Does food safety management give you competitive advantage?

There are many ways you can compete in business. Coca Cola and Pepsi have always had a fantastic sense for advertising and marketing – they have made brand building a strategic competitive advantage. Dr.Oetker re-invented the packaging of baking powder, and as a result managed to drive profit margin on their product through the roof.

This raises the question:

Can better food safety give you competitive advantage? Could investing more in food safety actually make your business more profitable in the long run?

Yes and no. The answer is not obvious, because food safety is nowadays mandated by law. In the early 90′s when food safety certification was still a novelty, there was a short time window when good food safety practice would have given you an obvious edge over competition. Today however, food safety is practiced by everybody, so we have to dig deeper to see if it can really give you competitive advantage.

Food safety is the safety net for your business

The reason why we practice food safety is to prevent people from getting sick, and to avoid product recalls and brand damage. This means food safety is a strategically critical insurance policy against all these negative, and possibly catastrophic, events. Look at the evidence – you can read any of these high impact food recalls to appreciate why better food safety might save your company a lot of money, and more importantly its reputation and consumer confidence:

• USDA orders recall of 143 million pounds of beef
• Recall caused Topps Meat Co. fold after six decades of being in business 
• Food recall cost Jack in the Box $160 Million

What becomes evident from reading these articles is that recalls cost the industry billions every year, it costs people their livelihood, and outbreaks hospitalize thousands of people.

What is the true cost of a product recall?

Grocery Manufacturers Association has produced a magnificent study about product recalls and their financial impacts. They sent surveys to 36 major food companies and engaged in deeper discussions with 8 companies.

The study lists these key findings:

• 81% respondents deem financial risk from recalls as significant to catastrophic
• 58% have been affected by a product recall event in the last five years
• 78% manage the risk by procuring insurance
•  77% experienced recalls that had a financial impact of less than $30 million
• The largest recall costs came from business interruption and product disposal
• The highest recoveries came from insurance proceeds

According to the respondents, the largest costs in product recalls come from business interruption and product disposal. And this does not even take into account harm related to the brand.

According to the respondents, the largest costs in product recalls come from business interruption and product disposal. And this does not even take into account harm related to the brand.
AIG is one of America’s largest insurers and they have recently released a calculator that helps you estimate the true costs of a food recall. This might give you a better sense of what these events cost. Here’s a link to AIG NOVI page where you can read more about the calculator.

Retailer relationships and food safety

Food recalls impact not only the producer, but the retailer as well. In fact, if you look at the recent horse meat scandal in Europe, few people remember the name of the meat packing company but everyone knows where the bad meat was being sold. So it’s no wonder that retailer food safety standards place the highest demands on the producer, and retailers are very keen to keep on auditing their suppliers.

Since the retailer is ultimately the distributor of your product in most cases, it’s crucial to maintain a healthy relationship with them. Practicing great food safety will no doubt improve your relationship with your customer and give your business longevity and more opportunities to get your product on the supermarket shelves. Great food safety practice will give you the upper hand over a competitor which may have inferior standards.

Look at the bankers

In times of continuous financial unrest it’s not too often you hear you should look at bankers for role model behavior. But there’s something the best hedge fund managers are very good at, and that is insuring their positions. A good money manager will always purchase some kind of product – such as credit default swaps or leveraged derivatives – against catastrophic failure. They are purchasing an insurance against a very rare, but high impact, event.

If you look at the performance of the best hedge funds during the 2008 crisis they have hardly been impacted by the surrounding meltdown, whereas many competitors who had exposed themselves to high risk without taking proper precaution, have gone bust. The best funds have thus made investing in insurance – and the identification of rare, but high impact events – a competitive advantage.

Because these high impact events are so rare, insurance is affordable enough and won’t cannibalize the overall profitability of your business. Similar options are available to food companies: Food companies can obtain insurance against production interruption and product disposal.

A good food safety management system is a kind of insurance as well. A world class food safety system today costs only a fraction of what its worth in the long run when you take into account the volume of business and the decreased likelihood of product recalls, not to even mention increased productivity, better audit outcomes and all the other inherent benefits of operating a world class food safety system.

Great food safety management can give your business a competitive advantage, but this advantage reveals itself only in the long run. It’s like having a spare tire in a race car. In a normal race nothing unexpected happens and it’s not the spare tire that decides the outcome of the race. But what do you do if your tire breaks, as it sometimes inevitably does? Your competitor’s car might be technologically just as advanced, and they might have a similarly skilled driver, but without that extra tire they’ll stay behind when things don’t go as planned. Practicing better food safety is akin to keeping a spare tire in the trunk, it will give you the upper hand when things get rough and it will ensure you don’t need to call an expensive taxi back home.

What do you think – can better food safety management give you a competitive advantage?