Bartering grows as economy stalls

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Schaumburg-based Ala Carte Entertainment and its 25 area restaurants use two barter exchanges to obtain its radio, print and billboard advertising.

The Chicago area's top corporations use corporate barter companies to move excess inventory in exchange for advertising and other services of value.

Be it person-to-person, small businesses or Fortune 500 corporations, the barter landscape is growing amid a stalled economy.

Often called the secondary economy, bartering empties inventories when customers are cash-strapped. It also provides services without using much cash.

Thousands of Chicago-area small and midsized businesses already barter, and evidence suggests these tight economic times attract even more barter activity.

"What's unfortunate for the economy is good for us," said Steven White, chief executive officer of barter exchange ITEX. "As we get into this (economic) headwind, businesses want to cut back on expenses."

With its local headquarters in Oakbrook Terrace, ITEX reported June 3 that its first-quarter revenue rose 19 percent.

The industry, dominated by small regional exchanges, is expected to grow 3 percent to 4 percent this year.

At the same time, mainstream economists believe the gross domestic product will be flat or slightly down.

ITEX and rival IMS are the two largest barter exchanges, both nationally and locally, with more than 5,000 Chicago-area members.

New Berlin, Wis.-based IMS has 18,000 members nationally.

Bartering is particularly popular with hotels, retailers, printers, restaurants and service-oriented jobs such as doctors, lawyers and contractors.

Exchanges cater to small and midsized businesses, which trade by using their markups - the bottom-line cost plus a profit.

Different businesses operate at different profit margins. Ala Carte, which operates numerous brand restaurants including Famous Freddie's Roadhouse and the Alumni Club, trades meals and drinks for advertising and computers. Ala Carte's profit margins range from 20 percent to 40 percent, according to Comptroller John McKendrick.

Ala Carte, which uses both IMS and ITEX, looks for a discount of 50 percent to 60 percent when buying with a barter exchange. That means if a computer is valued at $1,000, Ala Carte would aim to pay about $1,000 worth of food and drink cards to the seller.

But the deal would internally cost Ala Carte about $500.

Sometimes the values don't align exactly, so both IMS and ITEX offer barter "dollars" to store value for future purchases.

"It's sort of like a credit line," said Terry Bank, a ITEX customer and general manager of Downers Grove-based United Limousine and Sedan Service Inc. United Limousine uses ITEX to barter for advertising.

The small and mid-sized retail side of the barter industry is estimated to generate $3 billion to $4 billion a year in transactions, according to the National Association of Exchanges, a Mentor, Ohio-based trade association.

ITEX's White said his exchange serves "everyone from a professional clown to a $1-million-a -year business."

However, the average customer has about $30,000 to $40,000 a year in revenue. And a small business probably shouldn't barter more than 5 percent to 10 percent of its revenue, White said.

IMS, which claims to be the largest national exchange, employs about 175 people and has $14.7 million in annual revenue.

It is growing about 10 percent a year organically, according to Don Mardak, IMS' chief executive officer.

Mardak first got into the business when he traded a piano for a Mercury Cougar. He said the U.S. economy, which may be in a recession, is helping his firm.

"It is great in good times and good in bad times," Mardak said.

However, the biggest transactions are by corporations which use sophisticated trading firms that can handle their scale.

New York-based Active International Chief Financial Officer Richard Vendig said he "shies away from the word 'barter'" because of the possible negative perceptions of swapping practices.

However, his company posts about $830 million a year in sales, and creates a trading volume of about $1.4 billion, Vendig said.

Vendig declined to say which Chicago-area corporations his privately held firm has helped.

He said his "gut feeling" is the corporate trading industry is growing at about 10 percent a year.

Corporate traders buy underperforming assets in return for trade credits at above-market value.

Then, they help clients find advertising or other services to spend the credits. And they find ways to sell the inventory.

Vendig said many companies didn't anticipate this economic downturn.

"As the economy slows, the supply chain becomes somewhat stuffed," he said.

Vendig said what he does should be called trading. Mardak calls his business a barter exchange. Online sites often call their transactions swaps. The ancient Romans had a different term, though: "quid pro quo."

How ITEX works

There are different business-to-business exchanges, but this is how ITEX works for small and mid-sized businesses. For more information see the ITEX Web site, www.itex.com.

Registration is free

Monthly membership is $20

The fee on transactions is 5 percent to 7 percent

ITEX dollars act like a credit line

ITEX tracks IRS reporting requirements

ITEX has a national network

Source: ITEX