A recall of peanut butter made by a small Virginia company has ballooned into a withdrawal of related products nationwide, highlighting the challenges large food makers face in policing their supply chains.

Large manufacturers already have controls in place to ensure food safety, although the most recent recalls could push some of them to review those systems yet again. Analysts say the recent product recalls may have only a limited financial impact on the largest food makers, but they could face added pressure to reassure nervous consumers about the safety of their offerings.

Large packaged-food makers who have had to issue recalls "could incur some [financial] charges in the near term, but longer term it shouldn't plague them," said Erin Swanson, an analyst at Morningstar.

Still, some industry watchers also point to the hidden costs of recalls.

"The soft costs are with respect to their brand, which is ever more important as consumers have the ability to differentiate [between] products more than they used to," said Pat Conroy, national consumer products leader at Deloitte LLP.

Deloitte's recent Food & Product Safety survey found that about 58% of consumers who heard about product safety or quality problems then changed their buying habits, turning away from such products for more than nine months on average.

The most recent recalls are connected to peanut butter or peanut paste supplied by a privately held Virginia company called Peanut Corp. of America, which is being investigated in connection with a salmonella outbreak. Product samples from the company have tested positive for the bacteria that have sickened at least 474 people in 43 states and may have contributed to six deaths, federal health officials said.

General Mills (GIS) recently announced a voluntary recall of Larabar and JamFrakas peanut-butter snack bars because their peanut butter came from Peanut Corp., although no illnesses have been reported in connection with the two General Mills products.

The FDA also confirmed to Kellogg Co. (K) that salmonella was found in one package of its Austin Quality Foods Toasty Crackers with peanut butter. This product had previously been recalled by Kellogg as Peanut Corp. was one of its peanut paste suppliers.

Ralcorp Holdings (RAH), maker of private-label and branded foods, has announced that it has voluntarily recalled certain Wal-Mart (WMT) bakery brands of peanut butter cookies as they contained peanut butter supplied by Peanut Corp. and could be contaminated.

 
   Limited Damage

For the largest companies with broad product portfolios, the impact may be limited.

"You don't want to see any company associated with this, but consumers tend to shake this news off when it's involved with brand names they can trust. Kellogg and General Mills fall into that category," said Edward Jones analyst Jack Russo. "The big issue is that [because] both have such broad product portfolios, I don't think it will have much impact."

Still, consumers have had to deal with a spate of safety issues recently, ranging from contaminated baby food to vegetables. The Deloitte study found consumers becoming less tolerant of recalls.

Roughly half of the respondents in the study said they now gather more information, buy more U.S. products, and read product information more carefully as a result of problems with fresh food. Safety or quality problems with packaged food or beverages led half of respondents to pay more attention to company reputations.

Food companies are already doing a lot to ensure safety, said Russo. "When you are in the food business or the restaurant [industry], that is your biggest concern. It is probably the kind of thing that keeps executives up at night because some of these things could destroy brand equity overnight," he said.

A Kellogg spokeswoman said the company already has stringent food safety programs in place, which include tests for pathogens in its plants and using a third-party lab to provide certification that components being supplied to Kellogg are also free of pathogens. The business in which the recalls took place represents less than 1% of the company's total sales, she said.

A General Mills spokeswoman said the recalled products had been tested extensively. The financial impact of the recalls have not yet been determined and involves just two products on a relatively new product line, she said. Shares of both cereal makers showed little impact to news of the recalls.

But in the past, not all companies have been as lucky. The Deloitte study pointed out that when mad cow disease was reported in the U.S. on Dec. 24, 2003, shares of many restaurants and food companies - including McDonald's Corp. (MCD) and Tyson Foods Inc. (TSN) - saw declines for a while. When consumers get spooked, the overall category can be affected, said Conroy.

Companies that make or use peanut butter - but aren't involved in the recent recalls - have been quick to distance themselves.

ConAgra Foods (CAG), which sells Peter Pan peanut butter and other lines, said none of its products was involved in the recalls. A ConAgra spokeswoman said the company has detailed processes in place to know exactly where its ingredients and products come from, even if made by another supplier and even if that supplier sources from someone else. The company enhanced those procedures after a 2007 recall of certain products, with a complete rebuilding of the Peter Pan facility, additional testing protocols, and increased quality training for its employees, she said. ConAgra does not get any product from Peanut Corp.

"There could be some perception issues on the part of consumers. That is why you are seeing other companies come out and say, 'We are safe,'" said Morningstar analyst Swanson. ConAgra said it does not know yet if there is any impact on its sales or overall category sales as a result of the recalls by other companies.

Deloitte's Conroy believes there is more that food companies can do on the subject of safety. For one thing, he said, they should put more effort into policing not just their direct suppliers but also "suppliers of suppliers." He says food makers could also benefit from doing a better job of educating consumers on all the steps they are taking to ensure safety.

-Anjali Cordeiro; Dow Jones Newswires; 201-938-2408; anjali.cordeiro@dowjones.com

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