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The Bitter Taste of a Food Recall

06/09/2016


​​How A Recall Can Impact Your Brand Value, Your Reputation and Finances

A company’s reputation, goodwill and financial stability can take years to build – but it could take just one event, such as a food recall - to destroy it all. A recall can happen to nearly any manufacturer, regardless of how much attention is devoted to the product. In the food and beverage sector, vulnerability to recalls is constant.

A product recall can take away any goodwill a company has built up over the years, in an instant. The impacts are massive. Even if it’s just one product that’s affected, a recall can be enough to taint the entire brand in the eyes of consumers; impacting the value of your brand and business, not just today, but also for years to come. If you’re planning to refinance your business or eventually sell it, a food recall could make it more difficult to raise capital, or find a potential buyer.

Th​at’s why, for any food and beverage company, food safety is the No. 1 concern – encompassing everything from the processing plant, to the logistics and supply chain - knowing exactly where each ingredient comes from, and being able to trace it.

If a lender learns that a client, or potential client, is facing a food recall, the first thing that lender will question, is the impact a recall will have on the company’s bottom line. A food recall can exert a huge impact not just on a firm’s operation, but also on its profits and losses. A manufacturer dealing with a food recall will need to incur significant costs in order to clean things up. Depending on a company’s size and strength, a food recall could even impact the viability of the business itself.

When there is a recall, a company immediately incurs costs in order to have the affected product removed from store shelves. At the same time, consumers will stop buying the product, and in many cases, will also avoid purchasing other company products, questioning whether they should take a chance on buying anything else from the same company. They could switch to another brand, and not return.

Suddenly, there is a major dip in sales, and you’re faced with increasing costs to manage the recall and go through the entire audit process, from finding the source of the issue, to deciding how to handle it. On top of that, there is the marketing, public relations and social media strategy you’ll need to put together, which means you’ll be dealing with the fallout from a food recall on many different fronts.

In a recall situation, it can often be difficult for companies to access additional funds, unless it’s a sizeable company with a strong balance sheet to borrow off. Otherwise, it can be very difficult to go to a lender and say, ‘I have this issue and I need financing.’

In this type of scenario, an existing lender would question whether a company would be in a position to repay a loan, while a potential lender might not even consider a loan request, at least for the time being.

Even when it’s all behind you, many lenders will shy away from companies that have had food recalls in the past, unless they can demonstrate a strong track record that they’ve taken care of all issues, and that sales have picked up again.

For those looking to eventually sell their company, potential purchasers are especially interested in brands with great reputations and consumer support. If for example, a food and beverage company has built its own brand, its value will partly be based on that brand’s value and the goodwill built up in the brand, as well as on the company’s reputation, how profitable it is, and how profitable purchasers believe it will continue to be in the future.

A food recall will automatically have an impact on brand value and reputation, but the severity will depend on how extensive a recall is, as well as on the type of recall. For instance, was a foreign ingredient found in a single jar of food, or was the entire plant contaminated? How spread was the incident? If it’s a one-in-a-million event that has never happened before, and you can demonstrate you’ve put the right processes and equipment in place to ensure it doesn’t happen again, it’s much likelier that your company will be able to deal with a recall and move on more easily

Any company that has gone through a food recall and is looking to divest in the coming years could find the business’ anticipated value impacted significantly, even if it can find an interested buyer. In some instances, potential buyers won’t even consider purchasing such a business, while others will refuse to pay a premium for a company that has recently gone through such an event. A potential buyer might be willing to purchase a company hoping to revive the brand, as long as he feels he is paying the right price.

For more information, contact Patrick Khouzam, Senior Vice-President and Director, MNP Corporate Finance at 1.888.861.9724 or patrick.khouzam@mnp.ca