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Report Exposes System of Big Food Kickbacks to Cafeteria Contractors, Cutting out Local Producers

A report released last week by Real Food Generation [[link removed]] exposes new details about a secretive system of kickbacks between Big Food corporations and cafeteria operators. The report found that rebates from dominant food manufacturers have become a major source of cafeteria operators’ profits while incentivizing more processed food sales and shutting out local farmers and food businesses who cannot afford to offer kickbacks.

Tens of billions of dollars’ worth of food flows through schools, colleges, corporate offices, and cultural venues such as stadiums. A growing number of these institutions, including 81% of colleges and universities, outsource the management of their cafeterias to corporations called food service management companies (FSMCs). Just three large corporations – Aramark, Sodexo, and Compass Group – control 77.5% [[link removed]] this industry, and together they purchase more than $40 billion [[link removed]] in food and goods each year, generating $32.5 billion in revenue in 2019.

Organizations such as Real Food Generation and the Good Food Purchasing Program want more of this money spent on locally produced and ecologically sound foods from businesses that use fair labor practices and that treat animals humanely. However, Real Food Generation’s review of industry reports and more than 100 cafeteria contracts as well as interviews with cafeteria managers and farmers reveals that a system of deals with Big Food corporations and restrictive internal purchasing policies fundamentally limits FSMCs’ ability to work with local farmers and small businesses.

FSMCs pool the combined buying power of their many locations to strike massive purchasing contracts with Big Food manufacturers, such as Tyson Foods [[link removed]] or Pepsi [[link removed]], and food distributors, such as Sysco and US Foods. To sweeten the deal, Big Food corporations offer FSMCs a certain percentage of cash back on all their purchases – these kickbacks (also called off-invoice rebates, sheltered income, or volume discount allowances) can range from 5% to as much as 50% of purchase prices, according to the report. FSMCs order much of their food through large distributors, who also offer their own rebates. For instance, one former master contract [[link removed]] between Aramark and Sysco revealed Sysco provided a “produce incentive allowance” or rebate on all produce that Aramark purchased through Sysco.

Cafeteria operators require chefs and managers to purchase as much as 80% to even 100% [[link removed]] of their food from “approved” or “on-contract” vendors and distributors that have negotiated contracts with the FSMC, in order to receive more kickbacks.

Robert Volpi, a former food service manager of 13 years and now a principal at QCC Consulting, told Food & Power that FSMCs evaluated and rewarded chefs and managers based on their levels of “compliant” purchasing from approved vendors. “Your career advancement was pretty much held to your compliance level with how you purchased goods,” Volpi said. These systems and incentives limit chefs’ and managers’ autonomy to work with suppliers who are unable to negotiate similar contracts.

Cafeteria operators mandate on-contract purchasing because kickbacks are a central source of their revenues. One anonymous former FSMC employee estimated that kickbacks accounted for 40% to 50% of the top three FSMCs’ net profits for their North American operations, according to the report.

An anonymous former executive chef for Aramark recounted a meeting with a purchasing executive in which the executive allegedly told him that Aramark made more profits from big purchasing contracts than the day-to-day management of their cafeterias. “The millions of dollars that purchasing directs to the company’s profits dwarf what you guys in operations are doing,” the executive allegedly told the chef.

This business model shuts out local food businesses. A former student organizer at University of Utah, Sawson Gholami, said their student group worked for several months with their dining services to administer a questionnaire to local farms and food businesses to determine which might be able to sell to the university. When it came time to propose new suppliers, Gholami said, “We were very flatly told at that meeting that it would be impossible to do business with any producer that did not already have a business relationship with Sysco.” Sysco was the national food distributor that carried approved products for University of Utah’s cafeteria operator, Compass Group. “All the folks were too small or too new to have a relationship with Sysco,” Gholami said.

The report also argues that the pursuit of kickback revenue drives purchases of more shelf stable, frozen, or processed products, which the largest food corporations tend to sell instead of fresh foods, resulting in less nutritious meals. “There’s big money tied up in big company food and agribusiness. There’s not a whole lot of money tied up in fresh vegetables and fruits,” Rick Hughes, who managed for Sodexo in Colorado for eight years, said in the report. “Just follow the money. That’s what’s being given to kids.”

Some university systems, such as the University of Vermont, have been able to mandate more local purchasing as a part of their contracts with FSMCs. Volpi also touted the benefits of writing values-based “product specifications” into purchasing and food service management contracts. The report calls on administrators to make these stronger demands in contracts and to audit their invoices. It also urges public officials to investigate the top three FSMCs and their purchasing practices.

The report does not attempt to answer whether these purchasing systems violate antitrust law, but this conduct could be exclusionary and illegal. Bulk discounts are not inherently harmful or exclusionary, because they may reflect genuine savings from dealing in larger volumes or decreasing the number of deliveries. Volpi notes that savings on some bulk goods could be redirected to invest in local businesses or increase workers’ wages.

But rebates and discounts would violate antitrust law if they were conditional on exclusively purchasing a certain portion of products from one supplier. It is unlikely that the purchasing contracts between cafeteria operators and food manufacturers explicitly require FSMCs to purchase a portion of a given product from that manufacturer in order to receive a kickback. However, FSMCs’ on-contract compliance policies, paired with volume-based paybacks, may amount to a de facto exclusive dealing agreement.

Aramark, Sodexo, and Compass Group did not respond for request to comment.

Disclosure: The author was formerly employed by a subsidiary of Compass Group.

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What We're Reading

Texts and emails obtained by TheKansas City Star reveal that Tyson and National Beef executives pushed back against the Kansas secretary of agriculture’s quarantine guidelines, which the state agency then relaxed to allow workers potentially exposed to coronavirus to keep working. ( The Kansas City Star [[link removed]])Uber is in talks to acquire Grubhub, as restaurant closures for in-person dining make restaurants even more reliant on app-based delivery. ( The New York Times [[link removed]])Small- and mid-sized slaughterhouses are doing more business due to COVID-19 disruptions of large meatpacking plants. Local ranchers are advocating for more small- and mid-scale slaughter facilities. ( Civil Eats [[link removed]]) About the Open Markets Institute

The Open Markets Institute promotes political, industrial, economic, and environmental resilience. We do so by documenting and clarifying the dangers of extreme consolidation, and by fostering discussions of ways to reestablish America’s political economy on a more stable and fair foundation.

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Written by Claire Kelloway

Edited by Michael Bluhm and Phil Longman

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