Industry, regulators, and caregivers are grappling with a wave of global infant formula recalls linked to toxin concerns. Some of the biggest names in the sector are implicated, with Nestlé, Danone and Lactalis all triggering recalls.
At the centre of the issue is cereulide, a toxin known to cause nausea and vomiting and, in rare cases and at sufficiently high doses, more severe health effects.
The source of the contamination has been confirmed: an ingredient supplied by a third-party manufacturer added to formula to support brain and retina development. This widens potential financial exposure across the supply chain – from supplier and brand owner to retailer and, ultimately, the consumer.
When an infant formula crisis like this occurs, who is most at risk of financial loss?
The infant formula manufacturer
Infant formula manufacturers take the most responsibility when a recall like this occurs, both in terms of financial and reputational risk. It’s their branding on the product, after all.
Manufacturers are the ones covering costs associated with recalling the product, as well as for disposing of it, explains Vincent Billings, partner in the Corporate & Commercial team at UK legal firm SA Law. But the manufacturer may have product liability insurance, which could mitigate potential losses.
There’s also the financial loss of the products themselves. Nestlé estimated recalled products accounted for less than 0.5% of its sales, but that doesn’t take potential reputational damage into account. Financial analysts at Jefferies estimate losses could be as much as CHF1.3bn (€1.43bn), whereas Barclays is predicting a slightly more conservative CHF1bn.
The third-party supplier
Brand owners may take the responsibility publicly, but we now know the source of the contamination was further up the supply chain. The supplier of the contaminated ingredient, arachidonic acid (ARA) oil, will also be losing out financially. That’s because it failed to comply with safety regulations, making the supplier in breach of contract for the supply of product – at a minimum.
But there are other ways the third-party supplier loses out financially. When Nestlé first raised contamination concerns, the Swiss multinational immediately stopped sourcing ARA oil from the supplier. Although it depends on the individual arrangement in question, a fundamental breach like that can lead to a contract being terminated with no further payments, explains Billings.
And, there could also be a reputational clause that could allow for termination due to the negative press for the manufacturer.
As to who the supplier is, fingers have begun to point – but manufacturers have stopped short of naming names. According to the legal expert, this could be a strategic decision, an industry norm, or a move driven by legal considerations. “Naming a supplier may be a breach of confidentiality, which if disclosed, could lead to further reputational damage for the supplier and may lead to further claims between the parties.”
The retailer
Then there’s the retailer. As the primary point of contact with the consumer, they, too, have an important role to play – and are also vulnerable to financial losses.
Mostly, this comes from disrupted supply. When a manufacturer halts production and recalls products, the retailer may struggle to fill its shelves at short notice. It is possible the retailer has some form of product liability insurance, explains Billings, which could mitigate losses.
In the meantime, manufacturers are doubling down to fill supply gaps. Nestlé is ramping up production at all its infant formula factories, confirming they’re “running at full capacity” – boosting supply to meet demand. There are now added steps in place to ensure ingredients are safe: “All batches of the oil ingredient from other suppliers are now systematically tested to confirm our infant formula are free from cereulide,” notes the Swiss multinational. Cereulide safety thresholds have also been proposed by regulators.
Profit losses can also stem from the recalled products themselves, although retailers may offset these costs if they have product liability insurance in place.
The consumer or caregiver
And finally, we come to the consumer – in this case, the parent or caregiver purchasing infant formula for their child.
When a recall is triggered, consumers are given strict instructions on how to return the implicated product. They’re completely reimbursed for the price of the product.
But, of course, when toxins in food are involved, the potential fallout could be greater than the simple cost of a product. Regulators around the world are currently dealing with complaints of suspected food poisoning after babies consumed baby formula. At last count, French authorities have received complaints about eight individuals, and in the UK, 36 – though no causal link between the contaminated formula and infant illness has been established.
We’ll continue to track regulatory updates as they emerge.
