Transcript New Age of Barter - Chicago Research & Planning Group

THE NEW AGE OF BARTER
• Why Barter?
• Who Barters?
• International Barter
and Counter Trade
• Government Views
• Technology Behind
Modern Barter
• Barter Companies
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WHY BARTER?
• Profit
• Increased Buying
Power
• Utilization of
Surplus Capacity
• Increased Market
Share
• Upgrading
Manufacturing
Capabilities
• Preservation of
Hard Currency
• Expansion of
Products for Export
• Access to New
Markets 2 of 33
WHY BARTER?
PROFIT
The primary reason business owners and professionals barter are to increase
sales, gain new customers and conserve cash. Through associations with barter
exchanges and corporate barter companies, businesses can accomplish all three.
Companies of all sizes and industries are seeing the value of bartering. From the small
restaurant owner that wants empty tables filled to the multi-million dollar manufacturer
that wants to avoid a loss on the balance sheet, barter is more and more becoming a
preferred option.
In the case of the restaurant, if the owner is operating at only 65% capacity, he
has an excess capacity that has not been tapped. If they offer their services to a barter
exchange, they can bring in new customers. The trade dollars generated by the new
business can then be utilized to purchase carpet cleaning, paper napkins, or advertising.
All of these conserve cash and improve the bottom line.
With the manufacturer, if they are challenged with an inventory that is slow or
non-moving, they are likely going to have to liquidate it at 10% - 15% of the wholesale
value. This will show as a write down or a loss for the company. Corporate barter
companies will pay the prevailing wholesale pricing for the inventory and aid in the
unwind of the trade credits thus preventing the loss on the balance sheet and ultimately
saving cash on future expenditures.
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WHY BARTER?
INCREASED BUYING POWER
Trade dollars are in many cases much easier to acquire then cash
dollars. By utilizing the margin in a product and service, barter allows
companies to always purchase at a discount. If the manufacturing cost of an
item is $10 but you can trade that item at its’ wholesale value of $16 for
printing, the $16 dollar print job only cost you $10.
In situations where companies have strict budgets or have spent their
financial allotment, the purchase of services like media and travel can be
bartered for thus not exceeding budgetary restraints and in turn increasing
purchasing power. Many companies use barter to augment their advertising
budgets which in turn bring them additional cash clients.
If the inventory was one that was going to be liquidated at 10% of
value, it is easy to see why the popularity of barter is growing worldwide.
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WHY BARTER?
UTILIZATION OF SURPLUS CAPACITY
Surplus capacity can be a pitfall of all types of companies. In Far East Russia for
example, there are tremendous natural resources as well as an industrial infrastructure
that is under utilized. There are manufacturing facilities that have ceased production
because they cannot pay for the raw materials necessary to operate. In a barter
transaction, the excess capacity of a manufacturer can be leveraged to purchase these
materials and ultimately increase productivity. Here is an example of a transaction:
Several Russian mink farms were challenged with how to afford to feed their
minks. The reputation of the quality of Russian furs had been on the decline for several
years and the impact was being felt. Decisions had to be made as to whether they could
sustain another season.
The situation: No money available for mink feed
The Problem: Starving minks make poor pelts and result in lower earnings.
The implication: Without a solution, the farms would cease
The need: A way to acquire high quality nutritious feed for the minks
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WHY BARTER?
UTILIZATION OF SURPLUS CAPACITY
Barter allowed a meat company in New Zealand to take the fodder, or “scraps,”
leftover during their manufacturing process develop it into a freeze dried, dog food like
product which was then sold for trade dollars. The feed then was traded to the mink
farmer for a pelts that were harvested. The barter company then sold the mink pelts for
cash.
What was accomplished?
The mink farm produced the highest quality pelts in recent years. This was
accomplished with no cash cost to the farm. The farm saved cash by not having to
purchase food.
The meat company in New Zealand has utilized a surplus capacity that they had
not even been aware of and developed a new market for all of it’s products.
The barter company converted trade dollars into cash dollars. Everyone came out
a winner. (except the minks).
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WHY BARTER?
INCREASED MARKET SHARE
Many companies are interested in gaining a foothold in new markets
both domestically and internationally. Barter is a strong tool for entering a
market that may not otherwise have been receptive to the product or the
producer.
In one case, a large industrial machine manufacturer was interested
in entering the Russian marker place but was not able to overcome existing
competition from other US interests in Russia. Through barter however,
they are able to sell into the depressed economy and take back products that
are then sold for cash to cover their investment and produce a profit.
A printer manufacturer was facing the liquidation of several thousand
printers that were obsolete. They were able to trade them for advertising
and printing services on which they had intended to spend cash.
When the printers were re-marketed and distributed by the barter
company, the printer manufacturer realized increased consumption of their
printer supplies and a stronger market share.
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WHY BARTER?
UPGRADING MANUFACTURING
CAPABILITIES
Another compelling reason that businesses look at barter is the ability to
expand operations without financing or outlay of cash.
One example of this is a computer training company (New Horizons) that
needed to increase the number of locations that it offered classes. A company they
were soliciting had chosen to do business with a competitor. The company receiving
the training had invested in twelve new computers and all the software required to
train their staff and then dedicated space for the classroom. The competitor training
company only needed to provided the courseware and the instructor. They used the
room once per week to train the company’s employees.
New Horizons made a second attempt at wining this business. This time they
offered to barter the training that the client needed in exchange for the use of the
classroom during the remaining 5 days per week.
The company received their training on-going with no additional outlay of cash
and the training company received an additional location without the need to lease
office space and purchase computers and software. Combined, the two companies
saved an estimated $42,000.
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WHY BARTER?
PRESERVATION OF HARD CURRENCY
In economies where currency is in flux or has little or no value outside
of it’s borders, barter can be the only way to initialize international trade. In
many developing nations there are limits on the amount of currency,
particularly the US Dollar, that a company may spend across borders.
Preservation of this currency for priority usage is an essential part of many
overseas businesses.
Whenever there is an opportunity to purchase
internationally without spending the limited cash on hand, they are delighted.
In North Korea, there are restrictions on US companies that prevent the
spending of US Dollars with North Korean companies. The only way we can
bring products out of this country is in barter and counter trade arrangements.
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WHY BARTER?
EXPANSION OF PRODUCTS FOR
EXPORT
New Zealand and Turkey have demonstrated successfully how barter
can expand international distribution channels and become a profitable
venture. In New Zealand, a bottled water manufacturer is exporting their
bottled water to the United States. Here it is being traded for credit with hotels
and resorts all over the country. Some of the hotel credit is being returned to
the water company and the balance is being kept by the barter company.
A Turkish towel manufacture is exporting towels to the US for us in
hotels as well. In this case, the towel manufacturer is taking back trade dollars
which are internationally recognized and valued 1:1 with the US Dollar and is
spending them in their local economy on business related products and
services.
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WHY BARTER?
ACCESS TO NEW MARKETS
All of the aforementioned items in one way
or another help companies expand locally or
internationally. They open doors into places
restricted by trade embargoes, they give value to
economies that otherwise would be valueless,
and they solve problems in a more equitable
fashion then conventional business practice
allows.
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WHO BARTERS?
Manufacturers barter because they
receive more equity from unwanted surplus
or obsolete inventory then they would
realize in a cash liquidation.
As long as a company is spending
money, they are a candidate for barter.
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WHO BARTERS?
•
•
•
•
•
Manufacturers
Media Companies
Hospitality Companies
400,000 US Businesses (IRTA fact sheet)
30 Percent of the Worlds Total Business (US
Department of Commerce)
• $8.5 Billion Annually (IRTA fact sheet)
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INTERNATIONAL BARTER
AND COUNTER TRADE
• Counter trade
• Offset
• International Trading Partnerships
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INTERNATIONAL BARTER
AND COUNTER TRADE
International barter is comprised of two separate
elements: counter trade and international reciprocal
trading.
Counter trade constitutes large single
transactions between governments or multinational
corporations – or where government approval or
assistance will be necessary. There is also the
likelihood than an offset will be required in order to
facilitate transacting.
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INTERNATIONAL BARTER
AND COUNTER TRADE
An example of offset is a case in which an aerospace
company was planning to make delivery of several aircraft to a
Grecian company.
The Greek government then became
involved. They informed the aerospace company that they
would only allow the transaction to take place if the aerospace
company found a way to provide the Grecian Navy with
encryption software for their telecommunications system.
The aerospace could not directly meet the request of the
Grecian government as there are laws that prevent the sale of
encryption software to foreign governments. It is considered
munitions. They contacted a broker who purchased a software
development company in Greece and aided in the development
of the required software. This is Offset.
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INTERNATIONAL BARTER
AND COUNTER TRADE
International reciprocal trading can occur when
trade exchanges and/or corporate barter companies
have formed trading partnerships abroad. The goal is
to either start new or partner with existing barter
companies throughout the world and ultimately end
up with one international currency. This has been
successful in several countries and the bartering in
different domestic economies is beginning to transfer
into the importing and exporting of goods between
these independent exchanges.
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GOVERNMENT VIEWS
All trade dollars form a bona fide barter company credited to an account
will reported to the IRS. That is the deal the industry made with the
government. On October 1, 1979, the IRS initiated the Barter Project to audit
the returns of all barter exchanges and a sample of their members. After the
enactment of the Tax Equity and Fiscal Responsibility Act of 1982, which
established a 1099-b reporting system, the IRS Barter Project was formally
terminated.
This made the barter industry above board and legitimate. The
government views barter as an acceptable business practice and trade dollars
are treated the same as cash (except that the IRS wont accept them as payment).
Barter income needs to be viewed the same as cash income. There are no
inherent tax advantages or disadvantages just because you use barter. Barter is
a marketing tool, not a tax tool. Generally speaking, as with cash income,
barter purchases that are business related are deductible, and conversely, barter
purchases that are made for personal use are not.
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GOVERNMENT VIEWS
We are in essence the creators of our own currency. This is an electronic
currency that is backed by the commodities and products in the exchange
however and we do not “sell” our currency to our clients. We are record
keepers by government definition. The US Treasury makes its money by the
sale of new money. This practice has been going on for centuries, the value of
the metal in a nickel is not nearly worth a nickel.
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TECHNOLOGY BEHIND
MODERN BARTER
• The Personal Computer
• Barterwire
• Internet Explosion
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TECHNOLOGY BEHIND
MODERN BARTER
Paul Suplizio of the IRTA traces the advent of the
modern barter system to the birth of the personal computer
in the 1970s. “Trade exchanges would never have gotten
off the ground without them. You couldn’t keep track of all
the transactions manually,” he said, especially the little
deals, such as the guy who buys his wife flowers on barter.
The cost of recording such transactions would be to great if
done manually. “Computers are necessary to keep track of
transactions, maintain accounts, create bills, compute
commissions, issue monthly statements, and render
information to the IRS.
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TECHNOLOGY BEHIND
MODERN BARTER
Barterwire was the major electronic network
linking the barter industry. With a modem and a
PC, clients and brokers could access the data bank
from anywhere with a phone. The system was an
international version of electronic bulletin boards
that proceeded Internet popularity. This was the
first of many innovative steps that legitimized the
barter industry.
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TECHNOLOGY BEHIND
MODERN BARTER
The Internet explosion that has rocked the nation and the world
for the past three years has had a profound affect on the barter industry.
Clients and brokers all over the world have instant access to the
available items of numerous trade exchanges. Barter malls have
replaced the classifieds with full graphics of the merchandise. The
electronic economy of barter has almost come full circle. As it
continues, it in some cases renders cash obsolete and practically a
nuisance. After all, cash can be lost or stolen. With a trade account,
there is no wad of bills, no automatic teller machines, on one with a
knife or gun who can relieve you of your wealth. What has been
created is a true electronic currency that is commodity-based.
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BARTER COMPNAIES
There are three distinct levels at which today’s Barter
Industry operates:
• Retail Exchanges
• Corporate Barter
• Media and hospitality
•
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BARTER COMPNAIES
RETAIL TRADE EXCHANGES
These are associations of merchants and professionals who barter their surplus
products and services among themselves. The trade exchange in essence is a clearing house
for this excess. The barter transactions are tracked buy the use of “trade dollars” which are
simply an electronic method of keeping score on what goods and services have been bought
and sold. As with a bank, trade dollars are credited and debited into the accounts of each
business. Each client is serviced by a broker who helps the clients spend and acquire trade
dollars. These brokers rarely function as principles in these transactions. Under U.S. Law,
barter exchanges operate as third party record keepers. Transactions in retail barter are
typically made on a 100% trade basis.
Exchange administrators generally earn their living by helping their clients make
money. Each client has a Broker that brings them new customers and new sales. They
usually charge a commission for this service. They then have the responsibility of helping
the client conserve cash by finding things to spend their newly acquired trade dollars on.
Again they expect to earn a fee for professional delivery of this service. These fees range
from 10% - 15% and in a sophisticated system, are split so that the client pays ½ on the
acquisition of trade dollars and ½ as they spend the credits.
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BARTER COMPNAIES
CORPORATE BARTER
Manufacturers, wholesalers, and distributors often trade
excess inventory for “trade credits” rather then take a loss on
a cash sale in a liquidation situation. Typically, a cash
liquidator will offer $0.10 - $0.12 on the dollar for surplus or
obsolete inventory. In a barter transaction, the manufacturer
can realize up to 60% more equity from their goods.
According to the International Reciprocal Trade Association,
corporate barter is forecast to triple to $21 billion in the
decade following 1996. This will bring one out of four
businesses of significant size into the barter industry.
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BARTER COMPNAIES
RETAIL/CORPORATE DIFFERENCES
The main difference between corporate barter companies and retail trade
exchanges is that the corporate traders act as a principle in the barter transaction.
Corporate traders are buyers and sellers. They make money on the resale of the
merchandise they acquire on barter. Inventories are either sold for cash, or traded
into other products.
Transaction size is also note worthy. In a retail barter exchange there are
thousands of small transactions ranging from $50.00 to $1000.00. In corporate
barter, the size of a single transaction will vary from $50,000 to $5,000,000. The
deals are specialized and much more creative then the retail market sees.
Trade exchanges deal with Trade Dollars and corporate traders deal with
media credits, purchase credits, and cash equivalent credit. These are considerably
different from each other.
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BARTER COMPNAIES
MEDIA / HOSPITALITY
Media and hospitality are two industries that
work hand in hand with barter companies. They are
what are called “soft” products. Vacation spots and
hotels have found and appreciate that trade dollars
are better then vacant rooms, especially when they
can use trade dollars to buy advertising, towels, or
bottled water.
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BARTER COMPNAIES
According to the IRTA (International Reciprocal Trade
Association) there are over 400,000 businesses involved in
organized barter. This is an estimated $8.5 billion per year
industry and that is expected to triple during the next decade.
The US Department estimates that 30% of the business
being done in the world today is some form of barter.
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BARTER COMPNAIES
Here is a sprinkling of the many barter
companies both here in the states as well as
internationally. Many of these companies have
international operations and most have areas of
specialization. Active International and Tradewell
for instance work almost exclusively with media
inventories while Global Marketing Resources is
heavily involved with travel.
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BARTER COMPNAIES
• Active International
• Barter Card
• Corporate Barter
Council
• CSI International
• Global Marketing
Resources
• ICON International
• ITEX Corporation
• Media Barter
Associates
• Media Resources
International
• The Trade Exchange
• Tradewell
• TradeBanc
• Warner Media
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TradeBanc brings Trade into the
21st Century
•
Internet-Based
•
Trade between Exchanges
•
Universal Trade Currency
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Open an account and start to
e.Barter today!
The following was developed from a
presentation by William Knaak from
the ITEX Corporation
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