It is tough out there. And by “out there” I mean the business world in general.
Most companies face challenges meeting the bottom line—either by competitors putting pressure on prices, intermediaries squeezing margins or deal-conscious customers.
Every penny a business invests must generate a return to ensure its continued success.
So it is not surprising I am frequently asked about Corporate Trade and barter, two popular ways of maximizing value in a company. A colleague recently asked me about the differences between the two. She wondered if she should consider Corporate Trade or barter to solve some of her company’s challenges.
Her question is a good one. In fact, it is very common for business people to use the terms Corporate Trade and barter interchangeably. The principles behind the two are very similar: both are a financial solution or a means to get more with less, using trading principles.
Yet the two transactions are vastly different in terms of their application, execution and advantages.
What is barter?
Barter is a simple exchange of goods and services between two individuals or companies. One-to-one bartering is typically practiced between individuals or small businesses based on an informal swap of goods or services. It is also possible to barter using brokers, third parties who charge a commission or flat fee for finding a trading partner.
Who uses barter?
Just about any small business can use barter to its advantage. Beauty salons are some of the most successful barter businesses. Consider Tracy, a new salon owner who is dedicated to increasing her client base. As a small business, Tracy cannot afford to advertise and most of her customers find her salon by word-of-mouth referrals.
Tracy joined a barter network and traded styling during her slow days for trade dollars she used to barter with a local graphic designer for promotional materials. She got three new clients in the process, who recommended her to friends. Tracy then used her trade dollars to hire the graphic designer to create a postcard for her salon, using it to promote her business to nearby households.
There are minimal quality controls in this type of transaction, tax reporting is challenging and a fee or commission is charged by the third-party barter broker.
What is Corporate Trade?
In short, Corporate Trade restores value where it is diminished and creates value where it is needed. Many Fortune 1000 companies use Corporate Trade as a strategic tool to maintain book value on slow moving, returned, or obsolete assets—including last season’s clothing, perishable food, outdated electronics, capital equipment or excess real estate.
In a typical transaction, the Corporate Trade company acquires assets from a client in exchange for cash and Trade Credits. Corporate Trade delivers higher returns on slow moving, returned or obsolete assets, usually three times what the asset is worth on the open market.
Once the Corporate Trade company sells the assets, the client combines their Trade Credits with cash to purchase business goods and services, such as media, point of sale materials, printing, freight, logistics, travel, event space or hotel rooms.
Who should use Corporate Trade?
Corporate Trade is suitable for businesses with a minimum media spend (or other pre-existing business expense) of $500,000—anything less puts an organization at risk of not receiving the full economic benefit of the Corporate Trade transaction.
Consider a company like Pinnacle Foods, a North American manufacturer of leading brands, including Duncan Hines, Vlasic Pickles and Aunt Jemima. In the United States, Pinnacle had excess inventory of Vlasic Pickles with a wholesale value of over $3MM worth a mere $1MM if liquidated.
Active International US purchased the inventory using Trade Credits worth $3MM+, allowing them to avoid an expensive write-off of over $2MM. The US company did not have the media budget to use all of its Trade Credits. As a result, the US transferred the credits to its Canadian subsidiary.
Over the next few years, Active International Canada partnered with their Canadian advertising firm, Agency59, to jointly execute its digital and TV advertising efforts for Hungry Man, Vlasic and a number of different brands.
So which one is better—Corporate Trade or barter?
Well, it depends.
Small companies benefit more from a simple barter transaction while larger organizations should definitely consider a Corporate Trade partnership. Barter would simply become too inefficient for a big company, not to mention the complications to audit and tax reporting.
Kimberly Armstrong, Senior Director of Market Development