Less than 10 years ago, Washington Mutual (WM ) Inc. was a little-known regional thrift in the Pacific Northwest. Today it ranks as the biggest savings institution and mortgage lender in the nation, with $277 billion in assets and 2,500 offices coast to coast. But that's still not big enough. The Seattle company is spending some $210 million to build 250 branches this year, backed by an advertising blitz to make sure consumers in its new markets no longer wonder what it is. Chief Executive Kerry K. Killinger says he will match those numbers in 2004 as he makes good on his plan to make WaMu the Wal-Mart of consumer banking.
Gutsy? You're not kidding. After wandering the economic desert for several years, many companies are just trying to cut costs and hold on until the long-promised, much-delayed recovery arrives. Despite some signs the economy is starting to improve -- the stock market has come alive, business spending on technology rose 5.9% in the first quarter compared with a year earlier, and even manufacturing is starting to turn up -- much of Corporate America remains skittish.
But here and there, bold companies like WaMu are moving forward. They aren't waiting for the economy to turn. Instead, taking advantage of their own strong balance sheets and the availability of cheap money, these damn-the-torpedoes outfits are steaming ahead. They are boosting spending on capital investments, research and development, and marketing. They're breaking into new markets, launching new products, and starting to think about deals. They're making acquisitions. They're even hiring.
Sure, the moves might come back to bite them if the economy stalls. Detroit's auto industry is one example of the dangers of betting on an upturn too soon. As the economy gained momentum last year, the Big Three ramped up output. But even as those new cars were rolling off assembly lines, the economy stalled at yearend. Forced to lay on more cash-back rebates, cheap financing deals, and other costly incentives to try to empty dealer lots, they've seen profits squeezed.
But if the companies betting today on stronger markets are right, that gamble could be their wisest move yet. A recent McKinsey & Co. study of 1,200 companies over the past 20 years shows that many of today's industry leaders raced further ahead of the pack by increasing spending during the 1990-91 recession. One telling example: Intel (INTC ) Corp., which more than doubled its R&D spending between 1989 and 1992, to $780 million, while pumping up capital spending as well. It's no accident that Intel commands 82% of the $24 billion market for PC processors. "Making a big bet is the thing that allows you to build sustainable advantage -- in technology, manufacturing improvements, or relationships. You spend, and others don't," says Donald N. Sull, assistant professor of business administration at Harvard Business School.
This time around, though, rivals may feel compelled to spend to keep up -- and that could be key to keeping the economy from slipping out of gear. Thanks to low interest rates and the expected kick as tax cuts pump an estimated $200 billion into the economy by fall, economists predict gross domestic product will expand by 3.5% or more in the second half. But many fret growth will peter out once again in 2004 unless companies pick up the slack from consumers, who have single-handedly kept the economy going.
So who are these corporate daredevils? Not surprisingly, many of them are in the technology industry, where the risk-taking spirit is strong (page 34). Verizon (VZ ) Communications Inc. is spending $13 billion this year -- almost half what the entire domestic telecommunications industry will spend. A chunk of that will fund a 10-year program to string fiber-optic cable to every one of its home and business customers, bringing them videoconferencing and interactive television. Others are using fresh ideas to strike paydirt. Apple Computer (AAPL ) Inc.'s online iTunes Music Store sold 3 million songs at 99 cents a pop in the first month after opening its venture on Apr. 28, while rivals struggled to sign up monthly subscribers.
Replaying its well-timed move of a decade ago, Santa Clara (Calif.)-based Intel is once again investing for the future -- big time. While most of its rivals were putting on the brakes in the first year of the tech downturn, Intel spent $11.5 billion on R&D and capital expenditures, a staggering 45% of revenues. That's now enabling Intel to introduce powerful new chip designs for wireless notebooks, cell phones, and other portable devices. "The combination of putting communications capabilities with computing capabilities is starting to roll out," says CEO Craig R. Barrett.
Increasingly, however, companies outside of tech are also upping their spending as they pursue aggressive expansion plans. Take AirTran (AAI ) Airways Inc., a fast-growing upstart that has been steadily making money even during the airline industry's worst downturn. The Orlando-based discount carrier operates today with 76 aircraft. But on July 1, in a deal valued at up to $5 billion, AirTran ordered 50 planes from Boeing (BA ) Co., with an option for 50 more.
Others are breaking from the pack by getting into new markets. Consider Logitech (LOGI ) International, which has won a loyal customer base through clever design. Now the company, known for its computer mouses and keyboards, is leveraging that brand loyalty and its design skills by moving into a host of other product lines.
Fiscal 2003 sales jumped 17%, to $1.1 billion, due in part to new products such as special notepads that convert handwriting to digital print through a PC. And with a new line of speakers coming out, it expects sales to climb an additional 9% in the fiscal year that ends Mar. 31, 2004.
Some early birds are also replenishing their marketing budgets. Hewlett-Packard Co. is cranking up its ad spending twelvefold this year, to $400 million, according to TNS Media Intelligence/CMR, an ad-tracking firm. That should help repair its brand after its bruising takeover of Compaq Computer (HPQ ) Corp. Nontech companies, too, are stepping up to the plate. Kellogg (K ) Co. is adding 5% to its budget this year as it rolls out cereals such as Tony's Cinnamon Krunchers. Media analysts are forecasting overall ad spending will grow at least 4.5% this year, compared with about a 2.5% rise in 2002.
It's easy, of course, for executives to come up with plenty of reasons why they should sit on their wallets. Even as cost-cutting has helped profits inch up, many companies are struggling with stagnant sales and little leverage to raise prices. At the same time, much of the economy remains saddled with unneeded capacity. "If anybody builds to add to capacity, people would say they're out of their minds," says Norbert J. Ore, manufacturing chairman of the Institute for Supply Management. "We still have a save-our-way-to-prosperity mentality."
That's not a mistake Washington Mutual intends to make anytime soon. The company opened 28 branches in Chicago in June, with plans for 70 by yearend. Some of its customers are brand-new, but most came from established banks such as Bank One (ONE ) Corp., which had been backing away from retail banking since the mid-1990s. Now, to fend off WaMu, Bank One has reversed course and begun adding branches of its own, with 13 planned for this year and 15 in 2004. WaMu's countermove? With its beachhead in Chicago secured, it's planning to build at least 40 sites in Tampa, starting next year. Forget that tale about the tortoise. In today's market, it's the hare that wins the race.
By Michael Arndt in Chicago, with Steve Hamm and Steve Rosenbush in New York and Cliff Edwards in San Mateo