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Product recalls: what they are, how costly they can be and defending against them

Whether it is mislabelled foods getting pulled from shelves or unsafe items being withdrawn due to health and safety fears, product recalls often make headlines.

And the news stories are plentiful—with major supermarkets, popular brands and manufacturing firms issuing warnings to their customers.

Kinder’s urgent recall of some of its chocolate products over salmonella fears in the run-up to Easter last year is one example.1

For manufacturers, recalled lines and product alerts can hugely impact their reputation, finances and shares at any time.

At best, it is inconvenient for consumers and an announcement on a retailer’s website.

However, product recalls can be embarrassing, give competitors an advantage, and could be devastating—with some linked to illnesses, serious injuries and even deaths.

Here we look at how product recalls can be damaging for the companies concerned. And how businesses—large or small—can best protect themselves.

What is a product recall?

Product recalls are issued when an item has a potential or confirmed problem.

It could mean the goods are potentially unsafe for consumption or use or pose a health and safety risk to the customer.

In most cases, a company would post details of its product recall on its website and other online sites and could display recall notices in stores.

Recalls likely to affect many people or pose a greater risk are likely to be reported in the news.

With product recalls, customers may be able to receive a full refund from the manufacturer or retailer. Sometimes, they could be given a replacement or free repair or even sue for damages, for example, if the defective product has caused injuries or death.

Voluntary or compulsory?

There are two types of recall—voluntary or compulsory. A company could voluntarily withdraw unsafe items from its supply chain or recall an item from shelves or warehouses while further investigations are carried out.

However, if businesses suspect a problem and the product has already reached its buyers, they may decide to issue an alert to inform customers about making a return or ask them to dispose of the item.

Voluntary recalls show a company is taking precautions and acting responsibly to prevent any harm or further issues.

A regulatory body, the government, or a local authority can demand a product recall for compulsory recalls.

The government website and Trading Standards publish lists of product recalls, safety alerts and reports. This can include anything from cordless vacuums to mugs, grills and shoes.2

Why might a company issue a product recall?

Product recall is a risk for many businesses. And while the product or the reason behind the recall may differ, the consequences for a company or investor can be similar.

For example, food and drink manufacturers and distributors are at risk of dealing with accidental or malicious product tampering.

As well as contaminated products, there is also a danger of items being mislabelled due to human error or faulty machinery.

Mislabelling is one of the key causes of a recall. It can result in significant financial and reputational damage that some businesses cannot recover from.

UK-based popcorn maker Thomas Tucker went into administration amid “significant losses” caused by a product recall in September 2019.3

The company recalled some popcorn brands just a month before because they may have contained milk, which was not mentioned on the label.

Allergens are the main cause of food and drink recalls in the UK, with products containing milk—and therefore potentially causing issues for those allergic to dairy— most frequently pulled from shelves, according to a report in the scientific journal Food Control.4

More recently, Coca-Cola recalled some of its Christmas Zero Sugar 24-can multipacks after a small number of products were incorrectly packed with Coca-Cola Original Taste, which contains sugar, in November 2022.5

Consumption of full-sugar drinks could cause problems for those who must limit their sugar intake. The soft drinks giant apologised for the mix-up and issued a product safety notice “as a precaution”.

There were a total of 1481 food recalls reported in 2021 in Europe, representing a 27% increase from 2020, and more robust health and safety regulations and enforcement mean food and drink recalls are increasingly common.6

However, the food and drink sector is not the only one at risk of being affected by recalls. Carmaker General Motors and tech giant Samsung are some of the most famous examples.7

That’s not to say that only leading global companies need to be wary about how damaging product recalls can be. As Trading Standards’ list of product recalls in the UK shows, smaller businesses are just as likely to be plagued by recalls.8

Yet, the lost income and disruption could have even greater long-term financial consequences and damage a brand because, unlike larger firms, they operate without robust cash flow and business brand recognition.9

How damaging can a product recall be?

The Kinder product recall

When Ferrero, the company behind Kinder treats, warned customers not to eat some of its chocolate products, the timing couldn’t have been worse – just before Easter.

Due to salmonella fears, the chocolate maker issued an urgent recall of its Kinder Surprise eggs in April 2022.

It then extended the list of recalled products to include Kinder egg hunt kits and Kinder mini eggs.1

The Neutrogena and Aveeno product recall

The previous year, in July 2021, Johnson & Johnson announced a voluntary recall of five of its Neutrogena and Aveeno aerosol sunscreen product lines.10

It took caution due to fears that some aerosol sunscreen products may have contained low levels of benzene, a substance that can potentially cause cancer depending on the level and extent of exposure.

The FitBit product recall

Fitbit also made a voluntary recall, asking users to stop wearing its Ionic smartwatches because of a potential burn hazard.11

The fitness-tracking device maker announced a recall of 2m of the Ionic watches in March 2022. It followed reports of the lithium-ion battery overheating, leading to a warning from the US Consumer Product Safety Commission.12

This was not the first time a well-known company had to issue a product recall due to a battery fault.

The Galaxy Note 7 product recall

Samsung initiated a recall of its Galaxy Note 7s and confirmed the overheating and burning of the phones was due to faults with the batteries.7

The 2016 recall reportedly cost $5.3bn (£4.3bn), but the South Korean firm made a strong comeback with its Galaxy Note 8 the following year.7

Other product recall examples

For consumers, unknowingly using an unsafe product can have devastating consequences.

As any business whose products have been linked to illness, injury, or death will know, the financial impact of a recall—with interruption to business, replacing stock, and paying compensation or legal fees—can be staggering.

The Peloton product recall

Peloton recalled 125,000 Tread and Tread+ treadmills in America in May 2021. With costs estimated to be $165m, as it issued refunds, stopped taking orders, cancelled deliveries, and waived three months of subscription fees for those keeping their machines.13 Following the recall announcement, shares in the New York-based company fell by 14 per cent.14

Owners in the UK were also advised to stop using their treadmills amid concerns the display consoles could fall off.

The General Motors product recall

General Motors recalled 2.6 million small cars in 2014 to replace a defective ignition switch.15 It paid compensation for 124 deaths and 275 injuries.16 

During that year, the company recalled 30.4 million vehicles worldwide at the cost of $4.1bn in repair costs, compensation and expenses.17

How to defend against a product recall

Businesses affected by a recall need to ensure successive products are delivered without any issues.

Not only do companies have to recover financially and rebuild their reputation, but they must also identify the cause of a recall. This will reduce the risk the business will be affected again and deter customers from buying from a competitor.

Acknowledging errors, taking responsibility, and ensuring quality controls address any problems is vital.

Despite these steps, it is not always possible to fully reduce the risk of further product recalls.

As well as a faulty product caused, for example, by flawed parts or machinery, many recalls result from simple human error.

It's always better to protect your business from a serious risk of loss. That is why Marsh Commercial’s manufacturing business insurance, which includes product recall insurance, is so important.

Get protected with product recall insurance

Companies should not just assume that because they have business insurance, they will be covered in the event of a recall.

Existing products liability insurance may cover if a product causes illness, injury, or damage to a third party’s property, but it may not cover product recall. And when a policy does, it may not cover all losses, such as interruption to the business, so owners could face mounting costs.

Product recall insurance as part of your manufacturing business insurance offers you peace of mind. It could be crucial for the success of your company.

Is product recall insurance right for you?

Every manufacturing business is at risk of a product recall event, and errors can occur at any time.

Product recall insurance can protect you and your company from the devastating financial impact of an unexpected recall incident, keeping your business going at a difficult time.

It could cover the cost of lost sales, recalling affected or unsafe products, and investigating the cause and would ensure the money was there to put it right.

Equally, it can also help with brand rehabilitation, putting your business in a much better position to recover.

The right insurance will also give you access to a 24/7 expert helpline to minimise damage and offer advice, which is critical for smaller firms without crisis management teams for support.

For some manufacturers, product recall insurance may be required by their customers and retailers. However, even if this isn’t the case, quality cover can help your business stand out from the competition by demonstrating professionalism and a commitment to customer protection.

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