Mac-Gray Corporation

22 Water Street
Cambridge, Massachusetts 02141
U.S.A.
Telephone: (617) 492-4040
Fax: (617) 354-3963
Web site: http://www.mac-gray.com

Public Company
Incorporated: 1927
Employees: 525
Sales: $154.3 million (2000)
Stock Exchanges: New York
Ticker Symbol: TUC
NAIC: 81299 Miscellaneous Personal Services, Not Elsewhere Classified; 33313 Calculating Machines Except Computers

Mac-Gray Corporation provides debit card and coin-operated laundry services and other amenities to multiple housing facilities. Most of its clients are apartment buildings, condominiums, colleges, assisted living communities, military housing, and public housing complexes. The company is the largest provider of laundry services to the U.S. college and university market. Most of the company’s laundry equipment is Maytag-brand. Mac-Gray owns and operates about 170,000 washer and dryers in some 30,000 multiple housing laundry rooms across 33 states in the Northeast, Midwest, and Southeast. It also distributes commercial washers and dryers to laundromats, hotels, hospitals, and restaurants; sells a line of combination refrigerators, freezers, and microwaves; and provides vended reprographic services to colleges and libraries.

Origins

In 1927, H.S. (Stewart) Gray left his insurance sales job to found the company that later became Mac-Gray Corporation. Gray, born in 1900, bought a pick-up truck; cut a deal with Maytag, the appliance manufacturer; and began selling wringer washing machines and ice boxes door-to-door in the Boston area. An entrepreneur and risk taker, H.S. Gray remained active in the company into the late 1970s and died in 1994.

Throughout its history, Mac-Gray was a technology leader in its industry. The company leaders tended to be entrepreneurial and creative. In the 1930s, Gray installed coin boxes on washers, pioneering the “pay-as-you-use“ laundry service. The company devoted time to redefine or innovate and catch the early wave on industry trends. Examples included adopting European water-efficient technology and leading the change to coinless washers and dryers.

The Great Depression

The biggest challenge faced by the company in its early years was the Great Depression. In the 1920s and 1930s, selling equipment was often a door-to-door business. When the depression hit bottom in 1933, 16 million people (one third of the labor force) were unemployed. People did not have the funds to make a major purchase like an appliance.

This lack of individual sales spurred H.S. Gray to make his appliances available in common areas, put a metering device on them, and allow people to “rent“ the washer or dryer by the hour. “At this time, the coin operated laundry business was born out of desperation,” explained Stewart Gray MacDonald, Jr., the company CEO in 2001. “That was a major turn of the road where adversity pushed the company in a different direction.”

In 1946 H.S. Gray brought in Stewart MacDonald (the father of Stewart Gray MacDonald, Jr.) to help run the company. MacDonald, born in 1925, helped steer the company through a time of rapid change. After World War II, suburban development increased at a rapid rate. The interstate highway system changed the landscape and made the automobile essential to U.S. life. Consumers, whether they lived in apartments, college housing, or their own houses, became enamored with convenience. They were looking for easy access to washing machines and dryers.

1950s: the Leading College Laundry Service Provider

Mac-Gray foresaw that the growing U.S. population, with its movement to the suburbs, would spike the need for public laundromats. In 1952, the company de-emphasized selling appliances to homeowners. It established a store division and helped launch many self-service laundromats. H.S. Gray asked Stewart MacDonald to run the new entity, and they renamed the company “Mac-Gray” to reflect the dual leadership. Mac-Donald brought creativity, a commitment to customer satisfaction, and a strong work ethic to the job. In the 1950s, Mac-Gray became the leading laundry service provider to colleges and multi-housing communities and New England’s top commercial laundry equipment company.

Multi-housing complexes used the services of Mac-Gray to avoid the issues involved in running a laundry service. The company provided liability insurance; purchased, installed, and maintained laundry equipment; and by the 1990s provided coinless systems.

The 1960s brought an expansion of the Cambridge, Massachusetts, corporate headquarters and the introduction of cashless electronic ticket systems, a precursor to Smart Cards. Maytag, the primary manufacturer of nearly all Mac-Gray laundry appliances, created the ticket system. The market embraced this system well into the late 1970s, but it was a limited concept. The ticket system worked well for properties that had on-site managers or someone continually available to sell the tickets to residents. Technology to sell the tickets without human intervention (via vending machines, for example) was not yet perfected.

In the late 1970s, the company left the household market to concentrate on its commercial business. This was also the decade when Mac-Gray began expanding its operations through the acquisition of small companies.

1980s: Water-Efficient Technology

With utility costs rising in the 1980s, Mac-Gray implemented and promoted a new European water-efficient technology. Europeans used a horizontal access (front loading) washing machine as opposed to the common top-loading washer used in the United States. In the European machine the washing drum filled halfway. Rather than having the clothes completely immersed in water, as in the top-loading machines, European models milled the clothes through the water by a horizontal rotation of the drum. This technology conserved water and reduced the amount of electricity needed to heat the water. It also allowed for a faster spin cycle. Clothes came out of the washer with less moisture and needed less time in a dryer. Savings were three-fold: in water, in energy to heat the water, and in energy to run the dryer.

Because Mac-Gray felt that water would become a precious commodity in at least some U.S. markets, the company saw a product niche for a more efficient, front loading washing machine but none of the U.S. manufacturers were interested in making such a product. That led Mac-Gray to form a relationship with Ipso, a Belgian manufacturer, to produce a front-loading machine for the U.S. market. “We imported the Belgian-made machine and had a nice period of success with it. It filled exactly the niche we had identified,” said Stewart Gray MacDonald in 2001.

In 1997, Maytag began manufacturing the Neptune, a washer similar to the European models. It used about 50 percent less water than standard U.S. brands. That year Mac-Gray dropped Ipso to begin selling the Neptune. Twenty years later Mac-Gray still promoted a high-efficiency program designed to cut laundry room operating costs by saving on water, sewer, and energy via the Neptune. Compared to other models available in the United States, the Maytag unit was better for the environment, gentler on clothing, and allowed more people to do more laundry in less time.

Expansion and Acquisitions in the 1980s and 1990s

In 1983, Stewart MacDonald stepped down from his leadership position due to ill health. His son, Stewart Gray MacDonald, joined Mac-Gray in a director position in the early 1980s and accepted an executive position in 1989. He became Chairman and CEO in 1995.

Acquisitions have long been part of the Mac-Gray story, dating back to at least 1983. The company expanded into the southeastern United States in the mid-1980s and into the Midwest in the early 1990s. In 1996, Mac-Gray bought seven smaller competitors. However, the company needed more funding if it was to pursue larger acquisitions and mergers. To raise those funds, the company went public with an initial public offering October 17, 1997. The initial public offering generated sales of 4.6 million shares at $11. Going public made Mac-Gray unique among its competitors, all of whom were private companies. Although 70 years of private ownership ended, Stewart Gray MacDonald and family owned about 50 percent of the company in 2001.

Smart Cards Replace Coins

In the 1990s, Mac-Gray beat its competition in switching to new coinless washers and dryers. After first committing to cashless programs in 1991, Mac-Gray announced what was believed to be the largest cashless washer and dryer program in North America on December 1, 1997. It involved 50,000 Smart Card terminals. A prepaid Smart Card replaced the quarters. Knowing people disliked using quarters, the company saw cashless operating systems as the future.

First developed in France in the 1970s, Smart Cards gained wide use in Europe and Asia, but not in the United States where magnetic strip cards dominated. Smart Cards, plastic debit cards the size of standard credit cards, featured an embedded computer chip. Users added value to the card by inserting money into an ATM-like machine. The computer chip recorded the card’s changing value each time cash was added or a purchase was made. The chip was said to make the Smart Card harder to copy than other debit cards.

Company Perspectives:

Unlike every other laundry service provider, Mac-Gray is a public company operating under strict SEC guidelines. That means we’re responsible to both customers and shareholders. Our overall approach always reflects the highest ethical standards. The biggest reason for our long-term success is the trust we’ve established with customers and users. And we won’t risk that for anything.

Smart Cards did more than solve the “no quarters” problem. The cards could reduce laundry room wait times by providing a discount for washing clothes at less busy times. The cards also were used for other purposes like unlocking apartment doors, making photocopies, using vending machines, and providing access to select areas like pools or gyms.

Mac-Gray implemented the cards faster and more widely than any of its dozen or so competitors. The company claimed its cards offered superior security due to advanced encoding it developed via an exclusive relationship with the French company, Schlumberger Danyl. A report by Palmer and Palmer found that properties that switched to Mac-Gray’s Smart Card laundry system increased their incomes about 20 percent. One obstacle to the switch away from coin-operated machines was cost. The price tag on implementing the Smart Card system dictated that the switch to coinless operation was only profitable on larger properties.

Combining the card with Mac-Gray’s IntelliPass keyless door access system gave housing complex owners greater control of who used their properties. IntelliPass invalidated Smart Cards when they were lost or stolen and when units changed hands. IntelliPass also kept track of who entered the building.

1998 Expansion

In 1998, the company spent $26.4 million in stock and cash to purchase Intirion Corporation, a 48 employee company in Walpole, Massachusetts, that made the MicroFridge. The MicroFridge was a line of compact combination refrigerators, freezers, and microwaves. Colleges and universities, inexpensive hotels, assisted living facilities, and military bases were the markets for the MicroFridge. It was the most popular unit of its kind on college campuses. The purchase of Intirion gave Mac-Gray another major product line for its existing market.

Buying MicroFridge was one step in Mac-Gray’s plan to expand both geographically and in its product offerings. The company was trend-spotting and saw the multi-housing industry outsourcing many amenity programs like maintenance and service contracts. Real estate company mergers were another factor leading CEO Stewart Gray MacDonald toward gaining a presence in the 26 states in which the company had no laundry equipment.

Mac-Gray also acquired Copico in 1998 for $15.1 million in cash and stock. Copico provided reprographic services to colleges and libraries via card and coin-operated copy machines, laser printers, and microfilm machines. It was the leading provider of these services to libraries. The purchase proved ill-timed according to The Boston Globe, becoming one factor in a less than banner financial year in 1999. Company earnings fell 63 percent in the second quarter of that year. Throughout the 1998-2000 period, most students began shifting to Internet research and using laser printers to make hard copies on library-maintained printers—often free of charge. As a result, Copico suffered a 25 percent revenue decline in 1999.

“Copico has been a difficult division since we bought it,” said Stewart Gray MacDonald in August of 2001. “We had to incur a write-down at the end of 1999 ($8.5 million) in order to reflect what we thought was a diminished value of that division, but we remain cautiously optimistic about it.” Another challenging factor in 1999 was an unexpected surge in Mac-Gray’s distribution of Maytag and other laundry appliances to laundromats. This portion of the company’s business had thinner profit margins than the laundry services.

MicroFridge sales increased 9 percent in 2000. In one change to the business model, Mac-Gray decided to make a gradual, multi-year exit from a segment of the business that rented product directly to students in the academic market, due to low margins. Entering the new century, total company sales continued to grow steadily. Annual sales reached $154 million by December 2000—the fourth straight year of sales growth.

March 2001 brought the announcement an experimental online laundry system. Tested at the Massachusetts Institute of Technology (MIT), the system allowed students in their dorm rooms to log on to a Web site to see if a washing machine was available downstairs in the laundry room. When the student’s clothes were washed and dried, the student received e-mail notification. With a history sprinkled with creativity and well calculated risk-taking, Mac-Gray had become a leader in the laundry service business.

Principal Competitors

Coinmach; SpinCycle; Angelica Corporation; Dwyer Group, Inc.; Techsys, Inc.

Key Dates:

1927:

The company is founded by H.S. Gray.

1946:

Stewart MacDonald joins the company.

1952:

The company adds more emphasis to commercial Laundromats

1952:

Steward MacDonald becomes CEO.

1982:

The companies revenues reached $10 million.

1983:

Donald Shaw becomes CEO.

1995:

Company revenues reach $50 million; Stewart Gray MacDonald, Jr., becomes CEO.

1997:

Initial public offering in made by the company on October 17.

1998:

Mac-Gray purchases MicroFridge (Intirion Corporation) and Copico, Inc.; the company’s revenues reached $100 million.

Further Reading

Ackerman, Jerry, “Globe 100/Bears,” Boston Globe, May 16, 2000, p. C26.

The Clean and Simple Advances of a Mac-Gray Laundry Program, Cambridge: Mac-Gray Corp, 2001.

Cohen, Joyce, “It’s a Dirty Job But Now the Web Offers Help,” New York Times, March 15, 2001.

Muther, Christopher, “Firm Sees Future in the Cards,” Boston Globe, February 18, 1998, p. E4.

—Chris John Amorosino