Barter can work - barter agreement between Casio Inc. and Active International Inc - Marketing

Chief Executive, The, June, 1994 by John J. McDonald

Obsolete or excess inventory is fodder for barter in the '90s--provided such exchanges are backed by contractual guarantees.

Products are transformed at lightning speed in the consumer-electronics business. A typical calculator or electronic watch, for example, lasts about 18 months before the product designers add new features that make the old model passe. It's the law of survival in a highly competitive marketplace.

But besides generating the excitement of constant innovation, the realities of our business also create a problem. The accountants call it obsolete inventory. For me, that means the tens of thousands of "out-of-date" calculators, watches, and mini-TVs that reside in our warehouses, clutter the balance sheet, and always represent a potential write-off.

Managing this problem led me to rediscover the concept of barter and to see how it has emerged over the last decade into a valid and sophisticated financial-management tool. In the last five years, Casio has successfully bartered $25 million worth of excess inventory, restructuring our balance sheet. Other companies in different businesses have had a similar experience. Clearly, barter has come of age.

DRIVING THE PROCESS

When I first encountered the concept of barter, I confess it conjured images of an Egyptian souk. My first experiences with it, in the early 1980s, didn't change my mind. In the final analysis, I found barter to be long on promise but short on results.

In theory, barter should be able to transform non-performing assets into something of value. A middleman--usually a company specializing in setting up barter arrangements buys obsolete or excess inventory at book or wholesale value. The barter company pays in "trade credits," which we can redeem for something we plan to buy. This could be equipment or travel services, but most often is media--TV or radio time or space in publications--that we use for advertising. The barter company then remarkets the inventory in a way that doesn't interfere with our primary markets.

That's the way the process is supposed to work. But when I first tried barter in the 1980s, I faced two problems that are fairly typical of other firms' experiences with the barter process: When we tried to exchange our trade credits for media, we found the TV and radio advertising time the barter company offered was often the worst time slots--late at night, for example. And more often than not, the stations were not leaders in their markets. This significantly reduced the value of the trade credits, and some credits went unredeemed.

Bartered inventory was supposed to be sold in secondary markets, but instead often reappeared in the same distribution outlets as our new models, thus competing for the customer's attention. Promises to avoid this conflict were routinely broken.

In addition, I heard of barter companies going out of business, leaving their clients holding millions of dollars worth of unredeemable trade credits. Clearly, I thought, barter was not a risk worth taking, and I closed my mind about it.

That is until one of the larger barter companies, Pearl River, NJ-based Active International, schooled me on the efficacies of contractual guarantees. Active, which functions like an investment bank, told me to make any deal contingent on such guarantees. The firm was so confident this new approach would make me want to continue working with it year after year that I decided to take a second look.

GUARANTEED PERFORMANCE

Active guarantees that the advertising time or space we receive for our trade credits will be exactly what we request. It takes our annual advertising plan and meets the programming placement guidelines. We receive premium time on top stations at costs we can afford. Otherwise, no deal. And the agency gets its normal commission for the TV or print advertising Active places.

Our primary markets are protected by listing them in the contract. If the bartered products show up in these protected markets, it violates the contract.

We've been bartering with Active ever since: $5 million a year in products every year since 1989--mostly watches, calculators, and musical keyboards. The trade credits are used to finance an annual $10 million advertising plan. Thus, Casio has saved a $5 million write-off every year, plus received $10 million worth of TV and radio time for only $5 million in cash.

Financing our advertising budget with trade credits is an important draw, although some of Active's clients use the trade credits to finance sales conferences or other expenditures. But critical to making the media-buying segment of a barter deal work is to have the barter company establish a rapport with your advertising agency. Because barter companies make the media buys, agencies often feel they're out of the loop and lose buying clout. Initial reactions to barter arrangements from advertising people is usually negative. But once the ad people see how the system works, there should be no reason for them not to quickly come on board.