A product recall is never good news for a firm. And, though it might seem like a great occasion for schadenfreude, a recall is not necessarily good news for competitors, either.
This according to new research on the social media multiplier of recalls by Abhishek Borah, an assistant professor of marketing at the University of Washington Foster School of Business.
Borah’s study of the automotive industry reveals that product recalls provoke a sharp increase in negative chatter on social media sites. This online trash talk amplifies the damage, slashing sales and the market cap of the recalling company.
But the damage doesn’t end there. Innocent firms often face a similar fate when they get caught in a “perverse halo” of negativity created by a domestic competitor’s recall.
“Bad news travels fast on social media,” says Borah. “Our study demonstrates that a recall event increases negative chatter that can have damaging effects on the sales and stock market performance of rivals.”
The auto industry is rampant with recalls. In 2014 alone, 64 million vehicles in the United States were ordered back to the dealership to repair a defect. This plus a proliferation of dedicated online discussion, blog and review sites—such as automotiveforums.com and edmunds.com—makes cars the perfect context for studying the relationship between social media and recall events.
For the study, Borah and co-author Gerard Tellis, a professor of management at the USC Marshall School of Business, considered four automobile manufacturers: Japanese firms Toyota, Honda and Nissan, and American firm Chrysler. They tracked multiple nameplates (or models) within each automotive brand.
The authors analyzed the daily traffic, topic and tone on more than 1,000 automotive social media sites following recall announcements during an 18-month period. Using sentiment mining techniques, they were able to determine a sharp increase in negative chatter following a recall.
As you might expect, this negative chatter extended to other models of a car brand. So a Toyota Corolla recall incited worries about Tacoma, Prius and RAV4, distinctly different classes of Toyota vehicles. “If Toyota has an issue with one nameplate, people have the perception that their other nameplates have the same issue, and this creates negative chatter,” says Borah.
But a Toyota recall also sparked negative chatter about Honda and Nissan—brands whose cars had a clean bill of health.
Borah and Tellis call this phenomenon a “perverse halo,” a perception that others share the problem of the car being recalled.
More than just talk
Most talk is cheap, but not this kind of talk. The authors found that the negative chatter spurred by a product recall amplifies damage to the bottom line of domestic rivals
To assess the impact on company stock price, they aggregated nameplates across each brand and found that the online chatter sparked by a rival’s recall erased $7.3 million, on average, from an innocent firm’s market cap over six days.
To assess the impact on sales, they compared monthly figures of each brand’s most similar nameplates—Toyota Corolla versus Honda Civic versus Nissan Sentra, for instance. What they found was that the negative online buzz about both the brand issuing the recall and its nearest rival multiplied the negative effect on sales of the “innocent” rival brand.
“If a Honda nameplate has an issue,” Borah says, “the resulting chatter will cause Toyota’s closest car sales to go down, too.”
He adds that the perverse halo effect appears to be asymmetric in terms of market dominance. That is, a recall for a top seller like Toyota Corolla will have a greater negative impact on the smaller-market Nissan Sentra. And a Sentra recall will leave less of a dent on Corolla.
Curiously, Borah and Tellis found that the perverse halo has an inverse effect on car companies identified with different nations of origin. Specifically, a recall of a Toyota car (recognized as a Japanese brand) resulted in a decrease in negative chatter about Chrysler cars (recognized as an American brand)
The result? A Toyota recall increases Chrysler sales and market cap, at least temporarily.
“A brand like Chrysler should be cashing in when a competitor from another country has a recall event,” says Borah.
Avoid the vortex
Recalls are a growing phenomenon in the modern marketplace. Beyond cars, we’re seeing more defective food, drugs, toys and electronics than ever before.
Borah says that firms should be as concerned about their rivals’ recalls as they are about their own—especially rival firms of similar size and from the same nation of origin.
A recalling firm can mitigate the damage of a recall by quickly providing pertinent information to social media. “During crisis situations, it is imperative for firms to communicate with consumers in the right way,” advises Borah. “They can relay information about the recall, post a comprehensive set of FAQs to allay concerns, ensure that searches for information are directed to a dedicated recall microsite, and know the hashtags and keywords being used to discuss recalls so they can engage in two-sided dialogue to address specific concerns.”
What firms should not do is broadcast a public apology. “We find that apology advertising has harmful effects on both the recalled brand and its rivals,” Borah says. “In general, such ads backfire because they increase attention to and elaboration about the crisis.”
And for firms caught up in a domestic rival’s perverse halo? Sit tight. Keep quiet. Wait it out. And try to differentiate your company from competitors so that the next time, you don’t get associated with another brand’s recall.
“Halo (Spillover) Effects in Social Media: Do Product Recalls of One Brand Hurt or Help Rival Brands?” is forthcoming in the Journal of Marketing Research.