Thursday, August 07, 2008

Joe Barter Hits It Big

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Thomas Daley had been helping friends swap sports tickets for golf course green fees and concert tickets as a sideline. But on the advice of a friend, he set up an online trading site, Joe Barter L.L.C., two years ago where college students could trade textbooks, small companies could trade equipment and accountants, and plumbers, business consultants and others could advertise their services.

“I was told our site should be for the average Joe, so Joe Barter, get it?” said Mr. Daley, 36.

The company is still struggling to make its mark, he acknowledged in an interview, though he said he hoped an upgrade for the Web site, scheduled for August, along with a stepped-up marketing effort would significantly expand the membership.

The site has 2,500 individual members, who pay nothing to join the network, and 400 business-to-business members who pay fees for consultations and referrals in connection with transactions. Last year, the company’s revenue totaled about $80,000.

Whatever its prospects for success, Joe Barter is tapping into one of the largest “little” industries of small companies in America, the barter or trade exchange business. It is a business for “the little guys,” said Robert Meyer, a onetime pitcher for the New York Yankees who since 1979 has published Barter News, a magazine and online site that reports on more than 500 trade exchanges in the United States.

Mr. Meyer said about 450,000 companies do business in bartering’s many networks of retailers, services and manufacturers.

The barter business has developed broadly since 1982, he said, when federal law regularized the tax reporting of barter transactions by requiring them to be denominated in dollars for the Internal Revenue Service. More recently, the Internet has spurred the growth of barter.

Still, Mr. Meyer said, “the largest barter companies are relatively small, about $14 million each in revenue per year.” And the commercial barter business pales beside the decade-old development of eBay. Last year, that company took in more revenue from commissions — $7.7 billion — than the whole barter industry handled in transactions.

And the classified ad site Craigslist reaches 450 cities in 50 countries and receives 30 million new advertisements a month.

But one of the biggest advantages of bartering, said Steven White, chief executive of the Itex Corporation of Bellevue, Wash., one of the biggest barter companies, is “that it conserves cash for a small business and it brings in customers.”

The company, a trade exchange that has 24,000 small-business members who pay registration fees and commissions on transactions, illustrates how the business works with a hypothetical example.

A dentist provides dental work for a lawyer or accountant who also belongs to the Itex network and thus earns value, denominated in special barter dollars, in her account. She may then use those barter dollars to pay a decorator to work on her offices.

“In a small business, you have to pay cash for your mortgage and insurance and other necessities,” Mr. White said. “But barter helps you conserve that scarce resource.”

Now 50, Mr. White has led Itex since 2003, but he said he has been in the barter business since 1982, when he founded Cascade Trade Association, a company he eventually sold in 2000.

With Itex, he said, he is intent on expanding the trading network by working through brokers and 90 Itex franchises and by acquiring other barter companies.

In the last four years, Itex has grown by about a third to $14.1 million in fees and commissions in 2007. Its exchange processed $270 million in business transactions in 2007. “Distribution is the key to the business, expanding the member network so we can offer more services,” Mr. White said.

The barter business is growing, but slowly. In 2007, the total value of commercial barter transactions reached $6.5 billion, up slightly from the previous year, said Krista Vardabash, investor relations director for International Monetary Systems Ltd. of New Berlin, Wis., also one of the biggest bartering businesses.

The company has been growing much faster than that, reaching $14.2 million in revenue last year on $110 million in transactions, up from $3.9 million in revenue five years ago. Acquisitions of other trading sites have propelled some of that growth.

Donald F. Mardak, 71, founded what is now International Monetary Systems in 1985 after building a chain of piano and organ retail stores in Milwaukee and other cities. In 1989, he raised $8 million in a public stock offering, and he has driven the company’s expansion by acquiring barter exchanges in 16 states. The company now has 18,000 business members.

“The idea for the barter business hit me when I traded one of my Baldwin pianos for a Mercury Cougar,” Mr. Mardak said in an interview. “The two were comparably priced, but I had paid wholesale for the piano and got retail value for it. So there is leverage in the barter business, and that is one of its attractions.”

Mr. Mardak said he, too, planned to continue expanding. “Some of our employees are brokers,” Mr. Mardak said. “We tell them to drum up business. Trading doesn’t happen unless you make it happen.”

He dismisses the idea that trading Web sites like eBay are competition for International Monetary Systems. EBay is “more of an exchange for liquidating, not trading,” Mr. Mardak said. As for smaller companies, like Joe Barter and other exchanges that have fewer business members, he said, “They’re only swap sites; they have no supplier network.”

Mr. Daley of Joe Barter says he thinks the spread of Internet commerce supports his business vision. He plans to avoid using special barter dollars in transactions, relying on Internet trading enhanced by new technology. “I want to keep it simple,” he said. His company is intended to earn its way through business referral fees and online advertising.

“The evolving technology works for us,” Mr. Daley said. “We can target more specific groups; I’m going to hire people to market across the country.”

The barter industry is also aware of evolution. “The Internet is a two-edged sword,” Ms. Vardabash of International Monetary Systems said. “It facilitates spreading the trading community, but it also brings in competitors of every stripe.”

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