The Business of Recalls: From Booming to Bankrupt

The Business of Recalls

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.

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