Guarded optimism. (Management).

Still chastened by a slow economy, CEOs offer a mixed outlook for 2003. They're loathe to spend lavishly, but corporate purse strings aren't completely tied.

As chief executive of Staples, Ron Sargent knows all to well the lengths some division heads will go to plead their case for a larger budget. So he's come up with a plan: To every budget meeting he attends, Sarg~ent brings along a golden, Oscar-like statue he calls "Johnny."

"When people start to get a little dramatic in describing why they need more [spending], I push Johnny toward them," Sargent explains. "It's a humorous way to remind people that we're just trying to run a business here and it's in all our interests to keep spending under control."

Sargent may be sliding Johnny across the table quite a bit this year. Like many U.S. companies, Staples, the No. 2 office supply retailer in the country, is pinning its hopes for profits on curtailed spending. With some exceptions, most CEOs remain only guardedly optimistic in their outlook for 2003. Despite historically low short-term interest rates and the prospect of an economic stimulus package from Washington, many remain loathe to increase their capital investments.

"All the CEOs I talk to--and I talk to a lot of them--are looking to add to their bottom line by watching costs," relates Joe Tucci, chief executive of EMC, a high-end data storage provider in Hopkington, Mass. The $7 billion company has seen demand for its products fall and competition rise in the sluggish economy. For the first nine months of 2002, EMC's revenues fell by 29 percent. The company cut its capital spending in half last year. "We don't expect to cut that further," says Tucci, "but we won't be increasing it either."

Such anecdotes are borne out by national surveys. A poll taken by The Business Roundtable of 150 CEOs of leading corporations finds that 57 percent of them expect their companies' U.S. capital expenditures this year to be the same as in 2002; nearly a quarter anticipate spending less (see charts below). In a separate survey by PricewaterhouseCoopers, 35 percent of senior executives say their firms are planning major new capital investments this year. That's down slightly from even a year ago, when the events of September 11 were still fresh in mind.

Corporate spending has been slow to recover from lavish investments in information technology during the Internet boom. Companies find they no longer have--or in a weak economy can certainly do without -- such big-ticket needs. At Staples, for example -which experienced growth of 0.7 percent on $10.7 billion in sales in 2002--the massive IT expenditures that went into building the company's dot-corn business won't be repeated anytime soon, says Sargent.

TracFone Wireless, the largest nationwide provider of prepaid wireless phone service, is in a similar position. The private, Miami-based company invested millions several years ago in the infrastructure underpinning its virtual wireless network, sewn together from the smaller networks of 40 different carriers across the country. Last year, TracFone, known for selling phones that show how many minutes subscribers have left on their plans, spent $5 million on capital investments, or just over 1 percent of revenues, says CEO F.J. Pollak. He predicts roughly the same level of spending this year, mainly to compile a database of intelligence about its 1.8 million customers.

Beefed up marketing

Companies that do make IT investments this year will most likely be after efficiency, not infrastructure. "We will spend on things that make people more productive, including software to streamline inventory and the supply chain, and warehouse automation," notes Sargent.

Picking up on this trend, IBM CEO Sam Palmisano announced last fall that the company--which burnished its name on hardware breakthroughs -- will invest $10 billion to enable its clients to buy computing services "on demand." As part of this push, IBM has bolstered the ranks of its service consultants, now 180,000 strong, compared with 65,000 at Hewlett-Packard and 13,000 at Sun Microsystems.

Marketing expenditures may also pick up as companies work harder to boost sales. In consumer products, Gillette, Procter & Gamble and Clorox are all redeploying savings from plant closings and job cuts into vigorous advertising campaigns. Millennium Pharmaceuticals is building up its sales and marketing staff to sell its promising new cancer drug, Velcade, expected to be approved this year. Staples, too, is concentrating on direct marketing to lure customers into its stores. "One of the worst things you can do in a recession is lower your spending on marketing," asserts Sargent. "We won't make that mistake."

But over all, even sectors known for aggressive spending are showing at least some signs of restraint. On one hand, cash-rich Millennium, in Cambridge, Mass., has set aside a hefty $500 million for research and development this year. "We'll continue to invest in people and IT hardware and software to increase productivity," CEO Mark Levin, whose company had 34 percent growth in the first three quarters of 2002 on revenues of $256 million, said in early December. But on the other hand, Millennium announced two weeks later that it planned to layoff 103 employees, or almost 5 percent of its work force, as part of a shift from research to product development.

A notable exception is Sysco, the largest food service distributor in North America. With a remarkable history of sustained growth--106 consecutive quarters as of December--the Houston-based conglomerate has bold plans for 2003. Sysco expects to add at least 600 delivery vehicles to its fleet of computer-monitored, multitemperature tractor trailers, says CEO Richard Schneiders, a 20-year company executive who succeeded Charles Cotros in January. At the same time, Sysco is building a new ware-house and distribution center to better serve the Northeast, its busiest region, and is upgrading its prized supply-chain software. "We're the only national food service distributor that has an enterprisewide IT system," says Schneiders. "It's the platform upon which we're able to do everything else, whether it's install new warehousing systems or mine for data."

Despite the uncertain economy, Schneiders is confident that Sysco, which increased its revenues by 7.2 percent last year, will continue to grow. With annual sales of $23.4 billion, the company holds just 12 percent of the $200 billion North American food service business--an industry that grows 2 to 4 percent a year. Two of Sysco's top growth areas are restaurants and health-care facilities, thanks to dual-income families and an aging population, Schneiders says. Sysco's goal is to hit $50 billion in sales by 2008. Overall, he says, the company spends 1.5 to 1.75 percent of its revenues on capital, between $350 million and $410 million a year. Sysco is also committed to acquisitions: For planning purposes, it factors in 3 percent growth from purchasing other food distributors.

'A jobless recovery'

We believe in food service and we continually invest in it," says Schneiders. "In good times and bad, we're essentially continuing to grow our infrastructure and our capabilities so we can accommodate all the growth within the industry."

But despite such bright spots, the overall outlook for 2003 is clearly mixed. The National Association for Business Economics forecasts a bottom-line profit surge of 15 percent. Yet little of that expansion is expected to come from rising sales and revenues: Increased efficiencies are seen as the key. And, of course, business reticence doesn't bode well for the economy, which needs higher corporate spending to gain momentum. The lingering caution that settled in with the hangover from the dot-com era, along with concerns about terrorism or war with Iraq, lead many economists to predict only middling growth this year.

While layoffs are decelerating, few CEOs say they are aggressively looking to hire. Staples, for example, will need salespeople and managers to staff the 95 to 110 stores the company expects to open this year. But at Staples' administrative offices in Framingham, Mass., says Sargent, head counts will be flat.

"It's a jobless recovery," observes Mark Zandi, chief economist at Economy.com, a research consultant in West Chester, Pa. "Hiring is as flat as a pancake." For every worker hired into a growing sector--such as mortgage banking, construction, education and health care -- another is shed from a weak sector. Manufacturing, transportation, distribution, investment banking and the media have been particularly hard hit.

The prospect of an economic stimulus package from Washington, meanwhile, remains unclear. While Republicans' control of Congress will make it easier for President Bush to enact business-friendly tax cuts--possibly including an expansion of write-offs for capital investments -- few economists or business lobbyists expect much short-term change. As it is, after all the interest-rate cuts in recent years, it costs less to purchase capital today than during the height of the 1990s boom--and still business investment is sluggish.

Don't wait for Washington

As they continue to plan for 2003, many CEOs, it seems, aren't counting on a major boost from Washington. David Beattie, CEO of McNaughton-McKay Electric in Madison Heights, Mich., a nearly $500 million supplier of automation products to the Big Three automakers, keeps up with news from the National Association of Wholesalers, to which his company belongs. "I see bulletins out of there every day," Beattie says of the Washington-based trade group, which favors tax cuts and tort reform. "But I don't expect any major legislation right now."

So companies largely have had to come up with innovative ways to weather the slow economy. TracFone Wireless, the prepaid phone service, originally planned to hit profitability when it reached 3 million customers. But with cash running short, the company shifted its focus to reducing customer service costs, explains CEO F.J. Pollak.

TracFone's main cost-saving strategy is automation. Instead of signing up or servicing customers manually over the phone, the company now handles 90 percent of such transactions electronically--over the Web or through interactive voice-response systems. The company brought itself into the black for the first time last year-no small feat after facing an Ebitda of minus-$140 million.

Going forward, Pollak says he sees good signs for his business, but also further challenges. In one sense, a sluggish economy helps his company, he says, because it creates more customers who fall into TracFone's target group: people who have credit issues or who want to control their spending because they can't afford big bills. But at the same time, a slow economy can hurt the company's retail channels. In 2002, Ames, one of TracFone's large retailers, went into liquidation, while another, Kmart, is currently under Chapter 11. "So cautiously optimistic is probably the key for us," says Pollak.

Despite the continued challenges that lie ahead, there seems to be a feeling that the brunt of the storm has passed. Seventy-one percent of CEOs expect their companies to have higher sales this year than last. Although inventory remains flat, factory orders and shipments trended up in late 2002--a sign that the manufacturing sector may eventually need to loosen its purse strings. "Capital spending will be tight in 2004," predicts EMC's Tucci, "but I think we've seen the worst."

Send comments to CE at [e-mail].

TAKING THE PULSE OF CEOs

HOW WILL YOUR CAPITAL SPENDING IN 2003 COMPARE TO 2002?

More  19%
Less  24%
Same  57%

Note: Table made from pie chart

WHAT IS YOUR COMPANY'S EMPLOYMENT OUTLOOK FOR 2003? *

Increase   11%
No Change  28%
Decrease   60%

Note: Table made from pie chart

WHAT IS YOUR COMPANY'S SALES FORECAST FOR 2003 VS. 2002? *


Lower    9%
Same    19%
Higher  71%

* Percentages are rounded

Note: Table made from pie chart

WILL THE GDP GROWTH RATE IN 2003 EXCEED 2 PERCENT? **

No   36%
Yes  64%

** Avg. GDP growth rate over last 10 years: 3.2%

Source: The Business Roundtable

Note: Table made from pie chart