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The Cost of a Recall
Outbreaks of food borne illness are a real threat to quick-serves, and often through no fault of their own.

In mid-February, the United States Department of Agriculture (USDA) issued a recall on 143 million pounds of beef, the largest in its history, after it was discovered that Westland/Hallmark Meat Co., a California meatpacker, allowed ailing, or “downer,” cows to pass into the food supply. Much of the beef was provided to school cafeterias, but at least two quick-service restaurant chains, Jack in the Box and In-N-Out, also purchased some of the product through suppliers.

With a product like beef, which is a commodity, a sizeable recall in real time could cause a shortage in the market and push the cost up.

USDA officials acknowledged that the meat most likely did not pose a hazard to consumers—in fact, much of it had already been consumed long ago—but the incident has again focused the industry’s attention on the important issue of food safety. According to the National Restaurant Association, a single outbreak can cost a foodservice outlet $75,000.

The losses restaurants can incur as the result of a recall fall into two categories, the first involving product that must be destroyed and costs associated with that process. Joe Dunbar, president of food cost consulting firm Dunbar Associates, says that while suppliers will usually provide a refund on the product that was recalled, restaurants must still be able to quickly obtain replacement product in order to continue operating as normal. With a product like beef, which is a commodity, a sizeable recall in real time could cause a shortage in the market and push the cost up. As a result, Dunbar says, quick-serves with burger-based menus could see a 2 percent loss as a percentage of sales.

The second loss that can result from a recall is a decrease in sales themselves. Once a recall becomes public, consumers become more cautious and may avoid the food or chain in question. While no one can predict to what degree that will occur, the loss in sales can be significant.

If a recall is not just precautionary and is linked to an outbreak of food borne illness, losses take on a whole new meaning. Consumers who were harmed can sue for millions of dollars. To avoid being held liable if the product was tainted before a restaurant received it, Bill Marler, an attorney specializing in food borne illness cases, suggests that restaurants ask for an indemnity clause to be included in supplier contracts.

“Ten years ago, it was not usual for grocery stores and restaurants to have indemnity agreements between themselves and their suppliers,” he says. “It’s a new phenomenon, and certainly I’m seeing that much more. You’re seeing more restaurants and grocery stores understanding that they have less control over [the products they receive from suppliers]. There’s a recognition that a lot of the products they’re getting came to them [tainted], and they’re limited in what they can do.”

Marler says a rash of produce-related recalls and illness outbreaks in 2003 and 2004 led retailers and restaurants to tighten up agreements with their suppliers, often requiring that the suppliers’ insurance list the restaurant or grocery store as an additional insured party in the policy.

“The key is to push liability onto the entity that caused the problem to begin with,” Marler says. “If in your restaurant you’re getting contaminated food, there's a limited amount of things you can do to protect yourself … The responsibility for your business loss, the loss to consumers, shouldn't that burden be placed on suppliers?”

But Dunbar says restaurants also need to be proactive in their approach to protecting themselves from losses due to recall and illness outbreak, above and beyond safe food handling procedures in the store.

“At this time, I would have to say that if I was working in procurement, I would have to be out there taking a look at some of these processing facilities,” he says. “I would be, at this point, extremely incented to take a look at these processing plants. I think it would open a lot of people’s eyes up.”

He also suggests procuring product from multiple sources, so in case a recall does occur, there will be an alternative option for sourcing and risk will be mitigated.

This most recent recall has brought food safety to the forefront of the country’s consciousness, capturing the attention of the media, Congress, and ultimately, consumers. But Dunbar says that’s not necessarily a bad thing.

“There’s a pretty big awareness level and fear level in the marketplace, and companies that can twist that around and turn it into a marketing advantage will do a lot better than those that don’t,” he says, citing chains, like Chipotle, that draw attention to the quality of their meat.

In the end, Dunbar says, the companies that stay diligent will have an edge.