Recent Beef Recall Shows High Cost of Tainted Foods

The FDA's expansion of the Ranchero Feeding Corporation's beef recall was announced in Minnesota yesterday, the 43rd state to be affected. The Minnesota StarTribune, in its coverage of the incident, stated, "The USDA's public declaration of the matter has been particularly blunt." Citing federal regulators, the shutdown was initiated after it was determined Ranchero slaughtered animals that were "diseased and unsound."  The recall is now nearly a month old, initiated after Ranchero, located in northern Colorado, was shut down by the feds.

Contaminated food kills. According to the Centers for Disease Control (CDC), 5,000 people a year die from food-borne illnesses, which also causes 300,000 hospitalizations annually. On its website, the CDC states that 2012 data indicates "a lack of recent progress" in reducing food-borne illnesses. The CDC relies on the FoodNet tracking system, which monitors 15% of the population. FoodNet placed the number of food-borne incidents in 2012 (the latest year listed on its website) at 19,531 laboratory-confirmed cases.

Average cost of a recall exceeds $30 million

The impact of food recalls to business viability is so prevalent that the Grocery Manufacturers' Association commissioned Ernst & Young to conduct a survey among its members. The report, titled "Capturing Recall Costs, Measuring and Recovering the Losses" was issued in October 2010. The findings offer insight into some of the recall experiences of the biggest names in the grocery business, which are near the end of the food supply chain. A total of 34 member companies participated in the study, including such well-known companies and brands such as General Mills (NYSE: GIS  ) , Land O"Lakes, Hershey (NYSE: HSY  ) , and J.M. Smucker Company (NYSE: SJM  ) .

According to the study 77% of companies that faced a Class I recall, a threat to health and safety (44% of recalls in Q3 2013), counted expenses associated with the event of at least $30 million with 23% reporting even higher costs as a result of a recall. 

As examples, the report cited an egg producer recall of 500 million eggs in 2010. The one-month loss alone attributed to media coverage from a drop in egg prices topped $100 million. A peanut butter Salmonella outbreak tracked to a company in 2007 cost it $78 million in costs, and a similar outbreak two years later cost producers $1 billion.  

Another industry source, FoodProductiondaily.com, pegs the annual cost of food-borne illness at $77 billion. This includes: discarded product, lost revenue, health care costs, lost wages, litigation, and other costs. The cost to a company's brand and image are not included. 

The Business of recall crises management

Mitigating such losses is why recalls are big business for firms specializing in crises and brand management. For example, Stericycle (NASDAQ: SRCL  ) has its own subsidiary, ExpertSolutions, that works in several industries, including the food and beverage sector. The company's unique selling proposition as stated on its website is, "When faced with a challenge, companies want guidance from somebody who has been there before."

Not all recalls are the gut-wrenching stuff of the Ranchero Feeding Corporation variety, made famous over a hundred years ago by author Sinclair Lewis in his expose on the meat packing industry that outraged the country. According to Richard Perlmutter of Abington Nutrition Services LLC, which prepares nutrition labeling, 38% of results are due to the presence of allergens in products, while about 30% are due to the presence of Salmonella or Listeria. In 2010 Kellogg  (NYSE: K  ) , for example, in a low-profile incident, recalled ready-to-eat waffle and cereal products due to an unusual odor emanating from the waxy resins coating a package liner. The recall costs Kellogg $46 million and a 9-cent loss per diluted share on its stock price.

Most company's with good corporate values and corporate commitment to public safety through active reputation management trigger recalls appropriately when a problem is discovered. In the long run proper crisis management can mitigate damage caused even in tragic circumstances.

A contamination event by Toronto-based Maple Leaf Foods' (TSX: MFI  ) in 2008 killed 22 and sickened hundreds with serious illness from its ready-to-eat meals. The company took meaningful and swift action, including: a voluntary recall (as opposed to a government-ordered recall, as in the Ranchero case); a CEO statement and sincere apology; shutting down its plants for a deep cleaning; replacing equipment; appointing its first ever Food Safety Officer; and quick litigation. The initial cost to the company in the quarter in which the incident occurred was a 10-cent a share drop in earnings, or $13 million loss. A year later, the company reported $22.5 million in profits as customers returned.

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