With the announced merger of the two national foodservice distribution giants, Sysco and US Foods, the food distribution landscape is undergoing a seismic change. What will be the impact on schools, a unique segment of the onsite foodservice universe?

There are more than 14,000 public school districts in the U.S., and about 100,000 public schools, but the average district has less than 1,000 students. While hard to quantify with certainty, school foodservice generates between $18 and $20 billion dollars annually, approximately 60 percent of it from federal reimbursement for school meals. School meal program purchases generate around $10 billion.

Both the National School Lunch Act and Code of Federal Regulations include controls on procurement, generally by setting a baseline that states and districts use to establish their own procedures (as long as they are not less stringent than federal law).  

Federal procurement rules require that contracts be awarded to the vendor that offers the most advantageous proposal and is both responsive and responsible, but that doesn’t necessarily mean that schools have to buy the least costly products if doing so undermines the integrity of their programs.  

Eighty percent of what is procured by school meal programs is commercial product, with the rest being government commodities. Distribution represents a third area of procurement expense, though most schools bundle product and distribution costs, asking distributors for pricing of items either generically (2.25 ounce beef patties) or specifically if there has been a competitive solicitation to identify acceptable products by brand and code.  For larger districts, the solicitation may go directly to the processor, and distribution services are sought separately for the products of each successful vendor.

Understanding how schools buy

By law, schools must use a competitive procurement method for all purchases.  Where the only, or primary, differentiation in making an award is price, USDA requires schools to use price quotes or bids, but where there are other significant factors as well, schools might use a request for proposal (RFP) approach.  

When issuing an RFP, schools have to identify both the factors the award will be based on, and explicitly state the weight given each factor in the final decision (price must be the most heavily weighted factor). Also, factors like level of service and variety of SKUs must be defined by objective standards.

This approach works well for larger districts and those with a number of vendor options. Unfortunately, most school districts are small to very small and have limited choices both in available product and distribution services. For the most part, they must choose from the SKUs carried by the distributors available to them.  

To work around some of this, schools use a number of strategies. One is joining a purchasing cooperative such as the Super Co-op in California, which represents districts serving about a third of the state’s school meals. Super, as it’s known, bids directly with manufacturers for products, and separately for distribution. A few states take on the co-op role themselves, issuing and administering all aspects of procurement for their districts.

Another option is a piggyback bid, where smaller districts join in on a contract negotiated by a larger one (assuming the vendor’s consent). Related to the purchasing co-op approach is the use of a group purchasing organization (GPO), a relatively new phenomenon in the school procurement world because of the segment’s regulatory restrictions and price sensitivity.

For the 20 percent of school food represented by USDA commodities, a variety of distribution systems are in play. About 55 percent of commodities are bulk items (chicken, cheese, beef, turkey, etc.) that are diverted directly to processors for conversion into end products. These are then treated as commercial products except that the value of the commodities used in their manufacture are passed on as discounts to the schools purchasing them.  

Unprocessed commodities, what used to be called “brown box commodities” because of their packaging, are termed “direct ship” by USDA and their distribution varies by state. Some handle it themselves from state warehouse and distribution systems, while others contract with commercial distributors.