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10/06/09
Barter back into business:
In these uncertain economic times, bartering has shed its fairy-tale image and is making a comeback as a serious business tool


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In the fairy tale, Jack and the Beanstalk, Jack is sent to the market by his mother to sell their last remaining possession, a cow. On the way, Jack barters the cow for five magic beans and his understandably peeved mother beats him soundly upon his return and hurls the beans out of doors. Fortunately for Jack, overnight the beans grow into a giant beanstalk, which he climbs. As has been well documented, at the top, he finds a castle and a giant whose various treasures he steals. So, moral propriety aside, Jack eventually does pretty well out of the deal.

This story demonstrates some of the problems in a basic barter transaction where one good is swapped for another. Firstly, there has to be a mutually agreed value. Initially, along with Jack’s mother, we think that Jack has been stiffed. But then later, it turns out that the bean-seller may have missed out on the long-term value of his beans.

There are other problems, too. There has to be a coincidence of need. If, as a writer, I want to do a deal with a sandwich shop where I get a week’s worth of sandwiches for a short pamphlet on the virtues of ham and cheese, the sandwich maker must want words and I must want sandwiches at the same time — and he must have sandwiches to spare and I must have the time to write.

“Once you look at barter,” says Chris Higson, a professor in accounting at London Business School, “you see why money was invented.” At a stroke, it eliminates nearly all these problems. Money acts as a store of value, can be exchanged for virtually anything and provides a convenient and universally intelligible way of pricing goods. All that is needed is for everyone to have confidence in its value. Which is why barter tends to resurface when people stop trusting their currency, for example during a civil war.

It may come as a surprise then to realise that barter is still quite widely used in the business world. One of its leading proponents is Bartercard, an Australian based company with around 75,000 members worldwide. Members range from sole traders and SMEs to large corporates — and A$1.5bn was bartered in the company’s marketplace last year. “Bartercard,” explains CEO Wayne Sharpe, “overcomes many of the problems of traditional barter.”

It does this by operating an exchange whereby if I want £1,000 worth of shelving, I approach a member company that makes shelves and which supplies them to me. They then have £1,000 worth of credit in the system and I have £1,000 worth of debt. The shelving company can then spend its £1,000 with other Bartercard members while I have to work off my £1,000. Goods are priced at their normal cash value and Bartercard’s cut is 6.5 per cent (5.5 per cent in cash and 1 per cent in trade) of the value of each transaction to both parties.

Sharpe says that Bartercard offers businesses a number of advantages. Especially in the current climate, the fact that you can buy on credit acts as an interest free loan. It can ease cash flow: “Your goods and services are easier to get hold of than cash.” It can offer an opportunity to trade distressed inventories — whether these are last year’s computers or hotel rooms when you’re running at 50 per cent occupancy. And it can add a social element to doing deals and introduce you to new business opportunities and companies.

One of Bartercard’s clients is Stephen Hill, who runs the Penzance Hotel in Cornwall, England. He barters about £50,000 a year. “It’s an extra source of sales revenue, allows us to find income and preserves cash in the business,” he explains. Hill says that he barters rooms and restaurant meals and has used them to pay for everything from conference equipment to bedroom furniture to food and drink. Other Bartercard users range from antiques dealers to heavy equipment suppliers and even airlines. With a large exchange, it is possible to barter pretty much anything.

The US-based International Reciprocal Trade Association says that American barter exchanges now stand at 250,000, up from 200,000 five years ago. That said, because of its very nature, the value of barter in economies is notoriously difficult to estimate — if a painter and a gardener swap services, who will ever know? Nonetheless, earlier this year, Bob Meyer, the publisher of Barter News, told Forbes that he reckoned that in the US a million small businesses bartered in some way and that the transactions were worth $20bn annually. Furthermore, Meyer said he expected barter to grow at 10 per cent this year (5 per cent is more normal) as when cash is tight, interest in bartering increases.

Barter isn’t limited to SMEs and organisations such as Bartercard, though. There are some truly vast deals being done out there. Last year, for instance, China signed a barter deal with the Democratic Republic of the Congo worth $9bn — the largest ever. China committed to build the country $6bn worth of infrastructure in return for a slice of its mineral wealth. Both parties held the deal up as a win-win. China needs raw materials for its industries and DR Congo does not have the money to pay to upgrade its terrible infrastructure.

Barter also works very well in specific circumstances. When PepsiCo became the first large US company to move into Russia in the early 1990s, it famously took its profits out in the form of Stolichnaya vodka and tankers and freighters. This got around the problem of the Russian rouble not being a convertible currency at the time and gave Pepsi a head start in a new market. In a slightly different vein, oil for food type programmes may allow countries to feed their people without letting them divert revenues into arms or salt them away in Swiss bank accounts.

At the other end of the scale, the internet has proved a boon for bartering individuals and small businesses. The classified site, Craigslist has a lively barter section and there are dozens of exchanges aimed at bringing together people where you can swap anything from books to houses for holidays. In the right places you don’t even need the reach of the net: the Pig’s Head Pub in Edgefield, Norfolk, for example, allows locals to barter produce and game for beer and meal vouchers. 

But not everyone thinks that barter is quite so wonderful. “It’s very hard for any economist to see any merit in barter,” says Professor Higson. He believes that all the advantages that a barter system claims to have can be found in normal monetary trading, with none of the drawbacks. “If you look at discounts or credit,” he explains, “neither of these is exclusive to barter. There are no tax advantages and no accounting advantages — although there used to be in the dot.com boom when companies would swap services at very high prices to boost revenues.”

In the case of deals such as the Chinese-DR Congo swap, Professor Higson says it’s basically a polite way of doing an economic exchange with someone in distress: “China says, ‘We’ll give you some roads and you give us the family silver.’ It could be that doing it as a barter deal makes it less painful and avoids embarrassment, but we all know what end of the stick the Chinese are on.” (Indeed, these criticisms have also been made by human rights groups).

Large-scale Barter schemes, Higson continues, are effectively credit unions, and the bigger the scheme gets, the more it starts to resemble the conventional money-transacted market it purports to replace. He does allow, however, that there might be some small upsides to barter. “It makes you think more creatively about ways of seeking credit,” he says. “And it has a certain folksy charm in these difficult times.”

Still, while swapping is unlikely ever to replace money, the barterers are undaunted. “Although we have seen the banks killing a lot of SMEs, we’re seeing a lot of new members and the value of trades of existing members is growing,” says Sharpe, “so we’re very bullish about future prospects, especially in the UK.”

 

Article by Rhymer Rigby
http://www.babusinesslife.com


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