Food and Power: Big Food Paybacks to Cafeteria Operators Spark Controversy
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by Claire Kelloway | September 13, 2018
Last week, a coalition of farmers, fishermen, and food system activists launched a new campaign that calls on three dominant food service management companies, Aramark, Compass Group, and Sodexo, to increase local and humane food purchasing, invest in racial equity, and reduce their carbon emissions, among other demands. These companies represent 77.5 percent of the food service management industry, or the business of running cafeterias and restaurants for hospitals, schools, stadiums, corporate headquarters, and other institutions.
The Community Coalition for Real Meals also draws attention to “a system of exclusive relationships” between these large cafeteria operators and Big Food companies. Food service management companies purchase the vast majority of their food through large national contracts that systemically favor the biggest players. In recent years, these companies have come to rely on the discounts and rebates they get from Big Food as a part of their business model. This fundamentally limits individual institutions’ ability to work with local farmers and small businesses, who cannot supply companywide contracts or offer rebates.
Aramark, Compass Group, and Sodexo buy a lot of food. They spent at least $10 billion on food in 2009 to serve their tens of thousands of outlets. Sodexo alone represents more than 30,000 locations. To secure lower food prices, these management companies pool the collective purchasing power of their many locations to strike large national contracts with equally large food vendors, such as Tyson, Kellogg’s, Pepsi, and so on.
“They’re looking for contracts that can provide sufficient volume and consistent products,” explains Jennifer Obadia, the Eastern U.S. Regional Director of the Healthy Food in Health Care Program for Health Care Without Harm, “which is where it becomes tricky to gain access for smaller businesses … it reinforces consolidation.”
Food service management companies require that their locations purchase the bulk of their food from approved vendors who have negotiated a contract with the company. (In fact, they reward or penalize employees based on their levels of “on-contract” purchasing.) According to a report by Farm to Institution New England, most food service management companies “request facilities to maintain 80% compliance with approved vendors.” In select cases, facilities must buy all their foods “on-contract.”
Food service management companies’ motivations to stick “on-contract” go beyond buying in bulk at lower prices. Because of the way these discounts are structured, buying foods from contracted companies is tied to an increasingly important revenue stream: volume-based rebates.
To secure exclusive contracts, Big Food manufacturers offer food service management companies cash-back rebates, or “volume discount allowances” (VDAs), on their purchases. So if Aramark agrees to buy chicken from Tyson Foods, Tyson will give Aramark a certain percent cash-back on all sales. Big Food corporations can also give signing bonuses for new contracts, extra money to market certain foods within the institution, or larger rebates for increasing purchases of a product over time.
“There’s no question that the VDAs create a systemic incentive for the food service management company to buy from those prime vendors,” says Peter Allison, the Executive Director of Farm to Institution New England, “they get financial reimbursement based on how much they buy.”
But exactly how much money food service management companies make from rebates, and where that money goes, is highly secretive. In 2009, a report by In These Times found that many of Sodexo’s rebates were “off invoice,” which “can disguise the rebate” by sending it straight to Sodexo, hiding it from the institutions that hire them. And because some food manufacturers will mark up their sales price to cover the cost of the rebate, this covert payback system can artificially inflate the food costs presented to client institutions.
Whether or not food service management companies share these rebates with their client institutions is a point of contention. For instance, when food service management companies contract with public schools, they legally have to share rebates with the school district, because they technically represent a refund of public dollars. However, in 2010 Sodexo paid the State of New York a $20 million settlement “for [failing] to acknowledge rebates from suppliers, resulting in illegal overcharges to the schools.” D.C. reached a similar settlement with Chartwells, a subsidiary of Compass Group, for $19.4 million in 2015.
In most other sectors, there is virtually no visibility into how much rebate income food service management companies keep, but experts believe it is substantial, to the tune of hundreds of millions of dollars. John F. Carroll, former Assistant Attorney General of New York, explained in a speech to the School Nutrition Association that since the 2000s rebates have become an increasingly important source of revenue for food service management companies.
Aramark, Compass Group, and Sodexo may even rely on rebates to bring down management fees and undercut each other for more institutional contracts. “Over the last two decades or so, management companies have held their management fees the same or had very small increases,” explains Obadia, “in part, how they are able to continue to generate revenue when the management fees may just be covering costs, or not even, is through the additional funds they secure through these rebates.”
All told, this financial reliance on rebates encourages dominant food service management companies to buy more from Big Food. Such strict on-contract purchasing requirements limit the autonomy of individual schools, hospitals, and other institutions to work with alternative suppliers, particularly local farms and small businesses, who cannot afford to offer rebates or other discounts. The system “clearly constrains their ability to go off and buy from whoever they want,” says Allison, “it’s an inherent part of the business model of the food service management company to hit those compliance targets.”
Disclosure: Author was formerly employed by a subsidiary of Compass Group