Products Recalls: How Consumers Are Protected From Danger

By
Lucas Downey
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Lucas Downey is the co-founder of MAPsignals.com, and an Investopedia Academy instructor.
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Updated December 19, 2022
Reviewed by
Samantha Silberstein
Sam Silberstein
Reviewed by Samantha Silberstein
Full Bio
Samantha (Sam) Silberstein, CFP®, CSLP®, EA, is an experienced financial consultant. She has a demonstrated history of working in both institutional and retail environments, from broker-dealers to RIAs. She is a current CFA level 3 candidate and also has her FINRA Series 7 and 63 licenses. Throughout her career, Samantha has used her expertise and various licenses and certifications to provide in-depth advice about household and business-specific financial planning, investing, credit cards, debt, student loans, taxes, retirement, and income strategies.
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What Is a Product Recall?

A product recall is the process of retrieving defective and/or potentially unsafe goods from consumers while providing those consumers with compensation. Recalls often occur as a result of safety concerns over a manufacturing defect in a product that may harm its user.

A product recall may be voluntary or mandated by a regulatory body such as the Consumer Product Safety Commission (CPSC) in the U.S.

Key Takeaways

  • Product recalls occur as a result of safety or quality concerns related to a manufacturing or design defect in a product that may harm its users.
  • Recalls may negatively affect a company's stock as they are expensive and can damage a firm's reputation, leading to declining sales.
  • Recalls may be done voluntarily if the company believes it will be more cost-effective rather than wait for lawsuits or mandated recalls.

How a Product Recall Works

While the process behind a recall can vary depending on local laws, there are some general steps that occur. For example, if a pet food manufacturer releases a batch of product that contains an ingredient that may accidentally poison animals, the company will publicly announce the dangers of the food and request that its customers return the product to the firm, or simply discard it.

Customers will usually be given a full refund or replacement. A public relations campaign is often created to handle the publicity surrounding the event.

Recalls may negatively affect a company's stock price. If concerns grow over a company's status or reputation when a dangerous product is released customers may turn away from purchasing its goods in the future, leading to lower revenues and profits.

Some recalls may result in the outright ban of an item, while others may simply ask consumers to self-return a defective item for replacement or repair. In certain examples, such as an automobile recall, a seller may provide a new part or perform a diagnostic that reduces the danger of using the product at no cost to the consumer.

Note that manufacturers are often able to purchase product recall insurance policies to cover the expenses and financial losses related to a recall if it were to arise.

Examples of Product Recalls

Recalls can occur in any industry and for several different reasons. Below are just three examples of product recalls.

Airbags

Tens of millions of vehicles have been recalled in recent years over concerns that the airbags they have, made by the Takata company, are defective. The National Highway Traffic Safety Administration (NHTSA) reported that long-term exposure to high heat and humidity can cause these airbags to explode and injure passengers when deployed.

This particular recall included the phasing and prioritizing of repairs, as all of the replacement parts could not be made available right away and certain vehicles were at much higher risk of a dangerous airbag explosion than others.

Peanut Butter

In 2009, a major salmonella outbreak from peanut butter products processed by Peanut Corp. of America reportedly killed a number of people and sickened hundreds more. Thousands of products containing potentially-tainted peanut butter sold by a large number of different companies were associated with the massive recall. Peanut Corp. went out of business shortly afterward, and the industry took a major hit as a result.

Toys

Several toy makers, including Mattel and Fisher-Price, were forced to recall millions of their children's toys in the mid-2000s due to excessive amounts of lead in the paint of the products. These unsafe toys had been primarily manufactured in Chinese factories at low cost.