Auto recalls hurt rival brands, too

Note to auto executives: Don’t gloat too much over your competitors’ recall situation. Chances are good it will be hurting your bottom line as well.

That’s the finding of a new study from the USC Marshall School of Business co-written by Gerard Tellis, holder of the Jerry and Nancy Neely Chair in American Enterprise and professor of marketing, management and organization, and Abhishek Borah, assistant professor of marketing at the University of Washington Foster School of Business. It is forthcoming in the Journal of Marketing Research.

The study analyzed product recalls in the automobile industry and considered four car manufacturers: the Japanese firms Toyota, Honda and Nissan, and the American firm Chrysler. The authors tracked the sentiment of online chatter for multiple models within each automotive brand for approximately 18 months.

‘Perverse halo’

The authors found that recalls of one brand inflame negative chatter about that brand, but then spill over into negative chatter about rival brands, a phenomenon the authors call “perverse halo.”

“We found that negative perceptions of a rival brand are stronger when the recalled brand and the rival brand are from the same country of origin and have similar market share,” Tellis said.

The study found that negative chatter about a recalled brand spills over into negative chatter of a rival brand by a large majority — 67 percent to 74 percent.

“That means that a smaller proportion of negative chatter is truly brand-specific,” Tellis said. Negative spillover to rival brands is stronger when the recalled brand dominates market share, he said.

Loss in revenue

The researchers found that negative recall-related chatter on social media sites also cut into sales and market cap of the recalled brand and its rivals; negative chatter actually amplifies the negative effect of recalls on downstream sales by about 4.5 times, according to the authors. A mere 1 percent increase in concerns of a rival brand leads to a $3.8 million monthly loss in sales revenue, the research found.

Importantly, running an apology ad about the recall increases concerns for both the recalled brand and its rivals, the study found.

“Firms undergoing a crisis need to consider apology ads very carefully,” Borah said. “We found that apology advertising has harmful effects on both the recalled brand and its rivals.” In general, he said, such ads tend to backfire because they increase attention to and elaboration about the crisis.

What’s the best policy for auto companies whose rival undergoes a recall? The authors suggest, first, avoid comparisons with the rival undergoing a recall. Second, use clear communication in ads or social media about the positive record of one’s own brand without any comparison to the rival suffering a recall.

Likewise, the brand being recalled needs to accentuate the positive.

“During crisis situations, it is imperative for firms to communicate with consumers in the appropriate way,” Tellis said. “They need to emphasize positive aspects of the brand history and not focus overly on negative aspects with apologies or refutation.”

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