Corporate Barter: Out Of The Dark?

Dec. 21, 2004
More and more manufacturers are reaping the benefits of these exchanges, but they must be aware of the potential pitfalls.

When a company manufactures products that are used outdoors, the weather can play havoc with its sales forecast. "Sometimes Mother Nature throws us a challenge," says Edward Seligman, director of business planning and operational compliance for MTD Products Inc., a Cleveland-based manufacturer of outdoor power equipment. About five years ago, management at MTD, which also makes automotive stampings and tools and dyes, decided to produce and promote its own line of brand-name products. Previously, MTD had manufactured largely for the private market. While the switch has been successful -- about 90% of the products MTD sells feature the company's brand name -- it also has been a learning experience for management, as it took on the knotty task of forecasting inventory and sales levels. When the company's sales were primarily to the private market, MTD's customers were responsible for much of this. After some unseasonable weather one year, MTD found itself with an excess of mowers. Moving them through the normal channels could have ended up netting the company a mere 15 cents on the dollar, as new models were due out soon. In an effort to keep its top and bottom lines intact, the firm decided to work with Icon International Inc., a Stamford, Conn.-based corporate barter company. Icon purchased MTD's excess mowers at wholesale price. However, instead of receiving cash for the sale, MTD was paid in trade credits. It used the credits to buy time on several cable television networks over the next 18 months. Like MTD, almost all companies find it nearly impossible to consistently and precisely forecast the correct level of inventory. Corporate barter can be an effective means of handling excess or obsolete products or excess capacity. During the last decade, the value of transactions in North America completed via barter has more than doubled. The Corporate Barter Council, an association of barter companies located in New York, estimates that businesses bartered $8.2 billion of goods and services in 1997, up from $3.5 billion 10 years earlier. Businesses that have used corporate barter include such recognized and established names as 3M Co., Ocean Spray Cranberries Inc., and AT&T Corp. It's not unusual for the deals to top seven figures. Transactions can be structured in a variety of ways. For example, four years ago The Allen R. Hackel Organization (TAHO), a barter company based in Newton Center, Mass., worked with a manufacturer of sunglasses that had decided to upgrade its product line. At the time, the company still had on hand some 12,000 of its older and less expensive models.TAHO bought the sunglasses for trade credits and set about selling them according to the agreement. Four years later, TAHO still has the sunglasses, says President Paul St. Martin. "The restrictions were pretty severe. About the only places we could sell them were cold, wintry locations where people don't need many sunglasses." However, the client recently has eased the restrictions a bit. In addition, the client was so pleased with TAHO's willingness to abide by the agreement, that it struck another deal with TAHO a year later. This one was for bike helmets, all of which TAHO sold. Although TAHO's sunglasses deal was a little unusual, it prompts a common question: How does the barter company make money in all of this? In a typical transaction, the barter company purchases the unwanted products with trade credits redeemable for media. Because barter companies buy media in such large quantities, they can negotiate favorable pricing for it. The barter company then sells the goods at a price that covers the cost of the media and also leaves a profit. Turning to the other side of the transaction, why would a manufacturer want to barter? Like MTD, many companies use barter to achieve two objectives: to get rid of unwanted inventory and to increase their marketing budget without spending more cash. "Any company that does any amount of advertising definitely needs to consider barter,"says Phil Ponturo, a manager with Lucent Technologies Inc. "If they don't, they're wasting a good vehicle for adjusting inventory balances and getting something in return." Several years ago, AT&T (from which Lucent was spun off) found itself with excess inventory of a new consumer product. When discounting and heavier advertising failed to move the goods, a supplier suggested the company look into barter, says Ponturo, who was with AT&T at the time. Ponturo worked with New York-based barter company Global Marketing Resources to structure a deal to take the inventory off AT&T's hands in exchange for advertising credits. Because the transaction was sizable and barter was a new area for AT&T, the deal included a restriction that isn't typically seen. The cash generated from the sale of the products was put into an escrow account that was jointly held by AT&T and Global Marketing. As AT&T used up its advertising credits, the dollars were released back to Global Marketing. Barter also can be a way for a company to cost-effectively enter a new market. Camera manufacturer Konica U.S.A. Inc. has done just that, says Paul Gordon, marketing director with the Englewood Cliffs, N.J., firm. For example, Konica, a client of New York-based Tradewell Inc., may structure a barter deal that directs the products to states where the company lacks a good distribution channel. Although less common, barter can help a manufacturer translate excess production capacity into a boost to its advertising budget. Icon International worked with a soft-drink manufacturer that was able to increase production at a minimal incremental cost and use the extra soda in partial payment for additional media placements. Although the bulk of barter deals involve products, companies also have been looking at barter as a way to handle real-estate holdings that no longer fit their needs. When Heineken U.S.A. Inc., wanted to move from its offices in New York's Rockefeller Center to a location outside the city, it had to find a tenant to sublet the space. However, rates for office space had softened in the time since Heineken had signed the original lease. Heineken worked with Icon, which found a media company to occupy the space. The media company paid Icon in radio time, which Icon put into its "inventory" of media credits. Icon in turn paid Heineken in a mix of media time that was worth nearly the face value of the lease. Heineken continued to pay the landlord in cash. "It was an innovative way to get something of value," says Dan Tearno, vice president of corporate affairs with Heineken. Even as corporate barter grows, it remains somewhat shrouded in secrecy, and many companies decline to discuss it. Their reluctance may be a result of the less-than-sterling image the barter industry has had in the past or to the secretive nature of most marketing campaigns of which barter is a part. In some cases, barter may be a sore subject because it can be construed to mean that the company has a problem; otherwise, why would it need to get rid of the inventory? One food-industry executive -- who prefers to remain anonymous -- describes barter as a mushroom: "Barter's growing all the time, but it's growing in the dark." Even companies that have successfully used barter acknowledge that it can be a tough sell. "There was tremendous hesitation at first," Konica's Gordon says. "There are millions of horror stories out there." His solution was to start with a small deal and gradually increase the size of the transactions. In some situations, barter isn't an effective solution. Many in the industry agree that if a company can get at least 50 cents on the dollar for its inventory, it makes sense to sell the goods outright, take the cash, and move on. In addition, companies that have no need to advertise on a regular basis are less likely to be able to make barter work for them. "You have to be in a situation where you have a consistent advertising budget and where you do proactive advertising," Lucent's Ponturo says. Although companies sometimes use barter to offset travel costs, these deals tend to be smaller. In the future, bartering for items other than advertising may become more common, as the industry grows and clients request new services, predicts Richard H. Pippert, vice president of Global Marketing Resources. At the same time, barter deals for advertising should remain strong, as the proliferation of new media such as the Internet means more venues that need advertisers, says Sal Tofano, sales manager with Fox Sports, New York. The growth may help the industry lose its "mushroom" status, so that it becomes better understood, and more companies consider it a legitimate resource. As MTD's Seligman notes, "You always want to get your inventories in line from the beginning. However, if you have to use it, barter is a good way to get rid of inventory."

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