AD AGENCIES FACE BARTER BOOM

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Like it or not, agency media buyers will have to belly up to the barter.

Long considered a stepchild by the ad community, barter has caught the fancy of CEOs, chief financial officers and chief operating officers faced with excess inventory of goods and services.

The result is a fast-growing trend toward more barter, particularly through three-way alliances among barter companies, advertisers and their often reluctant ad agencies.

"I think barter is playing a more important role in our business, let's get that straight," said Page Thompson, exec VP-media director at DDB Needham Worldwide. "Our business is changing, and if we don't adapt to that change, we'll all perish. We have to understand this is a service our clients need and want."

And it's a huge business, said Paul E. Suplizio, executive director of the International Reciprocal Trade Association in Great Falls, Va.

"In 1993, $7.01 billion in goods and services were traded compared with $4.35 billion in 1988," he said. "We estimate that $3 billion to $3.5 billion of that, or 45% to 50%, was in media."

Richard Chase, CEO of Media ResourcesInternational with offices in Marina del Rey, Calif., and New York, recalled a recent transaction for a foreign carmaker in which his company actually bartered for cars in Siberia.

"The Siberian police department took the cars and paid us in oil, which we in turn sold for cash. We paid for the cars with television spots in the States by working with the company's agency to place fourth-quarter TV," he said. "These were new cars, not old ones, but the company would never have been able to sell them in Siberia because the Siberian police department didn't have any money and the auto manufacturer wasn't equipped to take oil in exchange."

Mr. Chase said that couldn't have happened 10 years ago. "This was a way for Siberians, who are just taking their first steps into capitalism, to trade something of theirs that had value for a product they needed."

Also, on April 19, Wings of the World Air Services, Los Angeles, selected Milwaukee-based Laughlin/Constable, with its associate Griffin Promotions, and Barter Corp of Oak Brook, Ill., to handle an estimated $3 million integrated marketing account.

Two other ad agencies competed for the work, but Michael DeBoer, Griffin partner and account director, strongly believes one of his agency's advantages was "our ability to introduce more creative ways of using old-fashioned barter that maintain the full value of the product because of this new partnership with Barter Corp."

He estimated trade will amount to between $500,000 and $1.5 million of Wings' marketing budget.

In the past, barter simply meant directly trading media placement, and in many cases, that devalued the products. Airlines traded seats at lower prices in return for radio advertising during off-hours.

"Today, we barter with integrity," said Scott Thomas, VP-media for Barter Corp and its full-service ad agency, Adex. "Laughlin/Constable will find creative ways for Wings to award full-price seats, and in return it will receive `full price' advertising and promotion services. Barter helps Wings increase cash flow while using seats that would otherwise be lost."

John P. Kramer, president of the Media Store, New York, and exec VP-director of sales for the barter company's parent, Icon International, takes the view that you can barter for media time with integrity for your client as long as you are very well-funded.

"What we did was raise a pool of money that then allowed us to provide goods and services, and we were able to take the doubt of the fulfillment of the trade out of the minds of the broadcasters," said Mr. Kramer, a former partner in cable TV rep company Cable Networks and former VP-director of sales for NBC Radio.

For example, the Media Store is placing all the radio time for Lufthansa German Airlines in a transaction that involved a lease with six years left to run on a retail space Lufthansa had at a Manhattan ticket office.

"They had too many ticket offices in Manhattan, and their original lease was at extremely high rent per square foot. So we came in and took it over on barter and sublet it," Mr. Kramer said. "We paid Lufthansa with the radio time for the regular schedules they run. As a result, they're getting quality advertising in about 10 top markets, wherever Lufthansa lands, and it saved the airline a tremendous amount of money."

To show how the phenomenon has grown, barter company Tradewell, New York, has been bartering spot TV and radio time for ConAgra's Armour Swift-Eckrich Processed Meats Co. since 1983.

"Five years ago, we bartered 10% to 15% of [Armour's spot TV and radio] advertising for Swift, Armour and Butterball brands, and today we do 80% to 90%," said William Steinberg, president of of Tradewell. "We buy inventory from [a marketer] in exchange for credit they apply toward advertising they would have paid for all in cash. I say `apply' because there will be some additional cash changing hands."

But that's the upside of barter. The reputation of this ancient practice has always suffered because of the general perception that devalued product was being exchanged for devalued media. Also, there have always been-and still are-barter companies that don't stand behind their products.

A media buyer in one of the top 10 agencies, who requested anonymity, argued: "Typically, they want to trade something of negotiable worth for negotiable value, and nobody knows what the product is worth and nobody knows what the media is worth, and therein lies the rub. The problem is, in my opinion, that you're playing with a volatile component when you screw around with advertising."

Advertising shouldn't be looked at as a trade, he said, but as a multiplier. "If you spend $1 million for advertising, you should generate more than $1 million in sales, and you shouldn't be screwing around with the multiplier."

The media buyer also claimed he has been in six or seven barter situations and in each case the client wanted to buy out the contract. "But it sure does look good when they come in and say, `We'll make gold out of straw."'

Another top agency media buyer who also requested anonymity, added: "Trade is garbage, OK? We do it if a client asks us to. Usually, they have old product, and if the CFO doesn't get rid of it, he'll have a bad balance sheet. The main part is `I've got a warehouse filled with stuff that yesterday was worth $2 million and today is worth bupkas.' So if the CFO [thinks he] can find a way to make the warehouse worth something, I have to do it.

"We have overseen barter from a lot of people, and I have no agency problem with it. We get used to it. But frankly, the trouble is you always have to watch the barter company like a hawk to make sure you're getting what you're supposed to be getting. Unfortunately, the deal is usually done by financial people who don't understand advertising and someone comes in and gives them 5 [gross rating points] cheap. They don't know that runs in the middle of night, it's off the objective and off the campaign strategy. Then the advertising people have to go in and clean up the mess."

Barter's sometimes scurrilous reputation is not without reason. The industry has been rife with allegations of questionable business practices, underhanded doings and even an occasional outright scandal of embezzlement.

In one of the most infamous cases, Hardee's Food Systems got caught holding the bag for more than $20 million in unpaid airtime to TV and radio stations when its barter media company, the Mediators, New York, was thrown into bankruptcy proceedings.

The incident forced the ad industry to clarify the issue of media liability, and contributed to the American Association of Advertising Agencies' controversial endorsement of "sequential liability," which tried to redefine client and agency responsibility for media payments.

Ultimately, the incident led to the collapse of the Mediators and a long list of unpaid media creditors.

It also led to the formation of the International Reciprocal Trade Association's barter division, which was conceived to help set trade practices for the barter business.

Randy Irion, who for 11 years was director of marketing services for Armour Swift-Eckrich and now is a VP-marketing for ConAgra's Healthy Choice, said he can appreciate both the point of view of the barter companies and that of the agency people.

"What's the truth? It's probably somewhere in the middle," he said. "Barter can address a problem with inventory and cash flow, but some of the barter deals that went through in the past I don't think made a lot of sense because they were deals by people in the operations or distribution side of the business trying to get rid of distressed inventories and they didn't really understand media. This integrity issue may have been not so much a lack of integrity but a lack of understanding.

"The deals we've done have been a blend of barter product and cash. Because of that, we've had our schedules executed as we expected and as they had been outlined to our barter company by the agency."

DDB Needham's Mr. Thompson takes the view that there are good barter companies and there are bad barter companies.

"With that in mind, since our clients are going to ask to barter and we know who the good ones are, it makes sense for us to suggest barter companies we would feel comfortable having our clients work with that we can work with too," he said.

"So we keep unwritten alliances with a couple of companies that we can go to when a client requests barter," Mr. Thompson said. "We trust them, we know them and that gives us a way to bring our clients to people who are good in the business and will make sure they get what they want. That way we are assured that our client will get media that meets our buy specs and our costs, and there's not going to be any funny business. We have control to make sure the barter stays within the confines of the client's marketing plan."

The International Reciprocal Trade Association's Mr. Suplizio confirmed that agency interest in barter is growing.

"More agencies are contacting us for references, and more of those people are attending and participating in our industry conventions and our annual meetings when the media segment of the industry joins together in our corporate trade council," he said.

The association exists to advise on credibility of barter companies, cautioning not to do business with companies that don't belong to the group. Mr. Suplizio said: "Check here to see if the company is a member and adheres to the ethics code of the industry-or if they're bartering for trouble."

Joe Mandese contributed to this story.

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