Brand and reputation damage major threat to companies, as product recalls rise

Product recalls are on the rise with product contamination having the potential to devastate companies as much as fires damages.

According to the Australian Competition and Consumer Commission, there were 538 consumer level recalls in Australia in 2013, up from 480 in 2012 and 448 in 2011. This represents an average of over 10 recalls per week.

The head of specialty lines for insurance underwriting group Catlin Australia, Steven Ward, told SmartCompany companies often underestimated the impact of product recalls for topical or ingestible products such as food, beverages, pharmaceuticals and cosmetics could inflict.

“It can be as damaging as a fire. I think one of the biggest threats is reputation damage,” he says.

“If there’s a fire and the client’s premise burns down, it can be rebuilt. The problem with contamination is it can often get a lot of media attention, which can have a profound impact on their brand and ongoing sales.”

Ward says no industry is immune to the potential damage brought on by product contamination – for topical and ingestible items such as food, beverages, pharmaceuticals or cosmetics – or product recall – for non-ingestible items such as clothing, electronics or furniture.

Ward also said Catlin Australia had seen a significant increase in the number of companies purchasing contamination insurance, by declined to provide figures.

“We’re seeing companies… such as importers, distributors and retailers that are buying it as well.”

“There’s an increase in awareness about the potential impact it [product contamination] can have on companies’ balance sheets and brands,” he says.

Forty-six food and beverage products were recalled for contamination in 2013, while 58 products were recalled in 2012.

Clair Richard, head of crisis management at international insurance group AIG, told SmartCompany a product recall is only one of the potential consequences of a product contamination.

“In addition to recall costs, product contaminations can cost food and beverage manufacturers millions in regulatory compliance, lost profit, decontamination, prolonged manufacturing delays and more. Ingredient contamination can be particularly costly, and with today’s global supply chains, can impact even those who do not think they are at risk,” she says.

“The long-term brand damage to an entire product category, if tarnished, can impact earnings over a longer period of time.”

The product contamination warning comes after the recall last week of more than 50,000 items by retailers including Myer, Target, Just Jeans, Rivers and Trade Secret after an Australian Competition and Consumer Commission investigation found the products were made with dyes containing hazardous chemicals.