Product recalls are an industry concern

17 July 2018

Whether you’re responsible or not, a product recall event can leave your business trying to shore up a gaping hole in the bottom line, while dealing with damage reputation issues, and a logistics nightmare.

For those responsible, managing the recall event makes it difficult to fulfil contracts and keep customers onside, and business interruption losses have the potential to become crippling. Where suppliers lose contracts as a result of a contamination incident the financial impact can be catastrophic.

And if the regulator shuts down your production line, then the problem can become terminal almost overnight. Certainly, this was the case for meat supplier Russell Hume after the Food Standards Agency (FSA) stepped in earlier this year.

Fault and financial loss are not always linked

In the last week the spotlight has fallen on frozen sweetcorn as the cause of the latest product recall in the food and agriculture sector. This is just one of many high-profile contamination events to have hit the frozen food industry this year. But, the more important question is not where the fault lies, but how the industry deals with such events as a shared rather than an individual concern. 

Sweetcorn is a common constituent ingredient and over 50 products have been recalled in this latest event. Many are own-label frozen vegetable products sold by a range of supermarkets, which could potentially see them suffering significant brand reputation damage.

The retailers are not responsible for the presence of listeria in some of these sweetcorn-based products, or the recall that has resulted. But, on the back of outbreak, they’re likely to face questions from concerned customers and may see sales dented and their brand damaged.

They will have to arrange for the removal of products from their shelves and restock them with new lines or unaffected batches. This takes time, resource and money.

It’s for this reason that retailers have become more demanding over the checks and balances they insist suppliers have in place. As such, contractual conditions with suppliers have become increasingly onerous as retailers look to push liability back down the supply chain.

Growing importance of insurance in recall events

One major building block in the required safety net is product recall insurance because of the protection it offers to both first and third parties. Such insurance can offer direct financial support as well as crisis management assistance.

As hygiene and safety standards in the food and agriculture increase, and product scrutiny becomes more stringent, more retailers will demand suppliers have robust product recall insurance in place if they want to work in partnership.

Purchasing such cover might come at a cost, but it also creates financial security and makes the business more attractive to larger retailers.

Suppliers should also consider the business interruption impact that a regulatory shut-down could have on their own operations. Loss of revenue from such an event can be incredibly difficult to replace, especially where the shut-down results in cancelled contracts.

It can take weeks – in some cases months and even years – to carry out the requisite clean-up following contamination events and to then pass the subsequent regulatory inspection.

Listeria, for example, which is at the heart of this recent product recall event, is notoriously difficult to eradicate. There are numerous examples of the same strain of the bacteria being responsible for a second product recall event many years after an initial outbreak.

In these cases, the original clean-up has not been sufficiently thorough, and the bacteria has slowly recolonised the production facility until it has found its way back into the end product. As a result, regulators will cast an exacting eye over premises before they give them a clean bill of health.

Some companies will own multiple sites and may be able to switch production to another location. Some may have contingency agreements in place with competitors to access their facilities in such situations, although agreeing and then implementing these arrangements can be challenging.

Even if there’s an effective contingency plan, the impact on production volumes and timeframes is likely to be significant, and this can make it difficult to fulfil customer contracts. Without a contingency plan, life becomes very difficult, very quickly.

And all the while retailers must find alternative suppliers or different products to meet their own customers’ demands.

Many suppliers have built their business on a small number of key contracts. If a product contamination event leads to one of these contracts being cancelled, the financial impact and brand damage can be devastating. In these situations, the financial support offered by an insurance policy can be the lifeline the business needs.

Individual recall issues need industry responses

It’s easy to think that you run a tight ship, have business continuity plans in place and that you won’t have to recall any of your products. And for many companies that’s true.

But it doesn’t mean your business is immune to the effect of a product recall and that not being responsible will protect you from experiencing financial loss or brand reputation damage.

There is a need for industry leaders and associations to make product recall events more of a priority and to encourage individual companies to think not only about preventing problems arising from their own operations, but also to consider how they would protect their business if it were affected by a recall event in the supply chain.

Companies no longer operate in a bubble. Working with multiple suppliers and customers and deploying a range of operating models creates opportunities. But the integrated nature of these more fluid working patterns also creates interwoven liabilities and exposures.

The challenge for companies, and the industry at large, is to make sure these exposures do not outweigh the opportunities.

For further information please contact Kiran Nayee, Head of Product Recall on +44 (0)20 7558 3029 or email Kiran_nayee@jltgroup.com.

This blog is compiled for the benefit of clients and prospective clients of companies of the JLT Specialty Limited (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property.

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