Monetizing the Impact of Food Safety Recalls on the Low-Moisture Food Industry

Abstract

ABSTRACTNew Food Safety and Modernization Act rules require that food producers implement and validate processes that sufficiently reduce the risk of known hazards, such as those posed by microbial pathogens. Investments in food safety technology choices are ultimately business decisions, and current decision-making methods make it difficult to quantify financial value associated with food safety risk reduction. Predicted financial loss is a tangible way to quantify how a recall might affect the manufacturer. The hypothesis of this study was that class I recalls of low-moisture foods due to the presence of microbial pathogens have a significant negative economic impact on the affected manufacturers, which can be quantified in terms of loss in market capitalization. Financial impacts of the recalls were analyzed over a 10-year period by computing the cumulative abnormal return (CAR) in stock values over a recall event period for 22 low-moisture foods made by publicly held companies. Abnormal returns were aggregated over an event window (0 to 20 days) to compute the CAR, which was multiplied by prerecall market capitalization to compute monetary losses due to the recall event. The CARs for a 20-day postrecall period were −26.5 to 8.4%, with a mean of −5.1%. These CARs translated to a median loss in corporate value due to a recall of $243 million for the recall events analyzed in this study. If implementation of a food safety technology could reduce risk of a recall by fivefold, the mean annual economic benefit would be >$2 million in reduced risk for companies such as those included in the study. Such analyses can positively impact business decisions to invest in food safety technologies.HIGHLIGHTS