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Q2 2015Recall Index

ARE HEALTH-CONSCIOUS CONSUMERS TIPPING THE RECALL SCALES?

Consumer Preferences Drive Increase in Healthy Product Recalls

Studies have shown that six out of ten Americans have given a lot of thought to their diet and exercise, and these trends are on the rise1. As the health industry continues to grow and the organic movement gains further momentum, what is the impact from a product recall perspective? The Q2 2015 Stericycle Recall Index analyzes trends surrounding the increased demand for healthier products, examines the future of product recalls, and shows why companies need to rethink their recall execution plans and expectations for consumer response.

From fitness apps and devices to organic food and dietary supplements, consumer awareness about health and the environment is driving a higher demand for products that meet these needs.

The Stericycle Quarterly Recall Index analyzes cumulative recall data from the CPSC, FDA, NHTSA and USDA. Each quarter, the report investigates emerging trends within the recall industry and includes scorecards with key takeaways in each category.

1www.foodinsight.org

6 out of 10 Americans have given a lot of thought to their diet and exercise1

Recall Index, Q2 2015

Wholesome Habits

This puts pressure on manufacturers to produce more organic food products and reconfigure their existing product lines to better cater to today's health-conscious consumer. For example, in June 2015 a large well-known food manufacturer announced plans to remove all artificial flavors and colors from the remaining 40 percent of its cereal products that still contain them3.

This is just the latest in a long list of companies taking steps to bring fresher, more natural options to the market. A major fast food restaurant chain is currently testing kale menu items in select California restaurants to determine whether the vegetable should be a permanent addition. Another large food manufacturer has announced plans to remove synthetic coloring and preservatives from its iconic Macaroni & Cheese product. And a well-known beverage manufacturer has divided its products into three categories (“fun for you,” “better for you,” and “good for you”) in an effort to better accommodate healthy preferences and boost sales as a result456.

Consumers are displaying a preference for healthy and organic products at an increasing rate. According to the USDA, 70 percent of consumers are likely to believe a food is safer, more nutritious, or of higher quality if it bears an organic label2.

2www.academicsreview.org3www.usatoday.com4www.npr.org5www.washingtonpost.com6www.beveragedaily.com

In June 2015, a large well-known food manufacturer announced plans to remove all artificial flavors and colors from the remaining 40% of its cereal products that still contain them3

Increased demand for healthy products has numerous industry implications and a direct impact on product recall numbers. With a greater amount of healthy and/or natural products available in the marketplace, the industry has seen an uptick in associated recall events. According to the data, since 2012 more than 64 percent of recalls have been related to healthy foods. The top category within these recalls is raw foods—often due to the use of unapproved pesticides. For example, 400,000 units of frozen spinach were recalled in Q2 as a result of residual pesticide levels over the limit. This trend has continued through Q2 2015 with 65 percent of recalls being related to healthy food, including Listeria contamination and labeling issues among the chief drivers.

The above examples highlight the recall impacts of increased consumer demand for healthy produce. However, other product categories are also experiencing recall ramifications from the environmentally-conscious movement. Solar panels are becoming a popular option for consumers looking to cut heating costs and increase efficiencies, while simultaneously reducing the impact on the environment. Surprisingly, more than 1.3 million solar panels were recalled due to an electrical shock hazard in 2014. While there was another, smaller solar panel recall in 2012, the 2014 event was the first large-scale recall the category has experienced. With market analysts predicting a 31 percent growth target for the U.S. solar industry in 2015, these new investments may result in a similar uptick in associated recalls7.

Recall Index, Q2 2015 | Wholesome Habits

7www.scientificamerican.com

More than 1.3 million solar panels were recalled due to an electrical shock hazard in 2014

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Recall Index, Q2 2015

Market Darling

As a result, companies across the country are looking for ways to expand their potential into this high-growth business.

The Honest Company, which provides a range of eco-friendly household and consumer products, is one such organization experiencing record success. In 2014, two years after it began selling such products, the company recorded a 1400 percent revenue increase of $150 million; and industry analysts are predicting a 67 percent year-over-year increase of $250 million for 20159.

Fitness devices are also becoming more popular. In light of increased consumer interest in pursuing a healthy lifestyle, numerous companies are springing up to meet the demand. As a result of more devices in the marketplace, the industry has already seen some large-

scale recalls. With 60 million wearable fitness devices expected to be in use by 2018, it’s likely that recalls in this category will continue in the years ahead10.

Food companies are reaping the benefits from health-conscious consumers as well. According to a recent report, solid growth in the organic food market is expected to continue for the next three years, at a compound annual growth rate of 14 percent. The Organic Trade Association reports that 81 percent of American families buy organic products at least some of the time11. Several large retailers are benefitting from this interest and expect to sell up to $4 billion worth of organic groceries in 201512.

The health and wellness industry has grown 12 percent in the last five years and reached over $162 billion in 20148.

8EuroMonitor 9www.forbes.com10www.venturebeat.org11www.foodnavigator-us.com12www.businessinsider.com

Top Recalled Healthy Products

42%15%

18%

12%

8%

Supplements

Raw Foods

Products Branded as Healthy

Sports Equipment

Small Appliances to Support Health

Growth in the Health Industry Over Time

2009 $145.5B

$148.1B2010

$153.8B2011

$157.6B2012

$159.4B2013

$162.3B2014

6© 2015 Stericycle, Inc. | www.stericycleexpertsolutions.com

Recall Index, Q2 2015

It's Not Easy Being Healthy

These occurrences have sparked discussion among industry experts about regulations on materials commonly found in fitness products. The Centers for Disease Control (CDC) estimates that 10 to 20 percent of the population is allergic to materials, such as nickel13. A directive limiting the use of nickel in consumer products exists in the European Union, but U.S. regulators have not reached a consensus and use of the material remains unrestricted.

Many consumers are also turning to dietary supplements as they continue to embrace more active lifestyles and look to improve their overall wellness. As such, companies are eager to capitalize on this interest and offer consumers new products. However, many supplement manufacturers have found themselves frequently in the news for product-related issues. One company experienced a recall of nearly 20 million units due to consumer complaints in 2013. Another organization was forced to pull its product from the market in 2013 because it contained an unapproved substance. This recall trend has continued into Q2 2015, with 13 events due to issues with dietary supplements impacting over 510,000 units.

New drugs must undergo a rigorous approval process, but vitamins and supplements have relatively minor regulatory oversight. As a result, companies striving to meet consumer demand have been able to produce supplements without adhering to the stricter requirements of other, more regulated FDA products. Recently, however, regulators appear to be taking a more hard-line stance against product claims. In 2014, one company was forced to recall its product due to misleading claims after a federal judge issued a $40 million fine.

With increased activity related to healthy products across sectors, the industry is witnessing more product recalls and greater regulatory scrutiny. Once again, this trend is evident in the fitness industry where there have been large-scale recalls due to adverse consumer reactions.

13www.nytimes.com

FDA Actions to Improve Consumer Health

FDA requires food labels to include trans fat content

2003

2004

FDA requires labeling of any food allergies

2009

FDA bans cigarettes w/ flavors characterizing fruit,

candy, or clove

2011

FSMA gives FDA authority over food safety

standards & imports

2015

FDA bans trans fat

7© 2015 Stericycle, Inc. | www.stericycleexpertsolutions.com

Recall Index, Q2 2015 | It's Not Easy Being Healthy

As consumers exhibit greater interest in adopting healthy lifestyles, exercise clothing has followed this upward trend with increasing popularity. With greater demand comes more complex and geographically distributed recalls, which can significantly increase the cost of responding to and recovering from an event. One athletic clothing manufacturer paid over $67 million in expenses related to a 2013 recall and was recently in the news for yet another event14. Throughout the health and wellness industry, companies continue to experience multiple recalls due to increased consumer demand and heightened activity. As a result, the overall financial impact is compounded and companies are faced with additional challenges to protect their brand.

14www.forbes.com15www.cnn.com16www.cpsc.gov17www.transporation.gov

Made With Real Fruit

Lite

Vegan

OrganicNon-GMO

Gluten FreeRaw

Low Fat

Omega-3

Low CalorieWhole Grain

No Artificial Colors DietFat Free

BPA Free

Sugar Free

All-Natural

No Artificial Flavors

Fresh

ProbioticsHigh Fiber

High ProteinLow-Glycemic

Antioxidants

In addition to manufacturers, regulators are also impacted by the increased interest in healthy products and must update regulations to reflect the new reality and meet consumer demand. The FDA recently ruled that trans fat is not safe for human consumption, and gave food manufacturers until 2018 to remove partially hydrogenated oils from their products15. Similarly, the CPSC has proposed new regulation to expand the list of permanently banned chemicals from toys and child care products16. The ruling would prohibit the use of numerous phthalates frequently found in common plastic products such as shower curtains, air fresheners, and food packaging. The Environmental Protection Agency (EPA) and Department of Transportation (DOT) have also tightened regulations that govern how defective lithium ion batteries can be packaged and shipped17. These regulations help to ensure batteries are transported safely and reduce the possibility of a hazardous situation.

All of these changes have implications for manufacturers. From both a recall planning and preparation perspective, companies need to be constantly aware of regulatory updates. In order to maintain compliance and prevent devastating losses, it’s crucial that companies review and revise their recall plans on a regular basis.

Consumer Preferences Drive Healthy Options

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Is Healthy Food Worth the Cost?

The “Growing” Trend

According to a recent Congressional report on the U.S. food system, farmers sold an estimated $6.1 billion in locally marketed foods in 2012 alone. The popularity of farmers’ markets is a big driver of this trend. In fact, the USDA found that the number of farmers’ markets grew 350 percent year-over-year from 2012 to 2013. As of 2014, there were nearly 8,300 farmers’ markets in the U.S.18

This trend shows no sign of dissipating—the majority of consumers surveyed in a study by Mintel report that buying locally grown produce is more important than buying organic19. Local farmers and grocers aren't the only ones embracing locally-sourced products—one of the largest retailers in the U.S. has committed to doubling its local produce stock by December 201520. The market opportunities of this phenomenon are clear, but the local movement has a potential impact on recall awareness as well.

The demand for healthy products and the farm-to-table movement is having a number of impacts from a manufacturing perspective as well. Specifically in the food sector, a strong trend is emerging around locally grown products.

Recall Index, Q2 2015

18www.ers.usda.gov19www.mintel.com20www.huffingtonpost.org

80%92%93%94%

Percent of Consumers Willing to Pay a Premium for Healthy Food

Source: CNBC

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Recall events related to locally grown and/or sold products generally affect a smaller pool of people, requiring a modified execution strategy. A farmer that only distributes to three local grocers, for example, would deploy a vastly different notification process than a large-scale grower who supplies produce across numerous states. Although they might be “smaller-scale,” recall procedures for local products are just as complicated as other recall plans. Local purveyors face their own unique set of challenges. It’s not uncommon for products purchased at farmer’s markets to be paid for in cash—leaving the vendors with no real way to track who bought an affected product in the event of a recall. Adding to the complexity, grocery stores also frequently mix product from multiple suppliers on store shelves or in bulk bins for consumer purchase. Mixed products can make it even more difficult to determine where a potential contamination issue is stemming from, and ultimately expands a recall across multiple suppliers.

While locally grown products are predominantly a domestic trend, the globalization element of healthier lifestyles extends across other product categories. Electric vehicles and hybrid cars are increasingly preferred by environmentally conscious consumers, as demonstrated with U.S. sales of more than 14,500 models in the first three months of 201521. Additionally, four of the most popular hybrid manufacturers are headquartered outside of the U.S. As with any new product on the market, hybrid vehicle manufacturers face an increased risk of potential recall situations as they master new technologies, designs, and production processes. As a result, the complex nature of these events will likely pose new recall execution challenges that manufacturers have not dealt with in the past but need to be prepared for.

Recall Index, Q2 2015 | The “Growing” Trend

21www.usatoday.com

Local Food Focus by State in 2015

1 = Strongest Commitment to Local Foods / 50 = Weakest Commitment to Local Foods

31-40 41-5021-3011-201-10

Source: 2015 Locavore IndexSource: 2015 Locavore Index

10© 2015 Stericycle, Inc. | www.stericycleexpertsolutions.com

Recall Index, Q2 2015

Recall-conscious Consumers

Brands can do everything in their power to alert customers to the product issue, but consumers also bear some responsibility in paying attention to recall developments. Given that today’s consumers have demonstrated a willingness to pay a premium for healthier products, they appear to be more attuned to market trends and more diligent about taking action when affected by a recall.

Recall response rates are generally driven by the value of a product, its age, and its intended use. Additionally, there may also be a direct relationship between response rates and health-conscious consumers. For example, a recent fitness device recall resulted in strong response rates of over 50 percent. Of course, depending on the industry, these rates can vary drastically, with some product recalls experiencing response rates as low as five percent. However, data suggests that consumers who invest their time and money in healthier products are more likely to be aware of a recall with that product and respond to the notification in a timely manner.

Typically, consumer notification is the main challenge of efficiently executing a product recall.

Factors That Impact Recall Response Rates

Consumer Notification Method

Available Customer Information

Product Price

Easily Consumed Products

Product Age

Remedy Value

Recall Index, Q2 2015

Healthy Appetite

Nevertheless, healthy and natural products do not preclude the inevitability of product recalls. As manufacturers look to capitalize on this growing market, it’s critical that they make recall planning a central element of their strategy and continue to prioritize consumer safety.

There are three essential best practices that manufacturers should utilize to help protect the environment, consumers, and their brand. Developing and testing a recall plan ensures that companies are prepared to react immediately whenever a recall occurs. Companies can also collaborate with industry experts, regulators and key stakeholders to assist with timely and compliant recall execution. Additionally, having a centralized data repository and scalable infrastructure helps manufacturers meet the ever-changing demands and global requirements of a recall. With significant financial and reputational damages on the line, manufacturers cannot afford to face the possibility of a product recall without being prepared.

It's evident that consumers are anxious to embrace healthier options and that this interest can quickly translate into dollars for companies who offer new products accordingly.

Best PracticesDeveloping & testing a recall plan

Collaborate with industry experts, regulators & key stakeholders

Centralized data repository and scalable infrastructure

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NHTSA

The Recall Scorecard, Q2 2015

There were 202 NHTSA-related recalls affecting over 56 million vehicles in Q2 2015. The largest increase was in the equipment category with 34 million units recalled due to ongoing airbag recalls. Additionally, automobile recalls were up substantially in Q2 with over 22 million units. This is almost three times the number of units recalled in Q1 2015.

More than 80 percent of the recalled auto units in Q2 were due to four manufacturers. These four manufacturers announced multiple recalls within the quarter, with one manufacturer launching 10 separate recalls.

EQUIPMENT UNITSRECALLED

34MM

87%Airbags

4%Steering

2%Latches / Locks /

Linkages

2%Seat Belts

NHTSA RECALLS

20211% from Q1 2015

Due to ongoing airbag recalls

Top Causes for Q2 2015 Automotive Recalls

13© 2015 Stericycle, Inc. | www.stericycleexpertsolutions.com

FDA

Medical Device (FDA)

FDA recalls (comprising pharmaceuticals, medical devices and food) increased by 18 percent from the prior quarter for a total of 511 events in Q2. The trend of complex, geographically distributed recalls continued with 34 percent of FDA recalls affecting the U.S. and at least one other country.

Medical device recalls in Q2 remained relatively consistent with the prior quarter at 255 events. However, the amount of affected units dropped significantly from the first three months of the year. There were 31.2 million medical device units recalled in Q2, a 62 percent decrease from the total in Q1.

The Recall Scorecard, Q2 2015

In line with recalls from Q1 2015

FDA EVENTS

511

MEDICAL DEVICE RECALLS

255

Comprising pharma, medical devices & food OF FDA RECALLS

WERE INTERNATIONAL

34%

Medical Device Units Recalled by

Quarter

18% from Q1 2015

Q1 2015

82.5MM

Q4 2014 Q2 201523.8MM

31.2MM

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Pharmaceutical (FDA)The amount of pharmaceutical recalls increased significantly in Q2 for a total of 78 events, up 77 percent from the first quarter. The amount of affected units was also on the rise, with 28.7 million units recalled throughout the quarter compared to the 1.7 million affected units in Q1.

Additional Index findings include:

• Twenty-five percent of companies had more than one recall in Q2, with one manufacturer experiencing eight separate events during the quarter

• Seventy-nine percent of pharmaceutical recalls were nationwide—a trend that has remained consistent for several quarters

The Recall Scorecard, Q2 2015

PHARMA RECALLS

78PharmaceuticalUnits Recalled

57.0

Q42014

9.7

Q32014

1.7

Q12015

28.7

Q22015

In Millions

79%

of pharmaceutical recalls were nationwide in Q2 2015

OF COMPANIES HAD >1 RECALL

IN Q2 2015

25%One company had 8 recalls in Q2 2015

77% from Q1 2015

15© 2015 Stericycle, Inc. | www.stericycleexpertsolutions.com

FDA Food

USDA Food

There were 178 FDA food recalls in Q2, an increase of 47 percent from the prior quarter. Sixty-two percent of the affected units were due to bacteria contamination, with salmonella and listeria as the most common contaminants. The top category behind FDA food recalls was vegetables, which contributed to 61 percent of the quarter’s activity.

USDA reports document a surge in activity related to recall volume in Q2 2015. There were 10.7 million pounds recalled throughout the quarter—approximately ten times the volume of pounds recalled in the prior quarter. The leading cause of these recalls was undeclared allergens at almost 90 percent of the affected units in Q2.

The Recall Scorecard, Q2 2015

FDA FOOD RECALLS

178OF RECALLED

FDA UNITS DUE TO BACTERIA

CONTAMINATION

62%Salmonella & listeria were the most

common contaminants

POUNDS WERE RECALLED BY

THE USDA

10.7MMCOMPANIES WERE

INVOLVED IN A USDA & FDA FOOD RECALL

195

61%Vegetables

11%Grains, Cereals & Bakery Products

10%Supplements

5%Nuts & Seeds

3%Herbs & Spices

3%Fruits

~10x more than in Q1 2015

Top Product Categories Behind FDA Food Events

47% from Q1 2015

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CPSCCPSC recalls were on the rise in Q2, increasing by 26 percent from the prior quarter for a total of 72 events. In addition, forty-six injuries were reported throughout the quarter as a result of a CPSC recall. This was more than two times the number of injuries reported in Q1.

Overheating was the chief hazard behind CPSC events contributing to 39 percent of recalls, followed by machine failure at 17 percent. Additional top hazards include:

• Fire (12 percent)

• Shock/electrocution (9 percent)

• Entrapment/strangulation (5 percent)

• Laceration (3 percent)

The Recall Scorecard, Q2 2015

CPSC RECALLS

72REPORTED

INJURIES IN Q2 2015 AS A RESULT OF CPSC RECALLS

46 >2x the number of injuries compared to Q1 2015

Top Hazards Behind CPSC Events

39%Overheating

17%Machine Failure

12%Fire

9%Shock /

Electrocution

5%Entrapment / Strangulation

3%Laceration

26% from Q1 2015

17© 2015 Stericycle, Inc. | www.stericycleexpertsolutions.com

FDA DataTo track trends in food, pharmaceutical, and medical device recalls, the Stericycle Recall Index uses information publicly available in news releases posted on the FDA website. For additional insight into recalls governed by the FDA, Stericycle collects and analyzes data from the agency’s weekly enforcement reports, which provide additional details including recall class, quantity of units affected and number of reported incidents.

CPSC DataFor further insight into consumer product recall trends, Stericycle analyzes data from CPSC recall announcements. When compiling statistics and analyzing trends for consumer product recalls, the Stericycle Recall Index uses standard product categories and hazards recognized by the CPSC.

Stericycle ExpertSOLUTIONS helps partners minimize risk to the public and to their company brand by executing and planning for product recalls efficiently, effectively and compliantly. Each quarter, we analyze cumulative recall data across six product categories. This helps our partners navigate the regulatory environment and identify trends.

A Class I recall, according to the FDA, is a situation in which there is a reasonable probability that the product will cause serious adverse health consequences or death. A Class II recall is a situation in which the product could cause temporary or medically reversible adverse health consequences or where the probability of serious adverse health consequences is remote. The FDA defines a Class III recall as a situation in which the product is not likely to cause adverse health consequences.

How the Stericycle Recall Index is CompiledThe Stericycle Recall Index gathers and tracks cumulative data from the four primary federal agencies that oversee recalls in the United States: the Consumer Product Safety Commission (CPSC), the Food and Drug Administration (FDA), the Food Safety and Inspection Service (FSIS) of the United States Department of Agriculture (USDA), and the National Highway Traffic Safety Administration (NHTSA).

For additional insight into food recall trends involving meat, poultry, and egg products, the Stericycle Recall Index collects and analyzes data from recall announcements posted on the USDA’s FSIS website. Statistics and trends are compiled using standard product categories, classifications, and reasons for recalls as recognized by the USDA.

USDA Data

To understand trends in the automotive industry, the Stericycle Recall Index analyzes data from NHTSA reports on recalls of autos, child seats, equipment and tires.

NHTSA Data

Announced recalls represent those recalls documented in news releases published on agency websites. Enforced recalls refer to those recalls documented in weekly FDA enforcement reports that are summarized based on the FDA assigned Event ID. Their documentation can lag behind announced recalls by weeks or even months because the recall process may take time to complete.

Terminology

Stericycle ExpertSOLUTIONS & the Recall Index Explained