Daily Archives: October 31, 2010

Protecting Brands from “Product Recall”

It’s been a year when several brands have taken a big hit on their reputation.  The most famous cases being Tiger Woods and Toyota.  But many others like Citi, UBS and many others in the financial sectors lost brand value, partly attributable to the crisis in the sector and partly attributable to faulty business models.  And then there are brands like Kodak which may have permanently lost their foothold in the consumer market.

The case of “product harm”, when brands are recalled due to a defect, has been well researched. Generally, firms that recall defective products in the midst of media publicity do pay a price – loss of sales, market share and financial value.  Apart from Toyota and a few other automotive brands, we have seen toy manufacturers (Mattel), food companies (Maple Leaf Foods) and pharmaceuticals (Tylenol) recalling brands in recent times.

One recent study in the Journal of Marketing reported that companies that proactively manage the response to product harm crisis lose more value in the stock market because the stock market may perceive a proactive strategy as a sign of a more serious case.  One would think that companies that take proactive steps will get some marks for acting swiftly.  Perhaps, that is not the case.

Product failures and recalls do adversely impact brand equity. The impact may depend on degree of ambiguity of the firm’s response according to one study.  It is possible that in the short-term the stock market’s response and consumer’s response to a recall may be different.  In the long-run the two will be aligned.

Another study in the journal Marketing Science found that marketing instruments such as advertising may be diminished in their effectiveness post-crisis, meaning firms may have to spend more in marketing post-crisis to get the same impact they got in the pre-crisis phase.  You can think of this as the added cost of winning the consumer trust back.

The case of BP is interesting.  When the scope of the oil spill crisis became known, the brand reputation and the stock price took a hit.  After much stonewalling and facing criticism from many quarters, the company seems to have responded.  If the stock price is any indication, the worse may be over for BP (see chart below).  After hitting its lowest point in late June, the stock price is on the upswing.

BP Stock Quote on October 31, 2010. Courtesy: MarketWatch.com

It is, however, interesting to note that the sentiment of the community (made of consumers and individual investors) lags behind the sentiment of analysts (see bottom of chart for “Sentiment on BP”).

It looks like the average consumer still has some reservations about this brand.

There have been other examples of harmful behavior in the oil industry (e.g., Exxon Valdez), from which the companies have come back.  The importance of the product (oil) and the somewhat short public memory is helpful in such cases.

So, what is the best way to protect a brand from a failure that results in recall? Here is my take based on previous cases, research evidence and a bit of common sense:

Prevention is better than cure in this case.  If companies build high quality products and have appropriate processes, employee training, safety standards, quality controls and consumer education, many of the crises can be avoided.

When you fail to do the above and have a product harm crisis at hand, try to:

  1. Take responsibility and respond unambiguously (stock market reaction notwithstanding).  Try not to shift blame (remember Ford-Firestone tire blowout case?).
  2. Communicate to stakeholders clearly on what went wrong, why and steps you have taken to prevent this from ever happening again (Tylenol did this well in the mid 1980s, but recently they’ve had problems again).
  3. Go beyond the call of duty to establish safeguards and to compensate customers who have been hurt.

There is no doubt these steps will increase the cost of doing business in the short to medium-term.  If you believe brand is reputation as I do, there are no shortcuts to building reputation.  Plus, as a CEO you will sleep better at night.