Lucrative deals offered by soft-drink bottlers raise concerns about exclusivity and fund raising
The rush for money started at big institutions, but now the cola wars are spreading.
Seven years after Pennsylvania State University signed a $14-million, 12-year contract to make Pepsi-Cola the exclusive soft drink sold on campus, PepsiCo and Coca-Cola are battling for supremacy at mid-sized universities and community colleges. With lavish cash incentives and sky-high commissions, campuses are profiting.
“They are in a duel to the death in every educational institution in the country,” says Burt P. Flickinger, managing director of Reach Marketing, a company in Westport, Conn., that consults with manufacturers and stores on retailing strategies.
Mr. Flickinger, who has done consulting for both Coke and Pepsi, estimates that those two companies will spend a total of $2-billion at colleges and universities over the next three years, based on the size of contracts already negotiated and on estimates by industry analysts that two-thirds to four-fifths of U.S. institutions have yet to be signed up.
By fiscal 1997, a survey showed, Pepsi had 62 beverage contracts with universities, and Coke had 60. One university had a contract with Dr Pepper, and a dozen others had deals with both Coke and Pepsi. The survey, conducted by George K. Baum & Company, an investment-banking enterprise in Kansas City, Mo., was sent to 2,000 campuses, of which 382 responded.
Over all, those institutions collected about $13.9-million in up-front payments that year for making the deals; $12.7-million of that came from Pepsi, which has been particularly aggressive in pursuing contracts on campuses and elsewhere in recent years. In that year, the colleges also received $16.8-million in annual payments from their beverage contracts.
As the contracts have proliferated, universities and colleges are becoming bolder, asking that at least part of the payments be in the form of gifts to scholarship funds or projects to renovate buildings or build new ones. Universities reason that if they ask for money for a variety of purposes, they might tap into more than one corporate account. That has raised concerns about whether colleges that strike such deals are tying themselves too closely to soft-drink companies.
Recently, the owner of a Pepsi bottling company in Illinois, Harry L. Crisp II, signed contracts with eight community colleges while serving as chairman of the Illinois Community College Board. That prompted questions about whether the colleges had felt pressured to go with Pepsi (The Chronicle, September 17). All of the colleges have denied that Mr. Crisp’s oversight role had any connection with the contracts.
For years, colleges have also earned commissions, usually about 15 per cent, on the revenue from the soft drinks sold on campus. Now, large universities are negotiating commissions as high as 65 per cent, says Manuel Cunard, executive director of the National Association of College Auxiliary Services, which collects examples of soft-drink contracts for colleges that are negotiating their own deals.
“The universities are generating some huge new revenues in the short term,” says Mr. Cunard. “Whether that will continue over the long term is unclear. I think everyone wonders when Coke and Pepsi will say, ‘Enough!’ Right now, the capital investments that Coke and Pepsi are offering are so significant, it’s hard to say No.”
What’s more, critics believe, the long-term effects of the relationships will be detrimental to university budgets. “It erodes the position of the university in asking for public money,” says Alex Molnar, an education professor and director of the Center for the Analysis of Commercialism in Education, at the University of Wisconsin at Milwaukee. “It is also anti-competitive and anti-capitalist -- exactly the opposite of what we are teaching our students. Why should we create a monopoly situation for one company, especially on public property?”
Cash-starved public universities, however, are precisely the institutions that are rushing most quickly into such soft-drink deals. The Baum study found that 104 public colleges had soft-drink contracts in fiscal 1997, compared with 31 private ones.
The soft-drink companies are reluctant to discuss how they calculate the value of contracts, but the deals are generally bigger if a college’s enrollment is large, its sports program high-profile, and its location in a high-traffic area of a city.
The biggest single soft-drink contract is a $28-million, 10-year contract between Coca-Cola and the University of Minnesota-Twin Cities, which, with more than 51,000 students, is the nation’s most heavily populated campus.
The University of Illinois at Chicago, emboldened by the big contracts of other institutions and aware that its location -- just a mile outside the downtown Loop -- is commercially attractive, put out a request for proposals in 1997 that “strongly encourages” bidders to donate a total of at least $450,000 a year to sponsor intercollegiate athletics, help build a new recreation center, and support a program for recruiting and retaining top faculty members and students.
Pepsi did not donate to those specific causes, but won the bid anyway by offering a package that university officials estimate will bring in $6.5-million over 10 years.
“We went into this with the question: Can we derive significant new dollars to support campus-life issues that we are not sure the legislature will provide?” says John M. Lowenberg, interim associate chancellor for development at Illinois-Chicago.
The University of Montana did not sign an exclusive agreement with either soft-drink maker, but leveraged the offers from both to bring the institution $400,000 over five years. Montana’s food-services director, Mark LoParco, notes that Pepsi sweetened the deal by including $40,000 a year exclusively for his department. He took the $1.75-per-case commission that Pepsi was offering, showed it to Coke, and said, “I’m getting this, so if you wanna come to the dance, you gotta play.”
He adds: “I’ve been able to donate some of this money to campus staff-development efforts, and we have talked about using some to update Web technology that will help my employees.”
The large, exclusive contracts, which generally require the winning bidder to supply all non-dairy beverages sold on campus, are pushing specialty suppliers out.
Glenn Golden, president and chief operating officer of the Nedlog Company, a fruit-juice dealer based in Wheeling, Ill., says he is being forced off campuses.
Nedlog does not sell carbonated beverages, but Coca-Cola owns the juice brands Minute Maid and Fruitopia, while Pepsi owns Tropicana and has a distribution agreement with Ocean Spray.
“This is a significant part of my business, but I certainly can’t compete based on how deep my pockets are,” says Mr. Golden. His company, which does less than $10-million in annual sales, works with more than 100 colleges. In recent years, however, several of them, including the College of William and Mary and the University of Oklahoma, have told him to pack up his equipment, Mr. Golden says. They had signed contracts with soft-drink companies.
In terms of corporate giving, the new contracts reflect the desire by companies to get something in exchange for their gifts.
“The corporate-giving world has become much more focused,” says Roger Trull, president of the McMaster University Foundation, in Hamilton, Ont., who spoke at a recent seminar run by the Council for Advancement and Support of Education. “Now there’s no interest in supporting bricks-and-mortar projects. There’s no interest in giving unrestricted gifts.”
McMaster has taken steps to break any linkages between companies’ making donations to the university and doing business with it. Two years ago, the foundation and the purchasing department agreed in writing that they would not let gifts to the university influence purchasing decisions.
“We realized that some of our best prospects might be suppliers to this university,” says Mr. Trull. “We wanted to be able to approach them, but we didn’t want them to feel as though if they didn’t give, they would lose their business with McMaster.”
Agreements between the Marion Pepsi-Cola Bottling Company, in Marion, Ill., where Mr. Crisp is president, and two institutions have raised eyebrows because they specifically tied gifts to long-term exclusive contracts for Pepsi.
In 1997, the company agreed with Southern Illinois University at Carbondale to give $500,000 to the Saluki Futures Campaign for Athletics, in exchange for the university’s promise that for 10 years, it would use, sell, and advertise only Pepsi products at all events in any of its athletics venues.
Ted Sanders, president of the university, characterized the money to be paid under the contract as a philanthropic gift from the Harry L. Crisp II & Rosemary Berkel Crisp Foundation.
Internal Revenue Service filings confirm that the first $100,000 came from the foundation. But in 1998, when another $100,000 was due, the payment did not come from the foundation.
Scott Kaiser, a Southern Illinois spokesman, would not reveal the source of the payment. “We don’t care where it comes from. If it comes from his personal checking account, it wouldn’t matter to us.”
Mr. Crisp also agreed, in April 1998, to give $500,000 over 10 years to John A. Logan College, a two-year institution. The contract says that in return, for a period of 20 years, the college will use, sell, display, and advertise only Pepsi products at all athletics and special events, and at all of its food-service locations. In addition, at least 90 per cent of all beverage selections in campus vending machines must be Pepsi products.
Ray Hancock, president of Logan, said he considered the money to be a philanthropic gift, and noted that Mr. Crisp was a trustee when the college was founded in 1968.
The college holds competitive-bidding processes for almost everything it buys, the president added, and under state law, it must take bids if the purchase is for more than $10,000. But there was no bidding on the soft-drink contract, he acknowledged.
Asked if the money from the bottler was termed a “gift” in order to skirt state bidding requirements, Mr. Hancock said: “Yes.”
Neither Mr. Crisp nor any staff members at his company returned telephone calls over several weeks from The Chronicle.
Legislators in Illinois were concerned enough about the soft-drink contracts with public colleges in the state that they passed a law this year making it illegal for any institution to “require, stipulate, suggest, or encourage a monetary or other financial contribution or donation as an explicit or implied term or condition for awarding or completing the contract.”
Officials of both Pepsi and Coca-Cola said they discourage using the term “gift” to describe money paid under their contracts. According to federal tax law, a philanthropic contribution is not tax-deductible if there is an expectation of receiving something in return.
“We don’t consider this philanthropy,” said Kimberly Price, a Coca-Cola spokeswoman. “We consider these long-term contractual arrangements. Colleges are using this money for student recreation centers, study-abroad scholarships, and new technology. Those are business decisions by the colleges, not philanthropy from us.”
Larry Jabbonsky, a spokesman for Pepsi, said, “these contracts are about Pepsi always having been a youth-oriented company, and empathizing with colleges and universities that are seeing their natural funding sources dry up, and wanting to help.”
With an eye on the money that is available, a new set of entrepreneurs is working to link colleges together and enable them to negotiate more-lucrative deals.
Dan DeRose, president of DD Marketing, in Pueblo, Colo., is working on an arrangement that will tie together 11 community colleges in that state to negotiate a single beverage contract. In New Mexico, he plans to get nine community colleges and 44 school districts together to negotiate a beverage contract simultaneously. “In a state like New Mexico, in order to get the kind of revenue you can get elsewhere, you have to team up, and I have found a lot of schools that want to do it,” he said.
Whatever colleges are being paid, said Mr. Flickinger, the marketing expert, it isn’t enough. Soft drinks have profit margins of 60 per cent or more. Beverage companies consider universities to be among their most important sales partners, right after chain retail stores and fast-food restaurants, he noted. But unlike soft-drink sales in those categories, which have been flattening out, sales are still rising steeply in universities.
“This market is so important to the soft-drink manufacturers, the colleges should allow companies to bid machine by machine, soda fountain by soda fountain,” Mr. Flickinger said. “They are sabotaging their future income stream by capitulating to the large cola companies’ demands for exclusive contracts.”
College officials, however, said bidding for every spot on a campus to sell soda would create a logistical nightmare for purchasing offices.
Meanwhile, with word spreading of the big money to be made from the soft-drink giants, it is getting more difficult for universities without a contract to remain that way.
“Our primary focus is to serve students. Finances don’t drive everything,” said William J. Duffy, associate vice-president for finance and administration at Southeast Missouri State University, which allows the sale of both Coke and Pepsi products, and gets a flat fee in return.
The university, he said, does not want to offend either local bottling company -- both of which have been generous in their support -- or to “alienate students, who have their favorite soft drinks.” Still, when the contracts expire in 2001, “we’ll be looking at exclusivity,” Mr. Duffy said. “The way these contracts have been going everywhere else, we have to.”
http://chronicle.com Section: Money & Management Page: A41
