One of the largest recalls related to fresh eggs just occurred in Europe after Dutch eggs were found to contain a harmful pesticide. Many egg-related food products were pulled from grocery shelves throughout Europe and Asia. At the same time, the U.S. was dealing with a salmonella contamination at a poultry farm in Michigan and a widespread recall of salmonella-infected papayas from Mexico that sickened 173 people in 21 states.
The risk for companies is increasing. There were 764 food recalls in 2016, a 22% increase from 2015, according to Food Safety Magazine. When a product's safety comes into question, time is everything — particularly in the age of social media. Decisions need to be made quickly, but ill-judged ones can add cost and damage a company's reputation.
In the past, product recalls were comparatively straightforward and would usually have passed unnoticed by the public. Today, recalls are much more complex and the stakes higher — both in terms of the potential impact to a company's profits and reputation.
Rise in recalls
Product recall exposures have increased substantially over the past decade, shaped by tougher consumer regulation, the rise of social media and the increasing complexity of supply chains. Many countries — including the U.S., China, Australia and those in Europe — have implemented much stricter product safety laws.
Recall exposures have also grown with the rise of large multi-national corporations and the development of complex supply chains in sectors ranging from food to automotive to electronics. Fifteen years ago, the ingredients for a burger purchased in a fast food restaurant would have mostly been sourced locally. Now the spice may come from China, the gherkin from the U.S. and the tomatoes from Spain, while the meat could be from multiple sources.
The product value chain is now global, and this has substantially changed the risks. Larger supply chains are more vulnerable, with more critical points where things can go wrong and that are outside the control of clients.
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Food contamination consequences
An issue with an ingredient can cascade through the supply chain, with recalls crossing borders and embroiling whole sectors. For example, peanut ingredients produced by The Peanut Corp of America were contaminated with salmonella, resulting in one of the largest food recalls ever in 2008. Over 3,200 products were recalled as more than 700 people were taken sick and the company eventually filed for bankruptcy protection. Seven years after the salmonella outbreak, in September 2015, its CEO was sentenced to 28-years in prison, the harshest criminal penalty ever for a U.S. producer in a food-borne illness case.
Regulation has made recalls more public — in many countries recalls are now recorded, closely monitored and disclosed publically by the authorities. However, growth in use of social media has been a real game-changer. The free flow of information means that even a relatively small product recall can give rise to a major crisis.
"Social media has made it more challenging to manage a crisis as it is free, immediate and open to everyone," explains Dan Cahill, general manager for the Americas for red24, a crisis management assistance company. "In a genuine case of contamination, social media can help make consumers aware of a problem quickly. This is good for safety but the control will be largely out of a company's hands unless they have a robust crisis management plan in place, which includes social media," he says.
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Social media also means that a potential issue has gone viral before a company has been able to establish the facts, including whether they are at fault or even if it is their product. "One of the biggest issues in a product recall is to determine if there is a genuine case of contamination or malicious product tampering and extortion," Cahill adds.
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Crisis management
One of the main roles of a crisis management expert is to help companies to prepare for a crisis. Some 75% of Allianz Global Corporate & Specialty's work is pre-event crisis consultation, testing protocols and recall plans, running scenario sessions to put the crisis team through its paces.
A crisis management company will also ensure that all parts of the business are operating to the same set of global procedures, and give people a central point of contact to help them through a crisis.
"We focus our experience and skilled personnel where and when it is needed, helping clients reach their own decisions in an appropriate way. It is important in a crisis to get all the facts and not rush decisions," says Cahill.
For example, he recalls an incident where cross contamination during product testing led to an unnecessary recall. The company risked its reputation but did not carry out secondary tests.
"Companies do not have the luxury of time. Testing of products can sometimes take weeks, yet decisions will sometimes have to be taken in the absence of facts and information," says Cahill.
"Management needs help to make balanced decisions and understand the regulatory perspective and response. Crisis management can save money, reducing the cost and time of recall," Cahill concludes.
For many companies, managing a major product recall is now too big a task and the exposure too great to go it alone. Companies understand that product recall is a real cost that can damage the bottom line and destroy a brand. As a result, we are now seeing a large increase in insurance coverage requests from a huge variety of food & beverage industries, starting from companies with $100 million in sales revenues and upwards. Such companies are seeking to protect themselves from the financial impact of a product recall via insurance and are also much more open to help from third parties and consultants than was the case in the past.
Marcos Garcia Norris (marcos.garcianorris@agcs.allianz.com) is crisis management regional practice group leader in North America for Allianz Global Corporate & Specialty. Based in Chicago, Marcos leads the North American crisis management team in providing insurance solutions that include product contamination and product recall insurance as well as terrorism and political violence coverage.
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