How Planning Ahead Can Protect Your Brand and Balance Sheet

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Magnetix was recalled after injuries and a
fatality when magnets came loose.
Image Source: Wikipedia

Jan. 6, 2014 - Even organizations with the best safety records and controls can sometimes find themselves dealing with a product recall situation. Retailers with an “it will never happen to me” mindset, or those who simply neglect to prepare for the consequences of a product recall, may be putting long-term revenue prospects for their products and their brand at risk.

Many retail companies regard product recalls as an issue for their suppliers and manufacturers. This view is misinformed. It is important for retail companies to understand that importers, distributors, merchants and marketers can all be held responsible for a recall, even if their products are manufactured abroad by another company. Retailers need to manage their supplier relationships to ensure they are manufacturing to U.S. standards.  

On the Rise

“A product recall is a legal term of art,” explains Katherine Cahill, founder and CEO of Cahill Consultants, Inc. “Companies are required to conduct product recalls when they have put a product into the stream of commerce that can or has already caused a safety related issue that was not anticipated when the product was originally designed or manufactured.”

According to data compiled from the Consumer Product Safety Commission (CPSC), the number of product recalls is on the rise. In 2012 there were 346 recalls issued by CPSC. This represented a 12 percent increase from the prior year, and a 65 percent increase from 2002.

Many are questioning why there has been this sudden spike in product recalls. Are today’s products less safe than those manufactured in the past? Experts say it is not that products are made any less safe. Rather, more products are being recalled due to various factors, such as better testing procedures; the use of social media where consumers can openly discuss problems; and greater oversight by regulators.

Legislative Changes

Product safety and regulatory compliance are issues that should concern every retail executive. Failure to pay close attention to these issues can result in a tarnished brand, fines, penalties and even criminal prosecution.

The Consumer Product Safety Improvement Act (CPSIA) came into effect in August 2008, and authorized new regulations and testing requirements for the production of children’s products, as well as some non-children’s products. Manufacturers, importers, distributors and retailers of consumer goods must ensure that their products comply with the CPSIA.

Preparing for a Product Recall

In addition to staying on top of legal and regulatory changes, developing a product recall plan is essential for efficient and comprehensive action.

The plan should include written procedures for identifying and dealing with a safety issue. Identifying a potential problem early and addressing it quickly can help keep a product recall situation from spiraling into a crisis.

A product recall chain of command is also critical. A product recall task force should be identified in advance, and detailed roles and responsibilities should be assigned.

A communications and social media strategy should also be a part of any product recall plan. Effective communication with the news media, regulatory officials, investors and other stakeholders is vital. A company spokesperson should be designated in advance and should receive training in dealing with the media.

Product Recall Insurance

Managing a product recall is time consuming, costly and potentially damaging to the business and brand. Product recall insurance provides the insured indemnification for their financial losses resulting from the recall of a product and an option for third-party costs, such as customer loss of gross profit and customer extra expenses.  This coverage treats a product recall as a catastrophic event like an earthquake: they don’t happen often but when they do, they are severe. 

Retailers should prepare for how best to respond to help minimize the impact a recall can have on both its financial statements and its reputation. Fortunately, businesses do not have to do it alone; instead they can seek guidance from insurance carriers who specialize in product recall coverage that will not only provide financial statement protection through insurance indemnification but also reputation protection through consulting services provided on both a pre-and post-incident basis.

Florian Beerli is Senior Vice President of Product Recall at ACE Westchester, the wholesale-focused business of ACE Group.

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