The Economics of Food Recalls:What a Recall Can Cost Your Business

Annette Dunlap, MBAAgribusiness Developer

Marketing Division, NCDA&CSJanuary 25, 2011

Three Things to Remember

Treat recall prevention as a key business and customer retention strategy

Don’t underestimate the true cost of a recall

Use appropriate tools to reduce and manage your risk

Medical Costs of Foodborne Disease Outbreak

The CDC estimates that the annual cost of E. coli O157, alone, was $405 M*:◦$370 M for premature deaths◦$30 M for medical care◦$5 M for lost productivity(*in 2003 dollars)

Business Costs of Foodborne Disease Outbreak

Peanut Butter Sales Still Stuck

During the 4-week period ending February 21, 2009, Peanut butter sales were down 2.3 % - $87.2 M – overthe same period the previous year

Consumer Costs of a Foodborne Disease Outbreak

Wholesale Egg Prices Jump 38%

Costs to Corporations

Kellogg’s, 1st qtr 2009: $27 M ($13 M in customer returns and rebates; $13 M in returns, disposals and write-offs; $1 M in general administrative and sales)

Hershey’s, 2006 recall: $14.5 M and temporary plant closure in Canada

General Mills: FY 2009: voluntary recalls cost $24M

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

Emotional costs: to you as the owner; to your employees; to the family

Public relations: repairing a damaged reputation

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

Expect the unexpected