Archive for the ‘Resources’ Category

WeMakeItSafer Releases U.S.’s First Set of Comprehensive Consumer Product Recall Statistics Reports

Monday, December 21st, 2009

CPSC Recalled Product Units 2004-2008 By Calendar Year

Use Google or any other search web site to help you find “recall statistics” and you get a very limited list of web sites that provide useful information. Searches for other keywords like “product liability statistics,” “product safety statistics” and “recall data” yield similar results.

The new 2004-2008 WeMakeItSafer recall reports include these interesting facts:

  • Although 2004 had the fewest recalls in this time period, it had the largest number of units recalled because of one anomalous children’s jewelry recall of 150 million units.¹
  • 61% of recalls are NOT for children’s products.
  • In almost every industry, the frequency of recall announcements occur with some display of seasonality.
  • Almost $7 billion worth of products in the Computers & Electronics category were recalled.

Who knew? Well, nobody knew because analyzing recall data to make meaningful conclusions has been almost impossible until now. At WeMakeItSafer, we spent the last three years cleaning and reorganizing Consumer Product Safety Commission recall data. We also use the recall data in conjunction with other data to provide valuable insights into how recalls are affecting businesses.

The recall data have been analyzed and segmented to make understanding complex recall data amazingly easy. Each report includes charts and discusses topics such as:

  • Recall effectiveness and implications for unrecovered recalled products
  • The overall dollar value of products affected by recalls
  • Prevalence of hazards that the recalled products could cause, for example lead poisoning, choking and falls
  • Timing of recalls over calendar years
  • The number of incidents reported (with and without injuries) relative to the timing of recalls
  • Much, much, more…

WeMakeItSafer has created seven comprehensive recall information reports:

  • Overall Recall Report: All Product Categories Combined
  • Children’s Products
  • Computers & Electronics
  • Hardware, Tools & Building Supply
  • Home & Garden
  • Sports, Outdoors & Recreation
  • Motorsport & Utility Vehicles

Whether you are a company executive trying to better understand recalls, an insurance professional assessing recall risk, a recall specialist looking to identify important market segments or an investor trying to assess the impact of recalls on businesses, these reports and our individual company reports will be crucial to your successful navigation of the recall landscape. We can also customize our research and reports according to your needs, giving you meaningful insight based on recall data.

For more information and to purchase reports, please go to our Recall Statistics and Reports page, or our Company Reports page. For specific questions, please contact us directly at Reports@WeMakeItSafer.com.

¹ WeMakeItSafer’s calculation of units is taken from numbers reported in recall announcements. These figures do not match numbers reported by the CPSC in annual reports. The CPSC has told WeMakeItSafer that it does not track the number of recalled units reported in announcements but has not yet responded to our request for explanation of the calculation methods for its annual reports.


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15 U.S.C. 2063 – Redlined: Laws Regarding Product Certification and Labeling, as Amended by CPSIA

Wednesday, March 4th, 2009



US Consumer Product Safety Laws Regarding Product Certification
and Labeling – Revisions Revealed

Compiled
by Jennifer P. Toney

 

What follows is
an edited version of Title 15, Chapter 47, Section
2063: Product
Certification and Labeling. It was
created by taking the latest version of the official code as published in
January 2007 and showing revisions imposed by the CPSIA of 2008.

 

Please note that, because the revised, official code will
not be available until at least late-2009, the CPSC’s
unofficial compilation of the code, in conjunction with the CPSIA, was used to identify revisions.

 

Edit Key:

Black type – unchanged

Grey strikethrough – deletion

Navy blue underline – addition

 

If you find this document helpful, I encourage you to leave
a comment on my blog post, where I describe the purpose of showing edits to the
Consumer Product Safety Act.
Because of the time involved with compilation and formatting, I will continue
to publish redlined sections of safety laws only if it proves to be a valuable resource for
companies and individuals.
Thank you in advance for your comments.

 

SEC. 14. [15 U.S.C.
§ 2063]

(a)
Certification
accompanying product; products with more than one manufacturer —

 

(1) GENERAL CONFORMITY
CERTIFICATION.–

Except as provided in
paragraphs (2) and (3), (1) every manufacturer
of a product which is subject to a consumer product safety rulestandard
under this Act or
similar rule, ban, standard, or regulation under any other Act enforced by the
Commissionchapter and
which is imported
for consumption or warehousing or distributed in
commerce (and the private labeler of such product if such product it
bears a private label) shall issue a certificate which

(A)
shall certify, that such product
conforms to all applicable consumer

product safety standards, and shall specify
any standard which is

applicable. Such certificate shall
accompany the product or shall

otherwise be furnished to any distributor
or retailer to whom the

product is delivered. Any certificate under
this subsection shall

be based on a test of each
product or upon a reasonable testing program, that such product
complies with all rules, bans, standards, or regulations applicable to the
product under this Act or any other Act enforced by;
shall state the Commission; and name
of the manufacturer or private labeler
issuing the certificate; and shall include the date and place of manufacture.
(2)

 

(B) shall
specify each such rule, ban, standard, or regulation applicable to the product.

 

[Effective Date.—Not
part of the Consumer Product Safety Act.—The preceding amendment made by Sec.102(a)(1)(A) of the Consumer
Product Safety Improvement Act of 2008 shall take effect 90 days after
enactment of the Act.] {Date of enactment is August 14, 2008}

 

(2) THIRD PARTY TESTING REQUIREMENT.–Effective on
the dates provided in paragraph (3), before importing for consumption or
warehousing or distributing in commerce any children’s product that is subject
to a children’s product safety rule, every manufacturer of such children’s
product (and the private labeler of such children’s product if such children’s
product bears a private label) shall—

 

(A) submit sufficient samples of the children’s
product, or samples that are identical in all material respects to the product,
to a third party conformity assessment body accredited under paragraph (3) to be tested for
compliance with such children’s product safety rule; and

 

(B) based on such testing, issue a certificate that
certifies that such children’s product complies with the children’s product
safety rule based on the assessment of a third party conformity assessment body
accredited to conduct such tests.

A manufacturer or private labeler shall issue
either a separate certificate for each children’s
product safety rule applicable to a product or a combined certificate that
certifies compliance with all applicable children’s product safety rules, in
which case each such rule shall be specified.

 

(3) SCHEDULE FOR IMPLEMENTATION OF THIRD PARTY
TESTING.–

(A) GENERAL APPLICATION.–Except as provided under
subparagraph (F), the requirements of paragraph (2) shall apply to any
children’s product manufactured more than 90 days after the Commission has
established and published notice of the requirements for accreditation of third
party conformity assessment bodies to assess conformity with a children’s
product safety rule to which such children’s product is subject.

 

(B) TIME LINE FOR ACCREDITATION.–

(i) LEAD PAINT.–Not later than 30 days after the date of enactment of
the Consumer Product Safety Improvement Act of 2008, the Commission shall
publish notice of the requirements for accreditation of third party conformity
assessment bodies to assess conformity with part 1303 of title 16, Code of
Federal Regulations.

 

(ii) FULL-SIZE
CRIBS; NON FULL-SIZE CRIBS; PACIFIERS.–Not later than 60 days after the
date of enactment of the Consumer Product Safety Improvement Act of 2008, the
Commission shall publish notice of the requirements for accreditation of third
party conformity assessment bodies to assess conformity with parts 1508, 1509,
and 1511 of such title.

 

(iii) SMALL
PARTS.–Not later than 90 days after the date of enactment of the Consumer
Product Safety Improvement Act of 2008, the Commission shall publish notice of
the requirements for accreditation of third party conformity assessment bodies
to assess conformity with part 1501 of such title.

 

(iv) CHILDREN’S
METAL JEWELRY.–Not later than 120 days after the date of enactment of the
Consumer Product Safety Improvement Act of 2008, the Commission shall publish
notice of the requirements for accreditation of third party conformity
assessment bodies to assess conformity with the requirements of section
101(a)(2) of such Act with respect to children’s metal jewelry.

 

(v) BABY
BOUNCERS, WALKERS, AND JUMPERS.–Not later than 210 days after the date of
enactment of the Consumer Product Safety Improvement Act of 2008, the
Commission shall publish notice of the requirements for accreditation of third
party conformity assessment bodies to assess conformity with parts
1500.18(a)(6) and 1500.86(a) of such title.

 

(vi) ALL
OTHER CHILDREN’S PRODUCT SAFETY RULES.–The Commission shall publish notice
of the requirements for accreditation of third party conformity assessment
bodies to assess conformity with other children’s product safety rules at the
earliest practicable date, but in no case later than 10 months after the date
of enactment of the Consumer Product Safety Improvement Act of 2008, or, in the
case of children’s product safety rules established or revised 1 year or more
after such date of enactment, not later than 90 days before such rules or
revisions take effect.

 

(C) ACCREDITATION.–Accreditation of third party
conformity assessment bodies pursuant to the requirements established under
subparagraph (B) may be conducted either by the Commission or by an independent
accreditation organization designated by the Commission.

 

(D) PERIODIC REVIEW.–The Commission shall
periodically review and revise the accreditation requirements established under
subparagraph (B) to ensure that the requirements assure the highest conformity
assessment body quality that is feasible.

 

(E) PUBLICATION OF ACCREDITED ENTITIES.–The
Commission shall maintain on its Internet website an up-to-date list of
entities that have been accredited to assess conformity with children’s product
safety rules in accordance with the requirements published by the Commission
under this paragraph.

 

(F) EXTENSION.–If the Commission determines that
an insufficient number of third party conformity assessment bodies have been
accredited to permit certification for a children’s product safety rule under
the accelerated schedule required by this paragraph, the Commission may extend
the deadline for certification to such rule by not more than 60 days.

 

(G) RULEMAKING.–Until the date that is 3 years
after the Consumer Product Safety Improvement Act of 2008, Commission
proceedings under this paragraph shall be exempt from the requirements of
sections 553 and 601 through 612 of title 5, United States Code.

 

[CPSC Consideration of
Existing Requirements.—Sec. 102(c) of the Consumer
Product Safety Improvement Act of 2008. Not part of the Consumer Product Safety
Act. In establishing standards for accreditation of a third party conformity
assessment body under section 14(a)(3) of the Consumer Product Safety Act, the
Commission may consider standards and protocols for accreditation of such conformity assessment bodies by independent
accreditation organizations that are in effect on the date of enactment {August
14, 2008} of the Consumer Product Safety Improvement Act of 2008, but shall
ensure that the protocols, standards, and requirements prescribed under section
14(a)(3) incorporate, as the standard for accreditation, the most current
scientific and technological standards and techniques available.]

 

(4)
In the case of a consumer product for which there is more than one manufacturer
or more than one private labeler, the Commission may by rule designate one or
more of such manufacturers or one or more of such private labelers (as the case
may be) as the persons who shall issue the certificate required underby
paragraph (1), (2),
or (3), of this subsection, and may
exempt all other manufacturers of such
product or all other private labelers of the product (as the case may
be) from the requirement under paragraph (1), (2), or (3)
to issue a certificate with respect to such product.

 

(5) Effective 1 year after the date of enactment of
the Consumer Product Safety Improvement Act of 2008, the manufacturer of a
children’s product shall place permanent, distinguishing marks on the product
and its packaging, to the extent practicable, that will enable—

 

(A) the manufacturer to
ascertain the location and date of production of the product, cohort
information (including the batch, run number, or other identifying
characteristic), and any other information determined by the manufacturer to
facilitate ascertaining the specific source of the product by reference to
those marks; and

 

(B) the ultimate purchaser
to ascertain the manufacturer or private labeler, location and date of
production of the product, and cohort information (including the batch, run
number, or other identifying characteristic).

 

 

 

(b) (b) Rules to establish reasonable testing
programs The Commission may by rule prescribe reasonable testing
programs for any
productconsumer products
which isare
subject to a consumer
product safety rule standards under this Act, or a similar rule,
regulation, standard, or ban under any other Act enforced by the Commission,chapter
and for which a certificate is required under subsection (a). of
this section. Any test or testing program on the basis of which a
certificate is issued under subsection (a) of this section may,
at the option of the person required to certify the product, be conducted by an
independent third party qualified to perform such tests, unless the Commission,
by rule, requires or testing by an independent third
party for a particular rule, regulation, standard, or ban, or for a particular
class of products. programs.

 

 

 

(c) (c) Form and contents of labels
The Commission may by rule require the
use and prescribe the form and content of labels which contain the following
information (or that portion of it specified in the rule) —-

 

(1)
The date and place of manufacture of any consumer product.

 

(2) The cohort
information (including the batch, run number, or other identifying
characteristic) of the product.

 

(3) (2)
A suitable identification of the manufacturer of the consumer product, unless
the product bears a private label in which case it shall identify the private
labeler and shall also contain a code mark which will permit the seller of such
product to identify the manufacturer thereof to the purchaser upon his request.

 

(4) (3) In the case of a consumer
product subject to a consumer product safety rule, a certification that the
product meets all applicable consumer product safety standards and a
specification
of the standards which are applicable.

 

Such
labels, where practicable, may be required by the Commission to be permanently
marked on or affixed to any such consumer product. The Commission may, in
appropriate cases, permit information required under paragraphs (1) and (2) of
this subsection to be coded.

 

(d) REQUIREMENT FOR
ADVERTISEMENTS.—No advertisement for a consumer product or label or packaging
of such product may contain a reference to a consumer product safety rule or a
voluntary consumer product safety standard unless such product conforms with the applicable safety requirements of such rule or
standard.

 

[Effective date.—Not part of the Consumer Product Safety Act.—This section
shall take effect on the date that is 60 days after the enactment of the
Consumer Product Safety Improvement Act of 2008.]

 

(d) ADDITIONAL
REGULATIONS FOR THIRD PARTY TESTING.–

(1) AUDIT.–Not later
than 10 months after the date of enactment of the Consumer Product Safety
Improvement Act of 2008, the Commission shall by regulation establish
requirements for the periodic audit of third party conformity assessment bodies
as a condition for the continuing accreditation of such conformity assessment
bodies under subsection (a)(3)(C).

 

(2) COMPLIANCE; CONTINUED TESTING.–Not later than
15 months after the date of enactment of the Consumer Product Safety Improvement
Act of 2008, the Commission shall by regulation—

 

(A) initiate a program by which a manufacturer or
private labeler may label a consumer product as complying with the
certification requirements of subsection (a); and

 

(B) establish protocols
and standards–

(i) for ensuring that a
children’s product tested for compliance with an applicable children’s product
safety rule is subject to testing periodically and when there has been a
material change in the product’s design or manufacturing process, including the
sourcing of component parts;

(ii) for the testing of
random samples to ensure continued compliance;

 

(iii) for verifying that a
children’s product tested by a conformity assessment body complies with
applicable children’s product safety rules; and

 

(iv) for safeguarding
against the exercise of undue influence on a third party conformity assessment
body by a manufacturer or private
labeler.

 

{Note: P.L. 110-314 contained the two foregoing provisions both
denominated as being codified as §14(d) of the CPSA.}

 

(e) WITHDRAWAL OF
ACCREDITATION.–

(1) IN GENERAL.–The Commission may withdraw its
accreditation or its acceptance of the accreditation of a third party
conformity assessment body accredited under this section if the Commission
finds, after notice and investigation, that—

 

(A) a manufacturer, private labeler, or
governmental entity has exerted undue influence on such conformity assessment
body or otherwise interfered with or compromised the integrity of the testing
process with respect to the certification of a children’s product under this
section; or

 

(B) such conformity
assessment body failed to comply with an applicable protocol, standard, or
requirement established by the Commission under subsection (d).

 

(2) PROCEDURE.–In
any proceeding to withdraw the accreditation of a conformity assessment body,
the Commission—

 

(A) shall consider the
gravity of the conformity assessment body’s action or failure to act,
including–

(i) whether
the action or failure to act resulted in injury, death, or the risk of injury
or death;

 

(ii) whether the action or
failure to act constitutes an isolated incident or represents a pattern or
practice; and

 

(iii) whether and when the
conformity assessment body initiated remedial action; and

 

(B) may–

(i) withdraw
its acceptance of the accreditation of the conformity assessment body on a
permanent or temporary basis; and

 

(ii) establish
requirements for reaccreditation of the conformity assessment body.

 

(3) FAILURE TO COOPERATE.–The Commission may
suspend the accreditation of a conformity assessment body if it fails to
cooperate with the Commission in an investigation under this section.

 

 

(f) DEFINITIONS.–In this section:

(1) CHILDREN’S PRODUCT SAFETY RULE.–The term
`children’s product safety rule’ means a consumer product safety rule under
this Act or similar rule, regulation, standard, or ban under any other Act
enforced by the Commission, including a rule declaring a consumer product to be
a banned hazardous product or substance.

 

(2) THIRD PARTY CONFORMITY ASSESSMENT BODY.–_

(A) IN GENERAL.–The term `third party conformity
assessment body’ means a conformity assessment body that, except as provided in
subparagraph (D), is not owned, managed, or controlled by the manufacturer or private labeler of a
product assessed by such conformity assessment body.

 

(B) GOVERNMENTAL PARTICIPATION.–Such term may
include an entity that is owned or controlled in whole or in part by a
government if—

(i) to
the extent practicable, manufacturers or private labelers located in any nation
are permitted to choose conformity assessment bodies that are not owned or
controlled by the government of that nation;

 

(ii) the entity’s testing
results are not subject to undue influence by any other person, including
another governmental entity;

 

(iii) the entity is not
accorded more favorable treatment than other third party conformity assessment
bodies in the same nation who have been accredited under this section;

(iv) the entity’s testing results are accorded no
greater weight by other governmental authorities than those of other third
party conformity assessment bodies accredited under this section; and

 

(v) the entity does not
exercise undue influence over other governmental authorities on matters
affecting its operations or on decisions by other governmental authorities
controlling distribution of products based on outcomes of the entity’s
conformity assessments.

 

(C) TESTING AND CERTIFICATION OF ART MATERIALS AND
PRODUCTS.–A certifying organization (as defined in appendix A to section
1500.14(b)( 8 ) of title 16, Code of Federal Regulations
(or any successor regulation or ruling)) meets the requirements of subparagraph
(A) with respect to the certification of art material and art products required
under this section or by regulations prescribed under the Federal Hazardous
Substances Act (15 U.S.C. 1261 et seq.).

 

(D) FIREWALLED CONFORMITY ASSESSMENT BODIES.–Upon
request, the Commission may accredit a conformity assessment body that is
owned, managed, or controlled by a manufacturer or private labeler as a third
party conformity assessment body if the Commission by order finds that—

(i) accreditation
of the conformity assessment body would provide equal or greater consumer
safety protection than the manufacturer’s or private labeler’s use of an independent
third party conformity assessment body; and

 

(ii) the conformity
assessment body has established procedures to ensure that—

 

(I) its test results are protected from undue
influence by the manufacturer, private labeler or other interested party;

4 (This section was
titled: “Notification and Repair, Replacement, or Refund”)

 

(II) the Commission is notified immediately of any
attempt by the manufacturer, private labeler or other interested party to hide
or exert undue influence over test results; and

 

(III) allegations of undue
influence may be reported confidentially to the Commission.

 

(g) REQUIREMENTS FOR
CERTIFICATES.–

(1) IDENTIFICATION OF ISSUER AND CONFORMITY
ASSESSMENT BODY.–Every certificate required under this section shall identify
the manufacturer or private labeler issuing the certificate and any third party
conformity assessment body on whose testing the certificate depends. The
certificate shall include, at a minimum, the date and place of manufacture, the
date and place where the product was tested, each party’s name, full mailing
address, telephone number, and contact information for the individual
responsible for maintaining records of test results.

 

(2) ENGLISH LANGUAGE.–Every certificate required
under this section shall be legible and all content required by this section
shall be in the English language. A certificate may also contain the same
content in any other language.

(3) AVAILABILITY OF CERTIFICATES.–Every
certificate required under this section shall accompany the applicable product
or shipment of products covered by the same certificate and a copy of the
certificate shall be furnished to each distributor or retailer of the product.
Upon request, the manufacturer or private labeler issuing the certificate shall
furnish a copy of the certificate to the Commission.

 

(4) ELECTRONIC FILING OF CERTIFICATES FOR IMPORTED
PRODUCTS.–In consultation with the Commissioner of Customs, the Commission
may, by rule, provide for the electronic filing of certificates under this
section up to 24 hours before arrival of an imported product. Upon request, the
manufacturer or private labeler issuing the certificate shall furnish a copy to
the Commission and to the Commissioner of Customs.

 

(h)
RULE OF CONSTRUCTION.–Compliance of any children’s product with third party
testing and certification or general conformity certification requirements
under this section shall not be construed to exempt such children’s product
from any requirement that such product actually be in conformity with all
applicable rules, regulation, standards, or ban under any Act enforced by the
Commission.

 

Sources:

Consumer
Product Safety Improvement Act of 2008 (CPSIA)

US Code, Title
15, Chapter 47: Commerce and Trade, Consumer Product Safety, January 2007

Unofficial
Compilation of Amended Consumer Product Safety Act developed by CPSC Staff

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Calendar of CPSIA Deadlines and Other Consumer Product Safety Dates

Sunday, January 4th, 2009

On the calendar below, I have listed upcoming Consumer Product Safety Improvement Act (CPSIA of 2008) deadlines and effective dates for various regulations. If you find any errors or omissions, please email me right away.

As I become aware of them, I will also include dates for relevant events such conferences, speaker series, Consumer Product Safety Commission (CPSC) comment requests and public meetings. If you know of an event that may be of interest to consumers, manufacturers, importers, retailers or others, please let me know.

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Company Costs of a Product Recall: Incentives to Fix or Ignore Recall Effectiveness Problems (Full Post)

Friday, August 29th, 2008

There are numerous costs involved in conducting a product recall.  Many of these costs vary greatly depending on factors such as the type of product being recalled, the cost and price-point of the product, the number of units recalled, the geographic location of the companies involved and even the demographics of the end-user.  This article attempts to look at large buckets of costs common to all recalls and discern whether the cost alone would give a manufacturer incentive to increase or decrease recall effectiveness.  For the purpose of this article effectiveness is measured by the successful correction or capture of recalled product units. You can read a summary of this article by clicking here.

Direct Costs

First, there is the cost of implementing the recall. This includes such costs as administration, shipping items back from retailers and consumers, and the cost of fixing or disposing and replacing the product. Each of these costs is positively correlated with recall effectiveness. That is, the more successful a recall is in locating items, the higher the cost to manufacturers. This correlation means that there is an incentive for manufacturers to slow, hide, or not fully advertise a recall.

Depending on the cause of the recall, work-in-progress and raw materials may be lost in addition to completed inventory. Because manufacturers are restricted by law from selling recalled products in the US, and we will assume for now that they do not attempt to sell them overseas, something the 2008 Consumer Product Safety Improvement Act (CPSIA) expressly prohibits, this cost neither increases nor decreases with the effectiveness of a recall. What is in stock at the time of recall will be the same whether or not the items that have already been sold are retrieved from homes or not. Therefore, inventory costs should not affect a manufacturer’s decision to implement a fully effective recall. However, it is possible that a company would have an incentive to stall a recall in order to sell additional inventory with the expectation that most consumers will either not find out about the recall or will not return the product.

Third is lost sales of the recalled product. Manufactures lose the margin on returned items, the sale of which must be reversed or otherwise reflected in financial statements, as well as any projected sales of the recalled product. The more product-units returned, the lower the revenue recognized, which again creates an incentive for companies to limit recall effectiveness.

Overall, the direct costs of a recall increase with the effectiveness of the recall. In other words, companies incur higher costs the more successful they are in recovering the defective products. Taking these costs alone, it is easy to see why one would conclude that a company has little incentive to spend any more time or money on a product recall than that which is required by law. However, these costs alone do not fully explain the observed financial impact of recalls.

Indirect Costs
I define indirect costs as the additional financial impacts beyond the direct costs of the recall that would not have occurred but for the recall. One such cost is government fines. As noted in my blog post outlining the recall process, the CPSC can now impose fines of $100,000 up to $15 million for failing to report potential product safety violations or defects. While these amounts are significantly higher than previous fines, for most large companies, all but the fines imposed for particularly egregious violations will carry a relatively minor financial burden. While companies have an incentive to avoid the fines, in the past they have neither carried much financial weight, nor had a tremendous impact on recall effectiveness.

The second category of indirect costs is related to product liability lawsuits. These costs are relatively easy for companies to quantify, but are difficult for others to analyze because settlements are often sealed. To the extent that the recalls are for products belonging to public companies, and the companies report these costs in their SEC filings, we can at least identify the claimed damage amounts. Yet, the actual cost of the suit, including legal fees associated with defense of a particular product issue, are difficult to discern. Using data in the CPSC Revised Injury Cost Model, published by the Public Services Research Institute, US companies spend a combined total of more than $2 billion a year in defense of consumer-product related lawsuits. These costs do not include the cost of settlements or jury awards, which can average $600,000 to $800,000 each. [1]

Exposure to potential legal claims often increases the longer a product is in use, creating an incentive to get defective products out of homes as quickly as possible. One possible counterpoint is that, if the company believes customers are unlikely to be hurt, it may be willing to bear the exposure risk in order to avoid the other costs associated with widely communicating a recall – not the least of which could be a fear of class-action lawsuits.

The third category of indirect costs is lost future sales. Based on the research described in my paper, The Effect of Product Recalls on Stock Performance, I use reputation effects as a proxy for how future sales will be impacted. In the case of brand image, sales are lost due to a customer’s fear that a particular brand is no longer safe. Sales of the brand’s other, non-recalled products will also decrease as overall brand-image declines. Given that how a company handles a recall has a greater impact on reputation than does the recall itself, companies ought to be incented to conduct a complete and thorough recall, taking the opportunity to also discuss how they have fixed problems and will prevent them in the future.

In reality, companies may not know of or believe the studies’ findings to be true, and therefore may try to prevent consumers from finding out about the recall at all. However, this strategy, especially in the days of the internet, is likely to fail, causing greater strife than had the company been forthright in the first place. Again, the incentive ought to be complete communication for increased effectiveness.

Lastly, if the company is perceived by the public as having acted irresponsibly by not doing everything possible to ensure an effective recall, Corporate Social Responsibility (CSR) ratings will decline, potentially adding to the negative financial impact of the recall. While there is some debate over the financial effects of CSR, we will assume that if companies believe CSR to be correlated with financial performance, they will have an incentive to act responsibly, or at least be perceived as having acted responsibly.

Company cost incentives

The chart above summarizes recall costs and whether each carries a positive or negative incentive for companies to ensure the recall is effective. Although quantifying these cost incentives is difficult and goes beyond the scope of this paper, I do offer this small bit of analysis:

Mattel Costs Pie
Mattel Stock Prices

In the fall of 2007 Mattel faced several recalls in a short period of time due to loose magnets and lead paint violations. Even though the fraction of Mattel’s products that were affected was very small, the company suffered significant impact on its stock price. Given that Mattel had $5.5 billion in annual sales at the time, and that the then-current direct recall costs were only $69 million, something else must have been driving the bulk of the impact.[2] Shareholders and analysts were building in expectations regarding the recalls’ impact on Mattel’s future sales, which are not captured in direct costs.
Therefore, while it may seem counterintuitive, when all costs are considered, companies have an incentive to implement the most effective recalls possible; that incentive being improved financial performance. It could be that companies that do not go the extra mile to locate defective products and communicate with consumers quickly and thoroughly are budget-constrained, but more likely, they are too focused on direct costs.

[1] CPSC
Revised Injury Cost Model, Public Services Research Institute, December 2000

[2] Mattel 10-Q, September, 2007

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The Effect of Product Recalls on Stock Performance (Full Post)

Thursday, August 28th, 2008

A 2005 statistical study published in the Quarterly Journal of Business and Economics analyzed the security prices of non-automotive recalls following the announcement of the product recall in the Wall Street Journal (WSJ).[1] [2] The study looked at a sample of 269 product recalls from 1984 through 2003 and reported the mean abnormal returns (MAR) for days surrounding the WSJ announcement date, or the event date. Because markets often know about the recalls the day prior to WSJ publishing (event -1), it was expected to see a reaction on this day as well, so long as the market had had time to react.

The results provide impressive evidence that product recall announcements have a meaningful negative effect on the common stock price of the responsible companies. Our MAR on the day prior to the announcement date (t = -1) is -1.11 percent, which is significantly different from zero at the 0.1 percent level. The MAR is -0.64 percent on the event date (t = 0), which is statistically significant at the 10 percent level. Approximately, 60 percent of the abnormal returns are negative on day -1 and 55 percent of the abnormal returns are negative on day 0. Pruitt and Petersons results closely parallel our own as they too report a large negative reaction to the recalls on both event day -1 and event day 0.

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Daily mean cumulative abnormal returns (MCAR) for selected event days [show that], except for a slight downward drift on day -12, the MCARs are comparatively stable during the pre-event period. The negative MCARs begin increasing over the post-event period, hover around 3 percent from day 13 to 36, and decline toward the end of the post-event period. The largest MCAR is -3.55 percent and appeared on event days 19 and 20.[3]

The study found that the impact on stock prices due to a product recall were negative and statistically significant. However, it also found that, on average, the impact did not last longer than 60 days. It is possible that this finding is skewed by the fact that 74.3% of sample recalls were from companies with a market capitalization greater than $1 billion, somewhat insulating the effects of a single-product recall. Smaller companies may see both larger and longer lasting impacts.

The study further analyzed the sample recalls by breaking them into six industry categories: 1) Food/Consumables, 2) Drugs/Cosmetics, 3) Electrical/Electronic, 4) Rubber/Auto Parts, 5) Toys/Appliances, and 6) Miscellaneous. The study showed that, “The two industries most severely impacted by recalls are the Drugs/Cosmetics industry and the Toys/Appliances industry.” but went on to conclude that, “Overall, the product recall announcements have strong negative effects on all industries and appear to be a wide spread phenomenon in the Untied States.” [4]

Although this study is quite helpful in proving that recalls do, in fact, generate negative reactions from the market most of the time, it does not attempt to explain why this reaction occurs, nor does it explain why the market does not always react negatively in statistically significantly meaningful ways.

In an attempt to better explain the relationship between recalls and Corporate Financial Performance (CFP), I reviewed news articles and discussions related to several product recalls, including Mattel’s recent toy recalls.  What I found is that, while the recall itself may be viewed positively by some, the net impact on a company’s reputation tends to be negative.[5] Interestingly, how a product recall is handled appears to have at least as great an impact on a company’s reputation as does having to issue a recall in the first place.  The negative affects are greatly increased if the company is perceived to have handled the recall poorly or in an
irresponsible manner.  According to the 2007 KLD report on Mattel, Inc.:

While some observers praised Mattel for voluntarily informing the CPSC of the product safety problems found in its supply chain in 2007, others criticized the company for not having done so quickly enough. As of September 2007, the CPSC was investigating whether Mattel had issued its recall of Fisher-Price toys the previous month in a sufficiently timely manner. The Associated Press reported that month that Fisher-Price had been fined $975,000 in March for being too slow to inform government officials that one of its Little People toys posed a choking hazard. Fisher-Price had been fined in 2001 for similar reasons.

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The CPSC requires companies to report, within 24 hours, any products that could be harmful. According to the Journal, in a number of earlier recall cases, Mattel had gathered information on potentially hazardous toys for several months
before reporting to the CPSC.[6]

While Mattel says that it handled its recalls responsibly, it is not inconceivable that a company, not necessarily Mattel, would delay notification of potential dangers in attempt to avoid or postpone negative financial impact.

In a 2001 discussion with AIG regarding recall insurance, John Pinner, Assistant Treasure at Mattel,
confirmed that product recalls have a negative influence on the reputation of Mattel’s products and alluded to the impact we expect to
see on CFP.

Mr. Pinner says Mattel doesn’t buy product recall insurance because the coverage doesn’t pay for the biggest expense associated with a recall – loss of market share. When there’s a recall, “you lose three things,” he
explained. “You lose the cost of the recall, which most large companies can afford; the loss of the product; and you lose market share, because people now have some concerns about your products.[7]

Whether or not you believe Mattel acted promptly, studies show that not doing so would only exacerbate market-share losses. BNet Research showed that, “Even the appearance of a sluggish response can turn consumers against a company.” The study sites as one example the Firestone tire recall. “60 percent of consumers believe that Firestone did not act quickly enough. …55 percent will never or likely never buy the brand again.”[8]

On the other hand, a company that makes the decision to recall a product is not resigned to either bad or very-bad financial
results. A Harvard Business Review article discusses in great detail how companies that handle recalls well can actually protect and even increase their market share:

“If product recalls are handled properly, a company not only can keep damage to a minimum but also may find opportunities to reap unexpected benefits.” … Consider Saturn Corporation and Intel, “in both cases, senior
managers quickly confessed their mistakes and sought to make amends with appropriate corrections. Both companies reacted strategically, focusing on long-term marketing implications, and both emerged stronger for the experience.”[9]


In addition to speedy recalls and complete information, other studies have shown that recovery efforts, such as quickly responding directly to a customer regarding his or her concerns increases customer retention rates by 60 percent.[10]

While in general the market responds negatively to product recalls, the effects are due to how the market perceives a company’s ability to retain customers and maintain sales. The company’s reputation – both as a safe brand and as a responsible company – help drive this perception, and therefore stock performance, surrounding product recalls.

[1] “An
Extension of Security Price Reactions Around Product Recall
Announcements,” Quarterly Journal of
Business and Economics, Summer-Autumn, 2005

[2]
Automotive recalls are not included because the consistently high frequency of
recalls in that industry suggested that their inclusion “would result in
significant sample bias.”

[3] “An
Extension of Security Price Reactions Around Product Recall
Announcements,” Quarterly Journal of
Business and Economics, Summer-Autumn, 2005

[4] Ibid

[5]I will
not attempt to prove that reputation impacts CFP in this paper, other than to
say that, according to Orlitzky, Schmidt, and
Rynes’ meta analysis, “the findings with respect to [Corporate Social
Performance] CSP operationalizations suggest that studies that used reputation
indices as proxies for CSP showed the highest average correlation with
[Corporate Financial Performance] CFP’.” [Corporate Social and Financial
Performance, 2003] Therefore, since a product recall affects a company’s reputation,
we would expect it to also be associated with changes in financial
performance.

[6] KLD
Mattel, 2007, p.22

[7] “Managing product recall risks no child’s play for toymakers”,
Business Insurance, 2001

[8] Widmer,
Lori, “When Your Name Is at Risk”, November 2000, BNet Research Center

[9] N. Craig Smith, Robert J. Thomas, and John A. Quelch,
“A Strategic Approach to Managing Product Recalls,” 1996, Harvard Business
Review

[10]
Amy K. Smith and Ruth N. Bolton, “An
Experimental Investigation of Customer Reactions to Service Failure and
Recovery Encounters: Paradox or Peril?,” 1998
Journal of Service Research

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