The Economics of a Food Recall: What a Recall Could Cost Your Business

1. The Economics of a Food Recall: What a Recall Could Cost Your Business Annette Dunlap, MBA Agribusiness Developer Marketing Division, NCDA&CS January 31, 2012

2. Three Things to Remember Treat recall prevention as a key business and customer retention strategy Don’t underestimate the true cost of a recall Use appropriate tools to reduce and manage your risk

3. 2010 Surveillance Data on Foodborne Disease Outbreaks In the US, contaminated food causes: • 1,000 reported disease outbreaks • Estimated 48M illnesses • 128,000 hospitalizations • 3,000 annual deaths • $365 M Direct Annual Medical Expenditures Source: CDC Vital Signs -http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6022a5.htm?s_cid=mm6022a5_w

4. Is Foodborne Disease Preventable? • National decline of E.coli 0157 to less than 1 reportable case/100,000 • Overall decline in 6 key foodborne illnesses by 23% YES, foodborne disease is preventable Source: CDC Vital Signs - http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6022a5.htm?s_cid=mm6022a5_w

5. Where you find Disease Pathogens • Healthy animals: they contaminate meat and poultry when animals are slaughtered and processed, • Environments in which fruits, nuts, and vegetables are grown and processed. • Exceptions are: • Shigella, which lives in the intestines of ill persons and can contaminate food when persons do not wash their hands after defecating • Vibrio, which lives in marine waters and healthy shellfish, especially oysters. Source: CDC Vital Signs - http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6022a5.htm?s_cid=mm6022a5_w

7. Major Corporations Recognize Recalls as Risk Factors • Item 1A.Risk Factors The following are certain risk factors that could affect our business, financial condition, and results of operations. … The risks that have been highlighted here are not the only ones that we face. If any of the risks actually occur, our business, financial condition, or results of operations could be negatively affected. In that case, the trading price of our securities could decline, and you may lose all or part of your investment. Source: J.M. Smucker Co., 2011 Annual Report

8. Damage to Our Reputation or Brand Name, Loss of Brand Relevance, Increase in Private Label Use by Customers or Consumers, or Product Quality or Safety Concerns Could Negatively Impact Us. The food industry generally is subject to risks posed by food spoilage and contamination, product tampering, product recall, and consumer product liability claims. For instance,we may be required to recall certain of our products should they be mislabeled, contaminated or damaged. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury or illness. A product recall or an adverse result in any such litigation could cause consumers in our principal markets to lose confidence in the safety and quality of certain products or ingredients, and otherwise have a negative effect on our business and financial results. Negative publicity about these concerns, whether or not valid, may discourage consumers from buying our products or cause disruptions in production or distribution of our products and adversely affect our reputation or brands.Source: J.M. Smucker Co., 2011 Annual Report

10. Kellogg’s Case Study

11. Statement in Kellogg’s Annual Report Selling food products involves a number of legal and other risks, including product contamination, spoilage, product tampering, allergens, or other adulteration. We may need to recall some of our products if they become adulterated or misbranded. We may also be liable if the consumption of any of our products causes injury, illness or death. A widespread product recall or market withdrawal could result in significant losses due to their costs, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. Source: Kellogg’s., 2011 Annual Report

12. Statement continued… We could also suffer losses from a significant product liability judgment against us. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our food products, which could have a material adverse effect on our business results and the value of our brands. Moreover, even if a product liability or consumer fraud claim is meritless, does not prevail or is not pursued, the negative publicity surrounding assertions against our Company and our products or processes could adversely affect our reputation or brands. Source: Kellogg’s., 2011 Annual Report

13. For example, in June 2010, we initiated a recall of certain ready-to-eat cereals due to an odor from waxy resins used to make package liner. Our consolidated net sales were down 1% on both a reported and internal basis…. We experienced supply chain disruptions in our waffle business and had a second quarter recall of select packages of breakfast cereals. As a result, we have increased investment in our supply chain to mitigate potential risks. Discussion of the 2010 Recall Source: Kellogg’s., 2011 Annual Report

14. The brands involved in the recall were the cornerstone of our back-to-school promotions in the third quarter. Source: Kellogg’s., 2011 Annual Report

15. Kellogg’s Sales Performance • Internal net sales for our North America operating segment declined 2%. • Retail cereal’s internal net sales declined by 5% on a full-year basis. • Our consumption was negatively impacted by the impact of the cereal recall that occurred in the second quarter of 2010. Source: Kellogg’s., 2011 Annual Report

16. Cost of the Recall Source: Kellogg’s., 2011 Annual Report

17. Additional Note to the Financials Source: Kellogg’s., 2011 Annual Report

18. Monitoring Your Supply Chain http://www.clresearch.com/research/detail.cfm?guid=FAA2C663-3048-79ED-9921-0A7885DB56CC

19. Spices & Seasonings are potential pathogens

20. Consumer Confidence has gone done • Reduced consumer confidence in the safety of the food supply means that consumers are becoming hyper-vigilant about the quality and safety of what they eat • Do not assume because you are “local” that you are “off the hook”!

22. Your Hidden Financial Costs Business interruption (lost revenue) Employee turnover/retraining Higher insurance premiums Liability-related expenses (such as medical bills for the sick customer(s)) Reduced commodity supplies -> higher prices

23. Qualitative Business Costs Emotional costs: to you as the owner; to your employees; to the family Public relations: repairing a damaged reputation

24. What can you do? • Treat recalls strategically • check reliable websites routinely • keep good records • know your suppliers • know your co-packer • have a plan in place • Use available and sensible risk management tools such as product liability insurance and business interruption insurance • Expect the unexpected

25. What can you do? • Practice proper sanitation • WASH YOUR HANDS

26. Contact Information Annette Dunlap, MBA Phone: 919.707.3117 E-mail: annette.dunlap@ncagr.gov