How barter works in million-dollar deals
An emerald-and-crimson talking macaw, an old motor scooter propped against the receptionist's desk, and a deliveryman dropping off a four-foot stack of cardboard boxes stamped ''BATTERIES.''
This must be the place.
The eclectic lobby of Atwood Richards Inc. is a window on the business conducted in the offices beyond. For this is the Park Avenue home of the oldest and largest corporate-barter firm in North America.
With a $1 million minimum, the 27-year-old barter giant makes economy-size trades only, but here and there are vestiges of old trades. For instance, when the Uniroyal Company had several thousand Keds sneakers to unload, it dropped them at Atwood's doorstep. Or when Resorts International wanted to fill a few thousand vacant hotel rooms, it traded reservation commitments for sporting goods (for promotional use), linen, and carpeting in Atwood's stock.
Typically, barter appeals to a company for several reasons:
* To reduce inventory that isn't selling.
* To get a foot in the door with a new company.
* To boost production levels by tapping new markets.
* To reduce cash outlays.
* To have another method of collecting bad debt.
In the underground economy, swaps are often ways of trying to avoid taxes, but legally a barter is simply a sale without cash, and taxes must be paid. A recent Internal Revenue Service regulation requires that the records of barter exchanges be turned over to tax examiners each year.
Corporate barter is the big brother to some 500 local barter exchanges or clubs in the United States. Most have sprung up in the last five to seven years to coordinate the trading of goods and services of small businesses.
A printer, for instance, may produce menus for a French restaurant in exchange for meals. But maybe the printer can dine on only so much haute cuisine. Out of the $200 bill, the printer opts for $100 in meals. The rest is credited to the printer's barter account. He may decide to use his barter credit later for $100 of ink or paper from another exchange member.
In addition to annual dues, the member businesses pay a transaction fee to the exchange for setting up the deals and keeping track of trading credits. At Atwood Richards, things are run a little differently.
''Atwood is a principal, not a broker. We actually take a risk position,'' says Robert F. Foth, senior vice-president of operations. ''We buy the inventory. We buy and sell for our own account.''
Down the hall from Mr. Foth's office is a display case stuffed with souvenirs of Atwood's bartering: a gold box labeled Bill Blass chocolates, a pair of hockey gloves, golf clubs, and a Bally video game unit, to name a few ''trophy'' items. In fact, just over half of the $500 million in trading Atwood did in 1984 was in consumer products and advertising time.
But the showcase does not hint of a new direction in corporate barter. Four years ago, Mr. Foth estimates, just 10 percent of Atwood's trading was in industrial goods - steel, tin, rubber, and heavy machinery. Now he estimates that trade with so-called ''rust belt'' companies has grown to 45 percent of the business.
Barter tends to flourish during recessions, when inventories are high and cash short. But industrial production also drops when the economy lags. Seeing an opportunity, Atwood began buying production time from heavy industry.
''At the time steel firms were operating at 25 percent of capacity. That's a painful number,'' Foth comments. ''They're higher now - up to about 55 to 60 percent capacity, but that's a reduced capacity. They've closed some plants.''
''Now the manufacturers (working with Atwood) can make products with the time they're not using and sell them to us. . . . And we now have a position with a steel or rubber company where we can say, 'Hey, we have another client who needs this quantity and type of steel. Can you meet their delivery schedule?' ''
From a corporate trader's standpoint, it's much easier to barter with raw materials. ''Instead of tape recorders or a certain kind of tire or specific steel products, we have production time. Otherwise, you have to find somebody who needs I-beams or radial tires that only fit Nash Ramblers. How do you retrade that stuff?'' Foth asks.
But since the recovery, how fares the barter business?
In each of the last two years, revenues were up 15 to 25 percent, Foth estimates. ''There are very few companies in this country running at the 100 percent production level,'' he points out. (The Federal Reserve Board reports the nation's factories were operating at 82 percent of capacity in October.)
''If a plant is running at 80 percent capacity, it's still 20 percent idle, and they're not making anything on that 20 percent,'' says Foth.
Despite the confidence exuded by Atwood officials, not every barter deal is a winner.
''It hasn't been a rousing success,'' says Fred Baxter, chief financial officer at Modular Computers in Fort Lauderdale, Fla.
Modular traded $2 million in computer products to Atwood Richards. ''Originally we signed to try to penetrate US Steel.'' But US Steel bartered for only about $200,000 worth of Modular's product. A reorganization at US steel resulted in a shift of the personnel who had been interested in bartering with Modular, Mr. Baxter recounts. ''The idea was that they would buy more, but they only used our product in one plant.''
''From Atwood's standpoint, it's difficult to sell a relatively complex and specialized product (minicomputers for steel, aluminum, power plant firms),'' Baxter says.
''In our case, we have not been particularly successful in getting things out of Atwood's inventory. Our people haven't been as aggressive and creative as they could be. And we don't have any direct use for raw materials. It gets to be complicated getting our suppliers interested in bartering for steel.''
On the other hand, Modular has been able to use some of its trade credits for hotel rooms, rental cars, and airline tickets, Baxter says.
How widespread is barter?
In the US, oil companies regularly swap supplies to reduce transportation costs. Since airline deregulation, a number of airlines have begun trading tickets for fuel, food, and advertising. A few colleges are accepting goods and services in exchange for tuition. But there are few solid statistics.
Estimates range from $20 billion to $90 billion worth of domestic goods swapped each year. Barter between nations (known as countertrade) contributes significantly to the total.
Many underdeveloped or oil-dependent countries are leaning on barter because they lack the hard currency to pay for imported goods. Sears, Roebuck, 3M, Massey-Ferguson, and General Motors all have active countertrade divisions.
Last summer Saudia, the Saudi Arabian airline company, announced an oil-for-airplanes swap with Boeing and Rolls-Royce - one that was so huge that it softened world oil prices for some months. The deal is pending, but because of opposition from Saudi Oil Minister Ahmad Zaki Yamani and other members of the Organization of Petroleum Exporting Countries, the barter aspect may be dropped.
With offices in Paris, Toronto, and Dusseldorf, Atwood has seen an upswing in overseas trading, too. ''With the strong dollar, there are advantageous offshore prices. So a lot of companies coming to us now are saying this is what I need: Here are the companies that make the thing - and they're not located in Des Moines or Cleveland but in Germany or Switzerland,'' says Foth.
How does Atwood make money? On the leverage - by reselling or trading goods for a higher value than it ''paid'' for them. And each trade has a cash ''leverage trading cost.'' For instance, if a steel company trades Atwood for $2 million in advertising, hotels, and airline reservations, Atwood may charge a 40 percent leverage trading fee. So the steel company pays $800,000 cash and promises Atwood $1.2 million in steel upon request.