A never-ending cycle of rebates, unsustainable eating, and cheap food: How do we break the cycle if even the big guys can’t do it?
Feb 22, 2016
If you’ve ever eaten a school lunch or at a hospital, chances are you’ve tasted the menu from one of the three largest food service companies – Sodexo, Aramark, or the Compass Group – which together raked in $33 billion in revenue in North America in 2014. Institutional food service is big business, and every move these companies make creates waves in the industry. Research from the Johns Hopkins Center for a Livable Future details the constraints that institutions face when trying to change their food procurement policies.
“Institutional food policies not only have a significant potential to directly affect the economic and physical infrastructure of the current food system; accurately and widely marketed efforts may also generate broader awareness and discussion of the impacts of the current food system and the potential benefits of transitioning to a more regionalized and sustainable one,” says co-author and CLF policy program officer, Claire Fitch.
Because they are so large, food service management companies are well positioned to insist on volume discounts from food manufacturers. Management companies are able to negotiate these low prices through the formation of group purchasing organizations within their procurement or supply management divisions. In these arrangements, institutions’ food purchases are often controlled and restricted to certain vendors to maintain group purchasing power and discounted pricing. Rebates and volume discounts are major hurdles for institutions trying to purchase regionally or sustainably produced food, yet many consumers are not aware of their influence, Fitch and co-author Raychel Santo write.
Most group purchasing organizations independent of food service management companies require their clients to buy at least 80% of their products through pre-approved vendors, a practice that is called “buying on contract.” When food service management companies are involved, the requirements for on-contract purchases can be as high as 100%. Food service managers have reportedly received incentives or bonuses from management companies for buying an increased percentage of their total product from approved vendors. This can present a problem for independent, regional farms. If institutions try to procure food from these farms, it may cost more initially and jeopardize the compensation of food service employees.
Food service management companies also profit from off-invoice Volume Discount Allowances—or rebates—from food suppliers. Group purchasing organizations independent of food service management companies may also secure discounts or rebates, which may be fully or partially redistributed to institutions. Due to a lack of transparency surrounding the amount or percentage value of rebates and discounts, it is nearly impossible to investigate the percentage of savings (if any)—in the form of rebates or discounts—that food service management companies and group purchasing organizations return to institutions.
These rebates have been the topic of recent investigations and growing public concern. The District of Columbia recently investigated Chartwells—owned by Compass Group USA—for claims that it fraudulently kept rebates from food manufacturers and distributors that the company was supposed to return to public school districts. In June of 2015, Chartwells paid a $19.4 million settlement to the Washington, D.C., school district. In 2010, New York State investigated Sodexo for similar claims, resulting in a $20 million settlement that was distributed to the affected school districts and public universities.
The report also describes food service management companies’ restrictions on the number of sources schools can use to purchase foods, explaining that companies “tend to restrict purchases to the larger, industrial food producing companies,” instead of regional food producers that are less likely to have the economic power to enter into rebate agreements with food service companies. Vendors that do not pay rebates rarely appear on the list of approved vendors of food service companies, creating a conflict of interest.
For example, for a regional produce wholesaler to enter the institutional food market, she must increase the price she charges the institution so she can also pay the food service management company a rebate, which they may give back to the institution.
Santo adds, “A large-scale shift among hospitals, schools, universities, and other public institutions to procure regionally and more sustainably produced food has the potential to change the U.S. food system substantially. The vast purchasing power and educational opportunity provided by institutions for assisting in this transition remains to be tapped.”
By highlighting the socioeconomic, environmental, health, social justice, and animal welfare impacts of the current food system and the potential benefits that could come from transitioning to a more regionalized and sustainable one, the authors of the report released today seek to inform the development, implementation, and education surrounding better institutional food service procurement policies.
“An Overview of Institutional Food Procurement and Recommendations for Improvement ” was written by Claire Fitch and Raychel Santo.