Leading Through a Food Crisis

Leading through a food crisis

Decisive reputational moments demand leadership Introduction Increased exposure Major crisis Cost beyond Learning from Dos and don’ts for a How we and complexity in an between 2011 the financials experience: food crisis: a recipe for can help ever-changing world and 2019 red flags for a crisis crisis management

Content

Introduction 3

Increased exposure and complexity in an ever-changing world 4

Major crisis between 2011 and 2019 5

Cost beyond the financials 7

Learning from experience: red flags for a crisis 8

Dos and don’ts for a food crisis: a recipe for crisis management 9

How can we help 11

Contact 12

PwC Leading through a food crisis Decisive reputational moments demand leadership 2 Introduction Increased exposure Major crisis Cost beyond Learning from Dos and don’ts for a How we and complexity in an between 2011 the financials experience: food crisis: a recipe for can help ever-changing world and 2019 red flags for a crisis crisis management

Introduction

As former Chief of Defence of the Netherlands, I have seen many different types of crises. In the armed forces, a crisis is often a question of life or death. Military decision-makers understand the potential impact of an action on their society, their coalition partners and themselves. So we train, practice our skills, test our protocols. We learn and implement the lessons we learned. We think of ourselves as professionals, and we know that professionals look for ways to improve themselves and their teams every day. The moment we stop doing that, we stop being good.

Does this apply in the food sector as well? Is your company prepared for a crisis? Are the relevant protocols in place and up to date? Does your crisis team have proper training? Do they know what to do and what to avoid? It’s always good to read up on relevant topics and learn from others in a safe way before a crisis actually strikes. Because one thing is for sure: whether you’re ready or not, problems are sure to come your way one day.

Peter van Uhm General, retired, Royal Netherlands Army Former Chief of Defence Consultant to PwC

PwC Leading through a food crisis Decisive reputational moments demand leadership 3 Introduction Increased exposure exposure Major crisis Cost beyond Learning from Dos and don’ts for a How we and complexitycomplexity in in an an between 2011 the financials experience: food crisis: a recipe for can help ever-changing world world and 2019 red flags for a crisis crisis management

Increased exposure and complexity in an ever-changing world

According to the European Standard for Crisis Management So what challenges trigger these events? (17091), a crisis can be defined as an unprecedented or extraordinary event or situation that threatens an organisation Globalisation and integration of food supply chains and requires a strategic, adaptive and timely response in order More and more food is being traded across borders as to preserve its viability and integrity. international food companies enter new markets and look to source the best prices for their food products, making There is a great deal of incentive for food companies to manage business activity more mobile. The food industry is subect crisis effectively. First and foremost, this is because they can to transformation as regulators, food producers, sellers and protect the public from consuming unsafe food, but there is consumers all demand a more consistent approach to food also a significant economic incentive to mitigate operational safety and quality standards across the world. Risks are and reputational losses. The degree and adequacy of crisis increasing and it is becoming more challenging to maintain preparation is fundamental to protecting consumers and oversight over food supply chains. stakeholders if and when an adverse event occurs. Rising regulatory standards Furthermore, the actions taken to respond to a crisis, Food safety standards are becoming more stringent and communication processes and systems all need to be governments are increasing supervision and imposing developed well in advance and coordinated in their sanctions. Different countries have varying regulations, and implementation to adequately manage public safety and this can be difficult to grasp for companies that operate across regulatory compliance, and inform the public (consumers, regions and are required to meet multiple country regulations government or investors). whilst remaining economically competitive.

It is essential that food companies clearly understand the cost Technology breakthroughs of a food crisis in terms of not only the direct costs of managing Scientific advances and technological breakthroughs provide an event, but also the personal, human and financial costs from food companies with opportunities to gather more information which brands and entities in some instances fail to adequately about the safety and quality of their food products across recover. the supply chain. New technologies hold some degree of uncertainty, meaning that, with innovation, organisations may As global megatrends transform the food industry and the way have to face new risks. people do business in an increasingly complex marketplace, we are witnessing an increase in the incidence and severity of crises.

PwC Leading through a food crisis Decisive reputational moments demand leadership 4 Introduction Increased exposure exposure Major crisis Cost beyond Learning from Dos and don’ts for a How we and complexitycomplexity in in an an between 2011 the financials experience: food crisis: a recipe for can help ever-changing world world and 2019 red flags for a crisis crisis management

Increased exposure and complexity in an ever-changing world

Scandals and increasing scrutiny High-profile food safety and quality scandals are damaging public trust in the food industry and increasing consumer concerns about food. With the ubiquity of social media and increasing media and public interest, more food scares are turning into damaging scandals – and pushing governments and food companies to improve standards.

Population growth and resource scarcity Growing populations and increasing prosperity mean that agricultural production will have to rise by an estimated 70% to feed all the world’s people by 2050. Both public and private companies across several regions are undertaking efforts to ensure sufficient and resilient food supplies in future.

Changing food demand The demand for safe, high-quality food and organic products is increasing in many regions. This presents new market opportunities for food companies as well as involving new standards for compliance, testing and certification.

PwC Leading through a food crisis Decisive reputational moments demand leadership 5 Introduction Increased exposure Major crisiscrisis Cost beyond Learning from Dos and don’ts for a How we and complexity in an between 20112011 the financials experience: food crisis: a recipe for can help ever-changing world and 20192019 red flags for a crisis crisis management

Major crises between 2011 and 2019

Although crises in the food industry are hardly a new to its chains. Based on average price, the value of Chipotle’s phenomenon, a number of incidents in recent years have shown giveaways totalled more than US$62m. that their impact is getting significantly worse. The 2007 Chinese milk scandal may have been the most striking, resulting in six 2017: The Dutch egg crisis broke out when fipronil was detected fatalities and bringing an organisation and an entire industry in Dutch and Belgian table eggs. Fipronil is a delousing agent down. It is also said to have had a spillover effect that cost the and banned substance, which had been used in poultry farms sector between US$4.1 and 4.9bn. Below are some more recent to control red mites in chickens. As the Dutch authorities examples of food-crisis events that have received great public blocked some 200 farms suspected of using fipronil,3.5 million attention. chickens and one million eggs were destroyed. A government investigation found that the system that was supposed to 2011: An E. coli O104:H4 outbreak in Germany affected 3,950 guarantee food safety in the egg sector was complex and people and caused 53 deaths. German officials did not have unclear and many chicken farms insufficiently assessed food access to up-to-date test results and incorrectly linked the safety risks. pathogen to cucumbers imported from Spain, which cost Spanish exporters €120m in a week. 2018: Global fruit and vegetable company Greenyard reported that it had recalled all frozen products produced between August 2015: A food scandal concerning Maggi noodles in India had 2016 and June 2018 at their Hungarian production facility on an estimated overall cost of US$588m for the Nestlé Group. account of an outbreak of listeria monocytogenes. Investigations Brand Finance calculated a US$50m loss due to destroyed to determine the cause of the outbreak were led by Greenyard, noodles as well as reputational damage to Maggi’s brand that who uncovered that one of the freezing tunnels at the production cost Nestlé another US$200m. And this figure still doesn’t facility had a persistent presence of listeria. The financial impact account for an estimated US$180m loss of sales and direct of the product recall inflicteda financial loss of roughly €30m. costs: a market cap decline for Nestlé India and marketing relaunch expenses of US$68m. 2018: Several batches of strawberries grown in Australia were affected by ‘needle contamination’. In September 2018 2015: Starting in July 2015, Chipotle struggled with six separate alone, local authorities received more than 200 complaints of foodborne illness outbreaks: three strains of E. Coli, two strawberries in which needles were found. While authorities were outbreaks of norovirus, and one salmonella contamination. investigating the issue in an attempt to find the culprit behind the Chipotle’s share price consequently dropped by 47%, leaving its contamination, the AU$116 million strawberry industry was at market capitalisation to shrink to about US$10b in June 2016. risk. The crisis led to tonnes of strawberries being dumped and In March 2016, Chipotle reported that it gave away roughly nine many farmers lost their businesses completely. million free burritos in an attempt to entice customers back

PwC Leading through a food crisis Decisive reputational moments demand leadership 6 Introduction Increased exposure Major crisis Cost beyondbeyond Learning from Dos and don’ts for a How we and complexity in an between 2011 the financialsfinancials experience: food crisis: a recipe for can help ever-changing world and 2019 red flags for a crisis crisis management

Costs beyond the financials

The above crises provide examples of the potential financial US organisations also cited that business relations (42%), costs to a business, industry and/or economy. This section looks reputation/brand strength (38%) and relations with regulators into the various types of costs typically incurred by entities as (37%) suffered significant impact from the crime. they deal with and respond to crises. Spillover effect and reputational damage Business interruption and loss of profits Negative publicity is a key determinant affecting consumers’ According to the 2011 Grocery Manufacturers’ Association buying decisions. Spillover effects tend to be different in the (GMA) survey, the highest cost associated with food-related short term compared to the long term. A study of the 2006-07 crises typically comes from direct costs associated with business ConAgra’s Peter Pan peanut butter recall case found that the interruption – i.e. failure to operate for a period. During a crisis, immediate impact of the food safety incident across competing a company is usually required to close the manufacturing, brands was positive, albeit statistically insignificant, indicating distribution and/or retail facilities to conduct investigations, or to there might be a short window for competitors to gain market amend or introduce processes or supply-chain controls. Taking share. However, the industry often collectively loses in the longer direct execution costs into account, 77% of the GMA survey term when due to a loss of consumer confidence in a particular respondents said that the financial impact represented up to product or category. This was the case with the Chinese infant US$30m, while the remaining 23% stated that the impact was formula production issue, where Chinese domestic producers even higher. incurred material declines in profitability across the board for a sustained period. Execution costs Execution costs involve transporting, destroying and replacing products during a recall, and include expenses related to public relations and reputation management. Litigation costs can be significant, especially in the food industry, as the investigation processes are usually complex and lengthy.

Damages to employee morale, business relations, reputation and relationships with regulators According to the 2018 PwC Global Economic Crime Survey, four in ten (43%) US respondents described employee morale as being damaged by the most serious fraud cases.

PwC Leading through a food crisis Decisive reputational moments demand leadership Inhoudsopgave 7 Introduction Increased exposure Major crisis Cost beyond Learning from from Dos and don’ts for a How we and complexity in an between 2011 the financials experience: food crisis: a recipe for can help ever-changing world and 2019 red flagsflags forfor a a crisiscrisis crisis management

Learning from experience: red flags for a crisis

Although food fraud and food-safety incidents have been around Growing concerns regarding food safety: The food industry for a long time – the earliest were recorded in Ancient Egypt – we will always be in the public eye. Food is part of our identity and believe that today’s advanced, global food supply chains mean is at the fulcrum of our growing need to maintain a healthier that incidents that trigger a crisis will become more frequent and lifestyle and offer ever more healthy products to our children. The significant. What general events drive these incidents? number of salmonella and listeria infections continues to rise, as does the number of people affected by allergies, and consumers Volatility in price and availability: In recent years we have seen are increasingly concerned about their well-being. A small the food industry become ever more global, with tremendous incident in food-safety terms (such as the horsemeat crisis that growth in product SKUs on the demand side, and a truly global initially did not appear to be a food-safety concern), can quickly supply chain to support this development. In a world where become a public-health scare regardless of whether it is in fact a climate change is affecting supply chains to a greater extent than legitimate concern. ever before, products are becoming more volatile in terms of price and availability. Growing volatility may drive supply-chain Ethics and corruption levels: In a globalised supply chain, actors to take more risk, providing either substandard or unsafe safety, quality and product integrity are safeguarded by various products to meet a demand or maintain contractual obligations. national and international regulatory frameworks and voluntary The more volatile a food company’s supply chain is, the bigger and compulsory food safety schemes. In those areas of the its potential to be hit by a crisis will be. supply chains where regulatory standards are lower and corruption levels higher, regulatory frameworks may provide Lack of transparency claims (in public): Consumers have lower levels of protection and food safety schemes are limited become increasingly vocal. As we saw during the fipronil crisis, in their focus on corruption. There are higher risks of a crisis the pressure on companies as well as regulators to provide occurring in such environments. information regarding the cause of an issue, even without knowing all the facts, is higher than ever. A small communication error can easily trigger major effects (such as the cancellation of sourcing from a whole country in the case of the fipronil crisis). Organisations should be aware that the average pace at which a crisis escalates has grown exponentially in a world where an issue can be communicated across global news in a matter of minutes.

PwC Leading through a food crisis Decisive reputational moments demand leadership 8 Introduction Increased exposure Major crisis Cost beyond Learning from Dos andand don’tsdon’ts for for a a How we and complexity in an between 2011 the financials experience: food crisis:crisis: a a recipe recipe for for can help ever-changing world and 2019 red flags for a crisis crisis managementmanagement

Dos and Don’ts for a food crisis: a recipe for crisis management

“Losing your head in a crisis is a good way to 3. DO prepare. Practice is everything. become the crisis.” C.J. Redwine, Defiance No one learns how to drive by simply reading a book. While theory lays the base of a plan, practice makes plans a reality. Handling a full-blown crisis is a team effort and each member Crisis management is a skill that is acquired through rigorous of the crisis management team must be prepared to make the training. PwC’s Crisis Leadership Simulations mimic crisis right decisions at every critical moment. Due preparation can scenarios and train crisis management teams to execute help crisis-management teams to acquire the skills they need to response procedures, identify opportunities to develop from function together and collaboratively handle an organisational lessons learned, and promote decision-making that benefits crisis. Knowing the dos and don’ts of crisis management the organisation as a whole. Testing written procedures in increases crisis resilience and ensures that organisations prepare practice before an actual crisis hits will enhance crisis-resilience for, respond to and emerge stronger from crises. capabilities.

1. DO remain in the driver’s seat. 4. DON’T make decisions alone. Invest in your crisis While crises may push Board Members to seek legal protection, management team. management must remember that legal advice does not forestall Good decisions can only be made if key internal and external accountability for business consequences. While legal advice stakeholders have a voice at the table. A major problem rarely is of vital importance, business expertise applicable to the remains isolated, and can easily snowball into an overarching organisation must accompany legal decision-making. organisational crisis if management focuses on isolated issues instead of organisational consequences. Invest in the crisis 2. DO make decisions based on facts. management team, define team roles, and determine escalation In a crisis, facts are a bedrock. Decisions must be based on procedures. Record the decisions that are made and make sure verifiable truths, and not on assumptions, speculations or even that a clear audit trail is maintained for all actions taken during a fake news. Trained forensic professionals can execute unbiased crisis. This ensures accountability and facilitates detailed post- assessments of a critical situation and alleviate the pressure from hoc evaluation to identify lessons learned. management by collecting and disseminating evidence to ensure fact-based decision-making and communication.

PwC Leading through a food crisis Decisive reputational moments demand leadership 9 Introduction Increased exposure Major crisis Cost beyond Learning from Dos andand don’tsdon’ts for for a a How we and complexity in an between 2011 the financials experience: food crisis:crisis: a a recipe recipe for for can help ever-changing world and 2019 red flags for a crisis crisis managementmanagement

Dos and Don’ts for a food crisis: a recipe for crisis management

5. DON’T communicate without a communication plan. During crises, management tends to become introverted. Limiting communication may do more harm than good, however. Failing to communicate with clients, customers and both internal and external stakeholders during a crisis could easily result in loss of trust, reputational damage and damage to an organisation’s potential to handle a crisis. The development of comprehensive, fact-based crisis communication is a vital component of a crisis-response plan.

6. DON’T be rash if you are in doubt. Re-evaluate your options. Steady hands are needed for complex interventions. The pressures created by crises can push us to make rash choices but if there is uncertainty over a course of action, it is important to re-evaluate all options.

PwC Leading through a food crisis Decisive reputational moments demand leadership 10 Introduction Increased exposure Major crisis Cost beyond Learning from Dos and don’ts for a How wewe and complexity in an between 2011 the financials experience: food crisis: a recipe for can helphelp ever-changing world and 2019 red flags for a crisis crisis management

How we can help

The PwC brand is built on trust. For more than 150 years, we have helped companies grow, reduce supply chain risks and improve the processes and systems that build trust and add business value. That is why we are confident that we have the full range of capabilities our clients need to build trust in their food brand and improve their resilience in the event of a crisis.

Our Sustainable Supply Chain Services and Crisis Management professionals draw upon the strength of the PwC Network to help food companies move from a traditional programme based on food science to one that takes an enterprise-wide view of issues that can create or dissolve trust in their brand. We have dedicated teams operating in all major markets to help clients with all topics for which they require support.

PwC Leading through a food crisis Decisive reputational moments demand leadership 11 Introduction Increased exposure Major crisis Cost beyond Learning from Dos and don’ts for a How we and complexity in an between 2011 the financials experience: food crisis: a recipe for can help ever-changing world and 2019 red flags for a crisis crisis management

Like to learn more?

Peter van Uhm Consultant to PwC

Andreas Mikkers Partner Forensics Tel: +31 88 792 63 48 [email protected]

Joukje Janssen Partner Sustainability Tel: +31 88 792 59 28 [email protected]

Bert Graafsma Director Agrifood Tel: +31 88 792 57 39 [email protected]

Onno Nillesen Senior Manager Sustainable Value Chains Tel: +31 88 792 64 14 [email protected]

Peter Hoijtink Partner Consumer Goods Tel: +31 88 792 30 90 [email protected]

PwC Leading through a food crisis Decisive reputational moments demand leadership 12