William P. Lauder was already adjusting his corporate budget for a tough holiday season. Then the financial crisis hit. Amid the turmoil, the Estée Lauder Cos. (EL) chief executive stopped at a Denver mall and found it practically empty. Now he's preparing for the worst. "We always do scenario planning, but not to the degree that we are doing now," says Lauder. He's asking each brand manager at the New York cosmetics giant three questions: "What must you have? What would you like to keep going? And what can you give up?"
Down in Louisville, David C. Novak is giving a similar message to staff. "We will not spend on projects that might [have] come true," says Novak, CEO of YUM! Brands (YUM), owner of Pizza Hut, KFC, and Taco Bell. "Today it's more of a 'must-have' mentality."
Faced with squeezed credit and unpredictable sales, U.S. companies are bracing for budget cuts that could be far-reaching, painful, and in some cases unprecedented. Even before September's turmoil, Moody's Economy.com predicted that corporate operating expenses—a proxy for budgets—would rise, on average, no more than 7% annually through 2012 across 59 industries, down from several consecutive quarters of double-digit gains.
A mediocre outlook has suddenly grown worse. "Just in the last two days, I have had clients rethinking not only their 2009 budgets but all the way to 2011," says Anthony D. Begando, founder and CEO of Tenon Consulting Solutions in Alpharetta, Ga. On Sept. 25, Rite Aid (RAD) CEO Mary F. Sammons cited "the growing uncertainty of this economy" when announcing a $50 million cut in capital spending over the next six months.
Some have already made big cuts. Houston's Petrohawk Energy (HK) disclosed on Oct. 1 that it's slashing its capital expenditure budget by a third, to $1 billion. CEO Floyd C. Wilson says "our shareholders would like to see conservatism in our balance sheet." Sam Rovit, a partner at Bain & Co., notes that many companies will be forced to cut expenses "that in normal times you would not touch."
INTO THE GARBAGE
Among the costs coming under immediate scrutiny are marketing and new construction. AT&T (T) and General Motors (GM) have already slashed their 2008 marketing budgets amid tough economic conditions. On Sept. 15, Visa (V) consolidated its ad account from four agencies to one to save money next year. Casino companies scrapped several high-profile expansion projects over the summer.
Faced with such instability, some executives feel it's more prudent to jettison troubled businesses than to fix them. Consumer-product maker Newell Rubbermaid (NWL) now plans to dump $500 million of low-margin products, such as $10 plastic garbage cans, reversing a previous plan to turn them around. Newell CEO Mark D. Ketchum says it's the best strategy, given the tough road ahead. "Two words come to mind when I think of 2009—difficult and volatile," says Ketchum.
The most painful trim, of course, is in payroll. Many executives expect layoffs to be swifter and deeper than before, accompanied by pruned salaries and bonuses for those who remain. On Sept. 30 drugmaker GlaxoSmithKline (GSK) said it would cut up to 850 jobs in research and development, on top of 350 eliminated from R&D earlier this year. Wall Street firms are expected to reduce bonus pools as much as 50%, according to compensation consultancy Johnson Associates. And the Corporate Library, a governance research firm, reports that at least 62 CEOs have so far pledged that if they have to cut their fellow managers' pay, they'll be sure to cut their own, too.