The University of Florida Earns a Yearly $20M Cut of Gatorade Profits. Here's Why.
- Every time you buy Gatorade or any other product under the PepsiCo umbrella, the University of Florida gets a cut of the money.
- The agreement between the members and the university allocated 20% of the royalties to the University of Florida.
- The University of Florida is one of many that uses its programs to work as a business in order to generate revenue.
The History Behind Gatorade
Dr. James Robert Cade was a nephrologist who studied exercise physiology. He joined the University of Florida College of Medicine as an assistant professor in the renal division in 1961.
Dr. Cade and a team of researchers, including Dr. H. James Free, Dr. Dana Shires, and Dr. Alex de Quesada, began work in 1965 to answer the question, "Why didn't football players urinate after a game?"
Recommended Read: The Annual Cost of the Super Bowl
At the time, common sense advised against replenishing liquids lost due to sweating during a game, and the team quickly discovered that players lost so much fluid that they had none left to form urine. As a result, the athletes in Florida did not drink water during practices or games because coaches at the time misbelieved that fluids caused cramping.
After five days of testing, Cade and his colleagues Shires, Alejandro de Quesada, and Jim Free found that the players were losing water and sodium, and their blood sugar levels were dropping. They thought the solution was a straightforward water-based beverage made from ingredients they already had in their lab: salt, glucose, and phosphate.
During a Friday scrimmage, head coach Ray Graves permitted his freshmen players to consume the novel mixture. Because of how well it worked, he asked Cade to make 100 liters for the night in preparation for a crucial game against Louisiana State University the following day.
Dr. Cade served the beverage from two enormous containers parked on the sidelines in a red wagon. The players, who were feeling the heat, downed Gatorade, dominated the second half, and won 14-7.
Image Credit: Gregory Reed / Shutterstock.com
The beverage produced a similar effect over the next two years: Florida would use a surge of late-game energy to win football games.
A few universities had already started producing comparable drinks, most notably rival Florida State University's "Seminole Water." Huskerade was invented in 1964 by an athletic trainer at the University of Nebraska, according to Darren Rovell's Gatorade book First in Thirst.
However, winners write history, and Florida was a victor.
After the team's 1966 Orange Bowl appearance, Miami Herald sportswriter Neil Amdur penned a column about the team's legendary sports drink, Gatorade. Newspapers all over the US published the story after it appeared on the wire.
Both Gatorade and the relationship between the creators and the university were on the verge of explosion.
One Big Mistake
A high school team, boxer Jerry Quarry, and the Cystic Fibrosis Foundation requested a Gatorade shipment.
However, as more and more news stories appeared, Cade and his team concluded that their creation was even superior to the Florida football team.
They needed to gain business knowledge. So, according to Cade and Shires, they entered the university as their first step.
Cade told Florida's university president and head of sponsored research that he thought every sports team in the nation would pay to drink Gatorade.
Later, Cade recalled that "[the head of sponsored research] said the University had no money for doing this." They were uninterested because they needed someone assigned to develop products. But Cade persisted nonetheless.
The professor completed several early deals and borrowed $500 (roughly $4000 today) from the bank to pay for bottling supplies. Stokely-Van Camp, an Indianapolis-based producer of canned foods, expressed interest in 1967.
According to First in Thirst, Cade and his team demanded a one-time payment of $1 million for the rights to the beverage. Stokely resisted, worried that Gatorade wouldn't be popular enough for the business to make back the investment.
As a result, the Gatorade Trust's founders reluctantly agreed to a 5-cent per gallon sold royalty structure.
The three original flavors of Gatorade were grape, orange, and lemon-lime. The drink quickly gained popularity, proving this was a wise business decision.
The profits allocated to the Gatorade Trust increased from $29k in its first year to $100k, or $768k after accounting for inflation, in year 3.
Fakes appeared on the market right away:
- The University of Georgia released Bulldog Punch.
- South Carolina University had its own Gamecock Punch.
Image Credit: Roman Samborskyi / Shutterstock.com
However, Gatorade continued to sell, and the Florida Board of Regents realized the university had made a terrible error.
In July 1971, while attending a conference in Munich, Germany, Cade learned that Florida had filed a lawsuit seeking 100% of the royalties from Gatorade.
Recommended Read: College Athletes Profit from NIL Deals
The 80-20 Divide
University-related patents and products were unheard of in the 1960s. In 1965, when Cade's research team created Gatorade, only 96 patents from 28 universities were authorized.
Most universities either didn't think the inventions of their faculty would be profitable or needed to be savvier to capitalize on them. For example, in the 1950s, Indiana University lost out on licensing a fluoride compound to Procter & Gamble used in Crest toothpaste, leaving tens of millions of dollars on the table.
Florida's lawsuit was in doubt for two main reasons:
- It needed a well-organized system for handling innovation. Cade had not consented to a contract that faculty members were required to sign, giving Florida the right to their inventions.
- The federal government, not the university, provided funding for Cade and his researchers in the form of a National Institutes of Health grant. Cade later estimated the NIH's funding for Gatorade research at $42.70, which also covered the cost of electricity for his lab.
However, a vintage TV ad with Florida coach Ray Graves had already linked Gatorade to the school.
In addition, the name itself was associated with the University of Florida's Gator mascot, and the Orange Bowl victory of the football team helped Gatorade gain early notoriety that set it apart from other similar beverages in the nation.
Florida and the National Institutes of Health joined forces in a federal lawsuit against the Gatorade Trust and asked for continual postponements. Legal fees accumulated. Florida's attorney forewarned the researchers that the university would eventually take the Gatorade Trust to court nationwide.
The Gatorade Trust's members decided to settle even though they knew they would eventually become wealthy.
Image Credit: University of College / Shutterstock.com
The agreement between the members and the university allocated 20% of the royalties to the University of Florida. Cade claimed that he and four other trust members received 10% of the royalties, with the remaining 40% divided among the remaining 42 members.
They all received incomes beyond their wildest expectations.
Following the lawsuit and Quaker Oats' acquisition of Stokely-Van Camp, Gatorade's popularity grew even more, reaching $600 million in sales in 1990 and capturing 96% of the market for sports drinks.
According to Beverage Industry, Gatorade (now owned by PepsiCo) generates around $3 billion in annual revenues and holds a 67% market share.
Florida's back-paid royalties increased from $237k in 1972 to an estimated $250m in 2015. The Gatorade Trust made $1.25 billion in 2015, based on an 80-20 split, and has been making $80 million annually in recent years.
Even for a company that earns billions of dollars annually, royalties are not a small cost. And if Cade hadn't made one very astute move, the Gatorade Trust and the university would almost certainly have received nothing today.
Recommended Read: March Madness Players To Profit from the Tournament
The Importance of Trademarking
Robert knew patents expired every 20 years, and trademarks were forever as long as you renewed them.
He was aware of this, and PepsiCo owes royalties only because of the Gatorade registered trademark, which Stokely-Van Camp first registered after agreeing with the Gatorade Trust.
Image Credit: Rei Imagine / Shutterstock.com
Even though it switched from the Gatorade logo to the letter "G" over the past few years, the company has been unable to exit the agreement.
The Hustle quoted Jim O'Connell, Florida's assistant vice president for technology transfer, saying, "Hey, you know, we may not have to pay you guys because it doesn't say Gatorade." But I'll say this: They give us royalties on those goods.
The university ranks near the top of the market, patenting about 140 inventions annually and earning $500 million from licenses between 2008 and 2018. Around $2.9 billion was made in licensing fees from university-related patents in 2018.
However, Florida has occasionally wondered what might have happened if it had held onto a more advantageous agreement.
In 1990, a university official told the Los Angeles Times that Florida's share of Gatorade royalties could have been 2-3 times higher if the university had been more innovative and better organized. According to its new intellectual property policy, the university can now claim ownership of any invention developed with its assistance; the inventor typically receives a 25% to 40% cut.
However, the university is most proud of its ties to Gatorade and Cade. A few months before his death, he was inducted into its athletic hall of fame.
Cade was not showered with Gatorade when he accepted the award at a banquet in Gainesville.
Recommended Read: Why Athletes Need Financial Literacy
The Money Wrap-Up
Dr. Cade developed his unique formula for heat-illness prevention. As a result, he made millions in royalties for himself, his colleagues, and the University of Florida. The University of Florida is one of many that uses its programs to generate revenue. The money goes back into the programs of the University of Florida so they can continue to be successful.
Main Image Credit: Patcharaporn Puttipon4289 / Shutterstock.com