B to B Bartering - A Tool for Small Businesses

Barter is an ancient form of exchange in which a person traded something he owned for something that someone else had and he wanted or needed.

A major problem with a barter system is the fact that one has to spend time searching for another person who both has what one wants and is willing to trade it for what you have to offer. 

The introduction of money removed this inefficiency as money is a universal good that everyone wants and thus be traded for anything anyone is willing to sell.

However, while the use of barter has for the most part been replaced by the use of money it still comes in handy on occasion.

In a previous article, Bartering Pepsi Cola for Vodka and Tanker Ships, I described how Pepsi Corporation got around the problem of repatriating profits from the production and sale of Pepsi Cola in the old Soviet Union by basically accepting vodka and tanker ships in exchange the cash it earned in the Soviet Union.

Currency controls and lack of foreign exchange in some countries make it difficult for foreign companies to do business in these nations.  In these cases, barter may be a solution.  In essence the company selling its product in the country accepts goods produced in the country in lieu of cash.  It then brings the bartered goods to its home nation where it sells the bartered goods for the cash it would have earned in dealing with the nation which either forbid the export of currency or lacked hard currency reserves to make the payment.

Small businesses, especially those starting out often lack the funds to obtain the supplies they need to produce their product.  Barter can be a solution in these cases as one small business can trade the goods or services it has to offer for goods or services it needs from other small businesses.  However, searching for such matches is inefficient.

Enter barter exchanges.  These are organizations that enable small businesses to trade their services without having to spend time searching for those  both offering the good or service the business needs and also wanting what the seeking business has to offer.

With a barter exchange, a business simply provides its good or service to a business seeking that good or service and receives a credit to its account with the exchange for the value of what it provided.  The selling business can then use the credit to purchase a good or service it needs from another participating member. 

For example a motel (most of which, despite bearing the name of a national or global chain are actually franchises and thus operate as a small local business) may need some computer work done.  Rather than searching for a small business providing tech services, the motel owners simple look in the local barter directory for a tech company and call to have the work done. 

The motel pays for the work by transferring barter credits (either by writing a check against its barter account or transferring them electronically) from its account with the exchange to the tech company's account.  The credits are equal to the dollar value of the services it received. 

What the tech company receives is not motel services but the dollar value of these services.  It can then use those credits to purchase some other good or service it needs such as tools or replacement parts for computers or services such as marketing, printing, meals at a restaurant, etc.  However, somewhere along the line some other member, who has never provided services to the motel may need a motel for a meeting or workshop will use its credits from other trades for the room at the motel.

Generally the barter exchange will charge small membership and exchange fees which have to be paid in cash but these are small compared to the value of services being exchanged.  Also, the dollar value (which is what is credited to a member's account when trades occur) is reported to the IRS for income tax purposes.

The best way to become involved with barter is to join an exchange or use a service like Craigslist.  Links for some large exchanges are listed below.

IMS Barter Exchange Network

Barter Exchange Network

Superbiz

Bartering Pepsi Cola for Vodka and Tanker Ships

Barter is defined as the act of purchasing a good by trading another good rather than using cash. Barter is usually viewed as an economic activity found in simpler, more primitive economies rather than in our complex modern economy. And, this is generally true as barter is an inefficient means of obtaining goods since considerable search time is involved in seeking out another person who both has what you want and wants to trade it for what you are offering. In a small Stone Age village this is not much of a problem because villagers tend to know one another and there are only a few economic goods available.

Despite the fact that barter is inefficient and associated with small villages in primitive economies, it remains alive and well as a niche market today where both small local businesses and large corporations operating globally still find uses for it.

One of the best publicized instances of barter in the modern world occurred in 1972 when, during a temporary thaw in the Cold War between the U.S. led West and the Soviet led East, Donald Kendall, CEO (Chief Executive Officer) of the Pepsi Cola Corporation (the name was later changed to Pepsico when Kendall initiated a merger between Pepsi Cola and snack food giant Frito Lay Corp.) negotiated a deal with the Soviet government that allowed Pepsi Cola to be bottled and marketed in the then Soviet Union in exchange for Pepsi importing and marketing vodka and other hard liquors produced in the Soviet Union. This deal gave Pepsi Cola, then the number two cola and soft drink company, a leg up on it arch rival, the much older Coca-Cola, Corporation had established a world-wide presence prior to World War II, years before Pepsi Cola even existed. However, with the Soviet deal, Pepsi Cola Corp. was able to enter the areas of the Soviet Union and Eastern Europe which, as communist societies, had been closed to private corporations. This gave the Pepsi brand a virtual monopoly in a sizable chunk of the world and which, following the fall of communism in Europe and Soviet Asia, placed it well ahead of the pack when these markets opened to other foreign companies.

But why did Pepsi elect to trade Pepsi Cola for vodka rather than simply build bottling plants and establish market share then pocket the profits in cash? The fact is, Pepsi did not establish a corporate presence in the Soviet Union. Instead it helped establish bottling plants (upgrading some existing Soviet plants and helping to build others), supplied the syrup necessary for producing Pepsi Cola and had the final product sold as Pepsi Cola. However, the bottling plants, distribution chain and sale of the Pepsi Cola produced was all done by the Soviet government the same as all other productive enterprises behind the old Iron Curtain. Much as the old Soviet Union wanted western consumer products for their citizens they were not about to allow privately owned companies to be established in their Marxist-Leninist society. There was a more practical economic reason as well and that was the fact that they did not want their scarce foreign currency reserves being sent abroad to purchase Western consumer goods. With the Pepsi Cola for vodka deal the Soviets were able obtain Pepsi Cola without bending their communist principles and without having to spend their foreign currency.

In a cash deal, Soviet consumers would have purchased their Pepsi Cola with their local currency (rubles) which the Pepsi Cola Corporation would have then converted to dollars with the rubles ultimately being presented to the Soviet Central Bank for dollars. However, in order to obtain dollars or other western currency the Soviets needed to increase their foreign exports but, due to the gross inefficiencies in their state controlled economy, they had little to trade and what few dollars and other western currencies they did obtain they used to buy capital goods needed to upgrade their factories and military complex.

For Pepsi Cola Corporation, the benefit was a major presence in a new area of the world and a supply of vodka and other liquors which they could sell in the U.S. for dollars. The vodka and other liquors also increased the offerings of Pepsi's hard beverage division, Monsieur Henri Wines Ltd., which not only gave that division additional product to sell but also made them the exclusive sellers of Russian vodka in the U.S.

In the late 1980s and early 1990s with the Soviet Union crumbling and still suffering from a lack of export goods, Pepsico made additional barter deals which increased their sales and presence in the area in exchange for vodka plus tanker ships, submarines and other similar hardware which the company had cut up and sold to scrap metal dealers for the dollars it desired.

Links for additional reading:


The Pepski Generation (Time Magazine - Monday Nov 27, 1972)


Communicating in Global Business Negotiations (Google Books)


Barter: An Alternative Currency ("The Guardian" Feb 27, 2003)


Pepsi Will be Bartered in a Deal With Soviets (New York Times - April 19, 1990)


Ukraine Tankers Hope Things Go Better With Pepsi (International Herald Tribune - October 23, 1992)


Behind the Barter Boom (All Business - Wed September 1, 1993)


Touting Barter, Russia Continues its Economic Regression (Asia Times - July 30, 1999)


Business Notes: Trade (Time Magazine - April 23, 1990)


Cold Cash, Not Cold War (Newsweek Aug 21, 2008)


Moscow's Favorite Capitalists (New York Times - July 17, 1983)


Pepsi's Pitch to Quench Chinese Thirst (Fortune Magazine - March 17, 1986)