Making Hay While It Rains

Companies with healthy balance sheets are buying rivals, cutting prices, and boosting marketing

While other hotel executives have been trekking to Washington seeking relief for their hard-hit sector, Hilton Hotels (HLT ) Chief Executive Stephen F. Bollenbach has taken a different tack. He has been spending liberally to renovate such top-of-the-line properties as the San Francisco Hilton & Towers. And instead of remodeling just a planned five floors at a time, he's overhauling 10 at a bound--taking advantage of slack occupancies at the 1,900-room site to replace everything from furniture to draperies.

Throw in renovations at Hilton units in New Orleans, Cleveland, and Salt Lake City, and the tab will come to $40 million. That doesn't count the $25 million Bollenbach plans to spend to build a 319-room tower in Portland, Ore., a new ballroom in La Jolla, Calif., and a new restaurant in Alexandria, Va. Says Bollenbach: "Now is the time to take market share from our competitors."

While plenty of managers seem shackled by the uncertainty brought on by recession, coupled with the new dangers and costs of terrorism, opportunists such as Bollenbach see this as a terrific opening to advance their strategies. Their goal: to outhustle, outmaneuver, or just plain outmuscle weaker competitors to be even further ahead when the recovery comes. "If you have a strong financial structure, gambling on picking up market share in a downturn can often be a great strategy," says David A. Wyss, chief economist at Standard & Poor's.

To be sure, more is required than an iron stomach and a roll-the-dice disposition. Investing in a downturn takes a healthy balance sheet, a strong core brand, and, often, the advantages that come with being the lowest-cost producer in a market. Those blessed with such strengths are slashing prices, pumping up marketing budgets, pouring capital into new equipment, and buying weakened rivals in hopes of coming out of the slowdown in much better shape.

Put another way, it's a great time for the strong to press their rivals to the wall. Companies that are able to exploit the downturn went into it with their financial houses in order--and many have continued to strengthen their balance sheets. That sturdiness allows them to grab more market share without having to worry as much as their more fragile rivals about the short-term financial consequences. Indeed, such moves are often aimed at putting ever more financial pressure on the faltering. "If you haven't got a strong balance sheet, you just can't take some of the risks--whether that's the operating risk of running a loss for a while or a business risk of making acquisitions or of making a major expansion," says Robert G. Atkins, a vice-president at Mercer Management Consulting Inc.

But financial health is just a start. The question is, how best to use it? For many, the answer is simple: acquisitions. With share prices at most companies now trading at just a fraction of what they were 18 months ago, bargain hunters are on the prowl. No. 1 electronics retailer Best Buy Co. (BBY ), seeing limited growth potential in its superstore concept, is snapping up suddenly more affordable retailers in other formats. Recent deals, including the $377 million purchase of 91-unit Future Shop Ltd. (FUTPF ) in Canada, quadrupled its store count. "In relationship to what other houses had sold for in the neighborhood, we got to buy this one at a little cheaper price," says Chief Financial Officer Darren R. Jackson.

Even the staggering media business, suffering its steepest downturn in decades, has its share of opportunists. Tribune Co. (TRB ), though suffering badly from the advertising drop, wants to add to its portfolio of TV stations. At the same time, it's investing $100 million in a joint venture with Knight Ridder Inc. (KRI ) to acquire job bulletin board Headhunter.net (HHNT ), bringing into the fold what once was seen as a dire threat to newspapers' classified-advertising business. "As some portfolio managers say, you should buy at the time of maximum pessimism," says Tribune President Dennis J. FitzSimons.

If acquisitions are fine for some, for many businesses, there's a more immediate way to bolster their position at the expense of rivals: slash prices. And if one thing is clear after a Christmas season in which retailers from Gap to Nordstrom discounted both early and often, it's that the strong are turning increasingly to price wars to try to grab market share. Here, the key isn't simply having a strong balance sheet--to come out ahead, it also helps to have the lowest costs in an industry. That way, any price war is guaranteed to wreak more havoc on rivals' profits and market position than on the company leading the price spiral down.

That's the logic driving Dell Computer Corp. (DELL ), which slashed computer prices by 16% in 2001. Sticker prices on some machines have dropped by as much as 47%. The payoff: At 14.5%, Dell's market share is up 1.1 percentage points over where it was in the three months ending in September, says market researcher International Data Corp. The price-cutting has put Gateway (GTW ) on the ropes, cut into Hewlett-Packard's (HWP ) piece of the market, and helped Dell snare the No. 1 spot in global PC sales from Compaq (CPQ ). What's more, Dell has also won 36 large corporate accounts, worth $270 million, so far this year. "We're in full account-acquisition mode," says CEO Michael S. Dell. "The whole market is down. We continue to be up."

How so? Dell's streamlined procurement, manufacturing, and distribution systems have blessed it with a low breakeven point that lets it cut prices while staying solvent. True, Dell has had to lop off thousands of jobs and recently logged its first losing quarter in eight years. But in the quarter that ended Nov. 2, Dell rang up profits of $429 million on revenues of $7.5 billion. And when tech buying bounces back, Dell expects customers it has lured with deals on PCs and low-end servers to ante up for more expensive gear.

Of course, cutting only gets you so far. Even as belts are being tightened, some companies are continuing to spend where it matters. Far from hunkering down, Wal-Mart Stores Inc. (WMT ) is undertaking its biggest expansion ever. Betting that it can take business from Kmart (KM ), Sears (S ), and a fragmented supermarket industry, the discounter will spend about $10 billion this year on capital projects, up $1 billion from 2001, to add 46 million square feet of retail space. "We refer to ourselves as maybe the world's only $200 billion growth company," says J.J. Fitzsimmons, senior vice-president for finance.

Even marketing, one of the first victims of cuts in a recession, is getting a sharp boost at companies such as Sara Lee (SLE ) and Wendy's International (WEN ). Sara Lee, with a diverse product line spanning cheesecake, panty hose, and shoe polish, is juicing advertising by 25%, to $434 million, in 2002. No mean increase even in flush times, it's a particularly strong boost in brand exposure considering how much the price of TV air time is falling. CEO C. Steven McMillan has even told his managers that they won't get bonuses if they try to meet financial targets by cutting marketing budgets.

Given the degree of economic and political uncertainty that confounds planning, McMillan is countering what is a natural reaction. Indeed, plenty of companies are sounding the retreat. Still, the players who wind up in the best position may be those who take the risky-seeming opposite course. And placing those bets will always be a game only the strong can play well.

By Julie Forster in Chicago, with Andrew Park in Dallas, Christopher Palmeri in Los Angeles, and bureau reports

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