Global economic meltdown boosts barter business
By Anne M Porter -- Purchasing, 2/11/1999
As the so-called "emerging" economies continue to quake and tremor, sending shock waves through the wealthier industrial nations, the business of corporate barter or multilateral trading is likely to continue to grow significantly.Even before the global economic crisis emerged in 1997, the corporate barter business was growing at a rapid pace. William Levitz, executive vice president for Atwood Richards Inc., a New York-based global multilateral trading firm, says industry statistics indicate that more than 300,000 companies were expected to use the services of commercial barter companies in 1998, accounting for more than $7.5 billion worth of goods and services. The annual growth figure for corporate barter is estimated at approximately eight percent.
In a climate of plunging currency values and canceled orders, Levitz expects increasing numbers of companies to exchange excess finished-goods inventories for such things as advertising, travel, printing, raw materials, packaging, freight, contract services, and capital equipment. They will do this, he says, by exchanging excess assets for credits with multilateral trading companies (such as Atwood Richards), then spending those credits on goods or services from either their approved suppliers or suppliers the barter firm can bring to the table. Atwood Richards, for one, guarantees that their clients control all commercial aspects of a trade transaction, including pricing.
Levitz cites the recent example of a shoe manufacturer, making inexpensive shoes for sale in Russia where "in a matter of days, the market went from millions of pairs to virtually zero." Atwood Richards, he says, bought ten container loads of shoes in St. Petersburg. Using its international network in 30 countries, the firm will find alternate markets for the shoes. Meanwhile, the manufacturer will obtain--in trade credits--the original market value of the shoes. "Why liquidate at 10 to 20 cents on the dollar, when you can receive full value for an inventory you can't otherwise sell?" Levitz asks.
In another case related to the global economic turmoil, Levitz says the Brazilian government has blocked a U.S. metals manufacturer from converting a Brazilian currency account to dollars for up to three years. "We'll purchase the currency account from the U.S. company, paying them a premium. The company will utilize their trade credits in the U.S. to pay for budgeted expenditures. Atwood can use the Brazilian currency for local operations."
Excess inventory, Levitz says, has many guises: overstock, canceled orders, packaging changes, seasonal merchandise, discontinued products. "These are all different descriptions of the same problem," he says. "We spend our time seeking and resolving companies' asset problems."
Consumer-goods inventories account for roughly 80% of the total business, Levitz says. But multilateral traders also deal frequently in excess raw materials and capital equipment. "We've acquired plastic resins from an appliance manufacturer. We've purchased corporate jets. We recently bought an entire plant from a dog-food manufacturer in the U.S."
Whenever a product is on the books for a lot more than it's worth in liquidation, Levitz encourages companies to investigate multilateral trading. "We can probably protect their book value. For example, they might be looking to sell a 1,000-ton press, one that is still on the books for $400,000, but will fetch only $175,000 on the market for used equipment. We will pay close to $400,000 in credits, then we will trade the press to a manufacturer who will supply products to Atwood."
Still, multilateral barter firms won't buy just anything. "Of course, we turn down things we believe are totally worthless," Levitz says. The firm also refuses inventories that are too small. "We can not gear up our international remarketing for small inventories," he says. "Our minimum is $1 million at original wholesale, and typically we don't trade with companies less than $50 million in annual sales."
Market entry
Excess inventory is not the only reason to think about multilateral trading, Levitz says. In many cases, he notes that firms seek out barter companies to gain low-risk entry to new global markets. "With business rapidly shifting its focus to the global economy, many U.S. companies are expanding into foreign markets. Although Eastern Europe, Latin America, the Middle East, and the Far East are excellent markets for Western goods, establishing operations in these regions often proves very risky for many North American and West European companies."
For example, Levitz says a consumer products company running at less than 100% of capacity might agree to use a portion of its capacity to produce for a new market. "We would figure out which products fit the target market, how they need to be packaged, and how they need to be priced. Having agreed on the specifics we would purchase several million dollars worth of the products to be made during downtime at the producer's plant. Through our offices in 30 countries, we would market the products in target countries."
Benefit to the client, Levitz says, is that they can become established in a new market without having to create, at great expense, their own initial distribution channels. "We're their Trojan horse to get into the new marketplace. They avoid all the expense of start up, develop pricing, export expertise, local legal requirements, and currency risk."
Spending credits
Atwood's Client Service department is solely responsible to make sure clients utilize their credits. "Our people are incentivized based on how many credits they help clients spend and the speed at which it is accomplished," Levitz says. "A large number of credits are spent on our ever-changing and growing inventory of common-denominator products and services. We have either an inventory or the relationship to acquire media, travel, hotel space, printing services, premium and incentive merchandise, meeting facilities, office furniture and equipment--items that can fit almost any company." In addition, Levitz says the firm will sometimes acquire "serendipity" items--for example, laser printers or notebook computers--offering them to clients as they become available.
"A large number of Atwood clients have relatively small budgets for marketing and administration expenditures; therefore, we have developed the capability to go out and work with virtually any company large enough to trade. For the last 20 years, we have regularly enabled our clients to use Atwood credits as partial payment for products they buy from their approved suppliers. Working together with our client, we create a win-win scenario so the supplier is willing to participate in a trade with Atwood."
Credits are converted to cash only through usage as partial payment. They expire typically after three years. "As a matter of policy we will postpone the expiration of credits if the client continues to actively use them," Levitz says.
On manufacturing-related deals, he says the firm insists on involving procurement professionals at the front end of any deal. He also recommends that clients create incentives for procurement professionals to participate in the trading process. "Unless the client is expecting to use its credits for just advertising, it's critical that they involve procurement from the very beginning."
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