Lactalis in crisis after baby formula recall

Baby food is a sector where even the suspicion that a product may be contaminated can cause immense damage to the reputation of a competitor – and indeed prove equally devastating to its sales. Therefore, the news that the world’s second-largest dairy company, Lactalis, has been ordered to recall its formula worldwide and desist from further sales of the product is little short of a disaster.

Around 7,000 tons of formula sold worldwide under various brand names, including Milumel, Picot and Celia, is potentially contaminated with the salmonella bacteria. This can cause food poisoning with symptoms including diarrhoea, stomach cramps and vomiting. The bug is regarded as being particularly dangerous for the very young and the elderly as there is a greater risk of dehydration. While the company notes that the bug can be killed by boiling the milk for two minutes, this is unlikely to be reassuring for anxious parents.

Damage control

The issue is exacerbated by the fact that Lactalis is a significant exporter of infant formula. The recall therefore affects a major portion of the global market, including China, Bangladesh, Taiwan, Pakistan, Afghanistan, Iraq, Morocco, Lebanon, Sudan, Romania, Serbia, Georgia, Greece, Haiti, Colombia Peru, and even the UK. Lactalis is unable to determine how much of the affected formula is still unaccounted for.

The immediate concern for the company after issuing the recall is to ensure no more affected formula is consumed, and as far as possible prevent a repeat incident. It has traced the outbreak to a tower used to dry out the milk powder at its factory in the town of Craon in northwest France, and as a precautionary measure has disinfected all of its machinery at the factory. Once this is achieved, it can turn its attention to dealing with the aftermath of what will inevitably be a PR nightmare.

Potential impact

The news reflects a similar case from 2013, in which formula produced by Danone was suspected to be contaminated with the potentially harmful botulism bacteria. Despite tests revealing that it was not botulism but a non-toxic bacteria which was present, Danone estimates the scare caused it to lose €300 million in operating profits and €370 million in lost sales. In China alone the damage to its Dumex brand was so immense, it was eventually sold off. With 26 children reportedly having fallen ill after consuming the Lactalis formula, the potential losses – both immediate and long-term – can only be significantly greater than this. The worst case scenario is that the company may never fully recover its standing within the baby food category.

Lactalis is the third-largest baby food company in France, behind Danone and Nestlé, but will inevitably drop market share over the next year or so, with Nestlé the most likely to benefit from the fall. However, more seriously for Lactalis is the potential loss of standing in the massive Chinese sector, which is likely to be causing most concern for company executives. The huge demand for international formula in China is a result of the 2008 melamine scandal, and the consumer’s subsequent inability to trust the domestic brands on sale. Although not yet a key player in China’s infant formula category, the company had recently been looking to expand its reach into Asia Pacific generally and China specifically. That particular ambition is now on hold – possibly permanently.