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Recall Déjà Vu: Reliving the Financial Impact of a Recall

September 1st, 2016

Authored by industry experts:

Joel Berrian, CPCU, ARM, AIC Jberrian@big-ins.com Joe Bermudez, Esq Jbermudez@big-ins.com

Companies prefer that the financial impact of a recall be handled in a quiet and confidential manner. If it remains in business and isn’t being investigated by the Department of Justice (DOJ) for criminal strict liability (CSL) issues, a company wants the memory of a recall to go quietly away and forgotten forever. And, while no recall is ever a quiet affair because of governmental, media, consumer, supplier, customer and lender scrutiny, larger public companies must openly relive the event when subsequently disclosing the financial hit. Private companies will also relive the event but in a smaller setting with their equity lenders and banks during annual loan review meetings.

Surprisingly, public companies and those companies that enjoy the benefit of private equity and bank lending can avoid re-living a recall if properly prepared because a recall’s financial hit can be substantially mitigated, if not eliminated. Campbell Soup, a fantastically great food company, provided an unfortunate example of recall déjà vu.

Understanding the trend of the consumers’ desire for fresher foods, Campbell Soup smartly began investing in companies that could expand its presence in the packaged fresh and organic foods arena. With acquisitions of Bolthouse Farms, Garden Fresh Gourmet, Plum and Kelsen, the Campbell Fresh business unit quickly grew and provided Campbell with a considerable footprint in this food industry growth area.

However, earlier this year, Bolthouse Farms, one of Campbell Fresh’s critical pillars, suffered a significant recall. Due to consumer complaints and illnesses, Bolthouse Farms, widely known for its “Baby Carrots” products, was required to conduct a national recall of over 3.8 million bottles of protein shakes and cappuccino beverages due to potential spoilage issues. The media and consumer response to the recall hurt Campbell Fresh and Bolthouse Farms’ reputations and bottom lines. Months later, Campbell Soup was required to relive the recall as it announced smaller than expected fiscal fourth quarter results, which sent its shares down by more than 4 percent. Could the recall déjà vu experience have been avoided?  What can food companies as well as their private equity lenders and banks learn from the recall event?

Investing in a food company can be a fantastic growth opportunity, but it can also bring about unwanted fiscal, media and governmental regulatory exposure from a product contamination recall crisis event. And, with a recall event that also involves consumer illnesses or outbreaks, it can also invite a DOJ investigation and prosecution for CSL. Appreciating at the outset any company’s product contamination or recall exposure is critical to whether the investment will be profitable.

Understanding product contamination or recall exposure can be provided by a proper risk evaluation analysis. Berrian Insurance Group works directly with a range of companies with sales from billion plus to smaller middle market in all aspects of the supply chain ranging from food production to retail distribution in order to provide a proper understanding of their production contamination or recall exposures. Because of our comprehensive product contamination insurance (PCI) and product recall insurance (PRI) expertise, strategic partnerships and specialized understanding of the perilous operating environment in which companies compete, we are able to assist clients to gain a thorough appreciation of their potential exposures, risk transfer gaps and supply chain hazards. Moreover, our comprehensive knowledge of PCI/PRI insurance coverages and our in-house underwriting authority enable our clients to properly prepare for the financial, operational and reputational exposures involved with any crisis recall event.

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Joel Berrian, CPCU, ARM, AIC Jberrian@big-ins.com Joe Bermudez, Esq Jbermudez@big-ins.com

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