Investigative journalist Lucy Komisar recently wrote an article, Cafeteria Kickbacks, focused on the millions of dollars of ‘rebates’ issued to food service providers around the country. The article poses provocative questions, an example of which is evident in Rhode Island school system. In Rhode Island, Komisar examined the 2006 purchasing trends of the more than 100,000 containers of milk needed each week by the state school system. A salesman from Garelick Farms, New England’s largest dairy, pointed out to the state’s childrens nutrition advocate that Sodexo– a food and facility management corporation– was paying Garelick more than it’s competitors to get a bigger rebate from the state. Sodexo then passed on the price hike to the schools.

Sodexo, a $20 billion-a-year leader in the food service industry has taken these rebates while operating cafeterias and other facilities in schools, hospitals, universities, government agencies, the military and private companies across the country. Sodexo’s lawyers declined to reveal the size of the rebates and rejected the idea that the rebates are abusive.

However, a manager for a small New England produce supplier describes the rebate practice this way: “Say you’re selling a case of apples at $20 and you have to pay a rebate to Sodexo. So now you have a $23 case that should be going for $20.” Then the price increase pushes the item off the menu.¬† Then schools will use something frozen to substitute for fresh produce. In the end, it forces small companies to pay the rebate as Sodexo owns much of the market and if these companies resist, they will lose the opportunity to supply the schools.

And in response, there has been a recent backlash against rebates across the country. In 2007 the USDA ruled that food service contractors had to provide schools with invoices showing the rebates–and that federal reimbursements would not pay them. The Pentagon has conducted audits as well and found overcharges for outsourced food services. These issues could end up in court as hiding a rebate could be considered fraud. Stay tuned.