Just How Bad Are Product Recalls for Business?
In recent years, we’ve seen the headline making recalls of baby gear, electronics, cars, and food, accompanied by an inevitable flood of social media commentary.
While we can all agree that they are never a good look, how damaging are recalls – the practice of retrieving and replacing defective goods – actually for business?
The truth is, it often depends on the size and strength of the company, the magnitude of the product defect and how companies handle the issue (i.e. their crisis communication skills). Reasons for recalls can be as serious as a response to a product-caused death, to “just-in-case” precautionary measures. Depending on the company, recalls have meant either a death sentence or an unexpected opportunity.
Often, however, once the recall is out of sight (i.e. absent from news feeds), it’s out of mind for consumers.
E. coli Outbreak Update: Don’t eat romaine lettuce from Monterey, San Benito, or Santa Barbara counties in northern and central California. Check labels on products. If you can’t tell where it was grown, don’t eat it. https://t.co/NrFOIxG8hx pic.twitter.com/bQM4KMaPiw
— CDC (@CDCgov) December 13, 2018
A handful of the brands you use on a daily basis – from electronics to food products – have experienced recalls at some point.
When it comes to recalls, brands quite literally pay for their mistakes. From a financial standpoint, recalls are never a positive thing. The brand is forced to absorb most of the costs associated with the defunct, recalled product and replacing it.
Though insurance may cover a fraction of this cost, it makes a minimal impact and most recalls come with massive lawsuits.
For some companies – for example global auto brands – recalling thousands of pricey products can make a huge financial dent (as in a multi-billion dollar dent). The thing is that these companies – like Honda, Ford, Toyota, and General Motors, who have all experienced recalls – can bounce back thanks to longtime brand loyalty and a flexible cash flow, even if their company’s stocks and reputation take a temporary hit.
Some auto manufacturing companies, namely Takata Corp., however, haven’t been as fortunate on the recovery front.
The magnitude of the issue was too extreme and continues to be, as recalls continue globally of the now defunct company’s airbags. In June 2017, the company filed for bankruptcy after a series of deaths associated with its airbags that resulted in the largest automotive recall in U.S. history.
To date, tens of millions of automobiles have been recalled. The company didn’t win any points in the PR department for its handling of the issue. In 2017, Takata paid $1-billion in a settlement with the U.S. Justice Department for concealing the defect from customers.
For smaller companies, a recall can also mean a declaration of bankruptcy and the end of a business.
— Samsung Mobile US (@SamsungMobileUS) September 15, 2016
Not only do they not have the overhead to absorb the costs associated with the recall, but many lack the brand recognition enjoyed by companies like Samsung, Kuerig, and Mattel Toys, who have successfully bounced back from highly public recalls.
A detrimental loss of brand trust may be reflected in everything from a drop in company stocks and sales, to a barrage of social media criticism, and smaller companies are less equipped to handle this.
When it comes to larger and established brands, however — like a good friend who makes a drunken fool of themselves at a party — a substantial number of recalls are soon forgotten thanks to longtime loyalty.
For many brands, a recall is actually far from a nail in the coffin; it may be an opportunity for both praise and growth.
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The way in which brands respond to a recall makes all the difference; swift action and ownership are key. For example, a textbook example of a successful recovery is the case of Tylenol in 1982.
In response to seven (!!!) deaths as a result of tampered-with Tylenol capsules laced with cyanide, Johnson & Johnson recalled the product, took full responsibility, and urged the public not to use it.
Customers appreciated the transparency with which the company dealt with the issue. The company also clearly prioritized lives over dollar signs. It goes without saying that Johnson & Johnson is certainly not struggling today.
In the recall-riddled food industry, consumers apparently aren’t picky eaters when it comes to recalled items.
New research from Category Partners reveals that customers will buy recalled food products not long after they are returned to store shelves.
Over half of respondents age 44 or younger said they would buy produce, meat, deli, and bakery products within a week or less of a recall, but were more cautious when it came to seafood.
Maple Leaf Food products continue to fill grocery carts years after the Canadian company’s widely publicized and extremely tragic listeria outbreak in 2008, which resulted in 22 deaths.
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Of course, though frequent, recalls are nothing to take lightly. They can be as financially damaging on a company as a factory fire and ruin reputations like a bad high school rumour.
The good news for marketing, sales and PR pros of major companies is that, in most cases, there is little evidence to show long-term financial harm of recalls – just a lot of short-term damage control.
Featured Image: Pixabay
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