Barter Gets Real

Say "barter" to most people, and they picture pioneers swapping bearskins for flint. But barter is thriving in the electronic age among a growing roster of prestigious companies that exchange surplus assets for more useful goods and services.

It's not a ground swell, to be sure, but corporate barter volume has progressed steadily in recent years to record levels. The International Reciprocal Trade Association (IRTA), in Chicago, tracked 1,424 exchanges, a doubling of activity since 1991. IRTA estimates that there were $9.1 billion worth of barter transactions in North America last year, with 84 percent handled by barter specialists. Another $100 million worth of transactions transpired in Europe, and $350 million more in Australia and New Zealand. The barter industry association, the Corporate Barter Council, in New York, has nine corporate members, all of which subscribe to a code of ethics governing their practices. IRTA counts 686 barter companies in North America alone, with more than 400,000 corporate clients.

For companies struggling to reduce operating costs and maximize working capital, bartering supplies a marvelous tool. Barter is a great way to dispose of excess inventory or other assets that would otherwise have to be written way down, liquidated at a deep discount, or written off entirely. Barter maximizes the economic value of an illiquid asset by transforming it into a cash equivalent.

It works especially well for companies with time-sensitive inventories--seasonal markets; highly competitive markets undergoing rapid change, such as computers; and what Paul St. Martin, CFO and chief operating officer of the oldest firm in the barter business (founded 1954), Allan R. Hackel Organization Inc., characterizes as "wasting" assets--those with a limited shelf-life, such as media airtime and magazine advertising pages. Other kinds of assets are bartered as well-- white elephant real estate is a growing market segment; off- specification product is another.

YANKEE INGENUITY
Most corporate barter transactions involve more than two companies, and cross-border swaps are common. Cash often changes hands. These complex arrangements are made by an industry of matchmakers, the "barter companies." Such companies trade in the bartered goods for their own accounts, rather than simply brokering deals.

Yankee ingenuity spawned corporate barter. Most of the precedent-setting transactions 20 or 30 years ago involved American companies trading excess inventories for advertising space through an intermediary. Trading excess inventory for advertising space still forms the heart of the barter business. For example:

* Minolta Corp. turned over 8,000 8mm camcorders to Media Resources International (MRI) and received media credits of nearly twice the cash value of the goods.

* Instead of swallowing a loss of up to $1.35 million on a property Citicorp carried on its books, the largest bank in the United States exchanged the property for $1.7 million of credits that supplemented the credit card division's advertising budget.

* Planters Peanuts had several hundred thousand pounds of shelled pistachio nuts in an inconvenient bulk form. MRI proposed that the goods be repackaged (private labeled) in one-pound cans. The media company then purchased the nuts for a substantially greater price in trade credits, which Planters used to complement current advertising schedules.

* Two million pounds of Hawaiian guava jelly covered part of Ocean Spray's tab for advertising cranberry juice.

* To keep production levels high through the launch of Natural Touch, a baby-care product, James River Corp. sold the excess inventory to Icon International, which paid the paper-goods manufacturer with media credits and sold the boxes of Natural Touch in a variety of markets outside the United States.

BARTER BAILOUT
MTD Products, in Cleveland, is flourishing today thanks to a barter arrangement made five years ago that benefited the closely held maker of outdoor power equipment. Edward Seligman, the director of business planning and operational compliance at the company, explains that his company's markets have changed over the past five years. MTD used to sell 90 percent of its products--such as lawnmowers--under the private labels of its large retail chain customers. However, around five years ago, retailers began demanding branded equipment, holding MTD responsible for carrying most of the inventory and for footing far more marketing costs, activities MTD didn't have much experience with.

Because MTD's products are seasonal, inventory management was tricky. One season, after an inaccurate weather forecast, MTD found itself sandbagged with excess inventory, which the company had to liquidate at a deep discount. At the same time, the company began stepping up its seasonally appropriate purchases of advertising time, and discovered that Stamford, Connecticut­based Icon International had better buying power than MTD had. The solution: barter. The next time the company found itself with excess inventory, it swapped the inventory for airtime.

Seligman couldn't be more pleased with the "tremendous cable- buying power" demonstrated by Icon, and is also impressed with the company's outlets to dispose of its out-of-season inventory. The deal preserved essentially all of the value of the company's out-of-season and obsolete models of equipment, and traded it for otherwise out-of- reach brand exposure.

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