What Is Product Recall? Definition & Overview

KEY TAKEAWAYS

• Product recalls happen as a result of quality or safety concerns related to a manufactured product.
• This often is due to a design or manufacturing defect that could potentially harm the user. 
• A recall can often negatively impact the stock of a company. This is because it is often extremely expensive to recall products and can damage a company’s reputation. 
• Voluntary recalls are common or they can be ordered through a court lawsuit. 

What Is a Product Recall?

A product recall is a process of retrieving potentially defective or unsafe products from customers while compensating them. Safety concerns or adverse health consequences concerning a manufacturing flaw in a device that could hurt its user frequently lead to recalls.

A regulatory agency, such as the Consumer Product Safety Commission (CPSC) in the U.S., may either request or require a product recall.

How Does a Product Recall Work?

Although the stages involved in a recall can vary according to local legislation, there are several common ones. For instance, if a pet food producer releases a batch of products that contains a chemical that can unintentionally poison animals, the company will publicly warn of the dangers of the food. They will then ask that its customers return the product to the company, or just throw it away.

In most cases, customers will receive a complete refund or replacement product. The media coverage of the event is frequently managed through a public relations (PR) strategy and will be handled by the company’s PR department.

The stock price of a corporation may suffer as a result of recalls. Customers may stop buying a company’s products in the future if concerns about the company’s standing or reputation rise after the release of a risky product. This can result in a loss of trust for the company, as well as less revenue and reduced profits.

While some recalls may result in a complete product ban, others may only instruct customers to return a defective product on their own for replacement or repair. In some situations, like a car recall, a seller might give the customer a free replacement part or do a diagnostic to lower the risk of using the product.

It should be noted that firms can frequently buy product recall insurance coverage to cover the costs and monetary losses associated with a recall, should one occur.

Examples Of Product Recall

Recalls can happen within any industry and for a wide range of reasons. Here are three examples of product recalls:

1. Takata Air Bags

The largest ever recall in the United States was from Takata Air Bags in 2008. 

Almost all of the world’s major automakers used Takata’s defective airbag inflators. About 41.6 million vehicles have been recalled as of January 2019 to replace 56 million Takata airbags that were found to occasionally detonate and shoot metal fragments at drivers and passengers. This resulted in significant injuries and caused 16 fatalities in the United States. Regulators predict that it may not be possible to recall and repair every vehicle with a defective Takata airbag until 2023.

It is estimated that the recall has cost over $24 billion, which bankrupted Takata. 

2. Volkswagen Diesel Engines

In 2015, German automaker Volkswagen was discovered to have cheated on diesel emissions tests. It was found that the corporation has been using software for years that enabled its turbocharged diesel engines to reduce their emissions when subjected to testing so as to comply with regulatory regulations. Actually, the engines released pollutants up to 40 times more than what was permitted by American regulatory standards.

Volkswagen had to set aside more than $18 billion to pay for the recall costs, legal claims, and other related expenditures after recalling 11 million vehicles worldwide. Shares immediately tumbled and took two years for the company to recover.

3. Pfizer’s Bextra

Due to heart dangers and “life-threatening” skin responses, the FDA ordered pharmaceutical behemoth Pfizer to take the arthritis medication Bextra off the market in 2005. Bextra generated $1.3 billion in yearly sales for Pfizer at the time. 

Pfizer resolved civil and criminal claims that it had promoted Bextra unlawfully in 2009. At the time, the $2.3 billion payment represented both the highest criminal fine of any sort and the greatest health care fraud settlement. The recall cost Pfizer a minimum of $3.3 billion overall.

Summary

Product recalls are an unfortunate, but necessary part of business operations. When a business has distributed a product that can unintentionally put people at a risk of injury, then it must be immediately recalled to prevent any deaths. 

While these are often extremely costly events, it is better to pay the money rather than risk lives being lost. The more a company can to do manage a mishap the better. As they are more likely to avoid deaths and can build up their reputation again.