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.

What these individuals correctly
assume is that product recalls are expensive to conduct.  What they are missing, however, is that there
are many indirect expenses that may outweigh any incentives to hide or slow a recall.  In my article, Company Recall Costs: Incentives to Fix or Ignore Recall Effectiveness Problems, I identify many of
the direct and indirect costs of recalls and discuss whether the influence is
likely to be positive or negative with respect to a company’s propensity to act
responsibly – that is, to do everything possible to retrieve defective products,
even if that means doing more than what the law requires. 

You can read the full article by
clicking the link above.   A summary of
my main points, and excerpts from my conclusion are presented here.

• Direct costs include the cost of implementing the recall, lost inventory and reversed sales.
• Direct costs tend to increase as recall
  effectiveness increases.
• Indirect costs include government
  fines, product liability claims and lost future sales; the last of which is driven by brand-image and Corporate Social Responsibility (CSR) effects.
• Indirect costs tend to decrease as recall
  effectiveness increases.

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 the
paper, I do offer this small bit of analysis:

 
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.[1]  Shareholders and analysts were building in
expectations regarding the recalls’ impact on Mattel’s future sales, which are 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 may be the case that companies that do
not go the extra mile to locate defective products and communicate with
consumers quickly are budget constrained, but more likely they are too focused on direct costs.  

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.

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:

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.

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.

***

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.

***

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.