Features
Oliver Griffin 2 Mar 2017 10:00am

What product recalls mean for business

Where there’s production, there will be recalls. The impact of issuing them can be devastating in terms of cost, reputation and, eventually, market share. Oliver Griffin examines what recalls mean for business

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Caption: Illustration: Billie Jean / Agencyrush.com

Last year was dominated by product fails as much as it was by political upheaval. Korean tech giant Samsung was forced to launch a global recall for its flagship phone, the Galaxy Note Seven, after batteries kept exploding, while faulty airbags from car component manufacturer Takata led to the largest recall in automobile history.

The impact of incidents like these on the businesses responsible for them is multi-faceted, resulting in damage to revenue, reputation and brand worth. When they do happen, handling them is a balancing act between addressing public concerns as quickly as possible and making sure senior executives have all the information they need to make an informed decision. Waiting too long to communicate problems, or issuing further recalls as the situation develops, can damage reputation further than necessary.

Reputation

Responding to recalls requires skill and experience if reputation and longevity are to be protected. The consequences of not handling recalls competently can mean the end of a business altogether, or at least result in a significant loss of market share, one that may never be fully clawed back.

“Takata might not recover [from its recall],” believes Roz Sheldon, head of client services at reputation protection experts Igniyte. “Its airbags have been linked with a number of deaths and injuries – the extent of the issue affected millions of cars.”

Its bit-by-bit response has been considered slow and frustrating, not to mention the impact on car manufacturers – all with their own reputations to protect – and in January the US government fined Takata $1bn as part of its agreement to plead guilty to wire fraud ($850m of that was for compensating car makers). This criminal financial penalty is in addition to the $70m settlement between Takata and US safety regulators in 2015.

“Honda and Ford have said they will not use Takata airbags in the future,” Sheldon continues. “Reports suggest that Takata was aware of issues in 2004, which were not reported to the [National Highway Traffic Safety Administration]. If this is the case it demonstrates a blatant disregard for safety, which just can’t be ignored.”

The chief delay to making a recall, which can impact businesses severely, is often being unsure as to what is causing the problem with the product in the first place. “If you really don’t know what the problem is it can be hard to be direct and transparent,” says Stephen Ibbotson, director, commercial and business at ICAEW. “Businesses may need to make a decision based on a limited amount of knowledge or facts. There is an internal impact too. People find it hard to accept what the problem is and see how it should be dealt with. There needs to be some strong leadership to make that happen.”

Yet history is littered with examples of poorly executed recall practices. One textbook example of how to further damage public trust was set by toy manufacturer Mattel when, in 2007, it issued a string of recalls over fears of toy safety, culminating in the world’s biggest recall – some 19 million products in total – of toys.

“[Mattel] issued one recall, then a few days later there was another one, and then another one and another one,” says Richard Matthews, partner in litigation and dispute management at legal firm Eversheds Sutherland. “Doing that just damages the credibility of the business. Making sure that you are aware of the full extent of the problem and making sure that the response tackles the problem is key.”

Matthews estimates that reputational damage could cost a business up to 25% of brand value, depending on what happened. And don’t think a previously strong brand is any kind of defence. Studies show that firms with initially strong market opinion behind them can see their reputations hit harder than those that start from weaker levels of confidence – particularly among car manufacturers.

The Toyota recall scandal – which rolled on through 2009 and 2010 and saw Toyota admit to making deceptive statements – resulted in severe damage to the company’s reputation, complete with screaming headlines and strained statements from company leadership. The car manufacturer lost billions of dollars due to reduced sales, lower manufacturing output and increased spending on incentive campaigns. Yet when General Motors experienced similar problems some five years later, the lower starting position for GM’s reputation meant that overall damage was less than that experienced by Toyota.

Regulation

Of course, reputation isn’t the only area where businesses see themselves hit in the wake of a recall. Punitive measures, dished out by regulators, are another potential result and – as with reputation – will escalate if handled badly.

“There are some extraordinary examples of regulator fines over the last few years and one that springs to mind is the Toyota recall, which was in excess of $1bn,” explains Peter Shervington, a senior associate on Eversheds Sutherland’s litigation and dispute management team. “That was essentially about the way in which it had responded to the issues, rather than the substance of those issues themselves. When you’re talking about fines of that level, it’s obviously a really serious risk issue for businesses.”

In Britain, Cadbury was stung by regulators reacting to the confectioner’s delayed decision to alert authorities over salmonella contamination. The situation was exacerbated significantly by Cadbury knowing about the contamination for a year before alerting authorities, then waiting a further three months before recalling millions of chocolate bars. In the end the company was fined £1m following a Crown Court case that, again, resulted in reputational damage.

In fact, in the run up to Cadbury initiating the recall, the Food Standards Agency took a bite out of the chocolate maker’s image by declaring that Cadbury products posed “unacceptable risk” to consumers.

Shervington says: “All regulators are under pressure to justify their role in the system and the funds that they receive from central government. There is a varied landscape in the way that regulators react to situations and the way that they engage with these issues. You do see that they are more inclined to prosecute and dish out fines in some jurisdictions than others.”

Despite differing jurisdictional practices, Shervington and Matthews say that the severity of fines from regulators is increasing. In part this is down to reputation but regulatory bodies also feel insecure under the glare of outside scrutiny.

“Regulators are increasingly concerned about their own position, and publicity, and this will only increase the feeling that they have to be seen to be acting appropriately in response to when there has been a perceived risk to consumers,” Matthews adds.

“What regulators are concerned about in practice is how companies respond when the issue has arisen,” he continues. “Are you as a business going to them with a plan of action, with a strategy? Are you responding? And, are you doing it with sufficient speed, and have you gotten to the bottom of the issue?”

Doing it right

Getting recalls “right” requires serious preparation and nous, especially in terms of communicating problems quickly and efficiently. While recalls done badly go down in history as infamous examples of corporate neglect, those done well can be forgotten.

In 1982, pharmaceutical giant Johnson & Johnson was praised by authorities for the way it handled a recall of popular painkiller brand Tylenol. More than 30 million bottles were withdrawn by the company after seven people died. The incident actually had nothing to do with Johnson & Johnson as the deaths – or rather, murders – were a result of Tylenol products being tampered with.

Ibbotson says: “Johnson & Johnson got a lot of plaudits because they said, ‘we need it back, we’ll pay for it’. Transparency is terribly important. People can just see through a lack of transparency and there are just so many communications avenues. It’s not like 30 years ago.” In the case of Johnson & Johnson, the firm reacted responsibly to a crisis that preserved its reputation and stopped the incident from causing permanent damage.

An immediate product recall was issued and the public was made aware of the danger posed by Tylenol bottles as quickly as possible. This helped to protect the brand and the company from reputational damage and put both in a position
to rebuild once the dust had settled. In the immediate aftermath of the crisis, Tylenol’s market share plunged from 37% to 7%, yet, within a year, it had climbed back to 30%. Rebuilding Toyota took significantly more time.

“Companies should provide unified and detailed factual information which is shared consistently across all company channels,” Sheldon explains. “A team and a strategy needs to be in place to respond quickly and calmly to any complaints or questions, especially across social media.”

For Sheldon, the best responses will include regular updates for consumers, with detailed information made readily available. Consistency too, is key, and businesses do better if initial timescales and promises can be met or brought forward, rather than if they have to delay the dissemination of key facts.

“Nominating a visible company spokesperson demonstrates that the company is taking the issue seriously,” Sheldon continues, but she acknowledges that SMEs might struggle more than bigger operations that can put time and resources into effectively managing the perfect storm of media pressure and consumer complaints.

Risk reduction

Of course, the best thing businesses can do to avoid reputational damage is to ensure that recalls don’t happen in the first place. Even if this is impossible to guarantee, practices can be adopted to make sure they are less likely, and that recovery can be as quick as possible.

“There are a number of things that businesses can do better to reduce the risk of these issues happening in the first place,” Shervington advises. “Making sure that, when they become aware of safety issues, those are escalated to the right person in the business is important. An issue where an employee has been informed about a problem but not done anything about it can have a severe reputational impact.”

From the start, businesses need to think about the contractual relationships they have with suppliers, and who is responsible for what. Similarly, adopting processes that boost traceability means that it is easier to identify more accurately where problems are coming from and how many products are affected.

“If there is effective traceability, you’re able to identify down to tens of hundreds of products, rather than tens of thousands,” says Shervington. Non-obvious risks must also be made clear in the first instance, he adds because, in the eyes of the law, products affected in this manner could be “just as defective as if there were a bolt missing or some other key aspect of the design [was] flawed”.

While it is no easy feat of planning, in reality all businesses must be prepared for the worst case eventuality. “The key thing is that when you have a problem you should respond promptly and appropriately so that you are mitigating the consequences,” explains Matthews. “Businesses need to make sure they have a recall plan in place that they rehearse periodically. If you have taken those steps in advance you are far better placed to manage that problem.”

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