Honey we need to talk - KOS

The Impact of Product Recall Message Design on Shareholder Reactions

Raoul V. Kübler!

Honey we need to talk

KOS Marketing Camp Sabanci University, Istanbul

April 25, 2014

KOS Marketing Camp 2014, Sabanci University, Istanbul, April 25, 2014Raoul V. Kübler

Agenda

2

Introduction

Conceptual Framework

Sample, Model and Estimation

Results

Implications & Future Research

I

II

III

IV

V


Product Recalls: a significant threat to public welfare

0

45

90

135

180

2001 2003 2005 2007 2009 2011 2013

Worldwide significant increase of product recalls since 20011

Consequences are tremendous: In 2011 in the US only defect toys caused 17 deaths and 250,00 injuries2

Yearly public costs in the US: 400 million USD

3

1Beamish, P.W., & Bapuji, H. (2008). Toy Recalls and China: Emotion vs. Evidence. Management and Organization Review, 4(2), 197-208.!2 CPSC (2011), "Toy Related Deaths Calendar 2010," in CPSC Online Report Vol. 2013.!


Recalls also a significant threat for companies

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Product Recalls exert negative impact on product image (Mowen et al. 1985), brand equity (Dawar et al. 2000), perceived product quality (Mowen 1979) and consideration (Rhee and Haunschild, 2006)

Decrease in sales (deMattos and Rossi, 2007) and market share (Cleeren et al. 2008)

Negative impact on marketing effectiveness!for recalled product and other products of same manufacturer; cross sensitivities also affected, competitors profit (van Heerde et al. 2007)


Shareholders anticipate negative consequences

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-20

-15

-10

-5

0

5

10

• Recalls lead to significant drop in financial performance and firm value (Chen et al. 2007)

• However significant differences in magnitude

• Even positive effects

• Recalls bring a severe risk for negative investor reactions • However ways to minimize or even overcome negative effects


No concrete insights how to minimize negative consequences

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Product Recall

The products made by the PCA Blakely, Georgia facility include peanut butter, peanut paste, oil roasted and dry roasted peanuts, granulated peanuts, and peanut meal. This investigation and subsequent recall became so widespread and complicated because some of the company's products were distributed in large containers directly to institutions such as schools and retirement homes

FDA's mission is to protect and promote the health of Americans. FDA does many things every day to accomplish this mission related to

• Recall Message primary tool to calm down consumers and reinstall trust

• Recall Messages share four Key Dimensions

• Message content adapted to recall circumstances (Kübler and Albers 2010)

• Very limited insight on consumer reactions

• No insights on shareholder reactions (Chen et al. 2007)

HOWEVER: Investors have different interests than consumers (Financial Value VS. Consumer Safety)

Specific Recall Message design DECREASING negative consumer reactions might simultaneously INCREASE negative shareholder reactions

1. How do investors react to the design of the recall message!2. How do investor and company specific factors moderate

the reaction

Research Ques+ons


Agenda

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Introduction



Results


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II

III

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1 out of 3 options pays off1

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Denial

Blame

Pro-Active Communication

Ignorance of market rumors, works at best only in very short term

Acceptance of defect. But company blames consumers or suppliers for causing defect. Works only in the short term

Acceptance of defect. Company pro- actively communicates defect and addresses problems. Works in the long term

1Quarantelli, E., L. (1988). Disaster Crisis Managment: A Summary of Research Findings. Journal of Management Studies, 25(4), 373-84.


Recall Message Design Matters

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Pro-Active Communication1

As an assuring measure of preventive consumer protection we offer you the possibility of returning the apple slicer marketed by us for 1.00€ (GER/AUT/SLO) and 29.00 CZK (CZE). As a matter of course we will refund your purchase price in full. Dear customer, In delivering our services we always place great importance on product quality and reliability. Especially when it comes to customer safety one cannot be careful enough. Unfortunately, in spite of our permanent quality and safety controls mistakes cannot always be avoided.

Attention! Product Recall

In case of the apple slicer, being distributed under item no 2351700, we detect the risk of breaking and splintering parts with the use of the product which may cause injuries.

As a matter of course we will refund your purchase price in full upon presentation of the corresponding receipt at one of our stores. Kind regards, Your KiK-Team

Social Responsibility Statements6 levels 1. Security of clients2. + stressing standards in QA…6. + Detailed Information on all installed safety mechanisms

Transparency4 different levels:

1. Mention the defect … 4. Mention all possible risks and injuries

Help with Identification6 different levels:

1. Only name of product … 6. Detailed description and Call Center

Return Convenience6 different levels: !

1. Disposal without compensation … 6. Replacement/ on-site repair

1Kübler, R.V., & Albers, S. (2010). Communication Behavior of Companies in Product Recalls Without Customer Identification Information. Marketing Journal of Research an Management, 6(1), 59-69.


Dissonance and Commitment1

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mp3mp3

Strong Commitment

Low Commitment

Confirmati

on

other info

ignored

Confirmati

on

other info

rational evaluation

Commitment decides on type of reaction

In case of high commitment information that helps to reduce regret important

In case of low commitment information that helps to rationally asses situation, decision based upon consequences

1Cohen, J.B., & Goldberg, M.E. (1970). The Dissonance Model in Post-Decision Product Evaluation. Journal of Marketing Research (JMR), 7(3), 315-21.


Investor commitment driven by company size1

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Small Companies Large Companies

Stronger Commitment Lower Commitment

VS.• No established routines to

assess companies • Data less likely to be

available • Takes more time and effort

to make investment decision

• Established routines • Data and expertise

publicly available • Less engaging as

perceived to be anonymous

• Takes less time and effort to assess

1Bhattacharya, C.B., & Sen, S. (2003). Consumer--Company Identification: A Framework for Understanding Consumers' Relationships with Companies. Journal of Marketing, 67(2), 76-88.


Effects for smaller companies

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Small Companies

• Strong Social Responsibility statements emphasize how strong the company cared about customers (H1)

• Strong Identification Help highlights company’s good will (H2)

• Transparency and Convenience of Return no impact or even negative impact (H3 and H4)

Soc. Respon

Transp.

HwI

ConRet

Investor Reactions

H1 (+)

H2 (+)

H3 (-)

H4 (-)

Regret Reduction


Larger Companies: Expertise matters

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Large Companies

• Lower commitment provokes more rational perspective • Behavior now driven by expertise, focus, and goal • Significant differences between private and professional

investors

Private Investors

Professional Investors

• Lower expertise • Invest own money • More longterm orientated

(pensions, etc.)

• Higher expertise • Not „playing“ with own money • More short-term orientated

(bonuses, etc.)


Larger Companies: Expertise matters

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Private Investors


Cost Reduction Problem InvestigationLower expertise will set focus on obvious effects like costs, potential image and sales losses

Stronger expertise will set focus on underlying reasons of recall to judge

future risks

Soc. Respon

Transp.

HwI

ConRet

Private Investor

Reactions

H5 (+)

H6 (+)

H7 (-)

H8 (-)

Soc. Respon

Transp.

HwI

ConRet

Prof. Investor

Reactions

H9 (-)

H10 (-)

H11 (-)

H12 (+

)


Investors of Small Companies

Conceptual Model

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Regret Reduction

Cost Reduction Problem Investigation

Soc. Respon.

Transp.

HwI

ConRetMes

sage

Des

ign

Investor Reactions

Private Investors of Larger Companies

Prof. Investors of Larger Companies

+

+-

--++

+

---

-


Agenda

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Introduction



Results


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Event Study Approach with 2 Stage Model

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Investors of Soc.

Trans

H

ConR

Mes

sage

Des

ign

Investor Reactions

Private

Prof.

++-

--++

+---

-

Regret Reduction

Cost Problem Investigation

Stage 1 Abnormal

Returns (AR)

Stage 2 Explain AR with

recall message design

1 2

Fama/French Model to investigate Abnormal Returns (AR) for each product recall

Expert Based Content Analysis of Recall Messages to measure strength of each recall message dimension

Latent Class Regression Model to explain differences in AR through recall specific message design


1st Stage: Estimation of Abnormal Returns with Fama/French Model1

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R

it− R

ft= α

ij+ β

i* (R

mt− R

ft)+ s

i* SMB

t+ h

i* HML

t+ ε

it

Fama/French 3 factor model

t = time index; i = recall index Rit = return of i in t; Rmt= average market return in t SMB = weighted portfolio of small minus big stocks HML = weighted portfolio of high book to market minus low book to market stocks

22.5

45

67.5

90

Average Market Recalling Comp SMBHML

17.5

35

52.5

70

Predicted Return Recalling Comp

Abnormal Return !due to Recall

Abnormal Returns

Cumulated Abnormal Returns

ARit =Rit −Rft − α i + βi i (Rmt −Rft )+si iSMBt +hi iHMLt + εit( )⎡⎣

⎤⎦

CARi = ARitt=−1

t=1

∑

Abnormal Returns depict difference between predicted share price and real share price

plus/minus 1 day to account for leaked and lagged information

1Srinivasan, S., & Hanssens, D.M. (2009). Marketing and Firm Value: Metrics, Methods, Findings, and Future Directions. Journal of Marketing Research (JMR), 46(3), 293-312.


2nd Stage: Explain AR with Latent-Class Regression Model1

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Regret Reduction

Cost Problem Investigation

Conceptual model requires estimation model that accounts for heterogeneity !• Company Size • Types of Investors • Types of Recalls • Industries • Brand/NoBrand

Latent Class Regression allows estimating models, which simultaneously identify homogenous clusters and estimate effects for each cluster

DV: CAR IV: SocResp, Trans, HwI, ConRet Co-Var: Comp Size, Type of Inv.

Estimation of model with Latent Gold in V4.0

1Wedel, M., & Kamakura, W.A. (2000). Market Segmentation: Conceptual and Methodological Foundations. Boston: Kluwer Academic.


Sample: All recalls of stock listed companies in Germany between 2007 and 2010

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• Identification of all recalls from stock listed companies in Germany, Switzerland and Austria since 2007

• Exclusion of companies with risk of confounding events

• In total 60 recalls from 6 industries • Data from Thomson Reuters

Datastream • Company data and investor data

from Yahoo Finance Germany

• Original recall messages from all recalls with the help of semi-governmental database

• Expert Based Content Analysis

• Daily Fama/French Factors from LM University Munich F/F dataset for Germany (data from 1981 to 2010) -20

-15

-10

-5

0

5

10Abnormal Returns

Industry Distribution


Agenda

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Introduction



Results


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Three different groups: small vs. large and professional vs. private

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beta z-‐value

Intercept .150** 5.370

SocR -‐.028** -‐2.686

Trans -‐0.008 -‐1.573

ConRet .004 . 0.121

HwI -‐.014** -‐2.865

Size .001* 1.884

Investor -‐.031** -‐2.312

beta z-‐value

Intercept -‐.030 . -‐0.705

SocR .050** -‐7.619

Trans .012 . 1.502

ConRet .045** 6.825

HwI .001 . 0.003

Size .001** 2.232

Investor .024* . 1.757

beta z-‐value

Intercept .196** 6.761

SocR 0.42** 9.258

Trans -‐.021** -‐3.773

ConRet -‐.010** -‐2.101

HwI .025** 5.006

Size -‐.001** -‐2.160

Investor .008 . 0.45

Class-R2 = .594 Class Size = 48.4%



Large Companies

Private Investors

Large Companies


Small Companies


Empirical Findings In Line With Conceptual Model

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Large Companies

Private Investors

Large Companies


Small Companies

H1: √ (SocR +) H2: √ (Trans -) H3: √ (HwI +) H4: √ (ConRet -)

Regret Reduction

H5: √ (SocR +) H6: n.e. (Trans -) H7: n.e. (HwI +) H8: √ (ConRet +)

Cost & Risk Reduction Problem Investigation

H9: √ (SocR -) H10: n.e. (Trans -) H11: √ (HwI -) H12: n.e. (ConRet +)


Agenda

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Introduction



Results


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Address investors separately

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Reduce Regret!

• High degrees of social responsibility and help with identification

• Low degrees of transparency and return convenience

Emphasize Actions!

• High degrees of social responsibility

• High degrees of return convenience

Avoid Suspicion!

• Low degrees of social responsibility

• Low degrees of help with identification


Future Research Opportunities

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Sample only reflects German behavior

Future research should address this shortcoming by investigating how culture moderates impact of message design on shareholder reactions

Current Analysis does not account for multiple recalls from same company

Future research should account for dynamic and stock effects from a recall

Thank you for your attention!

Honey we need to talk - KOS

Marketing

Transcript of Honey we need to talk - KOS