720 U.S. Highway One
Travellers may not recognize the name, but chances are Guest Supply, Inc. has been close to them--very close. Guest Supply is the leading supplier of amenities such as soap, shampoo, and other toiletries and personal accessories, including ice buckets, towels and linens, stationery, and drinking glasses, to the hotel and lodging industry. In 1996, Guest Supply's customers included approximately one-third of the 30,000 hotels in the United States. An increasing number of hotel and motel chains, independent hotels, and cruise ship lines have begun taking advantage of Guest Supply's "One Stop Shopping" concept, contracting with the company to supply all of their facilities' amenities needs. Guest Supply offers packaging design, amenity coordination, production, and distribution through its Rahway, New Jersey manufacturing facility and its network of 14 regional distribution centers. The company manufactures and distributes leading brand name products as well as the company's own products. Guest Supply also offers contract manufacturing services to retail clients including Victoria's Secret and The Limited. Contract manufacturing, which accounted for 14 percent of 1995 annual sales, is a fast-growing segment of Guest Supply's business. The company's $159.5 million in 1995 sales placed it at the top of the highly fragmented, $2.5 billion hotel supply industry.
A Real Cottage Business in 1979
When John J. Todd founded Guest Supply in 1979, he probably did not realize that he would create an entire industry. Indeed, as he told The New York Times, "It was a big joke. ... The industry wasn't there." And, to Forbes, Todd added: "I just wanted a few extra things at the end of the month." A year earlier, Todd, 28 years old, was earning some $23,000 per year working as a salesman in the toiletry division of GAF. One night while staying at a Hyatt hotel in Chicago, Todd was forced to wash his hair with soap because he had forgotten to bring along a bottle of shampoo. Remembering a recent article about shampoo manufacturers giving away sample sizes of their new products and spending as much as $30 million to place samples in consumer homes, Todd reasoned that those sample sizes could easily be placed in hotel rooms. "I was traveling and going into hotels all the time," Todd told Soap, Cosmetics, Chemical Specialties (SCCS), "when I made the connection that retail companies can take advantage of sampling in hotels and save a significant amount of money."
Todd initially approached the manufacturers. But there he found little interest; manufacturers were more interested in reaching the female consumer, and travelers tended to be male. Todd quickly shifted focus, turning instead to bring his idea to the hotels themselves. His timing was good, as the hotel industry had overbuilt during the 1970s and by the end of the decade hotels were eagerly searching for a competitive edge. Todd quit his salesman's job and took a job as marketing manager with another company. With his wife acting as bookkeeper, Todd took a $2,000 advance on his credit card, arranged a $10,000 line of credit with a local bank, and convinced two friends to join the venture with an added $4,000 investment. Guest Supply debuted in 1979. Headquarters of the new firm was Todd's living room; his basement served as his warehouse and distribution center.
Next, the company began developing a product line. Its first product was shampoo--Gillette's "Ultra Max"--which the company bought in bulk and repackaged into sample sizes. Hotels responded well. "We took a national brand," Todd explained to SCCS, "and sold a little sachet for a nickel. For a hotel to spend $200 was not a big expense to try. They found it to be something a guest appreciated ... [and] gave them a little bit of difference from the guy across the street." The company added more amenities to its line, and, in 1980, Guest Supply lined up its first major order, of $100,000 from Marriott Hotels. As a director at that company later told Forbes, "We wanted to show our guests we cared about service. A few companies offered customized bars of soap, but no one offered the array that Todd did."
Todd and his partners left their jobs to begin working full-time with Guest Supply. Sales grew quickly, rising to $1.8 million in 1981, doubling in the following year, and jumping to $7.2 million by 1983. The company was also turning a profit. Net income rose from $88,000 in 1982 to nearly $800,000 in 1984. By then, amenities had become a standard room feature throughout a hotel industry battling not only a glut of hotel rooms but also a national recession. By 1984, some members of the industry had even begun to speak of "over-amenitized" hotel rooms. Other companies were also entering the hotel amenity market. But Guest Supply already went beyond simply supplying amenities. The company offered custom packaging and design, as well as overall amenity coordination. As Todd explained to Travel Weekly, "People who are over-amenitizing their hotels haven't properly structured their thought processes. Amenities must be thought of as a marketing tool, a statement of management. When we put together an amenities program for a chain, we ask the hotelier some basic questions. ... Then we put together an amenities program that makes sense, that incorporates marketing goals, that presents the hotel in a favorable light."
To further this end, the company formed a subsidiary, Guest Design, Inc., to design, develop, and produce original packaging that featured both the client's name and the product's brand name and coordinated with a hotel room's overall decor. Products offered by Guest Supply featured nationally known and up-and-coming brand names, as manufacturers found this new, revenue-generating sampling program to be a lucrative addition to sample mailing programs. To step up the company's expansion, which included a move to new headquarters, the opening of sales offices in the West Coast, Midwest, and Southeastern markets, as well as in England, and the projected establishment of a network of regional distribution centers, Guest Supply went public in August 1983.
Losing Ground in the Mid-1980s
The Guest Supply formula proved to be a hit. By 1984, the company's customer base had grown to 850, representing nearly 2,500 hotels and other lodging facilities. Marriott continued to be a major client, accounting for some 20 percent of Guest Supply sales. Holiday Inns signed on in 1984, contracting with Guest Supply to supply a line of 20 custom-designed amenities in a mandatory program throughout its nearly 1,200-hotel chain, a contract then worth a minimum of $8 million per year to Guest Supply. The company also moved to increase its own capacity, purchasing bankrupt contract manufacturer Technair Packaging Laboratories and its Rahway, New Jersey factory and adding Miraflores Designs Inc., another large amenities supplier with $7 million in sales, the following year. In 1985, the company posted $18 million in revenues; the amenities industry itself had grown to a $40 million per year business. Customers also included major chains such as Quality Inns, Best Western, Omni Classics, as well as several cruise lines. The company posted a secondary offering in 1985, raising nearly $9 million to fuel its expansion. By then, Todd's own stock in his "big joke" was worth more than $4 million. Revenues for the following year nearly doubled, to $33 million.
Yet the transition from entrepreneur to head of a rapidly diversifying operation seemed too much for Todd. The purchase of Technair saddled the company with an antiquated, inefficient manufacturing facility. Guest Supply next acquired another large amenity supplier, Breckenridge-Remy, but the company lacked a sufficient distribution network to manage the increase in sales. Todd also attempted to enter the retail licensing market, a venture that was described as "disastrous" for Guest Supply. At the end of 1986, the company posted its first-ever quarterly loss; profit for the entire year was only $812,000. The company's losses deepened over the next year, while the company steadily lost its lead in market share and found itself faced with an ever-increasing number of competitors. Revenues remained stagnant at $33 million in 1987 in an amenities market that by then had reached nearly $400 million in annual sales. Guest Supply's losses for that year fell just under $7 million.
The company rejected an acquisition bid in early 1987 worth more than $53 million. But outside investors were increasing their holdings in, and influence on, the company. In early 1988 Todd proposed to expand the company's operations again, this time to the international market. His proposal was rejected by the board of directors and Todd left the company. Under the terms of his resignation, Todd took with him the company's failing retail unit. Todd was replaced by Clifford W. Stanley, a former vice-president with Johnson & Johnson, who had joined the company in 1985 as chief financial officer. Stanley moved to return the company's focus to its core amenities line and began a $10 million modernization and automating effort in its Rahway plant. In addition to exiting retail, the company abandoned another of its diversification moves, that of selling to distributors. The addition of Breckenridge-Remy doubled Guest Supply's revenues, to nearly $64 million, boosting the company's product line and sales force, while increasing its distribution capacity with a network of seven regional warehouses. Under Stanley, the company began to develop its one-stop shopping concept.
Rebounding in the 1990s
Guest Supply chipped away at its losses over the next years. Its 1988 loss of $3.3 million was reduced to $1.9 million by 1989, and losses were now largely the result of the company's push to modernize its manufacturing and distribution capacity; the company had managed to cut its operating losses from $2.7 million to less than $650,000. Guest Supply's renewed strategy emphasized direct sales and distribution to the hotel industry through a network of distribution centers, including those inherited with the Breckenridge-Remy acquisition. As the company neared the end of its 1989 fiscal year, Guest Supply continued to expand its regional sales and distribution network with a thirteenth center in Atlanta.
Through the 1980s, the hotel industry had once again gone on a building binge, and by the end of the decade that market was oversaturated. The hotel industry was further pummeled by the slide into the recession of the early 1990s, and then the outbreak of the Gulf War. Hotel occupancy rates slipped to 60 percent and lower. The hotel industry's problems cut into Guest Supply's growth, but the company's revenues continued to grow as hotels stepped up their amenity offerings to attract the traveling public. Guest Supply's sales grew to $75 million in 1990. Its upgraded manufacturing facilities were cutting the company's operating costs. Where eight workers once were needed to fill 70 bottles per hour, only five now were needed to fill 300 bottles. The increased capacity enabled Guest Supply to expand into another area of sales. Contract manufacturing began to represent a small but growing portion of Guest Supply's sales. Production of the company's own products provided the overhead for its contract orders; filled largely through excess manufacturing capacity, contract sales for such customers as Proctor & Gamble, Helene Curtis, and The Limited returned some 70 percent of revenues as profit.
The company's losses dropped to $300,000 by 1990. The following year, with revenues growing slowly to $78 million, the company achieved its first profit, of $400,000, since 1986. With its manufacturing capacity and distribution network in place, the company next expanded into a new area, producing trial sizes of other manufacturer's branded products. This was seen as a natural outgrowth of the company's core business, since the company's manufacturing facilities were already geared toward this type of packaging. As Stanley explained to Portfolio Letter, "We saw a market which was untouched by everyone else. There are a lot of manufacturers who want to sell trial sizes, but can't because their plant doesn't have those type of facilities, but we do."
Guest Supply regained its industry lead, grabbing an estimated 30 percent of the hotel amenities market. As the recession ended and the hotel industry rebounded, Guest Supply's sales took off, reaching $98 million in 1993 and then $116 million in 1994. In each of these years, net income doubled, to $2.2 million and to $4.1 million. The company stepped up its vertical integration efforts, adding paper products and housekeeping supplies, as well as waste baskets, stationery, and door signs. Hotels commonly purchased these supplies from a variety of vendors. "Our goal," Stanley told Investor's Daily Business, "is to get each hotel's entire account." The company added to its product offerings in 1994 with the addition of linens and other textiles produced by other manufacturers; these would quickly add some $20 million in sales in little more than a year.
Guest Supply's contract manufacturing operations, meanwhile, grew by 86 percent in 1995 alone and now represented about 14 percent of the company's total sales. To further fuel this growth, the company invested another $10 million in capital improvements to expand its manufacturing capacity. This in turn led to shortage of warehousing space, forcing the company to build a new 225,000-square-foot warehouse. Originally scheduled to open in September 1996, the warehouse was beset with construction delays. Yet this was a minor and temporary setback to the company, which saw its 1995 revenues rise to $159.5 million. In addition, by developing its infrastructure, Guest Supply was poised to capitalize on yet another burgeoning market. More and more retailers were pursuing plans for entering the huge personal care market. Guest Supply was already positioned to take on this new business. "We have formulating chemists and have literally hundreds of formulas. We customize products and can manufacture quicker," Stanley told Investor's Business Daily. Under Stanley, Guest Supply had successfully paved over its past bumps and was now traveling a smooth road to the future.
Principal Subsidiaries: Guest Design, Inc.
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