Cafeteria Kickbacks

By Komisar, Lucy | In These Times, March 2009 | Go to article overview
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Cafeteria Kickbacks

Komisar, Lucy, In These Times

How food-service providers like Sodexo bilk millions from taxpayers

AT THE END OF the 206 school year, children's nutrition advocate Dorothy Brayley had a disturbing conversation with a local dairy representative. He had come to her office to discuss participation in the summer trade show of food providers she runs as director of Kids First Rhode Island.

At the time, the state's schools were buying 100,000 containers of milk each week. The salesman for Garelick Farms, New England's largest dairy, told Brayley that Sodexo- a food and facility management corporation that managed most of the state's school lunch programs - was paying Garelick more than competitors in order to get a bigger rebate.

State Education Department records, which are required to chart milk prices, showed that Sodexo passed on the price hike, billing schools 24 cents to 27 cents a half-pint, while milk was available from Aramark, a competing company, for 18 cents to 21 cents a half-pint - a loss to schools and families of more than $100,000 a year.

That's just a taste of the hundreds of millions of dollars of "rebates" - or kickbacks from suppliers - that Sodexo, a $20 billion-a-year global leader in the food and facility management industry, has taken while operating cafeterias and other facilities for schools, hospitals, universities, government agencies, the military and private companies across the country, according to evidence provided by whistleblowers and internal company documents.

In some cases, such rebates violate the contracting policies of federal agencies. In others, undisclosed rebates may constitute fraud.

Sodexo's deputy counsel Tom Morse declined to reveal the size of Sodexo's rebate from Garelick Farms, and he rejected the notion that rebates are abusive. Dean Foods, which owns the dairy, declined to comment.

How the rebates work

Sodexo, founded in France in the '60s to do maritime catering, now has more than 30,500 operating sites and 355,000 employees in 80 countries. It reported revenues last year of $20.4 billion, and profits of more than $1 billion. It ranks second in food services worldwide, after U.K.-based Compass Group.

The rebate system, endemic to the industry, works like this: A food management company like Sodexo signs contracts to run a client's cafeteria. The company buys supplies from vendors such as Coke, Kellogg's or Tyson. Then, chosen vendors send the management company rebates based on a percentage of sales.

Tom MacDermott, a New Hampshire industry consultant who negotiates for clients with Sodexo and others, says kickbacks date back half a century.

"In the '50S, it was cash in an envelope slipped to the chefT says MacDermott. "As companies grew, they were getting back 5 percent from the produce vendor, 2 percent from the meat guy, 2 or 3 percent from dry goods and dairy."

In the United States, MacDermott estimates that management companies such as Sodexo, Compass and Aramark provide meals, catering and vending machines to virtually every federal agency, 95 percent of corporations with food service, 90 percent of universities, 40 percent of healthcare facilities, and 30 percent of schools. If you've eaten at a public cafeteria, you've probably eaten food sourced by one of these companies.

As major corporations and government institutions increasingly outsourced purchasing, kickbacks to megacorporations like Sodexo became rife - making up at least 10 percent of sales.

Contracts are typically cost-plus, meaning clients pay the cost set by the supplier, plus a percentage of that as a fee set by the food-service firm. There are generally no cost caps, so rebates which are not deducted from what the food-service company charges clients mean higher meal prices. They also limit food choice and quality: food-service companies buy products from vendors that pay bigger rebates rather than those that offer cheaper, locally grown, or higher quality food.

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