Firms could sue for brand damage
Companies that have recalled infant formula that contain potentially contaminated whey protein concentrate could sue Fonterra for damage to their brand and a loss of market share, a marketing expert says.
University of Auckland head of marketing Rod Brodie said there was precedent for infant formula companies to claim compensation for the damage done to their company's brand and reputation after a contamination or recall.
Brodie said he had been involved in the 1990s with a New Zealand infant formula company, which he wouldn't name. It had had to recall its products in New Zealand.
During the time it took the company to get the formula back on the shelf it had lost market share to competitors, he said.
The company was able to claim 10 per cent of the value of New Zealand's infant formula market for the next 20 years from the dairy company that supplied it with contaminated product, he said.
The Fonterra case was different as several different brands were involved, and the product was distributed in New Zealand and overseas, Brodie said.
Fonterra and other companies involved, such as Nutricia in New Zealand, were likely to recover their place in the market, he said.
However, the companies' income and brand would be damaged and someone would be able to put a cost on that, Brodie said.
"One of the things with infant formula is it's a very emotional sort of thing."
When mothers switch away from buying a certain brand they developed habits, and often did not switch back, he said.
Commercial lawyers said they expected Fonterra to offer compensation to the eight companies that had to recall their products.
University of Auckland commercial law professor Dr Chris Noonan said the companies sold the product could return the recalled goods to Fonterra and be refunded the cost.
While there were no reports of sickness from the contaminated product, Noonan said the situation would become even more difficult if someone fell ill.
ACC law prevented people in New Zealand from suing Fonterra if they became sick, he said.
However, if someone in another country became sick from the contaminated products they could sue the company, depending on the law of their country, he said.
Nutricia would not comment yesterday on whether it would be seeking compensation from Fonterra.
In 2010 Hong Kong's Small Claims Tribunal rejected a compensation bid by four Chinese mainland parents mounted against a Fonterra company after their children were poisoned in the melamine milk powder scandal in 2008.
The four had sought about HK$84,000 (NZ$13,845) from Hong Kong-based Fonterra Brands, which was a 43 per cent shareholder of the Sanlu joint venture on the mainland.
Brodie said the extent of long-term damage to Fonterra's brand, that of other dairy companies and the New Zealand export market depended on how sophisticated Fonterra's communication and marketing was during the recovery.
Fonterra had been lacking in its communication to consumers so far; it should have alerted stakeholders and interested parties before media announcements were made, Brodie said.
"Fonterra will learn from this."
This incident also drew attention to the necessity of a rebrand for the export market.
"'100 per cent Pure' is a tourism brand, which when transferred to export-related communications becomes a potential liability."
The clean, green, pure brand was an "overpromise" and could lead to excessive compliance costs, he said.
Fonterra, and the dairy industry, would have to spend a lot more to recover or rebuild their brand equity in the market after failing to uphold the pledge of "100 per cent Pure", Brodie said.