Recent Beef Recall Shows High Cost of Tainted Foods

Proper management can mitigate the business impact of food recalls.

Mar 13, 2014 at 4:20PM

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.

The next step for you
Want to profit on business analysis like this? The key for your future is to turn business insights into portfolio gold through smart and steady investing ... starting right now. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. The Motley Fool is offering a new special report, an essential guide to investing, which includes access to top stocks to buy now. Click here to get your copy today -- it's absolutely free.

John Mitchell has no position in any stocks mentioned. The Motley Fool recommends Stericycle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers