Food-borne illnesses will remain a major health and safety risk to consumers globally. Our credit ratings on food producers and manufacturers, and even food retailers, are exposed to negative impacts from food safety issues.

Why it matters:   Food safety is a key credit and stakeholder risk for food producers, manufacturers, and retailers. Credit impacts from food safety risks can materialize through financial losses related to recalls, compliance costs, litigation payments, reputational harm, trade or market access restrictions, and regulatory penalties.

What we think and why:   Food-safety incidents can occur anywhere in the value chain and are typically event-specific. How events affect creditworthiness varies greatly. Strategies such as product line diversification can moderate negative effects. In addition, the nature of the food-safety incident determines its impact to a large degree.

How Food Safety Incidents Can Harm Credit Quality

Food-borne illness, typically infectious or toxic in nature and caused by bacteria, viruses, parasites, or chemical substances entering the body through contaminated food, will remain an important health and safety risk to consumers globally. Research suggests that the effects of climate change could further exacerbate vulnerabilities. This is despite substantial enhancements in regulation, technology, food chain production and logistics, and product testing. The World Health Organization estimates 600 million people fall ill after eating contaminated food and 420,000 die yearly. About US$100 billion is lost annually from diminished productivity resulting from unsafe food in low- and middle-income countries.

Food recalls are trending up globally.   In the U.S., meat product recalls are rising, according to the U.S. Department of Agriculture. The number dropped in 2020 with the onset of the COVID-19 pandemic before rebounding (see chart 1). In Europe, food and beverage industry recalls were up 19.4% in the first half of 2024, hitting a 10-year high for a half year, and are on pace to eclipse European full year food and beverage recall records, according to the brand protection team at product recall service provider Sedgwick. In Asia-Pacific, countries such as Hong Kong, Australia, and New Zealand are reporting record outbreaks or upticks in recalls too. According to one former food safety adviser for the Food and Drug Administration and the United States Department of Agriculture, reasons for the uptrend include the rapid pace of change in manufacturing with the introduction of more ingredients, food traveling greater distances, and an increase in ready-to-eat foods.

Chart 1

Food safety incidents may affect creditworthiness.   Consumer health and safety is among the most material sustainability factors for food producers, manufacturers, and even retailers, both from a stakeholder impact and a financial impact standpoint (see S&P Global Ratings ESG Materiality Maps for Agribusiness, Consumer Products (Food), and Retailing (Food). Food-safety risks can be transmitted throughout the value chain, from farm and processing to distribution, storage, and selling. Thus, they must also be managed throughout the value chain.

Three Main Paths To Credit Materiality

The three principal channels that food safety incidents become credit material to an issuer are: operational disruption and adaptation, regulation and litigation, and consumer awareness. Each channel can lead to material credit impacts on issuers, though often it is the combination of two or more channels that leads to potential negative rating actions on issuers.

Transmission channel 1: Operational disruption and adaptation

Food-safety incidents can cause operational disruptions and prompt product recalls leading to substantial one-off costs as well as structural adaptations that can alter cost structures more long term.

Operational disruption can result in costs and lost revenue.  Costs include those directly associated with voluntary or mandatory product recalls, such as identifying the source of an incident, effectively remediating the cause, product write-off costs, and related logistics costs. Compounding these costs, the issuer may be required to pause or even permanently shut down production and distribution to market while the source of the incident is identified and rectified. This hurts revenue and can even lead affected issuers to sell facilities where incidents occurred, possibly to shore up liquidity for remediation costs (see the entry Dole Food exits packaged salad business in table 1 in the Appendix). Businesses with only one product or brand are especially vulnerable.

Operational adaptations can alter cost structures.   Longer term, effectively managing food safety risks and meeting regulatory compliance requirements may involve investments to improve product testing, quality control, and tracking/tracing systems (including the equipment, technologies, and related human resources). Management may also opt to alter sourcing practices, for instance, turning to more reputable or local suppliers with which they have greater control, visibility, or confidence in the management of food-safety vulnerabilities even if this means costlier inputs. When costs become too onerous and cost passthrough is difficult, management might opt to exit entire business lines (see the entry on Investigations on Brazilian beef packers in table 1 in the Appendix).

Transmission channel 2: Regulation and litigation

While food industries are heavily regulated in most markets, the degree, nature, and thus the potential credit relevance of food safety regulation can vary widely by jurisdiction. Regulation primarily affects issuers' credit quality through direct fines or penalties from noncompliance, increased cost of compliance, and market access restrictions.

In the more immediate aftermath of incidents, issuers may face financial penalties.   These include direct fines, costly litigation expenses, and financial awards to victims or out-of-court settlements. Further, issuers can be prevented from exporting goods into entire markets. Lengthy and public trials, and related media coverage, can have a compounding effect on reputational harm.

Incidents may give rise to new or more burdensome regulation, adding further structural costs to issuers.   These include higher operating expenses and compliance costs. In the U.S. in 2011, for instance, the federal government passed the Food Safety Modernization Act following a string of high-profile foodborne illness outbreaks. The act is widely considered to be one of the most significant food-safety regulatory overhauls in the US. It required, among other things, increased food safety preventive measures at facilities, more rigorous record keeping on practices and sources, enhanced import controls, and improvements in traceability capabilities.

Transmission channel 3: Consumer awareness

Consumer concern over food-safety issues could lead to immediate revenue impacts for issuers as demand for a specific brand or entire product category can be hit in the aftermath of an incident. This may lead to meaningful revenue declines. (see the entry on Peanut Corp. of America in table 1 in the Appendix)

Permanent loss of revenue is a risk.   The duration and magnitude of the revenue impact, and by extension, the likelihood of a negative credit action, however, depends on several factors. These include an issuer's record on food safety, perceived culpability, effectiveness of response, food-safety management reforms, and the availability of substitutes in the market. Ultimately, if the event leads to a fundamental mistrust in the affected product or issuer, revenue might be lost for good (see the entry on China milk scandal in table 1 in the Appendix).

Food Safety Vulnerabilities Can Emerge Anywhere In The Value Chain

Though food safety issues typically emerge at the consumption stage, their source can arise from all points in the value chain. Where in the value chain food-safety incidents arise, however, can influence which and to what extent issuers are materiality impacted from a credit standpoint, particularly as it relates to responsibility for remediation costs and legal or regulatory culpability. Here, we take the example of meat processing value chain to illustrate how food safety vulnerabilities throughout all stages can materialize and affect issuers.

Livestock production

Livestock production refers to animal breeding and raising.

Feed contamination could harm human health in a slow and indirect way.   Feed contamination, including that caused by contaminated soil, can spread across the food chain affecting consumers. Microplastics, for instance, has been reported in livestock feed in some studies, with the particles ultimately entering humans. Cases of contamination have prompted the sort of attention that often leads to regulatory action. This could mean tighter operational controls and related costs for issuers. In the event of a contamination incident, industry participants may have to bear the cost of cleaning up and remediation.

The use of antibiotics and other additives is under increasingly scrutiny by multiple stakeholders.   Regulatory changes to tighten antibiotics or other additives use could hurt farmers' toplines if they rely on such additives. Disease control, growth stimulus or feed efficiencies, and achieving desired food qualities are among the reasons for using additives. Consumer awareness and preferences could lead to calls for clarity in product labelling, raising operational costs. Investors are examining corporate practice in antibiotic and additive use, which could impact issuers' costs and reputation, possibly limiting access to cost-effective funding.

Disease outbreaks among farm animals can spread quickly.   Contagious disease in animals can cause operational disruptions to the producers and supply constraints for downstream buyers. This can translate to volatile pricing, swings in working capital, rapidly weakening liquidity, and spikes in leverage, particularly to upstream operators. Disease outbreaks may also have ripple effects on consumers demand, because of higher prices or health concerns. (see entries on avian flu and African swine fever in table 1 in the Appendix).

Processing and packaging

For meat, processing and packaging begins with slaughter and end when the product is in containers, ready for the store shelves.

Contamination can originate from multiple channels.   Inadequate inspection standards or inability to pinpoint the source of issues could invite regulatory scrutiny, which can result in fines, halts to factory operations, or even permanent facility shutdowns. Litigation for negligence could result in costly payments for companies and a hit to reputation. Issuers also need to consider expenditures related to equipment procurement and ongoing maintenance. Contamination can be:

• Physical: When foreign objects (such as hair, machinery parts) enter food;
• Chemical: When chemical agents (such as natural toxins, detergents used in food premises) exceed safety consumption levels;
• Biological: Occurs mainly from microorganisms (such as bacteria or viruses); or
• Allergenic: When food allergens are errantly introduced.

Poor sanitization practices can lead to cross-contamination risks or foodborne illness outbreaks.   Consequences arising from poor sanitation practices are similar to those from contamination. Meeting regulated sanitation practices may be outsourced to specialized entities, which may introduce additional exposures associated with oversight and control.

Mislabeling can lead to product recalls and higher operational costs.   Mismatch in product labels and its ingredients can run afoul of regulation and cause allergic or other negative health reactions among consumers. Whether mislabeling is intentional or unintentional, it has potential financial consequences. False advertising is one form of intentional mislabeling that can lead to consumer distrust and related reputational harm as well as litigation.

Distribution and retailing

Distribution and retailing refer to the steps required to get products to consumers, including transportation, storage, and point of sale.

Product spoilage from transportation often relate to quality control processes.   Outsourcing processes can save money but reduces control of processes. This can lead to issues such as inappropriate temperatures for meat during transportation and unsatisfactory hygiene standards. Companies make decisions on what and how much to internalize. This affects cost structure and cash flows through operating expenses and capital expenditure.

Product spoilage from transportation, storage, or retailing is most likely borne by the retailers and logistics providers, rather than product manufacturers or brands.   However, both makers and retailers, as the more public facing entities, could be exposed to reputational damage and bear regulatory fines.

Import/export restrictions can become a barrier when food-safety standards differ by region.   Countries can define safety levels of chemical and biological standards. This could make cost and volume management harder for companies, resulting in higher operating costs.

Looking Ahead: How We Consider Food Safety Risks in Credit Analysis

Not all food-safety incidents lead to material credit impact. Incidents themselves range widely in magnitude. Specificities of incidents and individual issuer characteristics are key to whether incidents result in negative credit actions.

In the aftermath of a food safety event, we try to understand the likelihood of material credit impact.

Ratings headroom:   What is an issuer's current rating? What do its financial metrics and liquidity suggest about its ability to absorb short term costs associated with recalls, remediation, revenue declines from the product line, and potential legal penalties without meaningful impacts to key ratios? Does the issuer have the appropriate insurance to offset a meaningful part of the exposure in a timely manner?

Product-line diversification:   How central is an affected product line to an issuer's revenue and brand identity? A more highly diversified issuer with a brand identity that is not intimately tied to the effected product line will be more likely to weather the event without meaningful credit impact.

Customer response:   How are key customers (which may be key consumer segments or downstream buyers of products) responding to the incident and the issuer's response? Do customers have clear, viable substitutes in the market? This may lend insight into the degree of near-term revenue impact and more lasting declines in customer demand and competitive position.

Food-safety record:   Does the issuer have a history of food safety incidents indicating an inability to operationally adapt to manage risk going forward and for which the most recent incident may act as a tipping point in the eyes of customers or regulators?

Culpability:   To what extent is a given issuer viewed as having direct culpability for the food-safety incident (versus a value chain partner) in the eyes of both regulators and customers? The level of actual or perceived culpability will have a bearing on the durability and magnitude of reputational harm and likelihood of substantial legal penalties.

Magnitude of human impact:   How severe is the food safety incident in terms of both degree of impact and number of heavily impacted individuals? How quickly was the incident's source identified and contained?

Food safety issues are often in the headlines. As a risk, food safety is here to stay. Its impact on creditworthiness will remain complicated. Capturing this in our analysis remains a key aspect of our assessments of creditworthiness for companies in food-related sectors.

Editor: Richard Smart

Digital design: Evy Cheung

Related Research:

• White Paper: Assessing How Megatrends May Influence Credit Ratings, April 18, 2024
• ESG Materiality Map: Agribusiness, Oct. 27, 2022
• ESG Materiality Map: Consumer Products - Food, Oct. 27, 2022
• ESG Materiality Map: Retailing (Food), Oct. 27, 2022
• Credit FAQ: How Does S&P Global Ratings Incorporate Environmental, Social, And Governance Risks Into Its Ratings Analysis, Nov. 21, 2017

External Research:

• Food Safety, World Health Organization, Oct. 4, 2024
• How Safe Is Our Food?, AARP, Sept. 25, 2024
• Q2 2024 Recall Index Report - European Edition, Sedgwick brand protection, Aug. 28, 2024
• Recorded outbreaks jump in Hong Kong in 2023, Food Safety News, April 4, 2024
• Summary of Recall and PHA Cases in Calendar Year 2023, Food Safety and Inspection Service, U.S. Department of Agriculture, Feb. 28, 2024
• Hong Kong informs on 2023 food incident monitoring, Food Safety News, Feb. 24, 2024
• Annual Report 2022 2023, Food Standards Australia New Zealand, February 2023
• Climate Change and Emerging Food Safety Issues: A Review, Ramona A. Duchenne-Moutien, Hudaa Neetoo, Journal of Food Protection, November 2021

Appendix: Case Studies

Table 1