Kellogg’s recent recall of two cereal products following a metal mesh contamination scare will cost the firm between $20-30m and will hit consumer trust in the short-term, an analyst says.
The cereal giant issued a voluntary recall of its Frosted Mini-Wheats Bite Size Original and Mini-Wheats Unfrosted Bite Size and was prompted by “the possible presence of fragments of flexible metal mesh from a faulty manufacturing part”. It pulled an estimated 282,000 packages off the shelves.
“This recall will obviously hurt consumer trust in the short-term. Since the two recalled cereals are aimed at kids, it will largely affect mothers’ purchasing behavior, some of whom may stop buying the product for a couple of months or longer,” Matthew Hudak, research analyst at Euromonitor International, told BakeryandSnacks.com.
“Some of those consumers may switch to cereal brands from rival General Mills or to private label alternatives to save money,” Hudak said.
However, this recall only affects a single brand and compared to its 2010 recall of 28 million boxes across various brands, it is “somewhat less substantial”, he added.
“Additionally, since no injuries or deaths resulted from the metal fragments in the cereals, consumers are likely to forgive Kellogg Company sooner than later and return to purchasing Kellogg cereals after a few months have passed,” he said.
No financial pains
While the recall may hurt consumer trust in the short-term, the cereal giant was quick to dismiss any financial pains. In a trading update posted on Wednesday it said that while costs would be recognized in the third quarter, there would be no impact on final year earnings. It reaffirmed its full-year 2012 guidance of between 3.18 and 3.30 per share.
“During the third quarter of 2012, good performance from the Pringles business and changes in the estimates for certain non-operating items allowed the company to offset substantially all of the costs related to the recent, limited recall of certain packages of Mini-Wheats cereal,” Kellogg’s said.
The firm sealed its $2.7bn acquisition of Pringles on June 1 following EU Commission clearance in May 2012.
Ratings agency Standard & Poor’s (S&P) estimated at the time that the purchase would nearly triple Kellogg’s snacks sales and drive broader international sales.