American research into the costs of food recalls, primarily in the meat and poultry sector, has just been published. It made 5 important conclusions on protecting market value that are directly applicable to the whole food and beverage industry.
The response of the financial markets to US recalls from publicly traded firms from Jan 1994 to Dec 2013 were considered. The financial markets responded to recalls on 5 statistical significant measurement points:
1. Health risks - stock markets did not react systematically to all recalls but the most statistically significant effect was in relation to 'Class I' recalls, ie where a human health risk was involved. It was concluded that prudent risk management decisions should primarily target safety measures for reasons of financial mitigation.
2. Volume - as might be expected, firms recalling a large volume of product were expected to be impacted more than those experiencing a small volume recall. The review advised that firms should try to rapidly identify contaminated products, perhaps by testing products in smaller lots, so that recalls of massive amounts of product were less likely.
3. Media - The extent of media information accompanying a recall event can decrease consumer demand for the implicated product. The research found that once news reaches the public, it will have a negative impact on the firm's market value. For example, one additional recall-related article published within 5 days after the recall announcement, was found to decrease stock returns by 0.10% on average. Therefore, having a plan in place to deal with this situation and media management strategies is important.
4. Size & breadth of company - The research found that firm size, scale of operations and levels of diversification also influenced how a firms' valuation changed in the midst of a food safety breach. Larger, more diversified firms were expected to be best able to weather a food safety recall than smaller companies. The conclusion was that it is even more important for SME's to have good crisis management protocols. Additionally, smaller food businesses might consider investing more of the total firms' value in food safety technologies and protocols as they have a greater risk of bankruptcy in the event of a recall.
5. Past experience - somewhat counter-intuitively, research found that firms with recurrent recalls had, on average, a stronger stock price 5 days after a recall relative to a firm facing its firs recall in the past year. This pointed to a firm's past experience in managing recalls as having a direct influence on the outcome of their market value; "that is, firms undertaking an effective food safety crisis management strategy may help minimize stock market reactions."
The main conclusion was that effective recall management and handling of a crisis, food safety experience and strategy will serve to protect a company's reputation, which in turn will protect its' market value. Therefore, that good crisis management should be a key point for investors to consider prior to investing in a food company.