of companies, the GMA found that 58% of companies had been impacted by food recalls, with 6% having an impact from 11-20 recalls.

The factors that are driving an increase in food product recalls include:

1. Just-in-time global manufacturing: products are increasingly sourced through global supply chains and contaminated products can rapidly spread worldwide before a problem is identified
2. Fewer suppliers and complex supply chains: supply is concentrated in fewer global suppliers who source through complex supply chains. This increases risks in food safety ie. when one supplier has a problem it can affect many more retailers and consumers than in the past
3. Improved technology and practices for traceability and detection of pathogens
4. Stricter regulations and enforcement: the US, especially with the Food Safety Modernisation Act, and other countries have recently improved food safety legislation and enforcement

What are the causes of food product recalls?

The most common cause of food product recalls is biological contamination (microorganisms and toxins), which mainly affects food supplied fresh or raw, such as nuts and vegetables. This type of contamination can have many causes, including use of contaminated water by a producer, personal hygiene and unsanitary food handling practices along the supply chain and pest infestations in the supply chain.

Allergenic products, such as nuts or dairy products, not declared on the label are a major cause of product recalls. These could be ingredients of the product or cross-contamination from residues in the machinery from a previous production run that used allergenic ingredients.

Foreign matter is the second most common cause of food contamination in the UK and third in the US. This is a catchall for many different items, such as metal, plastic, glass, wood from production lines or packaging, whole bodies or body parts of pests resulting from an infestation in the supply chain. Other causes include defective products, chemical contamination such as pesticides and unapproved ingredients.

What are the types of food products that are recalled?

As mentioned above, raw foods are a major source of contamination leading to product recalls. As they do not go through the sterilising phase of cooking, consumers rely on safe practices along the supply chain to ensure food is safe to eat.

Nuts, fruits, vegetables and dairy products are the major product types recalled, with spices and teas also significant. Baked goods are the most likely to contain unlabelled allergens such as milk or nuts.

What are the costs of a food product recall?

The direct costs of a food product recall include assembling a crisis team, removing the product from the market, investigating the root cause of the factor that caused the recall and the costs of managing the PR to inform customers and protect business reputation.

In 2010, researchers Moises Resende-Filho and Brian Burr developed an easy-to-use-model to estimate the direct costs of a food recall. This was based on the shelf price of a product and rough estimates of transportation and communications costs, including both notifications of recall and PR.

What are the indirect costs of a food product recall?

Indirect costs have no finite period and are often difficult to measure directly. For example, there may be no certainty that all reduction in sales or profits were caused by a recall. However, the lasting effects of reputation damage and brand avoidance can last for years.

In some cases, a whole industry can be affected by a food recall by one supplier or manufacturer, as happened with a spinach recall in the US which caused a long-term drop in spinach sales across the country.

The indirect costs of a food product recall include litigation costs, fines from government agencies, lost sales, a decline in value on the stock market and the impact on brand reputation in the industry and with consumers.

Product recall insurers Locton estimate that about 80% of the total costs are incurred long after the recall has been dealt with. This shows the importance of investing time and resources into PR to maintain brand reputation.

How to prevent a food product recall

The main way to prevent contamination is to implement hygienic practices to prevent cross-contamination.

1. Ensure proper hygiene procedures are in place

   Make sure equipment, machinery, surfaces are cleaned to a high hygiene standard and all food handlers adhere to the correct hand hygiene and personal hygiene procedures.

2. Prevent the growth of microorganisms

   Implement procedures to enable temperature and moisture control through adequate ventilation.

3. Prevent cross-contamination

   Ensure your processes prevent cross-contamination between raw, cooked and fresh products including measures such as separating employees working in each area.

4. Pest control

   Implement proactive measures to prevent pest harbourage, entry to buildings, access to food and water (including food waste).

How the internet of things can reduce the risk of product recalls

By utilising a range of new, innovative, technologies such as the Internet of Things the global food supply chain can improve food safety compliance and reduce the risk of product recalls through in several ways. This can range anywhere from analysing big data to identify the route of the problem to utilising connected devices to keep your food facility pest-free. Download a copy of our FREE report to discover how the IoT can help support your business to improve food safety.