Product recall events are on the rise. To avoid both the financial and reputational costs that come with them, businesses need to understand and address the factors that can trigger an event as well as its potential consequences.
According to the 2023 European Recall Index report (opens a new window), compiled by product recall logistics company Sedgwick Brand, recall activity in Q3 2023 across five key industries reached its highest level in a single quarter for more than ten years.
Product recall drivers
COVID-19 and global health – some governments relaxed rules for the food industry (opens a new window) at the beginning of the pandemic, allowing supermarkets to work together to combat incoming supply chain issues. Rules have since tightened, however, with authorities and regulators looking to promote consumer welfare, and enforcing protectionist economic policies through food controls.
Similarly, barriers for placing manufactured products necessary to combat COVID-19 (e.g. PPE) were temporarily relaxed, but are now back in force. Indeed, market surveillance and enforcement against those who placed sub-standard products on the market is prevalent.
Technological advancements – taking place across various sectors, e.g. in the motor industry, through a shift towards electric vehicles and advanced driver assistance systems (ADAS). This means there’s more that can go wrong as products aren’t as tried and tested as their combustible counterparts.
Supply chain disruption – disease outbreaks, war, and geopolitical tensions are more frequently disrupting supply chains. This can lead to longer journeys for perishable goods as shipments need to be re-routed, for example.
Rise in social media – reputations can be tarnished quickly, as product issues can spiral out of control without appropriate monitoring and communication strategy.
Potential consequences of a product recall event
Product recall events can prove highly damaging to businesses. In 2021, batteries supplied to an electric vehicle manufacturer overheated, causing the auto maker to sharply revise down its fourth-quarter operating profit (opens a new window), even though reports said the battery producer would bear the bulk of the costs. In 2022, a major US manufacturer of food and beverage products took a $125 million charge (opens a new window) from the recall of certain peanut butter products following a possible salmonella contamination.
Recall events can impact a variety of business areas:
Logistics
Advertising the recall, and tracing affected products can prove challenging, especially if the product is sold globally.
Sending recall notices out to customers and vendors may be a relatively easy exercise, but getting the product back is likely to be more complicated.
Storage space needs to be found and allocated for the returned products.
People
Staff will likely need to work overtime to deal with the issue adequately (e.g. customer service, warehouse). Hazardous product returns will need to be handled carefully, requiring workplace risk assessment.
Management will also need to spend time dealing with the fallout, diverting attention from other tasks.
Reputation
Reputational management will be at the top of the agenda. This is likely to require PR consultancy.
While helpful for communicating with customers, social media can cause significant reputational and potential financial costs. Misinformation or one miscommunicated post can easily escalate the issue.
Sales
Refunds for affected products or goodwill sums can be costly but are likely to pay off in the medium or long term. If made conditional on the return of recalled products, they also drive reduction in risk as dangerous products are sent back. Enforcement authorities may feel less inclined to opt for public prosecution if public outcry is reduced, the recall response rate is high, and the company is behaving responsibly.
The event is likely to result in loss of sales because of unsold affected stock that cannot be resold.
Future loss of sales can be difficult to recover, especially if the recalled product is a top seller, flagship brand, or results in cancellation of contracts.
Economics
Determining the scope of affected products and root causes of failure can be a lengthy and expensive process; as can ensuring the issue does not recur – particularly if it requires a supply chain overhaul.
Implementing an effective recall, ensuring regulatory compliance, corresponding with the regulator, managing the consumer and dealing with supply chain claims can incur significant legal fees.
Marketing to revive an affected brand or close it down and redeploy employees and resources to another product line, can be costly and affect future profit forecasts.
Legal considerations
Businesses may be hesitant to issue a recall for a faulty product in the belief that it could increase their exposure to a potential claim or provoke a prosecution. However, taking corrective action, at least in the UK, doesn't mean that the product will be determined to be defective from a civil claims perspective, as was held in the Supreme Court in relation to a hip implant product recently (opens a new window).. The claimant must still prove the product they have purchased is unsafe, if they are to pursue a civil claim for damages in the event of injury or property damage.
The incentive to carry out corrective action comes not from potential civil liability, but because each producer, distributor and retailer owes free-standing regulatory obligations to notify an enforcement authority where a recall is necessary and take appropriate corrective action. Failure to do so can be a criminal offence, and key individuals as well as corporate entities can be prosecuted.
Any recalled product should be retained for testing and evidencing and if the vendor may be deemed liable, they should be informed promptly.
It’s often the case that it is not a single party’s fault, and the loss will need to be apportioned along the supply chain. Where the root cause is due to one particular party, liability will need to be directed to that party as best as possible under the contract terms in the supply chain. A “lessons learned process” can take place to mitigate the risk of it happening again (which sometimes means a change of supplier).
In any event, evidence of loss should be gathered from day one, where it is usually easiest to capture it compared to a few months later. In addition, swift and reliable communication with those close to the product and the customer will be vital for mitigating potential losses.
Reducing the risk of a recall event
While an in-depth understanding of the product recall event itself is vital for businesses, knowing how to reduce the recall risk altogether puts businesses in a better position from the outset. For starters, firms should conduct a risk assessment using established methodology to identify core risk areas and to determine mitigating action. Pre-event preparation and planning can have a big impact on the size of a recall and the extent of financial and reputational damage. Frequent product testing is critical for identifying potential issues early and therefore limiting the size of a recall. Monitoring a wide range of indicators to establish if something might have gone wrong can speed up discovery. This can include monitoring social media for customer comments, tracking help lines and other forms of feedback for potential complaints. Relationship management that involves regular communication with customers and stakeholders, including regulators such as the local trading standards or environmental health authority, is likely to help smooth the process of a recall event.
Recalls are, of course, not just about risk of harm, but also involve environmental, social, and governmental (ESG) risks. Recalling and removing faulty products can be less financially damaging than the impact on reputation and loss of future sales, but both costs can be covered through tailored insurance policies.
The benefits of insurance
One of the benefits of insurance is the access to consultancy services, as they can be invaluable when faced with a major recall event – not only can they assist with managing stakeholders, but they can provide assurances and assistance with the recall itself.
Risk management bursaries, meaning funding provided by an insurance company towards risk management initiatives, can enable businesses to bolster their own quality and safety procedures and mitigate the likelihood of a future recall or withdrawal event.
Insurance considerations
Product recall insurance is not liability insurance, the core focus is balance sheet protection.
Cover is usually triggered by actual harm or an imminent risk of harm, but there are extensions beyond that.
Insurers won’t usually help to decide whether to recall a product – however, where the business voluntarily makes and can justify the decision to recall, insurance cover can still apply.
Gather evidence of loss throughout the recall, to facilitate the insurance claim (and claims against others in the supply chain) and align with an insurer’s loss adjuster.
This article has been produced in collaboration with David Kidman, Partner, Product Liability, Recall & Compliance at Simmons & Simmons. For more information, please visit the Lockton Crisis Management page (opens a new window), or contact:
Freddie Schlesinger, Vice President, Product Recall & Reputational Risk
E: freddie.schlesinger@lockton.com
