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Kraft Recall of String Cheese Raises Questions About Customer Loyalty

By Brenda Barron - Oct 31, 2013 at 10:44AM

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Everyone knows a product recall is bad for business. But how bad is it?

Kraft Foods ( KRFT.DL ) announced a recall of several types of string cheese on Oct. 25 due to a risk that the foods would spoil prior to their "Best When Used By" date. String cheese varieties sold under the Kraft and Polly O monikers are the affected brands, according to the announcement released through the U.S. Food and Drug Administration. The recall was completely voluntary but did occur after some consumers complained about the products spoiling faster than their best by dates. These dates range from Oct. 25 through Feb. 11, 2014, and consumers are advised to not eat them and return the cheese to the store where they bought it or get a refund. 

Recalls happen quite often and it always raises some eyebrows about a brand's viability. After all, if a company lets quality slip, consumers might start to question if that brand deserves their loyalty. Or, they might swear off purchasing that product for good. However, previous recall incidents at different companies have actually shown customers can be rather forgiving. 

To recall a recall

Back in early 2010, Toyota had to recall 5.3 million vehicles due a problem with acceleration. Even though the company handled the crisis swiftly, it still caused an 11% drop in customer loyalty to the brand between November 2009 and February 2010 when the story dominated the news cycle. However, Toyota's customer loyalty immediately rebounded in March 2010 and increased by 10%. What's particularly interesting is customer loyalty for the owners of the recalled vehicles actually increased more than non-recalled vehicle Toyota owners following the crisis. Strong communication and reputation management are likely the causes of such limited defections. 

That's all fine and well. But you can't eat a car. There's no risk of getting food poisoning from a car. True. But upon further digging, even consumable products have held up in the long term after major recalls. Tylenol suffered a major brand hit back in 1982 after several people lost their lives from consuming tainted product that had been laced with cyanide. Johnson & Johnson saw a significant drop in market share from 37% all the way down to 7% during the crisis. Johnson & Johnson quickly dealt with the problem and removed 31 million bottles of the pain reliever from stores and created a tamper-proof bottle. It only took a year for market share to move back up to 30%. Despite the severity of the issue, Tylenol is still a strong brand today.

Another example happened in 1993. Jack in the Box dealt with a huge crisis and resulting recall thanks to distributing E. coli tainted beef at their restaurants that caused hundreds of people to fall ill and several children to die. The company (which traded under Foodmaker, Inc. back then) lost 30% of its stock market value as a result. But after some major reputation management, the implementation of the Hazard Analysis & Critical Control Points (HACCP) system for food safety in 1994, and a new marketing campaign (have you met Jack?) in 1995, the company climbed its way out of the muck by 1997 and was back with a higher share value than it had before the crisis started. 

And it makes sense. In his book, Wisdom on Value Investing: How to Profit on Fallen Angels, Gabriel Wisdom indicates a company like this bouncing back after a disastrous event like a recall is "predictable," because it has a strong business model, established revenue, "low debt, and the likelihood of future growth." Basically, one mistake (even a doozy) won't doom a company forever so long as it has a plan for getting out of the hole it's created and goes above and beyond to make it up to its loyal customers.

The Takeaway

At the moment, Kraft's stock is unaffected from this latest recall -- the company produces so much more than just string cheese and can comfortably rely on its other popular consumer brands like Nabisco, Oscar Mayer, and Oreo. But it's also undeniably helped by the fact that it's an established brand that reacted quickly to consumer concern and withdrew the products in question, without question. So long as a company manages a recall with care and offers clear communication with consumers, the likelihood of long-term brand damage and a permanent loss of market share is slim.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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