Food manufacturers catch plenty of grief over the way they market junk food to kids. But the public is entirely unaware of the hundreds of millions of dollars those same corporations spend influencing the choice of foods served to children in schools by paying food service companies off-the-book rebates--sometimes referred to as kickbacks--to push their brand of industrial processed goods on unwitting school districts.
Giving a rare glimpse into the highly secretive rebate system, assistant New York State Attorney General John F. Carroll last week described in detail his unprecedented investigation of the influence rebates wield in the world of food service companies like Sodexo, Chartwells and Aramark. As a result of that investigation, Sodexo, the French-owned food service giant, last year agreed to pay New York $20 million to settle claims it had improperly withheld rebates it was supposed to turn over to its school district clients.
Speaking to a meeting of the School Nutrition Association in Washington, D.C., Carroll said what he uncovered about Sodexo was just the tip of the iceberg. His investigation continues, and he expects more claims to be brought against other food service providers over rebates that not only create "an inherent conflict of interest" in the choice of foods children are served at school, but also discourage the use of locally produced goods from smaller suppliers, including local farmers.
Rebates, Carroll said, raise the potential for abuse in schools across the country. Officials from numerous states, he said, have contacted him since the Sodexo settlement was announced. Here in the District of Columbia, I wondered why children as young as five routinely were being fed sugary brand-name cereal such as Kellogg's Apple Jacks for breakfast along with Pop-Tarts, Giant Goldfish Grahams and Otis Spunkmeyer muffins. From documents obtained through the Freedom of Information Act, I reported last year that the food service provider for D.C. schools--Chartwells--had claimed at least $1 million in rebates from food suppliers.
According to Carroll, companies such as Sodexo, Chartwells and Aramark go to great lengths to ensure that the products they use come from manufacturers who will write them checks for goods they purchase in large volumes, money that doesn't appear on any invoice. These "off-invoice" rebate checks, based on billions of dollars worth of purchases, "are extremely valuable because rebate dollars are the cheapest to earn," Carroll said ,and help explain why Tyson chicken nuggets and Schwan frozen pizza proliferate in thousands of school cafeterias nationwide.
In the case of Chartwells, for instance, purchases are arranged through a branch of its parent company--the $21 billion British behemoth Compass Group. Foodbuy, as the sister company is known, makes more than $5 billion worth of purchases every year for a host of Compass Group subsidiaries, employing dozens of people to focus on negotiating contracts with manufacturers and tracking the rebates that are due.
On some products, rebates amount to as little as five percent of the purchase price. But on others, rebates are extremely lucrative--as much as 50 percent of the cost of the product itself. Rebates act as a potent tool for imprinting popular brands of processed foods in the minds of children at a young age in a place where they eat every day: the school cafeteria.
Carroll said food service companies typically have strict rules for how local managers make purchases for school districts, limiting them to buying from a short list of large, industrial purveyors who give rebates, and punishing those who stray from the company line. Such rules prevent purchases from smaller, more local manufacturers who do not have the financial wherewithal to pay rebates. In particular, they discourage schools that employ food service management companies from serving children local produce.
"Site managers are evaluated based on compliance--the degree that they adhere to purchasing from the company's specific list of vendors," Carroll said.
In my own reporting, I heard from Rick Hughes, a longtime Sodexo manager who now heads food services for Colorado Springs School District 11. “We were rewarded for purchasing specific products,” Hughes told me. "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. So just follow the money. That’s what’s being given to kids.”
Carroll said conflicts occur not just in food purchases. He described one case where a site manager was prevented from replacing disposable paper plates with reusable plastic food service gear because the move would of course mean fewer purchases of paper plates, resulting in a cut in rebate payments from the manufacturer. In another case, he said a local produce wholesaler raised the prices he charged schools so he could pay a rebate to the food service company.
Carroll's investigation and his insights into rebate practices are extremely valuable because this is one area the food industry would rather the public not know about. Manufacturers and food service companies alike are loathe to give details into how corporate greed greases the wheels of the U.S. food economy, resulting in industrially processed convenience foods predominating on kids' cafeteria trays. Information about rebates appears on no annual report, or in any other public documents.
According to Carroll, rebating is rampant across all lines of the food economy, but did not begin to insinuate itself into schools until around 2000. The USDA had allowed schools to decide whether they would require their hired food service companies to declare the rebates. That changed in 2007. Now, schools that enter into "cost-reimbursable" contracts with food service companies--contracts that provide the company a fixed management fee and pay for invoiced purchases--must contain a provision requiring the companies to return to the schools any rebates they collect.
New York State has had such a rule on its books since 2003. Schools there are required to use a prototype contract provided by the state education agency.
In districts where schools pay their food service provider a flat rate for meals, rebates represent corporate profit that goes to shareholders instead of into the food kids are being served. The schools involved may have no idea how they are being short-changed by rebates. Carroll said rebates in school food contracts typically amount to 10 percent to 15 percent of total purchases. Here in D.C., the rebates Chartwells declared amounted to only 5 percent of purchases for that period.
Carroll said school officials in the cases he has investigated "had only very limited understanding and knowledge of what in fact the rebates were," and, as a result, "they were not in a position to come to the bargaining table with food service companies on an equal footing."
Under the federal False Claims Act, food service companies are liable for treble damages in cases where they improperly withhold rebates from government clients. Whistleblowers are generously rewarded. The Sodexo case, for instance, was sparked by two former employees who were disciplined after they complained about the company's rebate practices. They were awarded more than $3 million as part of the $20 million settlement with New York.
Sodexo, Carroll said, cooperated in the investigation and later set up an 800 number that school officials could call for information about rebates. But Carroll told the school nutrition group that food service personnel should not be shy about reporting abuses.
Carroll urged them to "go back to your schools and offices and kitchens and...exert all the influence that you have to eliminate this practice of rebating because in my opinion it is not good business and it does not adhere to the values of this industry."