Thirsty? Starting soon at Oregon State University, Coke is it. At Pennsylvania State University, Pepsi’s already the one.
On those campuses and at least a dozen others, soft-drink companies are signing long-term contracts for sole rights to sell their products in dining halls, vending machines, and stadiums and arenas.
Often the companies win the business by promising higher returns on sales and pledging payments to the institutions in return for advertising rights and exclusivity.
The companies urge colleges to think of them not as vendors, but as “business partners.” Pitches from Coke also typically include a mention of the potential for philanthropy from the Coca-Cola Foundation, although company officials say they never promise grants in exchange for contracts.
Exclusive contracts for campuswide “pouring rights” have not yet become the norm for the higher-education market. Such arrangements are catching on, however, as competition among the leading soft-drink companies grows fiercer.
Especially since Penn State signed a much-publicized $14-million, 12-year exclusive with Pepsi in 1992, colleges have been looking at their soda sales in a new light. In the last six months, at least three other large institutions -- Indiana University, Oregon State, and the University of Cincinnati -- have followed Penn State and parlayed their beverage business into lucrative financial packages.
Others, like the University of Virginia, say they may take advantage of the “soda wars” by making sure that any contracts they negotiate now for dining services leave open the option for exclusive soft-drink deals in the future.
(About 60 per cent of the college soft-drink business is still handled through third-party vendors, notably dining-hall concessionaires and brand-name fast-food restaurants that are becoming more prevalent on campuses.)
While university business executives praise the exclusive arrangements as creative ways to increase income, some administrators have questioned the financial wisdom of signing long-term exclusives in the intensely competitive soft-drink market.
“It sounds like a good idea if you need some up-front capital,” says Dan Williams, vice-president for administration at the University of Oregon, which has not followed Oregon State’s example. But he adds: “I don’t know why anybody would want to tie up a product line in a competitive market for 10 years. Your student population changes a lot and their tastes change.”
Others note that colleges could be so attracted to the guaranteed up-front payments that they might sacrifice good pricing on the sodas and syrups themselves.
The universities’ ties to the companies can also appear unseemly to some. When Penn State signed with Pepsi, for example, “there was concern among faculty that we were accepting an entrepreneurial model, essentially selling our name,” says Robert Secor, an English professor who was chairman of the Faculty Senate in 1992. The concern, he says, has since faded.
Institutions that have signed exclusivity deals may yet find themselves facing a hefty tax bill from the Internal Revenue Service, because some of the revenue may be considered “unrelated-business income” subject to federal taxation.
The determining factor is, What do you get for this and what are you required to do for it?” says Johnell Hunter, spokeswoman for the exempt-organizations division of the IRS. If a college happens to offer advertising space in exchange for the payment, she says, the income could be tax-exempt. But if advertising is offered as part of a quid pro quo under a contract, the IRS could rule the income taxable. Such arrangements are among the issues the IRS is examining as part of its broader audits of business practices at 30 colleges and universities. A spokesman for Penn State says the university considers some of the income from its Pepsi deal to be taxable as unrelated-business income, but regards “a fair amount of it philanthropic,” and hence exempt from taxation. Several of the institutions that have made their own deals say they do not know how they will treat their income for tax purposes.
Just how prevalent the arrangements are is difficult to quantify, since the cola companies are reluctant to discuss publicly their strategies for competing with each other.
Steve Beck, Pepsi’s director of national sales and marketing for education, says the company has “about a dozen” exclusive arrangements with universities. It is seeking others, but Mr. Beck wouldn’t say where. Coke is pursuing a similar strategy, he says, and “I’d hate to draw them a map.”
Coca-Cola’s assistant vice-president for the education market, Bonnie J. Pruett, says Coke isn’t out to copy Pepsi’s strategy for control of the college market, but she concedes, “In the last few years, that market’s probably gotten more competitive.”
Coke is still the biggest player in the market -- its products are sold on 85 per cent of all U.S. campuses, compared to 70 per cent for Pepsi -- but Mr. Beck says “that dominance has eroded.” Companies like Dr. Pepper and 7-Up play a lesser role.
What’s behind the companies’ thirst for the college market?
Ms. Pruett says Coke views college campuses as prestigious, and having exclusive arrangements “gives us a nice environment for reaching youth from a marketing perspective that isn’t available in a lot of places.” The youth market, she says, includes people from ages 12 to 29.
Mr. Beck says Pepsi sees its campus contracts as a chance to tap into “our future core-user base” while they are still developing brand loyalties.
The advertising exposure that is typically part of the arrangements is also important to the companies. Oregon State spent about $850,000 of its new revenue to install new scoreboards in its arena and stadium, and will give Coke space on those scoreboards to advertise. Robert Halvorsen, Oregon State’s business-services director, says that if the university had not been prepared to offer that space, he doesn’t think Coke’s bid would have been as attractive as it was.
And of course, the exclusives allow the companies to sell more.
The colleges say they expect to make more, too.
Oregon State will receive $2.3-million and a percentage of sales in exchange for Coke’s exclusive rights for soft-drink sales until 2006. (The contract for sales at athletics facilities kicks in when Pepsi’s existing contract for athletics venues expires in two years.)
Coke promised to install vending machines that allow students to charge sodas on their campus ID cards, a move expected to increase sales and hence boost Oregon State’s income.
Indiana University is putting the final touches on a contract with Coke that would pay the university $15-million over 10 years for rights to sell Coca-Cola products exclusively on the university’s seven campuses. Indiana says it did not sell scoreboard advertising rights as part of its package, but will allow Coke to advertise on the cups used in the sports facilities.
Oregon State estimates that it made about $320,000 a year from soda sales; Indiana, about $400,000. At both, Coke outbid Pepsi for the exclusive rights.
Last month the University of Cincinnati announced that it had authorized a 10-year agreement with Pepsi, in return for a $3.75-million “commitment of financial support.”
The university agreed to use $3-million of the money to help pay for renovations of its football stadium, and $750,000 for scholarships. Pepsi will receive rights to advertise in athletics facilities.
Pepsi’s deal with Penn State promised the institution about $8-million above what it could have expected from soft-drink sales over the life of the contract.
In return, Pepsi got rights to advertise on the football stadium scoreboard, on spots during coaches’ radio and television shows, and in the programs sold at sporting events. Pepsi can also advertise in the basketball arena and on menu boards in dining halls. “Beyond that, we don’t have signs all over the campus,” says William H. McKinnon, associate vice-president for business services.
Oregon State has 14,000 students and Penn State has 60,000.
“Proportionally, I don’t think we did too bad,” Oregon State’s Mr. Halvorsen says. The contract, he says, does not compromise the university, and it will not detract from the mission of teaching, research, or public service “one iota.”
Oregon State wouldn’t sign an exclusive with a liquor company, “but a soft drink made sense to us,” he adds, “particularly since we’re also strapped for funds.”
He says the institution has received fewer than 10 complaints about the Coke deal, a few from Pepsi drinkers and a few from people unhappy with how the university plans to spend the extra money.
In selecting Coca-Cola, Mr. Halvorsen says he and others were impressed by the company’s pledge to improve marketing and to support the institution. Coke showed an interest in Oregon State, Mr. Halvorsen says.
“They wanted to be part of this organization.” He says company officials also mentioned the potential for scholarships through the Coca-Cola Foundation, but that “there were no promises.”
Coca-Cola’s Ms. Pruett and a spokeswoman for the foundation say grants are based on merit, without regard to an institution’s business relationship with Coke.
“We would communicate to a customer that we do have the foundation and how to access it, but it would never be part of what we’re offering in a contract,” Ms. Pruett says. “I would imagine that a university understands where they get their philanthropy money from,” she adds. “But it certainly isn’t a criterion on our part.”
Colleges that do business with Pepsi have received grants from the Coca-Cola Foundation, a spokeswoman says.
At Cincinnati, officials began discussions with Coke but ultimately chose Pepsi because it offered better terms. Greg Hand, a spokesman for the university, says officials were sensitive to concerns about appearing to be soliciting donations in return for the university’s business. But he says they believed circumstances demanded it.
“We have had so many cuts in our traditional sources of funds, we have two choices,” Mr. Hand says. “One is to be traditional and broke. One is to be entrepreneurial and keep operating. There are no second thoughts here.”
