A Capital New Year?

After sucking up a mere $29 billion and countless barrels of ink in 1999 alone, Y2K mania threatens to ripple into the New Year as a financial hangover.

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After sucking up a mere $29 billion and countless barrels of ink in 1999 alone, Y2K mania threatens to ripple into the New Year as a financial hangover. But with the worst of the digital conversion issue behind us, some predict the coming of the New Year will serve as a pep pill for a capital-spending bonanza, especially in technology infrastructure. The thinking goes that while companies’ coffers may have been somewhat depleted fixing the Y2K bug, businesses cannot afford not to spend on new technology.

Although one would expect the Y2K fix to be a drain on capital spending in 2000, the latest numbers show spending on software and equipment will surpass last year’s, explains Gordon Richards, chief economist at the National Association of Manufacturers. Richards sees capital spending on equipment and software rising by 15.5 percent this year, up from a projected 15 percent in 1999. Computer equipment will continue to be a big driver of spending, Richards says, adding that the phenomenon of falling computer prices “is so powerful that it dominates everything when it comes to investments. Computer prices are continuing to decline, and the efficiencies you can generate by investing in them are great.” He adds: “Firms are gearing up to get the benefits of E-commerce.”

Companies are not only compelled to spend on infrastructure, there will also be some pent- up demand from draconian year-end policies, notes Ezra Greenberg, senior economist at Standard & Poor’s DRI. “If people are trying to paint a doomsday scenario, it’s not in the cards,” he says. There will be a “little bit of a slowdown” to a 10 percent increase in real spending on producer durable equipment, he predicts, but computer-equipment spending will contribute close to 60 percent of this.

CFOs are bullish on 2000 capital spending, according to a Financial Executives Institute/Duke University survey of 266 CFOs. Only 27 percent expected capital investment decreases for the last quarter of 1999 and the first three quarters of 2000. One big Main Street spender next year will be drugstore giant Walgreen Co., which has announced it plans to commit a cool $1 billion toward capital spending in FY2000. More than two- thirds will go toward building a planned 450 new stores, says Jeffrey Rein, Walgreen’s vice president and treasurer, and 14 percent will be spent on technology, up from a budgeted 10 percent in FY1999. “Most of our spending on technology is to allow us to stay ahead of the competition,” says Rein. Walgreen is installing inventory management systems that will allow each store to personalize its stock for its particular traffic so that it can free up unproductive shelf space. “The technology is allowing us to lower our working capital while increasing sales and productivity,” says Rein.

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