Leading through a food crisisDecisive reputational moments demand leadership

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

2

ContentIntroduction 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

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

3

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.

Introduction

Peter van UhmGeneral, retired, Royal Netherlands ArmyFormer Chief of DefenceConsultant to PwC

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

4

Increased exposure and complexity in an ever-changing world

According to the European Standard for Crisis Management (17091), a crisis can be defined as an unprecedented or extraordinary event or situation that threatens an organisation and requires a strategic, adaptive and timely response in order to preserve its viability and integrity.

There is a great deal of incentive for food companies to manage crisis effectively. First and foremost, this is because they can protect the public from consuming unsafe food, but there is also a significant economic incentive to mitigate operational and reputational losses. The degree and adequacy of crisis preparation is fundamental to protecting consumers and stakeholders if and when an adverse event occurs.

Furthermore, the actions taken to respond to a crisis, communication processes and systems all need to be developed well in advance and coordinated in their implementation to adequately manage public safety and regulatory compliance, and inform the public (consumers, government or investors).

It is essential that food companies clearly understand the cost of a food crisis in terms of not only the direct costs of managing an event, but also the personal, human and financial costs from which brands and entities in some instances fail to adequately recover.

As global megatrends transform the food industry and the way people do business in an increasingly complex marketplace, we are witnessing an increase in the incidence and severity of crises.

So what challenges trigger these events?

Globalisation and integration of food supply chainsMore and more food is being traded across borders as international food companies enter new markets and look to source the best prices for their food products, making business activity more mobile. The food industry is subect to transformation as regulators, food producers, sellers and consumers all demand a more consistent approach to food safety and quality standards across the world. Risks are increasing and it is becoming more challenging to maintain oversight over food supply chains.

Rising regulatory standardsFood safety standards are becoming more stringent and governments are increasing supervision and imposing sanctions. Different countries have varying regulations, and this can be difficult to grasp for companies that operate across regions and are required to meet multiple country regulations whilst remaining economically competitive.

Technology breakthroughsScientific advances and technological breakthroughs provide food companies with opportunities to gather more information about the safety and quality of their food products across the supply chain. New technologies hold some degree of uncertainty, meaning that, with innovation, organisations may have to face new risks.

Increased exposure and complexity in an ever-changing world

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

5

Scandals and increasing scrutinyHigh-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 scarcityGrowing 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 demandThe 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.

Increased exposure and complexity in an ever-changing world

Increased exposure and complexity in an ever-changing world

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

6

Major crises between 2011 and 2019

Although crises in the food industry are hardly a new phenomenon, a number of incidents in recent years have shown that their impact is getting significantly worse. The 2007 Chinese milk scandal may have been the most striking, resulting in six fatalities and bringing an organisation and an entire industry down. It is also said to have had a spillover effect that cost the sector between US$4.1 and 4.9bn. Below are some more recent examples of food-crisis events that have received great public attention.

2011: An E. coli O104:H4 outbreak in Germany affected 3,950 people and caused 53 deaths. German officials did not have access to up-to-date test results and incorrectly linked the pathogen to cucumbers imported from Spain, which cost Spanish exporters €120m in a week.

2015: A food scandal concerning Maggi noodles in India had an estimated overall cost of US$588m for the Nestlé Group. Brand Finance calculated a US$50m loss due to destroyed noodles as well as reputational damage to Maggi’s brand that cost Nestlé another US$200m. And this figure still doesn’t account for an estimated US$180m loss of sales and direct costs: a market cap decline for Nestlé India and marketing relaunch expenses of US$68m.

2015: Starting in July 2015, Chipotle struggled with six separate foodborne illness outbreaks: three strains of E. Coli, two outbreaks of norovirus, and one salmonella contamination. Chipotle’s share price consequently dropped by 47%, leaving its market capitalisation to shrink to about US$10b in June 2016. In March 2016, Chipotle reported that it gave away roughly nine million free burritos in an attempt to entice customers back

to its chains. Based on average price, the value of Chipotle’s giveaways totalled more than US$62m.

2017: The Dutch egg crisis broke out when fipronil was detected in Dutch and Belgian table eggs. Fipronil is a delousing agent and banned substance, which had been used in poultry farms to control red mites in chickens. As the Dutch authorities blocked some 200 farms suspected of using fipronil, 3.5 million chickens and one million eggs were destroyed. A government investigation found that the system that was supposed to guarantee food safety in the egg sector was complex and unclear and many chicken farms insufficiently assessed food safety risks.

2018: Global fruit and vegetable company Greenyard reported that it had recalled all frozen products produced between August 2016 and June 2018 at their Hungarian production facility on account of an outbreak of listeria monocytogenes. Investigations to determine the cause of the outbreak were led by Greenyard, who uncovered that one of the freezing tunnels at the production facility had a persistent presence of listeria. The financial impact of the product recall inflicted a financial loss of roughly €30m.

2018: Several batches of strawberries grown in Australia were affected by ‘needle contamination’. In September 2018 alone, local authorities received more than 200 complaints of strawberries in which needles were found. While authorities were investigating the issue in an attempt to find the culprit behind the contamination, the AU$116 million strawberry industry was at risk. The crisis led to tonnes of strawberries being dumped and many farmers lost their businesses completely.

Major crisis between 2011 and 2019

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

7Inhoudsopgave

Costs beyond the financials

The above crises provide examples of the potential financial costs to a business, industry and/or economy. This section looks into the various types of costs typically incurred by entities as they deal with and respond to crises.

Business interruption and loss of profitsAccording to the 2011 Grocery Manufacturers’ Association (GMA) survey, the highest cost associated with food-related crises typically comes from direct costs associated with business interruption – i.e. failure to operate for a period. During a crisis, a company is usually required to close the manufacturing, distribution and/or retail facilities to conduct investigations, or to amend or introduce processes or supply-chain controls. Taking direct execution costs into account, 77% of the GMA survey respondents said that the financial impact represented up to US$30m, while the remaining 23% stated that the impact was even higher.

Execution costsExecution 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 regulatorsAccording 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.

US organisations also cited that business relations (42%), reputation/brand strength (38%) and relations with regulators (37%) suffered significant impact from the crime.

Spillover effect and reputational damageNegative publicity is a key determinant affecting consumers’ buying decisions. Spillover effects tend to be different in the short term compared to the long term. A study of the 2006-07 ConAgra’s Peter Pan peanut butter recall case found that the immediate impact of the food safety incident across competing brands was positive, albeit statistically insignificant, indicating there might be a short window for competitors to gain market share. However, the industry often collectively loses in the longer term when due to a loss of consumer confidence in a particular product or category. This was the case with the Chinese infant formula production issue, where Chinese domestic producers incurred material declines in profitability across the board for a sustained period.

Cost beyond the financials

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

8

Learning from experience: red flags for a crisis

Although food fraud and food-safety incidents have been around for a long time – the earliest were recorded in Ancient Egypt – we believe that today’s advanced, global food supply chains mean that incidents that trigger a crisis will become more frequent and significant. What general events drive these incidents?

Volatility in price and availability: In recent years we have seen the food industry become ever more global, with tremendous growth in product SKUs on the demand side, and a truly global supply chain to support this development. In a world where climate change is affecting supply chains to a greater extent than ever before, products are becoming more volatile in terms of price and availability. Growing volatility may drive supply-chain actors to take more risk, providing either substandard or unsafe products to meet a demand or maintain contractual obligations. The more volatile a food company’s supply chain is, the bigger its potential to be hit by a crisis will be.

Lack of transparency claims (in public): Consumers have become increasingly vocal. As we saw during the fipronil crisis, the pressure on companies as well as regulators to provide 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.

Growing concerns regarding food safety: The food industry will always be in the public eye. Food is part of our identity and is at the fulcrum of our growing need to maintain a healthier lifestyle and offer ever more healthy products to our children. The number of salmonella and listeria infections continues to rise, as does the number of people affected by allergies, and consumers are increasingly concerned about their well-being. A small incident in food-safety terms (such as the horsemeat crisis that initially did not appear to be a food-safety concern), can quickly become a public-health scare regardless of whether it is in fact a legitimate concern.

Ethics and corruption levels: In a globalised supply chain, safety, quality and product integrity are safeguarded by various national and international regulatory frameworks and voluntary and compulsory food safety schemes. In those areas of the supply chains where regulatory standards are lower and corruption levels higher, regulatory frameworks may provide lower levels of protection and food safety schemes are limited in their focus on corruption. There are higher risks of a crisis occurring in such environments.

Learning from experience: red flags for a crisis

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

9

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

“Losing your head in a crisis is a good way to become the crisis.” C.J. Redwine, Defiance

Handling a full-blown crisis is a team effort and each member of the crisis management team must be prepared to make the right decisions at every critical moment. Due preparation can help crisis-management teams to acquire the skills they need to function together and collaboratively handle an organisational crisis. Knowing the dos and don’ts of crisis management increases crisis resilience and ensures that organisations prepare for, respond to and emerge stronger from crises.

1. DO remain in the driver’s seat. While crises may push Board Members to seek legal protection, management must remember that legal advice does not forestall accountability for business consequences. While legal advice is of vital importance, business expertise applicable to the organisation must accompany legal decision-making.

2. DO make decisions based on facts.In a crisis, facts are a bedrock. Decisions must be based on verifiable truths, and not on assumptions, speculations or even fake news. Trained forensic professionals can execute unbiased assessments of a critical situation and alleviate the pressure from management by collecting and disseminating evidence to ensure fact-based decision-making and communication.

3. DO prepare. Practice is everything.

No one learns how to drive by simply reading a book. While theory lays the base of a plan, practice makes plans a reality. Crisis management is a skill that is acquired through rigorous training. PwC’s Crisis Leadership Simulations mimic crisis scenarios and train crisis management teams to execute response procedures, identify opportunities to develop from lessons learned, and promote decision-making that benefits the organisation as a whole. Testing written procedures in practice before an actual crisis hits will enhance crisis-resilience capabilities.

4. DON’T make decisions alone. Invest in your crisis management team.

Good decisions can only be made if key internal and external stakeholders have a voice at the table. A major problem rarely remains isolated, and can easily snowball into an overarching organisational crisis if management focuses on isolated issues instead of organisational consequences. Invest in the crisis management team, define team roles, and determine escalation procedures. Record the decisions that are made and make sure that a clear audit trail is maintained for all actions taken during a crisis. This ensures accountability and facilitates detailed post-hoc evaluation to identify lessons learned.

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

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

10

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.

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

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

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

11

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.

How we can help

How we can help

PwC Leading through a food crisis Decisive reputational moments demand leadership

Introduction Increased exposure and complexity in an ever-changing world

Major crisis between 2011 and 2019

Cost beyond the financials

Learning from experience: red flags for a crisis

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

How we can help

12

Contact us

Peter van UhmConsultant to PwC

Andreas MikkersPartner ForensicsTel: +31 88 792 63 48Andre.Mikkers@pwc.com

Joukje JanssenPartner SustainabilityTel: +31 88 792 59 28Joukje.Janssen@pwc.com

Bert GraafsmaDirector AgrifoodTel: +31 88 792 57 39Bert.Graafsman@pwc.com

Onno NillesenSenior Manager Sustainable Value ChainsTel: +31 88 792 64 14Onno.Nillesen@pwc.com

Peter HoijtinkPartner Consumer GoodsTel: +31 88 792 30 90Peter.Hoijtink@pwc.com

Like to learn more?