Soda Contracts

As school districts around the country work to improve nutrition, soda and candy are not the only topics of debate. The controversy is also about money. School leaders, in the unenviable position of having to plug funding gaps, have resorted to the sale of unhealthy foods to keep important school activities afloat. But with the soaring rates of childhood obesity, parents, teachers, policymakers, and others are calling for schools to remove the high-sugar, high-fat snacks.

Exclusive contracts with soda companies have emerged as a commonplace source of revenue — and sugar — for school districts. In the early 1990s, school boards and administrators began signing these beverage contracts, granting companies exclusive and long-term rights to sell and advertise beverages on school campuses in exchange for funding and other incentives. According to a 2005 Government Accountability Office report, nearly 75 percent of U.S. high schools, 65 percent of middle schools, and 30 percent of elementary schools had exclusive contracts for the 2003-04 school year. According to this study, the contracts generated the largest source of funding of all food fundraisers outside the school meal programs.

But how much money do schools actually earn, and where is the money coming from? What rights have schools granted to companies in exchange for these revenues? And, most importantly, what are the short- and long-term implications for student health?

To address these questions, Com-munity Health Partnership, a public health advocacy organization, conducted a review of the contracts between Oregon school districts and beverage companies. Of the 25 school districts we surveyed statewide, 12 reported contracts with either Coke or Pepsi or local distributors of these brands. Among the 13 districts that did not report district-level agreements, most identified individual schools contracting with companies. These findings confirmed that soda contracts in Oregon are prevalent. Because of the scope of our study, we focused our review on the district-level contracts.

We found that these agreements are not as lucrative for schools and districts as they appear upon first glance. Divided by the number of students in schools covered by the contracts, total contract revenues fell between $12 and $24 per student annually. In the larger school finance picture, this amount is equivalent to less than half a percent of annual district per-student spending, which ranges from $6,000 to $8,000 for the districts studied.

In addition, although the soft drink industry espouses community-minded values of helping schools to “narrow the education funding gap,” our study identified that the bulk of the financial gain from these agreements comes from the community’s own pockets, not from the donations of the soda companies.

Here’s an example. In 1998, Hills-boro School District, a district near Portland with approximately 19,000 enrolled students, signed a 12-year exclusive contract with Coke. In exchange for about 30 percent of the sales revenue, plus a $300,000 upfront cash payment and a $1 million all-weather playing field, the district granted the company exclusive rights to sell and advertise its products on school campuses.

Over the course of the contract, our study reveals, Hillsboro students will have to spend about $10 million in order to purchase the minimum sales volume of 10,800,000 beverages guaranteed by the district in the contract. Based on its 30 percent commission rate, the district will receive about $3 million of this total amount spent; the company will gain the remaining $7 million. Clearly, the majority of money generated by the contract is coming from students, not from the $1.3 million in upfront company fees. And the company takes the majority of money that students spend.

Companies gain more than just money from sales. Of far greater value, companies gain an opportunity to build brand loyalty among young people in an educational setting. Exclusive contracts mean competition-free, profuse exposure for their products, name brands, and logos. Vendors also receive explicit rights to advertise and promote their products on school campuses through banners, cups, scoreboards, and more.

Vendor contracts may pose challenges for many school districts wishing to make changes. The agreements we examined last an average of nine years, with some lasting as long as 15 years. Where schools receive upfront payments, they may find it extremely difficult to terminate an agreement early because of contract provisions requiring schools to pay back company fees paid in advance.

Schools also relinquish their autonomy over nutrition-related decisions. As Portland Public Schools experienced two years ago, for example, the district not only had to ask for Coke’s permission but also had to pay a $9,000 penalty for removing sports drinks from middle schools.

As of May 3, schools have a new opportunity to amend existing contracts to supply healthier products, according to a new school beverage policy announced by the American Beverage Association. The policy establishes guidelines to limit portion sizes and calories of beverages available in schools, and the industry has committed to implementing these guidelines in 75 percent of schools that have contracts with bottlers by the 2008-09 school year, and in all schools by the 2009-10 school year. The policy is an important step toward improving school nutrition environments. Yet the issues of advertising in schools, the loss of community money, and the long-term binding obligations placed on schools still persist.

Some school districts are taking back control, freeing themselves from existing and future exclusive agreements with soda companies entirely. In 2004, Seattle Public Schools, for example, passed a set of nutrition and advertising policies terminating the district’s exclusive agreement with Coke, prohibiting future exclusive beverage contracts, and setting nutrition standards for foods and beverages sold on school grounds. Despite the district’s tight financial position, public activism on nutrition, commercialism, and children’s health ultimately overrode perceived financial constraints.

As our report reveals, companies are actually taking more money from communities than they’re contributing, while gaining long-term rights to control the availability of their products in schools and building brand loyalty among young people. It’s time for schools and districts to take a closer look at these contracts and reconsider whether such arrangements truly support the best interests of communities.

Further Resources

Government Accountability Office,”School Meal Programs: Competitive Foods Are Widely Available and Generate Substantial Revenues for Schools,” August 2005 (GAO-05-563).

American Beverage Association, “School Partnerships,” accessed May 2, 2006, at: www.ameribev.org/schools.

American Beverage Association, “Statement on New Vending Policy,”
accessed May 3, 2006, at: www.ameribev.org/pressroom/2006MayStatementNewVendingPolicy.asp.