111. Product Recalls

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This past summer, millions of Americans were warned about an unusual problem in the frozen food aisle.

If you bought frozen shrimp from Walmart recently, we have an important and yes, a strange warning.

The shrimp may be radioactive.

Aquastar issued the voluntary recall after traces of radioactive material were found in shrimp from an Indonesian supplier.

More shrimp are being recalled because of radioactive contamination.

Seattle-based Aquastar expanded the recall yesterday to cover more than 100,000 bags of frozen shrimp.

Radioactive shrimp even made it into a congressional hearing.

The shrimp was radioactive.

If you eat this stuff, I guarantee you'll grow an extra year.

It turned out that the amount of radioactive material in the shrimp was far below the threshold of what would be considered harmful.

And there was no evidence that the affected shrimp was ever even sold in U.S.

stores.

But the FDA still decided to issue a recall.

Multiple retailers pulled shrimp products from store shelves, just in case.

Every year, there are thousands of recalls that affect millions of units of products.

There are contaminated corn dogs, tainted deli meats, defective bicycle helmets, and cell phones that catch on fire.

Pharmaceuticals, toys, smartwatches, blow dryers, cars.

Recalls span nearly every sector of the economy.

And it's not a simple process.

Companies are great at forward distributing their products down through the supply chain to make their way to a consumer.

But with a recall, they have to reverse that process.

And there's a lot of gaps associated with that.

For the Free Economics Radio Network, this is the Economics of Everyday Things.

I'm Zachary Crockett.

Today, product recalls.

When a company discovers radioactive elements in its shrimp or finds out that a battery in its toy is explosive, it usually enlists a professional to help with the recall, someone like Chris Harvey.

I've been working in recalls for 20 years, so predominantly my entire career.

It's really all I know.

Harvey is a senior vice president at Sedgwick, one of the largest product recall specialists in the world.

We help companies globally with the execution and the logistics of a recall.

We do these day in and day out, and we can make sure they're running an effective and efficient recall to really check those boxes of reducing liability, litigation, protecting their brand, protecting consumers.

Sedgwick has no shortage of business.

Really all products can be subject to recalls, but the top five main categories include drugs, so like pharmaceuticals or over-the-counter.

You have medical devices, that could be a blood pressure monitor that's in a hospital that has a defect, food and beverage, so produce, meat, egg products.

The automotive industry can have a lot of recalls, and then consumer products, that's electronics, toys, appliances.

Last year, there were more than 3,200 recalls in the U.S.

across those five categories, affecting 681 million units of product.

In recent times, the number of product recalls has gone up.

Globalization and mass production have led to more frequent manufacturing issues.

And sometimes, a company doesn't realize a mistake has been made until after a product has been sold and distributed all over the world.

It could be a product has a substantial safety hazard.

So we're talking about an electronic product that has a lithium battery, and the battery could overheat, could cause a fire, burn, property damage.

There's some that violate a standard.

So drawstrings in infant sweatshirts are banned.

You still see those popping up on the market and being recalled.

Other times it's sterility, it was unclean as it went through the line.

You hear about these food recalls, all the bad bacteria, the salmonella, listeria, E.

coli, that can create these recalls, undeclared allergens, foreign objects.

And when you say foreign objects.

A lot of times it's metals, it's plastics,

sometimes there's bugs and things that you don't want to really know about.

There are all kinds of ways that a company might identify an issue like this.

The exposure of a problem can come from the manufacturer themselves.

A lot of times they have samples that they've retained that they do testing and they may identify an issue.

Other times, companies are getting calls into their customer service line where they may have a complaint.

For example, my child was eating this snack and they found a little piece of wood in it.

So from there, it should trigger an investigation.

Has anyone mentioned a similar type issue on social media?

Other times, they might be made aware of an issue by the regulatory agency that oversees their product.

You've got the Food and Drug Administration, who regulates drugs, medical devices, the majority of the food in the U.S.

You have the U.S.

Department of Agriculture.

They regulate other foods, Consumer Product Safety Commission, Consumer Products, and then the National Highway Traffic Safety Administration.

They regulate automobiles.

And they all have some slightly different requirements for reporting.

Manufacturers and regulatory agencies take product recalls very seriously because if defective products aren't recalled quickly and adequately, they can cause injury or death.

With any type of recall, there's liability of having a product out there that could hurt someone.

Typically, the liability does fall on that producer, the grower, the manufacturer.

In most cases, manufacturers will do the right thing.

The majority of all recalls are voluntary.

It's very rare across all the industries to have a recall that's mandated.

So imagine you're a company that sells frozen shrimp.

You buy thousands of pounds of them every day from fishermen, package them in a giant facility, and ship them all over the world.

These frozen bags are sold to dozens of different retail chains like Kroger and Walmart.

And they make it into the freezers of thousands of individual consumers all over the country.

What do you do when you find out that some of those shrimp contain radioactive isotopes?

One of the earliest steps is to cease production of the product in question and figure out the root cause of the problem.

Most companies will retain some of the product.

They just don't send it out, but they have it on hand so they can test it and use it for investigations.

In some cases, they don't find any issues.

So at what point between when they shipped it to now it's on the shelf, could it have been contaminated?

For food products, the company might go through its supply chain systematically.

to pinpoint where contamination was introduced.

For something like, say, a cell phone that overheats, every single component of the device might be tested.

They have to see what's making it overheat.

Is it the connector?

Is it the battery cells?

They have to go back to suppliers to see, did they change something?

Sometimes these companies also go to external labs.

They're trying to create a fire within a controlled environment to see if they can't replicate it happening again.

Once they've established the source of an issue, the company has to figure out the scope of the problem, which batches of product were affected and where they were sold.

In the U.S., most food suppliers use codes that can track the day and time that a product was produced.

They can analyze the codes on the affected products and determine which batches were contaminated.

There has been a vast improvement in traceability from the farms growing the product to it being packaged all the way to the stores.

But honestly, a lot of companies struggle to quickly put a fence around, okay, we know this food product, it's only three date codes because of our investigation.

So out of an abundance of caution, they may actually add a couple lot numbers that came before the batches that you knew were impacted or after.

A lot of times the recalling firm will then, through their records, be able to identify where the distributor sent the product.

They should have good data that traces it as that seafood comes off of the boat, goes into a distribution site, and then goes to the individual stores.

To stop the affected product from spreading, the manufacturer sends its distributors and retailers a stop sale notice.

Sometimes a retailer will just pull the affected batches of a product from shelves.

They typically get a reimbursement or future credit from the manufacturer for any unsold goods.

In other cases, the retailer might get rid of everything that the supplier sold them.

Retailers deal with a lot of recalls.

I mentioned some 60 recalls being announced on a weekly basis.

And retailers, if they don't have the time, if it's not easy, they may just sweep the shelf and send back non-affected product.

They may not take the time to look at the date codes or the lots and just send it back.

I still remember this to date where a retail grocer literally took

the shelf off of one of their racks and they saran wrapped all of this company's product and just shipped it back to the manufacturer.

And most of it was non-affected product, but they were just done with it.

So let's say I'm Walmart and I just bought like $200,000 worth of frozen shrimp.

And then I'm told it could be radioactive.

So I decided to just dump everything out of caution.

Who covers that cost?

It's a business decision for that manufacturer if they want to replace or credit for the non-affected product that comes back.

In some cases, they do make that call.

And we could be talking in some cases like tens or hundreds of thousands of dollars.

Oh, absolutely.

It can get very expensive.

But for manufacturers and suppliers, there's an even more expensive part of the product recall process.

Getting defective goods back from thousands of individual customers.

That's coming up.

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Ideally, companies catch problems before a defective product has been disseminated to the public.

Sometimes it's enough to just cease production and alert retailers.

But in many cases, the product in question has already been sold to hundreds, thousands, or even millions of individual customers.

Warning all of them about that radioactive shrimp in their refrigerators can be a big challenge.

Chris Harvey says that companies like Sedgwick often use a multi-pronged media strategy to get the word out.

You have to rely on the media, social media, the press release.

Some retailers do a little bit better job of tracking this through loyalty programs, that they can actually email the consumer that may have that seafood recalled, or in some cases, retailers actually print a recall notice on their receipt as well to notify them that, hey, you may have purchased this recalled seafood in the past

with the help of a company like sedgwick manufacturers set up toll-free numbers and recall websites that customers can use to report faulty products and they provide clear instructions on what to do with damaged goods most retailers do not want consumers taking product back to their stores so that already is a gap within the supply chain to reverse it so manufacturers need to have mechanisms and infrastructure in place to provide return kits, prepaid return labels, in some cases freight shipments, palletized larger shipments to get product back to their warehouses.

Once products are back at the warehouse, there's a protocol for destroying them.

Some products pose special challenges.

Most drugs are just incinerated.

Sometimes the FDA will want to witness it being destroyed.

So that does add some complications.

Now, the medical devices, like infusion pumps, CPAP devices, they have a lot of metals and other components in that.

At times now, there could be options to recycle some of that.

And then you have things like infant formula.

There's a large black market for infant formula because it's expensive.

We actually have armed guards who will follow it to be destroyed.

These days, a lot of product recalls can be done without physically reclaiming something.

Some modern vehicles can address recalls with over-the-air software updates, and others may try to find local solutions.

In many cases, the remedy for the auto industry is a repair, so you're having to take it into a dealership.

In some cases, the recall issue is so severe, a stop-drive order is issued.

You can't drive it.

Now you're dealing with a lot of consumers that can't go to their jobs, can't take their kids to school.

But with food products like frozen shrimp, it's far easier to instruct the customer to just dump it in a trash can.

Many times they'll have you dispose of it and then call in or go to a website to register that you have that product.

You may put in the lot number or the date code, and from there, the manufacturer or the grower, they may then directly send you a reimbursement check.

These days, the reporting systems also require you to submit photographic evidence as a part of your claim.

Because as it turns out, there's a lot of fraud in the product recall space.

It's gotten worse and worse, whether it's just a general consumer that's upset they had to undergo a recall and they want to get double the reimbursement, or actually organized crime where they may look at every recall being announced to get a refund.

And I've actually seen counterfeit product, so they pretend that they have an expensive recall product and try to send that back in as well.

Even without fraud, a recall can be incredibly pricey for a manufacturer.

The average food recall costs about $10 million.

What is contributing to that?

You have the execution costs, so costs to notify the market, collect the product, destroy the product.

That's one thing.

You have loss of business.

A lot of retailers, they won't sell any of your products until they know the recall product is out of there.

One of the bigger items, though, is the cost of the remedy.

So sending reimbursement checks, that value of that product to refund, sending replacement inventory.

You sort of get slammed on both ends.

You have to take the loss and all the products that you have to incinerate or destroy, and then you also have to issue those refunds for new products in addition to that.

Absolutely.

And that's why some companies actually buy recall insurance.

It's more common in the food and beverage industries.

And that pays for the majority of those items, the execution, the loss of business, the remedy, which can be very beneficial.

In the grand scheme of product recalls, $10 million is actually fairly reasonable.

The Japanese auto parts manufacturer Takata reportedly had to pay as much as $24 billion to recall faulty airbags in millions of vehicles around the world.

And a recall of 2.5 million smartphones in 2016 set Samsung back at least $5 billion.

The cost is steep, but it often beats the alternative.

If a company and its executives are aware of a problem and don't issue a recall, they can face civil penalties in the millions of dollars.

And even worse, they might be slammed with class action lawsuits.

There are law firms that the only thing they do is look at recalls being announced and look at how it was executed, look at what remedy was made available, and look for opportunities for litigation with that.

In the end, that litigation can be much higher than the actual execution piece of doing a recall.

Companies have gone out of business when they've not undergone a recall properly.

Aside from the dollar amount, a bungled recall can lead to reputational damage and lost trust.

Those things tend to be harder to recover from than a bad quarterly report.

I've seen this many times before where they didn't necessarily want to do a full refund, but they said, all right, we'll send a replacement.

It's more cost effective.

But in the end, they lost a lot of brand loyalty because it took months to actually get these consumers their replacement product.

But if they run the recall right, I've actually seen customer loyalty increase.

I've seen sales increase.

They can bounce back very quickly.

Companies can make mistakes.

We all make mistakes.

It's less about being known for having the recall that matters, but how you handled it that truly sticks.

From start to finish, the entire recall process can take anywhere from a few weeks to a few months for a food product and 12 months or more for a consumer good.

But just because a recall is successful doesn't mean it's fully resolved.

There are almost always some units of product and by proxy liability left out in the market.

Because lots of consumers either don't hear about a recall or don't care to take action on it.

With consumer products, if you have like a power bank that was $5 to $10,

you're probably looking at a 5% to 10% response rate.

Now, if you have an $800

cell phone that people use every single day, the response rate's going to be much higher.

You might be able to hit in the 90% response rate.

I'm just trying to wrap my head around this.

Even if you do everything right, there are probably thousands or millions of products out there that people are still using that have some kind of recall issued on on them.

And each one of those products that's out there is still a liability.

Yeah, just because you close a recall with the agency doesn't mean the liability is gone.

You still have to actively monitor the marketplace.

The big thing is companies monitoring the online secondary marketplaces to see are things being sold.

Their products that were recalled could have been a year ago, could have been three years ago.

With my boys who are now older teenagers, half the stuff we had in their room, you can't use anymore.

It's been banned.

Most consumers that are buying don't look to see if it's recalled before they buy it.

But the big thing I always look at to deem the effectiveness of recall is: are there still injuries?

Are there still adverse events occurring after the recall has been announced?

If that is true, then you probably ran an ineffective recall, and the agencies are probably going to make you do more.

In some sense, Chris Harvey Harvey can never really tie a nice little bow on his caseload.

Once you've done your due diligence, you've done what you can.

I mean, that's really it.

You've done what you can to protect the brand, to reduce risk, mitigate liabilities.

Now, it doesn't mean you're completely done, but you do have to move forward.

But in the end, he says a successful product recall is a team effort, not just between the suppliers, distributors, and retailers, but also me and you and every other consumer that buys something at a store.

Whether it's a cell phone, baby formula, radioactive shrimp, or a vegetable.

My mom, I text her about a recall on some carrots, and I said, you know, check your carrots, make sure you're not eating recall carrots.

About a week later, I go over to her house and she's eating carrots.

And I said, Mom, are these recalled carrots?

And she's like, oh, I took these out of the freezer.

They're really old.

And knowing that listeria can't survive in frozen conditions, I was a little worried.

Turns out they are recalled carrots she was eating.

Luckily, she didn't get sick or anything like that.

I can't even get my own mom to pay attention to these recalls.

So there is a little degree of, I think, shared responsibility throughout the supply chain to, you know, pay attention and take appropriate action.

For the economics of everyday things, I'm Zachary Crockett.

This episode was produced by me and Sarah Lilly and mixed by Jeremy Johnston.

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All right, until next week.

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