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Inventory & Brand Value Impacted by Recalls - Large & Small

A product recall is usually due to the discovery of safety issues – tainted pet food, contaminated toothpaste, e.coli in food, lead in children’s toys and clothing—necessitating the return to the manufacturer a batch or entire production run of a particular product. On average, there are 2,500 to 3,000 recalls issued annually. The direct costs following a recall tie to the product, but it is the indirect cost – damage to the brand name – that can have a stronger impact.

Brand recognition and reactions to a particular brand can be influenced by the media. No longer limited to news stories or editorials, a brand can become an electronic target for consumer blog posts, online comments, and videos. With the e.coli outbreak affecting spinach in 2006, there were more than 1.98 million indexed pages and 6,750 blog posts referencing just that recall. How many “hits” can a brand take and remain strong?

In the wake of the recent rash of recalls, the Consumer Federation of America is looking for change: increased government involvement, penalties and independent testing. Even though 45% of product purchasers have not been directly impacted by the recent recalls, they expect stricter product quality evaluations going forward. Currently, China is the world’s foremost supplier of children’s toys – producing more than 80%. As manufacturers begin closely evaluating the supply line from China, 76% of product purchasers anticipate additional recalls from overseas factories. Which brands are going to be impacted?

In an effort to protect their brand and corporate image, companies that do not manufacture or design consumer products but that allow their “characters” to be used via licensing deals are also at risk for being impacted by the recalls. These licensing companies will likely be adding additional pressure to the manufactures by demanding increased inspections and by becoming more personally involved in product quality evaluations.

In addition to the value of a brand being impacted, the inventory might also be negatively affected regardless of product safety record. The consumer may not necessarily differentiate between a “safe” product and an “unsafe” product if both are marketed under the same trademark and brand. The quality of the brand and inventory become intertwined – each undeniably affects the other simply by reputation and through association.

The good news is that, while concerned about the rash of recent product recalls, experts are acknowledging that the nation’s level of consumption will continue. Most consumers, if they hear about a recall, continue to make purchases. After the spinach recall in 2006, Rutgers conducted 1,200 telephone interviews with American consumers: 13% continued to eat spinach; 44% of those surveyed thought washing the spinach made it safe; and only 18% surveyed stopped buying spinach and other similar produce altogether.

While the number of recalls on products from China hasn’t reached the level of “international crisis” yet, there is concern that “Made in China” could equal “Buyer Beware.” U.S. executives are worrying that another recall involving China could start a consumer backlash against Chinese imports. A consumer boycott, while difficult due to the large quantity of products on the market, can impact the value of all brands – large and small.

Read more about product recalls at the U.S. Consumer Product Safety Commission.

Canada exports approximately $10 Billion in FDA-regulated food and agricultural products to the Unites States compared to the approximately $2 Billion from China¹.

¹Washington Post, Rick Weiss, May 20, 2007