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The Business of Recalls: From Booming to Bankrupt
by Neil Canavan
Houston, we have a problem. Or maybe the problem is in Chicago, or Schenectady, or Cucamonga, or maybe all of the above. That’s why when there’s a food recall (the problem) the impact can be vast in scope, and astonishingly expensive.
According to the Centers for Disease Control, there are an estimated 300,000 hospitalizations and 5,000 deaths related to food-borne illnesses every year. The cost of these incidents to the economy is estimated to be $7 billion. Costs include notifying consumers, removing food from shelves, and paying damages that result from lawsuits. Further, short-term revenue is lost because of recalled/destroyed product, and in the long term, in some cases, the damage done to branded products may take years to repair. You may even go bankrupt, or out of business altogether.
A few recent examples:
- 2007: Canadian-based, Menu Foods, once the largest producer of pet foods in North America is held liable for the distribution of product tainted with the industrial chemical, melamine. The recall involved over 60 million units of pet food, at a cost of $42 million. An additional $24 was paid out in litigation. After share prices plummeted, the company was bought out.
- 2008: Westland/Hallmark Meat Packing Company is the subject of the largest meat recall in U.S. history. At the behest of the FDA, Westland/Hallmark recalled more than 143 million pounds of beef. Initial costs of the recall to the company exceeded $116 million. In November 2012, Westland/Hallmark reached a $500 million settlement with numerous plaintiffs, including the federal government. However, the assessment will go unpaid, as the California-based company is now bankrupt.
- 2009: In one of the deadliest cases of food contamination, a Salmonella outbreak occurred at a plant belonging to the Peanut Corporation of America (PCA). The outbreak resulted in more than 700 cases of serious illness and at least nine deaths. Days after a second plant was implicated in the contamination, PCA permanently discontinued operations. The economic impact of the recall extended far beyond PCA. The food giant, Kellogg, reported recall-related losses of $70 million, and Forward Foods, of Minden, Nevada, makers of the Detour brand energy bars, was forced to file for bankruptcy.
Recalls of this scale are uncommon, however, recalls in general, due to new regulations, heightened detection sensitivity, and the expansion of global supply chains are increasingly frequent.
In the third quarter of 2012, the FDA documented 414 recalls involving 189 companies, and 8.5 product units. That’s 2.5 times the number of reported recalls for the second quarter, and the highest level recorded in more than two years. More than 55% of all units were part of Class I recalls, items which put consumers at the highest risk.
In 74% of the recalls the concern was Salmonella, Listeria, E. coli, and botulism contamination. Undeclared allergens or other allergen concerns account for the balance of recall incidents.
Avoiding A Recall
Nothing is foolproof, but there are steps to be taken to avoid a recall. Perhaps the most effective means is to create a culture of food safety within your company.
“We’ve seen much more awareness around the importance of employee training in the food industry of late,” says Jeff Eastman, CEO of Alchemy, Austin, Texas. “I think people see it as more of a preventive control now rather than just regulatory compliance.”
For the last nine years Alchemy has been designing and implementing food safety education programs that provide comprehensive and consistent employee training—consistent in that everyone, throughout the plant, or across multiple facilities is on the same procedural page.
Designed for production workers, Alchemy’s SISTEM is a training and compliance management platform that enables food manufacturers and processors to train up to 150 employees with industry specific courseware that’s updated regularly as laws, regulations, and industry best practices change. Using handheld remotes and interactive courseware, SISTEM validates employee comprehension, provides automatic documentation of results, and enables real-time reporting to quickly meet auditor requests.
The message is also skewed towards the personal, which can be a powerful tool. The training will incorporate familiar products—McDonalds, for instance—products that workers purchases themselves, and then using that association to drive home the message of food safety. “It’s like, this is something you would feed your child,” says Eastman. “How would you like that product to be handled?”
A platform like SISTEM also enables repetition. “You have to constantly train and reinforce the behavior if you expect that culture to be pervasive throughout your company.”
Ensuring employees take part in a training program that advocates a food safety culture is a major factor in preventing a recall.
– Peter Mehring, CEO, Intelleflex
“Most people do traceability today in what they call one up and one down look.”
SISTEM allows you to follow the progress of an employee to help avoid any mishaps that might lead to a recall, while the ZEST cloud-based data collection platform, from Intelleflex, Santa Clara, Calif., allows you to track the journey of your product. The technology facilitates two critical aspects—the ability to verify the integrity of the cold chain; and the pinpoint location of product should there be need to pull it off the shelf.
“You can try traditional approaches, either through barcodes, or passive RFID (radio-frequency identification),” proclaims Intelleflex CEO, Peter Mehring, “but neither approach is very reliable.” A barcode has to be manually entered at each station, and passive RFID doesn’t work automatically around food of high water content, like produce. “People have to go after it with handhelds, so that’s just like barcodes again…” Too much room for variability, for error.
The biggest challenge Mehring sees in recall events is location, location, location. “Most people do traceability today in what they call one up and one down look. They only know where they got it from, and where it went.” To really figure out if your product’s affected, you have to go through a chain of companies to get the data, and that can take days.
Intelleflex’s solution is built around the hardware component (RFID tag) that travels with the product through the supply chain, with the tags checking in automatically at every access point. The data captured is then pushed to the cloud-based ZEST platform.
“Not only does ZEST capture that data, but we’ve built in a notification engine, based on business logic set up by the user, which notifies the given individual (via smartphone or PC) should an event occur.” In other words, the information goes only to the person who needs to know it, say the person to remove a specific lot number from the shelf. The idea here is to manage by exception—meaning that the manager’s attention should be directed exclusively to the thing gone awry, rather that on the mechanisms that are still humming smoothly along.
However, some potential customers have taken issue with the additional overhead. Mehring counters with this: Traceability is an excellent way to ensure freshness of product (saving money) while at the same time operating as a sort of insurance policy for optimum response should a recall be required. Sure, nobody wants to pay for insurance when they think they are great drivers, but as he sees it, particularly where leafy green produce is concerned, a recall is not a matter of if, it’s when.
When? That Would Be Now
Precautions are not foolproof. Recalls do happen, and when they do, any future litigation may hinge on the manufacturer’s appropriate, and above all, rapid response.
“A lot of companies do not possess the core capabilities to support recalls,” says Jeri Cockrell, vice president of client strategy for Telerx, Horsham, Pa., “But we’re equipped for an expedient response, setting up preferred channels of communication with a dedicated 800 number, social media contact, email, or even website support. Whatever modality is required.”
Once a recall is announced, a company like Telerx can be your point man in assessing the scope of the communication required, and addressing the concerns of your particular customer base. “We start asking questions of our clients immediately,” says Cockrell. “We ascertain the household impact (a few hundred households, millions?), how many units of product are involved, is it a full product line, a specific lot number, is there a particular demographic that we need to focus on, be it children, or the elderly…” And then Telerx staffs accordingly. For instance, a high volume recall can have as many as many as 300 reps engaged one recall program.
It’s also important to take into account the timing of a recall announcement. “If it’s Friday at 5 p.m., generally you’ll start seeing your volumes (customer queries) rising over the weekend, then Monday, the media pick it up, you get hit hard,” notes Cockrell. A 1,000 percent increase in queries is not uncommon.
It’s advantageous to be ready to handle the influx with as little as 24 hours notice. According to Cockrell, if the news breaks at 5 p.m., Telerx can be ready to answer customer questions by 8 a.m. the next day. Just five to 10 years ago you would merely set up an 800 number, says Cockrell, but today recalls are supported through chat, social media channels, phone, email, web support, etc. “There are so many different ways that consumers can reach you today.”
The bottom line is that in order to protect your brand you have to get the information out there, and be able to address any customer concern in real time. Without those options to assuage fears, whom else might a customer turn to—a lawyer perhaps?
– Bernie Steves, managing director of Aon Risk Solutions
“In some instances, the insurance companies will pay some, if not all of the cost of doing a mock recall.”
Enter The Lawyer
“We have worked closely with all segments of the industry in handling their regulatory crisis management and litigation in food safety,” says Shawn Stevens, an attorney at Gass Weber Mullins, LLC, in Milwaukee.
If you have a recall that results in litigation, call an experienced attorney. Even before you’re involved in a recall, it’s a good idea to call an attorney with expertise in assessing client exposure.
“I’ll come in and do brand protection audits for companies,” comments Stevens. “I can look with a new set of eyes at problems that companies are missing. Sometimes it can be the most basic food safety procedures from an operational standpoint, something that with little or no money can be modified.”
One of the major causes of bankruptcy can be inadequate coverage. “Any insurance policy can be tricky once you look at the fine print,” explains Stevens. Many policies do not cover all the contingencies that a company might face during a recall.
Consider a market withdrawal: You’ve proactively invested it traceability technologies, pathogen detection systems, etc., and you caught a problem and traced it to the source before any outbreak occurred. You retrieved the lots in question and dodged a bullet. But it was expensive, yet, because no formal recall was executed, your recall insurance is not going to pay for a dime of the action taken. “So the company would almost be better off by ignoring the problem until someone gets sick—no company does that of course—but this (gap in coverage) is a huge problem,” says Stevens.
Another scenario: Many policies are written to provide coverage only in the event of a government mandated recall. “The problem here is that every single recall in the history of recalls has been voluntary.” The FDA, mentions Stevens, doesn’t want to be in the position of overreacting, or misidentifying a recall culprit, so they pass the responsibility on to the corporate suspect. They will only strongly suggest to the company that a recall is in order. “So what will happen is these companies, as they always have, will announce a voluntary precautionary recall of their food products, so technically coverage would not be triggered under the policy.”
Going For Broker
For a complete assessment of your recall insurance needs, call a broker.
Speaking from 25 years of experience, Bernie Steves, managing director of Aon Risk Solutions in Chicago, says it is not uncommon for companies to assume a recall is already covered by their product liability, or general liability policies, but that generally isn’t the case. A broker can assess the recall-related utility of your existing policies and look at the food safety systems being employed (RFID, pathogen testing, training programs, etc.) to gain an overall picture of a company’s risk; a broker asks upfront what the insurance underwriter is going to be asking later.
“We look at each insured a little bit different,” says Steves. Are you a branded product? Are you a co-packer, or ingredient supplier, is your exposure more first party, or third party? And so on.
Should you purchase a recall policy, and you really should, there are perks you may not be aware of. “One of the most important aspects of these policies is that each of the insurance carriers has retained crisis consultants that are available to assist the insured in the event of an incident.” These crisis consultants are available to assist in managing that situation, experts who have dealt with recalls and know how to effectively recall products, and how to properly get the message out.
“Most of the carriers will also make those consultants available before an incident happens,” says Steves, “and in some instances, the insurance companies will pay some, if not all of the cost of doing a mock recall—bringing consultants in and practicing your recall plan.”
Keep in mind that the insurers are there to help you because they don’t want to pay for a recall any more than you do. It’s their input that may make the difference between thriving, just surviving, or going under.
Canavan is a freelance writer based in Brooklyn, N.Y. Reach him at email@example.com.