Food recall.

For consumers, those two words send a red-flag alert: Don’t buy the recalled food or get rid of any of it you might have in your home.

To retailers and food companies, the two words can strike fear in their hearts. “The food industry’s biggest threat to profitability,” read a recent headline in an industry magazine.

Food recalls happen for a variety of reasons. The food might have dangerous bacteria such as E. coli or Salmonella in it, or pieces of metal or plastic, or allergens such as soy or milk that aren’t declared on the label, or other toxins or pesticides.

For consumers, a recall means the food has to be taken out of the fridge or off the kitchen shelf. They can throw it out or take it back for a refund. Nothing much complicated about that.

But recall situations are not that simple for the rest of the links in the field-to-fork chain. They can cost a farm, company or store a lot of money. A lot of money as in an estimated average of $10 million in direct costs, according to a study conducted by the Grocery Manufacturers Association (GMA) and the Food Marketing Institute (FMI).

A separate survey sponsored by GMA, found that 5 percent of companies incurred more than $100 million in direct and indirect costs — even more sometimes.

Take Peanut Corporation of America, which in 2009 knowingly shipped out peanut butter contaminated with Salmonella to a multitude of producers. That recall, the largest in U.S. history, has been estimated to have cost $1 billion in production losses and sales for the U.S. producers that used the peanut butter. Thousands were sickened and nine people died. Three of the company’s top officials are now in prison.

In 2006, a deadly E. coli outbreak traced to raw, bagged spinach led to $350 million in economic losses. That outbreak sickened 205 people,102 were hospitalized, and at least 31 people developed hemolytic uremic syndrome (HUS), a severe complication of E. coli infection that can lead to kidney failure. Of the victims, five died..

Sometimes a recall happens because there’s been an outbreak of foodborne illness related to the food. But sometimes no illnesses are reported. In those recall scenarios, problems are usually discovered by a company’s internal testing or government investigators conducting routine, random pathogen testing. In either case, the food must be recalled when pathogens are detected.

According to an analysis of the food recalls in the United State and the United Kingdom from 2002 to 2012, only 21 percent of those identified were detected by the company in question, while 68 percent were detected during routine of spot testing by regulatory bodies.

Bottomline, food recalls are an important tool that companies and government regulators use to improve food safety — for the sake of the consumer.

An important tool because, according to a government report on the economic impact of outbreaks on food businesses, an estimated 300,000 hospitalizations and 5,000 deaths annually in the United States are related to food-borne illnesses. The estimated costs of these incidents to the nation’s economy adds up to around $7 billion — costs that come from notifying consumers, removing food from shelves, destroying or relabeling food, and paying damages as a result of lawsuits.

Worse than that, companies’ or farms’ reputations can be so damaged that they have to close their doors, sometimes leading to the end of a multi-generational company and the loss of jobs for their employees. Again, the word “devastating” comes to mind.

According to a Harris Interactive poll, 55 percent of consumers would switch brands temporarily following a recall. About 15 percent would never again buy the recalled product.

One in five of the consumers answering the poll, 21 percent, would go even further and never buy any brand made by the company that produced the recalled product.

Why are foods recalled
According to a report on the cost of product recalls to food businesses, 540 food products were recalled in the United States in 2016 — up about 23 percent from the 437 food recalls in 2015.

In the United Kingdom, 84 food products were recalled in 2016 — up 29 percent from 65 in 2015

In both the United States and the United Kingdom, biological contaminants such as E. coli, Salmonella, Listeria and other bacteria, parasites and toxins were the main cause of recalls — 46 percent in the United States and 44 percent in the United Kingdom.

Other causes were mislabeling, foreign matter contamination, product defects, chemical contamination, hygiene issues and unapproved ingredients.

Illnesses from many pathogens can occur from eating fresh or raw foods such as vegetables and fruits simply because they don’t go through a so-called kill step such as cooking. In cases like this, there can be many causes, including unsanitary food handling practices along the supply chain, the use of contaminated water by a producer, and pest infestations.

Canned, frozen and other processed foods, including basic food ingredients such as flour, can become contaminated with pathogens in original source foods or from contaminated equipment and surfaces on production facilities.

So why do recalls cost so much?
The four direct costs of a recall are assembling a crisis team; tracing and removing the product from the stream of commerce; investigating and addressing the cause; and managing the public relations fallout of the recall.

Take removing the product from the market as an example. Somehow that food has to be removed, stored, transported and then destroyed.

Investigating and addressing the cause behind a recall calls for experts who know how to do that. Again, a lot of money.

Managing the public relations is another expensive, but essential, part of the effort. Press releases need to be sent out. Statements from company officials need to be gathered and shared with the public. And somehow, consumers need to be assured that all necessary steps have been taken to prevent another recall from happening.

Indirect costs can go on long after a recall and are more challenging to measure. These would include loss of reputation and loss of trust in a brand. Worse, sometimes a recall can affect producers whose products weren’t even part of the recall as happened in the spinach recall when consumers avoided spinach of all kinds, leading to lost sales for the fresh spinach industry across the country.

The indirect costs can be more damaging that the direct costs. Litigation, a decline in stock value, fines, sales losses and impact to the industry are all indirect costs. Location Companies, a product recall insurer, estimates that about 80 percent of the total costs are incurred long after a recall has been executed.

The overall goal, of course, is to get the food out of distribution as soon as possible. To do otherwise is to risk ruining the trust consumers have in a product and/or retailers that sell it.

According to the 2017 U.S. Grocery Shopper Trends report, 76 percent of shoppers said they’re more likely to shop at stores that take a proactive approach and are prompt in communicating recalls. In other words, consumers value the ability of stores to quickly take action during a recall.

Why are there more recalls?
The number of recalls continues to rise, according to a survey done by the Grocery Manufacturers Association. A number of factors are involved.

Because of global supply chains, contaminated products can quickly distributed across the nation or even across the globe before the problem is identified.

Courtesy of Stericycle

Inventories are concentrated in the hands of fewer global suppliers who source their foods through complex supply chains. This, in turn,  boosts food safety risks. Compounding the problem is that if one supplier has a problem, it can affect many more retailers and consumers than in the past.

Also, improved technologies and practices are being used to trace problems and detect pathogens. In the not too distant past, testing could only detect pathogens based on parts per million. Current testing can detect pathogens based on parts per billion. For food in the U.S., where there is a zero-tolerance policy for pathogens, that improved testing is resulting in more recalls.

Whole genome sequencing, the process of determining the complete DNA sequence of an organisms’s genome, means there’s no doubt about the specific bacteria or virus strains involved in a contamination incident.

Stricter regulations and enforcement, especially in the United States under the Food Safety Modernization Act, have helped  strengthened regulations, which could lead to even more recalls of contaminated food.

Other countries, meanwhile, have strengthened food safety regulations and enforcement, thus boosting the number of recalls.

What’s going on in the grocery stores?
Some big changes have come to grocery stores in the 21st Century, and it’s all been driven by what consumers want: fresh, organic, natural, and when possible, local food. Oh, and cheap, too. That’s the name of the game. You can see it in how many of these items are now in the stores — and how much advertising money retailers put into them.

There’s even talk about Walmart delivering groceries to your house and actually coming into your house to put them in your refrigerator.

Food safety becomes even more complicated with such services. If the store were to pack up the groceries you wanted, many of them fresh and local, the last thing Walmart would want to have happen is to have them sit on your doorstep in the sun until you get home.

That’s because a lot of food items, among them fresh cut produce, have to be kept at 41 degrees or cooler. If they aren’t, any bacteria such as E. coli, Listeria and Salmonella that may be on or in the food will multiply — quickly and abundantly.

For consumers, that means possible foodborne illnesses, hospitalizations or even death. For retailers, it could trigger recalls.

In other words, all of this fresh food — and the private-label brands, which are made exclusively for a retailer in order to compete with more expensive brand names — call for strict attention to food safety. It’s not like the old days when packaged processed food were the mainstay of a store. For the most part, that just took some clever advertising and creative displays.

“Consumers have definitely changed the grocery stores,” said Joe Bermudez of Berrian Insurance Group. “Change brings in new different and unfamiliar risks. Now there are different exposures stores have to think about. Nothing’s static.”

What’s also happening is that the stores’ investments in freshly prepared foods and private-label products are growing into important profit centers — in some cases the highest-performing segments in the food retail business, according to the Food Marketing Institute.

No surprise then that risk is part of the new profit picture, as it always is when fresh foods are involved. That’s where recall insurance comes into the picture.

“It can be the difference between companies going out of business or surviving,” said Bermudez, explaining that product liability insurance and general liability insurance leave gaps in coverage in the case of recalls.

Seattle food safety attorney Bill Marler said in his experience, one of the reasons to have recall insurance is that if there is an outbreak, the cost of the illnesses can sometimes pale compared to the cost of a recall.

He also pointed out that when a product goes out to multiple places, as usually happens, the stores can charge the offending party the cost of taking the product off the shelves, transporting it, and destroying it.

“The entire cost can be really, really expensive,” Marler said.

And while almost everyone thinks of insurance as a way to cover an injury, Marler said that if a company has insurance for injury claims but no recall insurance, “the expense of a recall can really tip a company over.”

With this harsh reality in mind, the Food Marketing Institute, whose U.S. members operate nearly 40,000 retail food stores, is partnering with RevenueShield to promote an insurance program to protect grocers and supply-chain partners from risks associated with managing retail fresh prepared food initiatives and private brand manufacturing.

The institute reports that as these profit centers continue to grow, the risk to a brand and balance sheet has consequently expanded, particularly with regard to product recalls and the potential for food-safety risk.

“The expansion into these non-traditional revenue centers has resulted in significant sales growth, customer loyalty, and stronger brand awareness,” said Joel Berrian, co-owner of Berrian Insurance Group. “With that expansion comes additional risk, especially to a retailer’s brand reputation during an outbreak or recall event.”

He describes RevenueShield as the first of its kind to address business income loss from this type of risk as the crisis management tool needed to keep customers coming through the doors as well as a number of other factors that protect a company’s revenue stream.

Joe Bermudez

Bermudez, who helped develop RevenueShield, said many grocery stores are family owned and are generally doing a great job when it comes to food safety.

“But you still can’t stop this with some foods,” he said, referring to foodborne pathogens. “The nature of the beast is that it’s going to sneak through. Human error is our biggest enemy.”

It could be something as unnoticeable as a worker coming to work with norovirus or Listeria monocytogenes that comes into a food environment on a fork lift or someone’s boots.

“Pathogens don’t care if the food is local or comes from big ag,” he said. “This is change that brings in new and different and unfamiliar risks. It’s different exposures you’ve got to think about. There has to be a comprehensive effort to make sure that the insurance is there, and that includes recall insurance.”

Bermudez said he’s seen too many companies suffering economic death inflicted by something that happened in the supply chain.

“Retailers need to go through their insurance policies and make sure they’re ready for recalls,” he said.

With some recall insurance, a panel of experts arrives like the calvary, rushing in to help. Expenses such as freight and disposal are covered. And many policies pay for lost profits and other economic costs. And there’s also money for marketing “rehabilitations.”

“It covers all kinds of exclusions found in general liability policies,” he said.

He warns that many CEOs and other top company officials underestimate the potential problem.

“You need to go through your insurance policies and make sure you’re ready for a recall,” he said. “I’ve seen recalls, some good and some bad, but even with good recalls,  it can still cost in the millions. It’s going to be a big number; I promise you.”

As for the cost of recall insurance, Bermudez said he’s never seen two recalls that are the same. Each company faces its own risks and each company needs to decide on the specific coverage it needs.

Recall insurance for fresh produce
Stores have their challenges when it comes to ensuring the food on their shelves is safe, but food producing companies — from seed to store shelves — have plenty of challenges of their own. That’s especially true for fresh produce, which consumers continue to demand in increasing amounts.

Yet, there have been many recalls of fresh produce, ranging from baby spinach leaves to cantaloupe, and from papayas to broccoli.

With this in mind, the United Fresh Produce Association and Western Growers have teamed up to promote Western Growers Shield, which is described as a “first-of-its-kind insurance program specifically designed to protect food companies from recall liability.”

Tom Stenzel, United Fresh President and CEO, described it as a way to bring recall insurance to every segment of the fresh-produce supply chain.

Western Growers represents local and regional family farmers growing fresh produce in Arizona, California, Colorado and New Mexico. Its members and their workers provide half of the nation’s fresh fruits, vegetables and tree nuts, including half of American-grown fresh organic produce.

By teaming up with United Fresh in this endeavor, Western Growers will be able to extend its reach for recall insurance into other states.

Jeff Gullickson

Jeff Gullickson, senior vice president of Western Growers Insurance Services, said “Western Growers Shield” is a response to what the growers said they were worried about and what they needed.

Some of those concerns are the physical loss of the product being recalled, the cost of recapturing that loss, the cost of a recall, which includes the interruption of business or the halt of processing the food, and the cost of restoring a brand.

Also of concern was management’s liability, since owners, directors and managers are held to higher accountability.

“Our members said these are some of the things that concern them,” said Gullickson.

With that in mind, Western Growers Shield designed a program that starts off with “pre-event planning.” In other words, what are you doing to get ready for a food-safety recall. This includes a mock recall.

Also important is what companies are doing to self-measure actual practices versus their written policies and guidelines. Businesses have to show in writing what they’re actually doing.

Should there be a contamination event, many managers and owners are unsure how to respond. Do you need a recall? Who notifies whom?

When it comes to recovering after a recall, different questions come up, such as how do you restore the brand and how do you recover financially? Who talks to the media and what’s your message?

“Judging from their responses, it’s clear they’re looking for input and assistance,” he said. “They want an insurance policy that will help pay for all of this. Our policy connects the dots.”

He also emphasized the importance about being transparent about what happened and what you’re doing.

“You want to tell the people the truth, said Gullickson. “People want to know you’re taking it seriously.”

Being a farmer, packer, manufacturer or shipper involves taking risks every day, Gullickson said, and the new recall insurance program measures the risks involved.

According to Western Growers Shield, the program can help managers and owners:

Understand the true cost of a recall. Recognize which costs are associated with a recall and how to quantify unique exposures.

Manage economic risk. Reduce the exposure to the brand and the balance sheet during a contamination event by preparing, responding and recovering.

Plan for financial recovery. Understand your specific opportunities to recover expenses related to a recall.

How does this benefit consumers?
Gullickson said that consumers definitely benefit from recall insurance. That’s because Western Growers Shield scores a company’s risk.

“We can quantify what risk looks like,” he said. “We can actually score the risk. Those with high scores get the best policies.”

But in the case of applicants with lower scores, Western Growers Shield can help them improve their scores.

What this does, he said, is give members the chance to improve, and that, in turn, benefits consumers. You have to meet qualifications to get the best prices on an ongoing basis.

Gullickson said that cost is variable as each risk is underwritten individually. High limits and deductibles are available.

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