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article imageThe high cost of product recalls can be complex

By Karen Graham     Oct 30, 2015 in Business
Not a day go by without a handful of recall notices being posted to the Internet or in the newspapers. The number of recalls is so numerous that the federal government has set up a special website devoted to recalls just so we can keep track of them.
The numbers are mind-numbing, especially for vehicle recalls, but other products are not ignored. Toys, baby products, medical devices, furniture, electronics and food product recalls are just some of the items included on the list.
For an interesting break from your normal activities, take a look at the federal government's recall list. It is a peek into the 2,363 product recalls reported annually. Those recalls represent approximately 32 million "things" that have to be sent back, destroyed or replaced annually.
So how much does that recalled jar of peanut butter or "Easy Bake Oven" really cost? It's a heck of a lot more than what the consumer paid, that's for sure. Here's something to think about; food recalls alone cost the American economy about $7 billion every year.
One of the biggest auto recalls in American history centered around an exploding airbag found in mil...
One of the biggest auto recalls in American history centered around an exploding airbag found in millions of vehicles. The Takata brand airbag has a history of exploding and sending shrapnel flying upon impact. Over 11 million vehicles with this dangerous defect were recalled.
CBS Evening News
Even more significant is vehicle recalls. In September 2015, a total of 10,292,339 vehicles were recalled in Japan between April 2015 and September 2015, topping the previous annual record, all due to problems with potentially lethal airbag inflators produced by Takata Corp.
Consumers are left wondering if all the recalls are really out of safety concerns for the intended user, of just good business practices. Actually, it's a bit of both and more. Let's look at what happens when something is recalled.
What happens when a product is recalled?
Let's picture a food processing plant that ships meat across the country. In the first place, as owner, there are many state, local and federal regulations that must be adhered to in order to do business across state lines. Now let's say that $50 million worth of ground meat processed, packaged and shipped to distributors is found to possibly contain a pathogen.
So initially, you're out $50 million in the cost of the product, but this is just the beginning of your woes. The company also has to handle the cost of notification of the recall, getting the food off store shelves, handling lawsuits, revamping plants and repairing public relations.
Notification involves informing the public of what went wrong, regardless of whether its a food item or a baby chair. The fees will include radio, television, newspaper advertisements, telephone messages and direct mailings.
Getting the product returned is a big job, and your company is responsible for collection, shipment or destruction of the recalled product. If your company is a publicly traded company, it is likely your shares will drop. This happened with Jack in the Box in 1993 in what was the most devastating foodborne illness outbreaks ever.
This Jack in the Box off U.S. Highway 83 is one of five company outlets in Laredo  Texas. Notice the...
This Jack in the Box off U.S. Highway 83 is one of five company outlets in Laredo, Texas. Notice the 1980s logo.
Billy Hathorn
Product liability entered the equation when by selling hamburgers contaminated with E. coli, hundreds of children became sick and four ultimately died from foodborne illness. When the company that ran the restaurants, Foodmaker Inc issued a recall, only 20 percent of the contaminated meat was recovered.
Foodmaker Inc lost $160 million in sales and 30 percent of their stock market value. At the time, the press reported the company also offered to pay all victim's medical expenses with "no strings attached." Even so, this one incident with Jack in the Box resulted in the company paying out 10's of millions of dollars in individual and class action lawsuits.
A white paper, published online in 2011 by the Grocery Manufacturers Association (GMA) gives us some sobering statistics on the cost of product recalls:
In August 2010, more than 500 million shell eggs distributed by an egg producer had to be recalled. According to the Center for Disease Control (CDC), from May 1 to October 15, 2010, approximately 2,500 illnesses associated with the eggs were reported, making it the largest recorded Salmonella Enteritis outbreak reported since the FDA’s outbreak surveillance began in the early 1970s. Total costs to American shell-egg producers have yet to be calculated. However, the negative media attention produced a drop in prices that cost the shell-egg industry over $100 million in September 2010 alone. In 2007, the estimated cost of the peanut butter recall to one company due to Salmonella contamination was $78 million. The estimated cost to American peanut-containing product producers from the 2009 incident contamination of peanut butter by Salmonella was $1 billion.
These are sobering statistics and something to think about. Shoddy workmanship, knowingly using faulty items in production, lax sanitation, and other problems infect the production of everything in society, from soup to wing-nuts.
More about cost of recalls, loss of productivity, Liability, economic hemorrhage, lost profits
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