Effects of a Product Recall on Competitors

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Chloe Xu
Director, Australia

Effects of a Product Recall on Competitors

Of course any product recall damages a firmís reputation and brand equity and leads to losses in sales and stock market performance. However, a recent study on four of car manufacturers indicated that a brandís recall may hurt its rivals as well. This is termed the "Perverse Spillover Effect".

FINDINGS
  • A brand recall often creates customer concern about the rival brands as well, hurting their sales and market value. This is particularly true when these brands are from the same country of origin.
  • Foreign competitors may benefit from a recall.
  • Highly dominant brands or products create a stronger perverse spillover effect than smaller ones.
  • The financial impact of a recall can be significant for all market players.
IMPLICATIONS
  • A firm hit with a recall should (re)consider apology ads carefully, as they may increase the damage by raising public attention about the incident.
  • Firms from the same country need to keep a close eye on a rivalís recall events.
  • Rivals from different countries can achieve a boost on sales by emphasizing their uniqueness and strengths.
  • The recalled firm should monitor and manage social media conversations as online chatter can multiply the negative effect on sales of the focal brand.
⇒ Are there any other effects of product recalls?

Source: Borah, A and Tellis, GJ (2016), "Halo (Spillover) Effects in Social Media: Do Product Recalls of One Brand Hurt or Help Rival Brands?" Journal of Marketing Research, 53 (2), pp. 143-160.

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