The Economics of a Food The Economics of a Food Recall: What a Recall Recall: What a Recall

Could Cost Your BusinessCould Cost Your BusinessAnnette Dunlap, MBA

Agribusiness DeveloperMarketing Division, NCDA&CS

January 31, 2012

Three Things to RememberThree Things to RememberTreat recall prevention as a key business

and customer retention strategyDon’t underestimate the true cost of a

recallUse appropriate tools to reduce and

manage your risk

2010 Surveillance Data on Foodborne Disease OutbreaksIn 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,

product recall, and consumer product liability claims. For instance, we may be required to 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 ReportSelling 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

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.

Discussion of the 2010 Recall

Source: Kellogg’s., 2011 Annual Report

The brands involved in the recall were the cornerstone of our back-to-school promotions in the third quarter.

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

http://www.clresearch.com/research/detail.cfm?guid=FAA2C663-3048-79ED-9921-0A7885DB56CC

Spices & Seasonings are potential pathogens

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 CostsYour 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 CostsQualitative Business CostsEmotional costs: to you as the owner; to your

employees; to the family

Public relations: repairing a damaged reputation

What can you do?What can you do?

Treat recalls strategically check reliable websites routinelykeep good records know your suppliers know your co-packerhave a plan in place

Use available and sensible risk management tools such as product liability insurance and business interruption insurance

Expect the unexpected

Practice proper sanitation

WASH YOUR HANDS

What can you do?What can you do?

Contact Information

Annette Dunlap, MBA

Phone: 919.707.3117

E-mail: annette.dunlap@ncagr.gov