When you think about the greatest threat to your food company’s profitability, your mind might automatically jump to nuances like employee turnover, inflating overhead costs or mismanaged advertising campaigns. Would you be surprised to know that a single failure in your food safety program could actually be the most devastating profitability factor of all?
Last year, the food industry experienced recalls in a wide spectrum of categories. From lettuce and beef to cereal and cake mix, billions of dollars were sacrificed to food safety program failures that resulted in potentially harmful consumer products. And it’s not just the wasted ingredients or production time that put a financial strain on recall-impacted companies; expensive losses were felt from repercussions like compliance penalties, litigation fees, severed business relationships, and major reputation blows.
When you’re so focused on production uptime and profitability, it can be easy to overlook the details involved in maintaining a strong food safety program. In reality, though, food safety and profitability are inextricably linked. Any direct or indirect threat to the success of your food safety effort is an automatic threat to your bottom line. To illustrate this connection in more tangible terms, here is an informative breakdown of the real costs associated with a potential food safety program failure.
The Clear-Cut Financial Costs
In a 2011 report sponsored by the Grocery Manufacturers Association (GMA), based on a survey of 36 U.S.-based food companies, 77% of respondents that had faced a recall in the previous five years estimated the financial impact to be up to $30 million dollars, with 23% reporting even higher costs. Only 9% indicated recall costs that amounted to less than $9 million.
Over 81% of survey respondents described the financial consequences of a recall as either
“significant” or “catastrophic,” and the report reveals the four largest financial exposures faced by companies of all sizes as a result of a recall include:
- Business interruption or lost profits
- Recall execution costs
- Liability risk
- Reputation damage or loss of brand equity
A recall can be a company-defining event, with costs mounting from needs such as:
- Pausing production to carry out recall response initiatives
- Alerting necessary parties within and outside the organization, including regulatory agencies and relevant retailers
- Managing the logistics of removing affected or mislabeled products
- Examining the source of the recall, including issues with suppliers, equipment, processes or contamination prevention plans
- Remediating the identified problems to prevent similar occurrences
- Planning for expanded human resources to handle recall tasks in addition to routine operations
In addition, FSMA laws and USDA regulations stipulate that in response to a food safety violation, these governing bodies may consider costly regulatory actions like:
- Issuing advisory letters
- Initiating court actions, such as seizure or injunction
- Implementing administrative detention to gain control of adulterated or misbranded products
- Mandating a recall of adulterated food
- Suspending a facility’s food registration to prevent the shipment of food
And those are just the costs incurred directly by the recall-initiating companies themselves. These events have even wider-reaching impacts on the overall economy. In fact, an Ohio State University study published in 2015 estimates the total national cost of foodborne illness to be up to $93.2 billion per year. It also reveals that foodborne illness costs some states more than $350 per resident every year. Even if you don’t immediately consider these outlying expenses as detrimental to your own bottom line, there’s no limit to how overarching economic outcomes like these can negatively impact every industry across the nation.
The Hardship of Reputational Ruin
At the end of the day, your brand is your primary asset. It is a representation of who you are, how you do business and what you stand for. When food safety program failures happen, customers lose faith in your brand, a reaction that can leave lasting effects on your bottom line. If your brand deteriorates due to consumer mistrust, you’re risking business failure.
“Our food travels around the globe, and so do the stories about food safety issues,” says The Acheson Group, a global food, and beverage consulting company. “Stories of companies that don’t take food safety issues seriously are shared instantly across social networks, and sharing is virtually frictionless. It takes only the click of a ‘like’ button to repeat news of a contamination across yet another social media platform, growing from nationwide to worldwide news instantaneously.”
In the event of a food safety program failure, publicity is inevitable – and it’s an expense that spans every aspect from public relations management to eroded sales. Customers want to know that the products they’re buying are safe, and food recalls are alarming. In response, consumers may change their purchasing, food preparation and consumption practices, or avoid the product for months or years afterward.
“Food safety problems are not bad just for companies that recall products,” says Stephen Ostroff, M.D., deputy commissioner for foods and veterinary medicine at the FDA, in a recent article in Food Safety Magazine. “Even companies that market products similar to a recalled food can suffer, too. The worst thing that can happen to a food sector or the food industry is the loss of consumer confidence due to recalls or disease outbreaks.”
The Long-Term Aftermath
The ripple effects of a food safety program failure can be felt long after the initial recall and remediation efforts. Some of the greatest hits to a company’s profitability are the resounding losses that accumulate over time.
A single food safety incident can affect a long list of distribution channels, including wholesalers/distributors, repackers, manufacturers, retail outlets, consumers, federal government consignees, and foreign consignees. Just think about the time and resources a grocery store, for example, must expend to gather recall-related details (lot numbers, UPCs, shipping information, etc.), issue internal recall notices, pull products from shelves, make arrangements for food disposal and reimbursement, notify consumers appropriately and file any necessary compliance paperwork.
Because of the chaos and disruption, a food safety program failure causes for these channels, clients may choose to move their business elsewhere, leaving a significant gap in sales potential. If that happens, your company is then challenged to secure new business from other distribution options, which demands an expensive sales effort. This aftermath can put a serious strain on your brand’s relationships and jeopardize future income.
In addition, you have the process rectification and improvement costs to consider. To comply with regulatory oversight, gain back the trust of consumers and ensure against reoccurrences, you’ll be spending on ongoing efforts like managing corrective actions, purchasing and implementing new preventive technology, undergoing rigorous (re)training and more – all on a shortened timeline and with the burden of food safety failure hanging on the company’s back.
The Smartest Investment in Profitability is Proaction
There’s no way around the fact that food safety program failures lead to plunging profitability. Over and over again, even the strongest of brands have suffered immense financial burden in the wake of food safety incidents. That’s why it’s so important to understand the link between food safety and profitability and make the best decisions to ensure that your program is reducing risk in every possible way.
If you’re not sure what a truly proactive approach to food safety looks like, here are some helpful indicators:
- Having an environmental mapping and food safety workflow solution to gain as much visibility as possible into the root causes of contaminants and pathogens in your products
- Gaining and maintaining visibility into your upstream supply chain partners’ food safety performance, thereby mitigating the chances of a hazard caused by raw ingredients and materials entering your environment
- Employing a simplified testing process within your manufacturing facilities via automation tools that drastically decrease manual, error-prone steps
- Leveraging a thorough, accurate documentation system supported by a centralized database that allows you to unlock food safety and compliance insights
- Fully harnessing data to stay on the pulse of your operation, as well as enable early detection and action based on tracking and trending of all data components
If profitability is your goal (and, really, when is it not?), now is the time to invest in a proactive solution that empowers you to manage your food safety risk and protect your bottom line.
Interested in accessing informative guides to keep your brand strong, minimize your organization’s food safety risk and elevate your reputation for quality? Get your free Food Recall Prevention Kit.