Total Recall: Do Consumers Drop Brands After Products Fail?

By Markets Fool.com

Last week, Honda Motors gave me a new car. Well, they didn't exactly give it to me (I'm pretty sure I signed a paper saying I'd bring it back). But they let me take home a new Accord while my local Honda dealership waits for airbag parts to come to fix my car. My vehicle is just one Honda in a sea of 28 million cars (from 14 automakers) currently being recalled for faulty Takata airbag inflators.

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The National Highway Traffic Safety Administration (NHTSA) has said the recall is "the largest and most complex safety recall in U.S. history." More than 28 million vehicles have been called in the U.S. so far. So yeah, it's a huge problem for carmakers right now.

Honda gave me a loaner car because the parts won't be in until sometime this summer (they weren't being extra generous to me, other Honda owners can ask for loaners as well). But my experience with Honda got me thinking: Do brands suffer after they go through massive recalls? And not just automakers -- what about Chipotle's recent food blunders? You can't exactly recall a burrito, but Chipotle's E. coli problems have certainly forced the company to build back some of its image.

Luckily, there's plenty of research on how recalls impact a company's brand. And, unsurprisingly, their effect all depends on how companies respond to customers after they've messed up.

Survey says: Act responsibly
A 2010 report from the The Relational Capital Group said that brands can actually build stronger loyalty with their customers after a recall so long as they respond responsibly.

"Product recalls create rare and powerful moments of truth for companies and brands through which loyalty can actually be strengthened and enhanced. The way they're handled leaves a deep and lasting impression on consumers, for better or for worse," Chris Malone, the chief advisory officer of The Relational Capital Group, said in a press release.

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The study found that 91% of people understand that product and safety recalls will happen at even the best-run companies. And even more importantly, 87% of the respondents said they'd be "more likely to purchase and remain loyal to a company or brand that handles a product recall honorably and responsibly, even though they clearly made mistakes that led to a safety or quality problem."

That's nearly nine out of 10 consumers that would continue choosing, or even prefer, a company that's had a serious recall --if they company handles it correctly.

And I can relate to that. I went from driving a seven-year-old Honda to driving a brand-new one within 48 hours of receiving my recall notice. The Honda dealership near me never fought me over getting a loaner, and I was in and out of the dealership within about 20 minutes. I'm hardly a representative sample, but all of the above makes me like Honda as much as I did before, if not a bit more.

But it doesn't always work out this way. In 2010,Toyota issued a recall for many of its vehicles' accelerator pedals and it didn't leave consumers with many positive vibes. Only 62% of survey respondents said the company had handled the recall "honestly and responsibly," according to Relational Capital.

But there's a downside to brand loyalty, too. A 2013 study by Penn State showed that customers who strongly trust a brand can feel betrayed by the company when there's a serious recall.

"Indeed, committed consumers might view a product recall as a 'breach of contract,' and hence might exhibit more negative responses following a recall announcement than their less committed counterparts," the study said.

It's still a bit early to tell how things will play out for Honda and Chipotle. But in the case of the burrito maker, acting quickly is paramount. Chipotle closed 43 of its stores after an E. coli outbreak was sourced to some of its stores. The company then threw away the food from the stores and closed all of its stores nationwide for one day to talk to its employees about food safety. The company also changed how it sanitizes its vegetables, in order to keep the same thing from happening again.

But even when companies act quickly to fix a problem, the damage is often done to its stock.

A harder problem to solve
Honda's stock is down 14% since it started recalling vehicles for faulty airbags back in 2014. While other factors may be at play as well, the recall is expected to take $2.6 billion out of Honda's fiscal 2016 revenue, which definitely helped contributeto the company's recent 12% drop back in January.

And Chipotle's stock is suffering an even worse fate -- it's plummeted 30% since the E. coli outbreak back in October.

So while consumers don't necessarily walk away from a company after a major recall, it's clear that investors aren't always so forgiving.

The article Total Recall: Do Consumers Drop Brands After Products Fail? originally appeared on Fool.com.

Chris Neiger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.