Preventing Finances from Spoiling When a Food Recall Hits

Food contamination and recall issues are becoming more commonplace, and the scale of the problem is growing, affecting some of the biggest names in consumer product goods. General Mills, for instance, recently recalled 45 million pounds of flour due to an E. Coli outbreak. Food contamination issues forced numerous other major food manufacturers, such as ConAgra and CRF Frozen Foods, to issue national recalls this year as well.

The U.S. Department of Agriculture (USDA) has reported 51 food safety and inspection recalls and alerts this year to date, an increase of more than 121 percent over the same period in 2015. Food Safety magazine tallied more than 600 food safety recalls last year between the U.S. Food and Drug Administration, USDA and the Canadian Food Inspection Agency; mean losses for each recall averaged $10 million.

The stakes are exceedingly high not only for food manufacturers, but for all players along the supply chain including the retailers that ultimately stock products on their shelves. To minimize the consequences, it’s critical to understand the driving forces behind this trend.

What’s Behind the Uptick?

Consumer preferences have forced dramatic changes in the food industry in recent years. Organic foods, which tend to have more susceptibility to foodborne illnesses, are in greater demand, with sales in 2015 up 11 percent over the prior year; non-food organic products were up 13 percent. Consumers are pushing for more natural products, free of preservatives and artificial ingredients. And while some of these moves may be beneficial long-term, there is also an upside to some preservatives and additives, which are included precisely to help prevent bacterial growth that can make people ill.

At the same time, technology advancements are making it easier to trace problems. Earlier this year, the U.S. Centers for Disease Control and Prevention (CDC) rolled out whole genome sequencing to its labs, which can more efficiently and accurately detect the source of contamination.

Are the Right Protective Measures in Place?

Food contamination seems to be one of those inevitable risks today, akin to data breaches. The latest BDO Manufacturing RiskFactor Report found that 100 percent of U.S. food manufacturers cite product quality or contamination issues and recalls as a significant risk to business in their 10-K filings, up from 90 percent in 2015. Increasingly, boards and shareholders are asking about the protections companies have in place should something go wrong—and they don’t want to hear, “none.”

The costs of a product recall aren’t only financial; reputation also takes a significant hit. What are companies doing to shield themselves from the potentially devastating consequences?
  • Transferring risk to a third-party. The 500-pound gorillas in the retail industry are increasingly making this move. For example, a heavyweight like Costco might require food manufacturers to indemnify three times their losses in the event of a recall of a product, as part of a standard clause to do business with them.
  • Purchasing insurance protection is also gaining popularity. Demand for product contamination policies is rising and premiums are dropping as new carriers enter the market and more companies make liability, property and product recall insurance part of their standard coverage.
  • Implementing strong supply chain review procedures. Having a thorough understanding of where risks lie, the various channels for information flow both internally and with vendors, and the quality control processes implemented by retailers, food processors and distribution centers can help identify and sometimes, contain food contamination. And testing procedures to isolate and address risks—and ensuring compliance with existing food safety regulations—is key to being prepared in the case of a food recall incident.
  • Contingency planning. Even organizations that cross all their T’s and dot all their I’s aren’t immune from a food event. And unfortunately, affected consumers tend to extend the blame from the supplier to the store. Companies that proactively put in place an incident response plan can mitigate the fallout from a food safety issue.
With food contamination incidents on the upswing, it’s important to review your insurance policies and the language in your supplier contracts with a fine-tooth comb to identify where recall responsibilities lie and re-evaluate the proactive measures being taken to mitigate financial and reputational damage.