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FINANCE

Are you ready to barter?

By Richard Dunnett
  • As the recession continues, corporate bartering is on the rise as companies of all sizes realise that trading old and new stock can open new distribution channels, boost sales and ease cashflow. How do you embrace the trend and turn it to your advantage?

  • Five years of economic downturn have proved that there's an urgent need for companies to find innovative ways to grow. Bartering isn't a new idea but history shows that in tough times people look back to traditional behaviour for ways to move forward.

  • "When the recession hit there was a knee-jerk reaction towards cutting the most obvious costs – payroll, insight and innovations," explains consumer trends forecaster William Higham of The Next Big Thing. "Now payroll isn't being hit as much and companies are looking at other areas to save money – barter is one of them."

  • Corporate bartering involves acquiring goods or services by using your own goods or services instead of paying cash. During the downturn companies ranging from Honda to small independent shops have bartered products to increase revenue streams, maximise marketing budgets or protect cashflow. Some businesses barter old stock, others use it to place their latest products into new channels.
    While corporate bartering specialists report a strong appetite among businesses wanting to trade, many directors remain reluctant to pay for goods using their own products instead of cash.

    Part of the problem, admits Simon Barker, chief executive of Bartercard UK, is the perception of barter being a straight swap. This type of direct barter – famously demonstrated by PepsiCo when it swapped cola for Stolichnaya vodka to enter the Russian market – can put off SMEs. "They worry about the value of the products and timing," says Barker. "Is what you want to barter the same value as what you want to swap it for, and do they [other businesses] want to do it at the same time as you?"

    However, this anxiety has given birth to various solutions which in turn makes corporate bartering more accessible for all kinds of companies – swapping to many, not just one.

    "Small businesses want a mechanism to swap, not just with a direct swap, but they want to swap with a whole group of different people," explains Barker, illustrating his point with the example of a hairdresser who wishes to trade 15 haircuts in return for book-keeping from an accountant.

"The accountant could be bald and never want his haircut, so a direct swap wouldn't work. But if the hairdresser places the haircuts into a pool for other members to use, she gains 15 new clients. They could become regular customers and refer cash-paying friends and colleagues to her. Meanwhile, the accountant receives credits for doing the book-keeping and spends them on goods or services that are more worthwhile to his business, and at a time that suits him."

How smaller firms benefit
Bartercard now has 35,000 members worldwide, including 4,000 in the UK, who barter their goods or services for credits. Devon-based Richard Phillips, co-director of specialist toiletry-ingredients business The Soap Kitchen, joined Bartercard 10 years ago. Bartered sales now account for a small yet valuable percentage of the company's £1m yearly turnover. "At Christmas the phone rings off the hook. Companies order large quantities of gift hampers for their staff using barter."

When trading on Bartercard Phillips sells only at his retail price, not the wholesale price. "Where normally we would have sold 50 gift baskets at wholesale price, we are actually getting retail money for it, although not real money. So you end up with much more back to trade than you would do."

On the flipside, as a specialist firm selling functional ingredients to hobbyists wanting to make artisan soaps and toiletries, the business does not lend itself well to turning barter products back into cash. "We never seem to find anything on Bartercard that we can sell back for cash to our customers," says Phillips. "At any one time we've probably got between five and 10,000 bartered pounds sat unspent."

So what's the benefit? "Other than the extra sales we've made, I tend to think of Bartercard as our little reserve savings account. We spend the barter pounds on the occasional bigger purchases," he adds.

This is one area where small firms struggling with cashflow can see positive results, says Higham. "Their problems are accelerated by a lack of short-term loans. Paying for goods and services without having to pay cash is going to be useful."

In February, Phillips traded the bartered pounds he'd squirrelled away for materials and services to refurbish his business. "We could concentrate our cash on new stock to fill the shop, rather than tying it up on engineered-hardwood floor, UV-absorbing window film, carpets, shelves and office desks," he says.

Barker admits the barter exchange system isn't right for every firm. "You are buying at a discount equivalent to your gross margin. If you're a high-volume, low-margin business it's not going to work for you but that isn't the vast majority of SMEs in the UK."

But Paul Mann, joint managing director of specialist barter agency Miroma, says he would be hard-pressed to think of a business that doesn't have something to barter – from stock to depreciating assets.

Miroma, which has a turnover of £60m, works with advertisers, their agencies and media owners. It creates deals for brands to part-pay for media with their products or services. Mann has seen the barter market almost double in two years as companies demand more from creative agencies. "They want more value: better prices, better positions in newspapers, and better outdoor sites," he says.

"Without changing existing procedures, pricing or target strategies they can get additional value by using their own stock, product or service."

Carmakers are warming to the idea of trading vehicles that would otherwise sit devaluing on forecourts to increase their market spend or boost sales of certain models. "We are able to offer promotional opportunities, or place cars into new channels that the manufacturer hasn't already got a foothold in, such as a car-leasing company," says Mann.

In the case of Honda, Miroma uses a return on investment model that sees the client paying the full amount of the campaign to their advertising agency and Miroma guaranteeing a spend-back for
an agreed percentage.

"Whatever the net media value we will make a guaranteed spend-back on, for example, 10 per cent of that media cost in cars," says Mann. "[Honda] spend money as they would do normally in marketing and get a guaranteed sales return from us. We then put the cars into a brand new distribution channel. It's quite a powerful argument: the manufacturer can do what they are doing already in marketing and get a guaranteed increase in sales on the back of it, and get their cars into new channels, which in today's climate is key."

Smaller firms without the deep pockets to afford the services of advertising agencies are also contacting Miroma to fulfil their media brief. "We have direct clients who use stock towards campaigns," says Mann. "For them a £10k to 30k return is just as important as £500,000 – £1m for a big brand. It's all pro-rata. With big brands, it can be difficult to see who gets the benefit back whereas for the small brand it's directly to their bottom line, and they see it physically."

Monopoly money?
Higham sees the barter community expanding as both small and large firms tapping into the market grow accustomed to it being a financial deal. "People will have to adapt their methodology, just as we have done with shopping online and using debit cards. We're seeing a growing awareness of the purchase portfolio; the idea of mixing old and new methodologies and becoming comfortable with different routes to purchase."

Phillips agrees that there is a different mentality when bartering. "It's a bit like Monopoly money. It's not like real cash coming out of your bank – although it is because you've sold on it – but you spend it in a different way," he says.

It all adds up, says Higham, to part of a broader trend among companies seeking new ways to do business and becoming less afraid of collaborating with suppliers and competitors. "As barriers continue to be broken down, expect to see new types of companies taking advantage. Bartering not only offers a means for small businesses to cut costs but also opportunities for new entrepreneurs."

 


Bartering and tax
All bartered goods are subject to the usual tax rules. The HMRC website reminds suppliers and receivers of bartered goods or services that they must account for VAT on the amounts each would have paid had they been paid for with money.

Opportunity knocks
Products or services ripe for bartering…

Restaurant tables
"Few restaurants are always full," says Bartercard's Barker. "Rent, heat and electricity are already paid for. If a restaurateur fills empty tables with new customers paying by barter the only cost is the food and wine – probably 30p in the pound. Not only do they have extra sales but, on that basis, they've got a 70 per cent gross margin for when they need new menus printed. What would have cost them £1,000 in cash could cost only £300."

Gift vouchers
"Stock can fluctuate depending on the time of year so many retailers barter gift vouchers and rewards cards," says Miroma's Mann. "It increases footfall and the number of consumers interacting with brands. Shoppers tend to spend more than the value of the voucher, and some don't redeem them at all."

Older tablets
"Bartering can be used not just for your ongoing spare capacity but also when you have excess stock," says Bartercard's Barker. "Ahead of the release of new tablet computer models, manufacturer Elonex offered surplus stock of an existing model on Bartercard. We marketed the tablets in bundles and cleared their warehouse stock quickly."

New smartphones
"Putting old stock in the marketplace might position manufacturers where they don't want to be," says Miroma's Mann. "Funding a campaign with new stock puts the latest products in as many hands and channels as possible."