The risk of food recalls

Ian Harrison of Lockton examines the causes and implications of rising food recalls in recent years

No news story captures the headlines or the nation’s attention quite like a public food recall. But looking beyond the headlines and hysteria, product recalls can be the most critical risk facing a food and beverage (F&B) business.

Taking a product off the shelf due to contamination or mislabelling dents consumer confidence in the brand and the retailer. It can also have a knock-on effect on other similar products. The impact of recalls is wide-ranging, costing a business on average $10 million .

Worryingly, recalls are rising. Lockton’s recent analysis of Food Standards Agency (FSA) data highlights a 70% increase in product recall alerts since 2012 while half (50%) of UK food and beverage manufacturers have witnessed an increase in the number of product recalls in the past five years .

The industry is changing rapidly; while these changes present new opportunities for businesses, they also present new challenges. New technologies, new suppliers and new products can all boost the bottom line, but they can also introduce new risks.

Man vs machine

Increased automation in the food production process could go one of two ways in terms of product recalls. Reduced human involvement in the food production process, by definition mitigates the risk of human error. Employees can often be responsible for cross-contamination of products on the production line, mislabelling or product contamination as a result of personal illness or lack of personal hygiene. Recent research highlighted the risk human interference presents to the production line, with Esko estimating that 60% of product recalls are the result of human mistakes.

In a recent report on the pressures facing UK food and beverage manufacturers, Lockton found that 95% of manufacturers have either already introduced or are considering additional automation in the manufacturing process to meet pricing pressures . Cost of labour is a significant expense in the manufacturing process, and one that is only set to rise in the wake of Brexit. Increased automation in the production process is therefore becoming an increasingly attractive option to manufacturers as they try to protect their squeezed margins.

Yet while automation and technology can reduce the frequency of recalls, should one occur, technology advances can also significantly increase the severity. With one of the major advantages of increased automation being the ability to produce larger batches of food in a relatively short period of time, should there be an error in the production process this means more products are affected and there is a larger recall to handle.

Prepared food

Prepared food is an area of huge growth for the industry, valued at £3.7bn in 2016 alone. Unsurprisingly, many manufacturers and retailers are keen to get a slice of this pre-prepared pie. Yet, while the industry is lucrative and presents considerable opportunity for growth, it also carries a considerable amount of risk.

Our recent Recall Risk Tracker identified that prepared dishes and snacks were amongst the most recalled foods in the past five years, accounting for more than one in 10 (11%) product recall alerts issued by the FSA from 2012 to 2017. Their usage of more ingredients than other food products, from multiple providers and origins, means a larger and more complex supply chain. This creates more opportunities for errors to occur and food safety to be compromised. The risk is not only present in the supply chain, but in the production process too. Once the raw materials reach the production plant, they are subject to many more processes than a bottle of milk or loaf of bread. Production processes for prepared dishes are far more complex, creating more opportunities for error or contamination.

The global food chain

The way we consume food is not the only thing that is changing - the food itself and its provenance has changed considerably in recent years. Turn the clock back sixty years and you would probably be met with fridge shelves and kitchen cupboards filled with predominantly domestically-grown food.

Since then, our food chain has become increasingly globalised and complex. Travel and globalisation has transformed tastes and diets, while food that was once domestically produced is often now more cost-effective to source and import from abroad.

As the food supply chain becomes increasingly globalised, it also becomes increasingly complex. Establishing traceability in a global supply chain, where there are multiple entities and interfaces, is challenging. However, it is one of the most pressing issues the industry faces, with PwC estimating food fraud alone costs the global food industry $40bn each year. Furthermore, Lockton’s research found 40% of manufacturers believe ingredient transparency and traceability is becoming harder to determine, while a third (32%) cannot guarantee their products are not fraudulent.

Thankfully, technology is responding well to these issues with innovations, such as DNA barcoding to establish the source and authenticity of food. Blockchain is also being explored as a way of tracking and tracing the food chain by acting as an incorruptible ledger for food products as they progress through the supply chain.

The science that powers food testing is constantly improving, becoming more stringent and less forgiving.

Recalls rise as food safety improves

Does a rise in recalls mean a decline in food safety? To assume so would be a very simple and easy conclusion to draw, however, the situation is more complex than that.

Arguably our food has never been safer. The science that powers food testing is constantly improving, becoming more stringent and less forgiving. Laboratories are now able to identify the minutest traces of bacteria or contaminants, traces so minimal they pose no viable threat to consumers, yet traces nonetheless.

The improvement in detection means food, which years ago would have been deemed fine, is no longer fit for consumption. These more stringent testing methods are a win for public health, but place increased risk and pressure on manufacturers. Improved testing now leaves no room for error or mistakes from manufacturers.

Trial by media

Consumers are now more aware about what is in their food and where it comes from than ever before. Positive developments in recent years, such as the organic, free trade and free range movements, combined with more negative developments, such as the horsemeat scandal in 2013 and the recent 2Sisters investigation, have created an unprecedented level of vigilance amongst consumers.

A consequence of this growing vigilance is the increasing public awareness and interest in food recalls. Google trends analysis shows that online interest in food recalls has almost doubled in the past five years.

As a viable threat to public health, recalls offer the perfect sensationalised story for the media, which, thanks to 24-hour news reporting, has become hungry for headlines. Social media combined with this increased vigilance and awareness towards food safety and provenance means recalls easily attract negative national headlines.

Since food and beverage companies’ success and viability depends on consumer trust, a product recall that makes the headlines can be seriously damaging to a company’s reputation, destroying consumer confidence in a product and potentially damaging a brand for good.

For Findus, the brand at the centre of the horsemeat scandal, this reputational damage was too great to overcome and the impact of the scandal proved so damaging the business had to undergo a total rebrand.

Too often, businesses can be fixated upon the logistical cost of a recall without much consideration of what it could mean for their reputation or brand should it become public knowledge. Consumers today are far less forgiving and while the FSA holds the regulatory power, often it is the court of public opinion that can determine the fate of retailers and manufacturers.

Conclusions

Food and beverage products are changing continuously. The products we are producing are more sophisticated, the supply chains sourcing the ingredients are increasingly globalised, innovative production methods are being introduced and the methods for food testing are improving.

Many of these new developments can improve efficiency and bring a boost to bottom lines for businesses, much needed at a time of record inflation and downward price pressure. However, while appreciating the benefits these developments can bring, businesses must also acknowledge the new risks they introduce to the food production process. Failing to consider these new risks can cause irreparable damage to a company’s bottom line, reputation and ultimately its viability.

Refusal to change and adapt can be damaging to a business, but so can accepting and embarking on change without fully considering potential implications and consequences. As the industry changes, so should our understanding and perception of its key risks.

Ian Harrison

Head of Product Recalls, Lockton

Ian develops insurance and risk management programmes in the consumer products industry. He advises food and drinks makers and retailers, including FTSE 100 and Fortune 500 companies, and speaks and writes on product recall matters. He has helped clients worldwide as an underwriter and a specialist broker for more than 25 years. He has devised new ways to protect food processing and packaging companies and designed trade name income protection policies for brand owners and franchisees in the restaurant sector.

Weblocktoninternational.com

References

1. https://www.rentokil.com/blog/the-cost-of-product-recalls-to-food-businesses/#.WjkugSNl_Gg

2. Lockton’s Recall Risk Tracker, 2017

3. Lockton Food and Beverage Report, 2017

4. http://jamandco.com.au/60-of-product-recalls-are-caused-by-human-error/

5. Lockton Food and Beverage Report, 2017

6. https://www.statista.com/statistics/713065/value-of-chilled-prepared-food-market-in-the-uk/

7. https://www.pwc.com/gx/en/services/food-supply-integrity-services/assets/pwc-food-fraud-vulnerability-assessment-and-mitigation-november.pdf

8. Lockton Food and Beverage Report, 2017

9. https://trends.google.co.uk/trends/explore?date=today%205-y&geo=GB&q=food%20recall