Audit Report on the Process by Which the Department of Education Awarded a Vending Machine License to the Snapple Beverage Group

AUDIT REPORT IN BRIEF

This audit of the New York City Department of Education (DOE) reviewed the processes by which DOE awarded a vending machine agreement to the Snapple Beverage Group, Inc. (Snapple) and authorized Octagon, Inc. (Octagon) to serve as its marketing agent.

In June 2003, DOE informed the schools that all existing vending machines selling beverages should be removed by the beginning of the 2003-2004 school year to allow for a centralized vending process. DOE centralized the vending process due to a new Chancellor regulation (Regulation A-812) on the nutritional content of the food and beverages being sold to students and the need for better controls over vending arrangements. In addition, DOE had an interest in establishing a concession and sponsorship arrangement with a beverage company.

On June 23, 2003, DOE, based on a request for proposals (RFP) issued in 2001, signed an interim authorization for Octagon to serve as DOE’s agent for a vending machine marketing and administration program. On behalf of DOE, Octagon implemented a vendor selection process in July and August to select a beverage company for the school vending machine opportunity.

On September 9, 2003, DOE signed an interim agreement giving Snapple the exclusive right to sell water and 100 percent juice products in vending machines to be installed in the New York City public schools. The agreement guaranteed that Snapple would pay a minimum of $40.2 million to DOE between September 1, 2003 and August 31, 2008. Also on September 9, 2003, the New York City Marketing Development Corporation (MDC) signed a letter of intent with Snapple for the exclusive right to sell water, iced tea, and chocolate drink beverages in vending machines to be installed in City buildings. This agreement guaranteed that Snapple would pay a minimum of $126 million to the City between January 1, 2004 and December 31, 2008.

The process that the Department of Education followed in awarding Snapple an exclusive vending machine opportunity in about 1,200 City schools was fundamentally flawed. For example, there were minimal solicitation efforts, an inadequate request for proposals package, and a defective bid evaluation and selection process. In addition, although DOE’s process for choosing the marketing agent to implement the vendor selection process for the school vending machine opportunity was generally adequate from the announcement of the marketing RFP through to the selection of an agent, the process became questionable in that the ownership of the significant party of the selected marketing agent changed before it was authorized to work for DOE. Furthermore, Octagon, the agent subsequently authorized to handle the marketing of the vending machine opportunity, stands to realize exorbitant compensation for its services.

• Not pursue a school vending machine contract with Snapple in connection with the completed vendor selection process. Rather, DOE should conduct a new process for this opportunity that complies with its own RFP manual and ensures a fair and reasonable result.
• Ensure that any concession and sponsorship opportunities be handled through a well-structured request for proposals process in which there is: extensive public notification of potential bidders; an RFP package presenting detailed specifications and clear standards for evaluating the proposals; a pre-proposal conference to ensure that all bidders receive consistent information about the opportunity; and a written assessment of the competing proposals based on the evaluation standards identified in the RFP.
• Either reopen an RFP process or, at the very least, require a revised proposal before entering into an agreement with a company that has experienced a change of ownership after being selected through an RFP process. DOE should also prepare a written justification for entering into an agreement with such a company.
• Restructure and greatly reduce Octagon’s compensation for its marketing and administration work on the school vending machine opportunity.
• Not award any new marketing assignments to Octagon in relation to the 2001 marketing RFP.
• Before hiring a marketing agent for similar work in the future, seriously consider the benefits of implementing the concession and sponsorship RFP process itself or of seeking the assistance of other City agencies.

On February 6, 2004, a draft response was sent to DOE officials with a request for comments. We received a response from DOE officials on February 24, 2004. In its response, DOE challenged many of the audit’s findings and recommendations. We address the full scope of DOE’s response in a section entitled "Discussion of DOE Response" that we present at the end of this report. The full text of DOE’s response is included as an addendum to this report.