First it was E. coli in spinach, then Salmonella in peanut butter, then melamine in pet food. When quality controls in the food supply chain break down, the results can be deadly. The risks dwarf anything faced by makers of khakis, couches, or most other consumer goods. The human cost is incalculable; the financial consequences just keep multiplying. They include not only the immediate cost of recalling tainted product, but also the future cost of damage to the company's brand and reputation, and loss of future sales.

In 1990, for example, the makers of Perrier mineral water had to pull that product off store shelves after it became contaminated with benzene, a carcinogenic chemical. The recall cost its manufacturer about $200 million, but the subsequent hit to revenues as customers fled the brand was far more expensive. Sales of Perrier, which had peaked at nearly $110 million in 1989, slid to $32 million by 1995 and are only now, under the guidance of $69.2 billion Swiss food giant Nestlé SA, which acquired the brand in 1992, approaching their previous record.

Fall Out from Free Trade?
The challenge of keeping food safe has become more daunting, in part due to global sourcing, which has fueled consumer expectation of cheap produce all year round. "We've become a society that expects to be able to have the same meats and fruits and vegetables in our grocery stores 24/7, 12 months a year," observes attorney William Marler of Marler Clark LLP, a Seattle law firm that specializes in representing food-poisoning victims. "We're not inclined to think of anything as seasonal anymore. That means you have to get stuff outside the United States, and that means a longer supply chain."

While Marler points out that most cases of food-borne illness today can't be linked to foreign-grown products, he suspects that supply-chain risks will increase as food imports continue to rise. The U.S. Department of Agriculture forecasts that the United States will import a record $70 billion of agricultural products in the fiscal year ending this September, up from $64 billion in fiscal 2006 and $41 billion as recently as fiscal 2002. By 2012, the DoA predicts, imports could reach $81.6 billion.

The most recent high-profile food scare, of course, originated offshore. Canada's Menu Foods Corp., a $316 million producer of pet foods for other companies, including Procter & Gamble, was forced to recall more than 100 brands of dog and cat foods this year after they were found to contain melamine, an industrial chemical suspected of causing kidney and liver failure. The melamine was traced to wheat gluten the company had bought from a U.S. supplier who, in turn, had sourced it from China. (Chinese producers added the chemical to gluten to artificially boost protein levels.) Wheat gluten is a component of many processed foods as well as feed for chickens and hogs. Although the United States produces a major share of the world's wheat, about 70 percent of wheat gluten is imported because producers can buy it cheaper overseas.

The pet-food incident has put the entire food industry on notice. "Gluten is in a lot of different products and raw materials in the food industry," notes Rick Puckett, executive vice president, CFO, and treasurer of $730 million snack-food manufacturer Lance Inc. The Charlotte, North Carolina, company acted quickly to verify that it hadn't received any contaminated gluten.

So did McCormick & Co., in Sparks, Maryland. "Whenever an event like that happens," says Roger Lawrence, vice president of corporate quality, assurance, and regulatory affairs for the $2.7 billion spice company, "even if it's not really related to our business, we immediately take a look to see if even in the remotest sense we could be vulnerable, and what we could do right now proactively." For example, when ConAgra recalled its Peter Pan peanut butter because of Salmonella contamination, and it appeared the problem might be environmental, McCormick went so far as to reevaluate its environmental monitoring program to verify that it wasn't at risk.

Who Checks the Food?
The U.S. government is supposed to monitor the safety of the food supply. The USDA's Food and Safety Inspection Service inspects and regulates meat, poultry, and eggs, and is responsible for issuing or overseeing recalls of those products. "We have full-time USDA inspectors in both our plants all the time," notes Harold Boone, CFO of $180 million Odom's Tennessee Pride Sausage Inc., in Nashville. Among other things, he says, they ensure the plants are adhering to their written safety procedures.

The Food and Drug Administration regulates all other foodstuffs, including feed for pets and farm animals. In response to the gluten scandal, the FDA is appointing a food-safety czar. But as a practical matter, the FDA can inspect only a small fraction of all food imports — about 1.3 percent of the total last year. In fact, a recent analysis by the Associated Press found that between 2003 and 2006, the number of food-safety inspections conducted by the FDA declined by 47 percent, which academics and other industry observers blame on underfunding.

That puts the bulk of the safety burden back on industry. In addition to adhering to best-practice safety procedures, attorney Marler recommends that food companies sign indemnity agreements with their vendors and make certain those vendors are well insured. "You may still get whacked in the media and in sales," he says, "but ultimately you can push the cost of litigation and settlements and judgments off on someone else."

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