High Tech and Entrepreneurship Strategy

Professor Ron Adner

Club Med: From Value Innovator to Follower

PREPARED BY: N IR MAROM A NNIE DUDKIEWICZ JEHAN COYAJEE IFTAH YAIR MATTEO CARLI A DAM C LOSENBERG

FEBRUARY 13, 2003

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A parallel universe where every day is beautiful, where there are no locked doors, no more barriers between people, where the body is cause for celebration and the mind runs free.
Philippe Bourguignon, CEO Club Med (19972002)

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EXECUTIVE SUMMARY In 1936, the French government introduced the paid vacation, but World War II broke out before this policy could set the tourism industry alight. A few years after the war, Gerard Blitz, a Belgian, championship-level athlete and resistance fighter, visited Club Olympiques tent village in Corsica and was inspired to establish Club Med as a non-profit organisation to develop appreciation for the outdoor life and the practice of physical education and sports. Little did he know that Club Med would assume to mantle as Value Innovator of the all-inclusive vacation industry.

Club Meds innovativeness extended beyond its product to its business model. The innovation of its product was to provide young adults, like Blitz, with somewhere exotic to vacation. At tha t time, vacations were predominantly local and usually involved staying with relatives or, at best, at family-run inns. The innovation of its business model was in the combination of: (1) the all-inclusive concept, which required that Club Med control the entire vacation value chain (sales and marketing, transportation, destination, food and entertainment); (2) a members club which brought some subscription revenues but, more importantly, encouraged repeat business 1; and (3) cash free resorts which boosted guests spending on alcohol and other extras. Club Med started small but scaled fast. In total, Club Med opened 19 resorts in the fifties, 32 in the sixties, 59 in the seventies, and 29 in the eighties 2. This rapid growth was made possible by loyal guests who were willing to prepay for their vacations, lack of any direct competition, and Club Meds ability to cross the chasm into the mass tourism market. The latter required management to replace its original tent villages with more comfortable hotels and bungalows, add family -friendly facilities, extend sales and marketing efforts outside France, and invest heavily in establishing Club Med as the trusted brand in family vacations.

Club Meds success from the 1950s through the 1980s was based on a deep understanding of its guests and a willingness to respond to their changing needs. So

1 2

According to Club Med, 20% of members visit every year and 83% to return every three years. These numbers include permanent and temporary villages and do not account for any closures.

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when its original guests matured from singles and young adults into parents, it made sense for Club Med to adapt the product into something more suitable for families. However, by the late 1980s, competitors finally realised that Club Meds undifferentiated product for all market segments left the door open for them to serve the very segments Club Med had left behind singles and adults.

Today, Club Med faces intense competition from other all-inclusive resorts like Sandals and SuperClub in the U.S. and Caribbean, who learned from Club Meds successes (all-inclusive; organised entertainment; and exotic locations) but improved on its mistakes (different brands and products targeted specifically for singles, adults and families, or for low- or high-end resorts; deeper rather than broader geographic coverage; and free alcohol!).

Club Meds response to the competition has fallen short of a complete segmentation and multi-brand strategy. Instead, it has renovated its older resorts and re-classified all its resorts in terms of the different level of facilities it provides for babies, toddlers and unsupervised children, as well as those resorts that are suitable for adults only. Club Med is currently testing a resort for college students under a separate brand, Oyyo. In addition, to achieve critical scale and to attempt to fill its excess capacity, Club Med has invested heavily in the sales and marketing and distrib ution side of the business by acquiring European tour operators and transport providers. Thus far, its this strategy has not translated into improved performance.

In this paper we evaluate Club Med in two parts. Part One The Rise and Rule of Club Med spans from its creation in 1950 until the mid - to late 1980s and it reflects the company as a Value Innovator and undisputed leader of the all-inclusive tourism industry. And Part Two Competing with the New Breed of Innovators considers how Club Med was out-innovated by its more segment-focused, multibrand competitors.

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TABLE OF CONTENTS EXECUTIVE SUMMARY........................................................................................... 3 PART ONE: THE RISE AND RULE OF CLUB MED............................................ 6 Identifying and Capturing the Opportunity ............................................................... 6 Classifying Innovation ............................................................................................... 7 Understanding and Mitigating Risk........................................................................... 9 Crossing the Chasm ................................................................................................. 10 Geographic Expansion ............................................................................................. 11 Business Model........................................................................................................ 11 PART TWO: COMPETING WITH THE NEW BREED OF INNOVATORS...... 12 Evolution of Club Meds Offering .......................................................................... 12 Competitors Offerings ............................................................................................ 13 Club Meds Reaction ............................................................................................... 14 Current Financial Situation...................................................................................... 16 Main Causes of Decline........................................................................................... 16 Conclusion ............................................................................................................... 17 LIST OF REFERENCES:............................................................................................ 18

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PART ONE: THE RISE AND RULE OF CLUB MED Identifying and Capturing the Opportunity

In 1936, the French government introduced the paid vacation, but World War II broke out before this policy could set the tourism industry alight. A few years after the war, Gerard Blitz, a Belgian, championship-level athlete and resistance fighter, visited Club Olympiques tent village in Corsica and was inspired to establish Club Med as a non-profit organisation to develop appreciation for the outdoor life and the practice of physical education and sports.

The 1950s brought the Boeing and the bikini and saw the phenomenal rise and rule of Club Med as the dominant provider of all-inclusive family vacations. Until then going on vacation meant staying with relatives, at a family-run inn, or camping, and it almost never meant going abroad.

After the depressing war-torn forties, Blitzs concept for Club Med was as a club where friends could socialise together in exotic locations. And so, in June 1950, after a long journey by train, boat and bus, 300 guests arrived at the first Club Med resort a no-frills tent village on a secluded beach on Alcudia, in the Baleares. That summer, Blitz welcomed 2,300 guests refusing nearly 10,000 other reservation requests!

For a hefty 16,800 FF, guests were treated to an all-inclusive Paris -to-Paris package, two weeks at an exotic location, with G.O-led3 sports and entertainment, rich and varied cuisine, a bar, conviviality, a bank with currency exchange, a post office, a first aid station, and even a hairdresser under the coconut tree! Over the next fifty years, Club Med applied this same formula to grow to over 70 resorts, in 32 countries, on 5 continents.

General Organisers are Club Med employees who coordinate social activities at the resort.

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Classifying Innovation It is interesting to analyse, ex post, the level of risk inherent in Club Meds initial launch and subsequent expansion strategy. 4 Using the Innovation-Risk Profile framework, we defined Club Meds product as an all-

Graphic 1: Club Med Innovation-Risk Profile

Existing

inclusive international vacation.

Its initial launch (at point A) held medium risk: a new product for

Identifiable

Market

an identifiable market (young

B A

French Adults). Thereafter, Club Med innovated in triangle -like fashion, from A to B and A to C, and then from C to B. Move from A to B: Based on its

Unknown Existing

Modified Product

New

early
LOW RISK MED RISK HIGH RISK

successes, its

Club

Med adults

extended

young

product into new geographic markets. This involved relatively low risk as Club Med leveraged the same formula in new locations and it targeted existing customers as well as similar customer segments outside France.

Move for A to C: Club Med then modified its young adults product into a more family -friendly product to cater for the changing circumstances of its existing customers. This implied medium risk given the potential for dilution in the Club Med brand and loss of management focus.

Move C to B: Finally, Club Med extended its modified family product into its new geographies also implying relatively low risk due to its experience rolling out its original concept.
4

For a more detailed assessment of how Club Med was able to mitigate many of its innovation risks, please refer to the section: Understanding and Mitigating Risk.

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Club Med defines its core capabilities as the four pillars, which include transportation, accommodation, food, and sports and entertainment. By integrating these four pillars, Club Med established itself as a true value innovator, even if this integration strategy was largely driven by necessity as all the components for an international tourism industry were not sufficiently developed.

These four pillars became the hallmark of Club Meds value proposition: the ability to provide guests with an end-to-end, hassle -free experience from the moment they decide to go on vacation until the time they return home re -energised and arguing over which Club Med to visit next. (Club Med did, however, modify the details of the pillars to account for technological developments and the different requirements of new locations. For example, transportation evolved from chartered boats and trains to airplanes; accommodation evolved from tents to hotels and bungalows; food evolved from hunting and fishing to a choice of international cuisines; and entertainment evolved from simple games on the beach to golf and tennis.)

Club Meds ability to continuously innovate across its four pillars created superior value for its guests and helped the company combat the increasing threat from international hotel chains and tour operators.

Some of its most noteworthy innovations include:

Graphic 2: Club Meds Value Creation

1955: Bar necklace

CREATE Valuable new features RAISE Primary factors CUSTOMER BENEFIT

signalled the end of hard cash 1955: Free wine with meals 1956: First Club Med ski resort (ensuring G.Os were on staff year-round and members could vacation at a Club Med twice a year!) 1960: Mini Club for kids

All- inclusive control whole value

chain from transport to destination Wide range of exotic locations Culture/ Socializing/ Membership Target only young

Food as an experience Wider range of activities supported by G.O. concept Emphasis on trusted brand

ELIMINATE Tertiary factors REDUCE Secondary factors

Expensive central locations High-end hotel services

(e.g. room service)

COSTS

Offer acceptable comfort levels

1964: Professional, intellectual entertainment by writers, poets and actors

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1967: Buffet-style dining 1970: Club Med for senior citizens 1972: Convention services for businesses 1978: First Nudist village 1979: Club Med branded merchandise 1987: Indoor tropical paradise in Vienna 1989: Club Med I largest passenger cruise-liner

Understanding and Mitigating Risk Gerard Blitz started small and scaled fast. The primary risks inherent in his model were associated with managing the multitude of interdependencies, including site selection and development, financing, transportation, and demand generation. He was largely able to mitigate these risks by managing each new village as an independent project, getting guests to pre-pay for their vacations long in advance, driving loyalty and repeat business, and by controlling all strategic components of the value chain: sales and marketing, transportation, destination, and entertainment.

In truth, Blitz probably never explicitly dealt with the five questions around making sense of uncertainty. With all due respect to Mr. Blitz and Club Med, we have taken the liberty of trying to predict what his answers to these questions might have been.

5 Areas of Uncertainty: Product Uncertainty Can I make it work? Market Uncertainty Who will buy and at what scale? Competitive Uncertainty Who are my rivals? Operational Uncertainty What is the relevant scale? Organisational Uncertainty Who must buy in?

Blitzs Possible Answers: Who cares? Im having fun. And its not costing me that much. Young adults like me who are looking to put the war behind them and have fun. What rivals? Theres no tourism yet, and certainly no all-inclusive packages. I have no idea, but I want to expand to as many exotic locations as possible. What organisation? Its just me.

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In reality, Club Med has encountered financial difficulties on more than one occasion. By the 1960s, rapid growth placed a severe cash drain on the Club and Blitz was forced to bring in Edmond de Rothschild as majority shareholder. And, a few years later, the company listed on Paris stock exchange.

Crossing the Chasm

Club Meds overall business strategy centred on satisfying the desires of its original members principally young adults. By default, this strategy enabled Club Med to cross the chasm, giving it access to the newly created mass tourism market.

There were several internal and external developments that enabled Club Med to cross the chasm and provide a product that had mass-market appeal:

Graphic 3: Crossing the Chasm

Early Majority

Technological

developments:

Tent

villages were replaced by hotels and bungalows that offered electricity and

Innovators & Early Adopters

Time

running water and made for an easier vacation. Permanent sites: Helped justify more significant investment in comfort, facilities and services, and drove economies of scale and learning. Mini Club: Its young adult members became parents and they demanded more family -friendly facilities and services. Geographic expansion: Opened up the doors to new guests and ensured that its existing guests never got bored with the Club Med concept. The Club Med brand: Through principally word-of-mouth, the brand became globally synonymous with trusted, family vacations.

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Geographic Expansion Club Med extended its geographic footprint as rapidly as funds allowed and ensured that members could take a Club Med vacation at a wide range of exotic locations.

In the 1950s, Club Med grew to 19 villages across Spain, Italy, Tunisia, Polynesia, Montenegro, Greece, France, and Switzerland.

In the 1960s, Club Med built 32 new clubs in far off places like USSR, Bulgaria, Romania, Guadeloupe, Mexico, Martinique, Israel, Morocco, Egypt, and Tunisia.

In the 1970s, in addition to consolidating its position in its existing markets, it expanded to Latin America (Brazil) and the U.S. (Hawaii), and it opened a sales office in Japan. In all, it opened 59 new resorts a rate of almost 6 per year!

The 1980s saw growth of only 29 new villages, but more significantly it brought the first villages in mainland U.S., China, and Japan. By 1987, Club Med

operated 66 villages, serving over 1 million guests, and generating more than 6 billion FF in sales.

Business Model Club Meds business model is driven by its desire to create the most value for guests. Its success is highlighted by the fact that 20% of members to return to a Club Med resort every year and 83% to return once every three years. The business model comprises the following three highly integrated elements:

1. All-Inclusive: Club Med assumes the hassle of arranging transportation, food, and activities, freeing up guests to enjoy their vacations, at a predictable price. 2. Membership: Still today, Club Med guests pay a nominal membership fee. But, rather than acting as a deterrent, it entitles guests to a colour brochure of all resorts and entices them to return to a Club Med at every opportunity. 3. No Cash: In reality, we all know there is no such thing as no hidden costs at a resort but Club Med makes its guests feel more comfortable about buying cocktails at the swimming pool by letting them pay for it in beads! HTES: Club Med Page 11

PART TWO: COMPETING WITH THE NEW BREED OF INNOVATORS In Part One: The Rise and Rule of Club Med we described how Club Med as a Value Innovator was able to create an entirely new industry in which it was the undisputed leader. Club Meds reign lasted from the 1950s until the late 1980s. By the 1990s, however, the industry was evolving, and Club Med was not. This opened up an opportunity for a new breed of innovators to try to assume the mantle as king of all-inclusive vacations. This is that story.

Evolution of Club Meds Offering

Club Meds offering quickly evolved from a singles/young adult product into one that was more family-friendly. This move was, to some extent, driven by the changing circumstances of its original customer base. By the 1980s, this push upmarket strategy
Functionality

Graphic 4: Evolution of Club Meds Offering

Club Meds Offering
s; iti e activ

opened the door for competitors like Sandals and SuperClub in the U.S. and Caribbean and a host of large tour operators in Europe to develop targeted

Families
Sandals Offering

offerings for the singles and young adult markets.

e; nienc onve ility; C essib ons; ; Acc ca ti Adults s only otic lo rt; Ex amilie F omfo e Sandals Offering ility; C clusiv All in essib ; Acc here osp un atm nly; F ive Singles ults o clus Ad All in ons; lusive c locati All in Sandals Offering xotic ere; E osph y atm , sex ; Fun s only ingle S

id ice; K Serv

Club Med did not develop a

Time

market segmentation strategy that could defend it against its more focused competitors. Rather, it pushed an essentially undifferentiated product to all three customer segments. In so doing, Club Med ignored the fact that these segments are largely mutually exclusive: that it is not possible to serve more than one segment with the same product at the same time, and almost most certainly not with the same brand. Adults and singles do not want a resort overrun with kids; just as families and adults do not want drunken singles disturbing their relaxing vacation.

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Competitors Offerings The Sandals and SuperClub resort chains are two good exa mples of competitors that successfully exploited this gap in Club Meds strategy.

Sandals implemented a highly granular segmentation strategy. Stewart, the Sandals chairman, acknowledges its debt to the all-inclusive pioneers like Club Med. Indeed, with Beaches he says he has emulated Club Meds concept by targeting specific resorts for families and couples, but took it a step further: both core brands (Sandals and Beaches) are subdivided to appeal to different income levels, with low -end inns (Sandals Inn and Beaches Inn), mid-range resorts, and
Our goal is to have a product that all travel agents can book and know theyre going to have a happy client. - Sandals Chairman

more upscale properties (Signature Spa). Under the Beaches brand it offers three types of resort each targeting a specific need: Beaches for kids, Beaches for adults, and Grande Sport for the more active vacationer. Even Sandals product looks to out-innovate Club Med featuring bigger and better rooms, better food served by waiters compared with Club Meds buffets. It even exploited a gap at the heart of Club Meds successful all-inclusive offering: not only did they include beer, wine and soft drinks, but also alcohol.

Unlike Club Meds more direct sales model, Sandals developed close relations with travel agents and tour operators. The Certified Sandals Specialist (CSS) programme was established in 1998 to train agents to more effectively sell Sandals and Beaches products. By 2001, there were almost 9,000 CSS agents, all of which participate in a one-day workshop, plus receive continuing education on the companys niche travel products such as spa and scuba. Agents also gain access to extensive marketing support.

Finally, unlike Club Meds more geographically scattered approach, Sandals chose to focus mainly on the Caribbean Islands, making it easier to protect its domain from would-be competitors.

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Similarly, SuperClub has employed a highly segmented strategy.

It positions its

Grand Lido resorts to serve the luxury end of the market, Breezes resorts target more active travellers, and Hedonism resorts promote a spring break-like offering for the out-of-college traveller, including nude bathing and wet t-shirt contests.

A vacation at Sandals starts at $1,600 a week compared with $1,000 a week at SuperClub. Club Med prices itself in the middle at around $1,400 per week.

Club Meds Reaction During the 1980s and 1990s, Club Meds lack of innovation and renovation caused many of its older resorts to deteriorate below its members expectations. And, since it lacked the necessary cash to renovate, Club Med introduced the Trident grading system, reflecting the relative comfort (or age) of the resorts. In the late 90s, however, one of the first decisions of the new CEO, Philippe Bourguignon, was to renovate more than 70 resorts at significant cost to the company and to close down several under-performing 2Trident resorts. ClubMed also introduced, with varying success, a range of product innovations: a number of adults only resorts, a product targeted at college -aged singles under the separate Oyyo brand, and several new activities like circus school, inline skating, and wakeboarding. loyalty card. And, to promote member loyalty, it introduced the Millesia
It is not that Club Med underestimated its competition it didnt see the competition coming. When the competition gets stronger and stops being a clone of what the founding company has done and starts innovating, its a little late to react. Bourguignon

Throughout the 1990s Club Med refocused its geographic expansion on North America, including intensive marketing efforts. The company also followed an acquisition strategy that involved both acquisitions of players in the value chain (tour and airline operators) and low-end competitors (Aquarius). In 1999, Club Med

acquired Jet Tours, the fourth largest tour operator in France. This acquisition was intended to strengthen the positioning of Club Med as the number one tourism group

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in France. It is interesting to note, however, that Jet Tours continued to operate under its own brand, offering more cultural/exploratory vacations, thereby expanding the Club Med offering. Based on the recent financial results, these acquisitions are still to prove themselves financially.

Club Med looked to capitalise on its strong brand by stretching it into new markets such as health and fitness, with a chain of Club Med gyms, and Club Med World, an indoor facility in Paris that includes activities on travel, gastronomy and talent.

Though Club Med fiddled with its product and segmentation strategy, it was not effective at communicating the changes to existing and target customers. Former CEO, Bourguignon, acknowledged that the brand was clouded by misperceptions.

The Value Curves (below) are useful to compare and contrast Club Meds value offering with those of its competitors. Club Med is vastly different from tour operators and hotel chains, but it does face a significant threat from segment-focused all-inclusive operators like Sandals. Club Meds brand and member loyalty are still superior, however, and represent its most valuable assets in this increasingly competitive market.
Graphic 5: Relative Value Curves
High Club Med

Sandals Low

Relative Offering

High

Club Med Tour operators

Low High Hotel Chains Club Med

Trusted brand

Conciergestyle services

Low Membership loyalty

Comfort level

Food variety

All inclusive

Recognized culture

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Geographic coverage

Segmented guests

Activities

Central location

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Current Financial Situation Club Meds deteriorating competitive position is reflected in its financial performance. Overall profitability of the Club Med Group, in terms of Group Net Income, deteriorated throughout the late 1990s to reach only 5m in
120

Graphic 6: Club Med Operating Income and Net Income

103
100 80

2000, negative 70m in 2001, and negative 62m in 2002. Operating

Milions

71 59 39 26 5 1998 1999 2000 2001 -3 2002 50

60 40 20 0 -20

income has also declined, reaching 103m in 2000, 50m in 2001, and negative 3m in 2002.

-40 -60 -80

-70

-62

Main Causes of Decline

Group OP income

Group Net income

While Club Meds recent performance can, in part, be attributed to the general economic recession and the aftermath of September 11, several of the underlying problems originate from before. Specifically, we have identified four main causes of decline: a high fixed cost base, excess capacity, non-performing low-end resor ts, and its brand extension/acquisition strategy. High Fixed Costs: Club Meds operating structure is burdened by extremely high fixed costs, which are due to the fact that it owns some 50% of its villages real estate and has vertically integrated into such capital- intensive areas as reservations and transportation. Beyond the inherent risks of its high operating leverage (i.e. high elasticity of operating income to changes in revenues), Club Med has had to incur capital expenditure upwards of 350m to renovate its older villages, not to mention the strain that servicing debt has placed on cash flow. In addition, Club Med incurred IT costs of nearly 60m to upgrade its booking system.
Graphic 7: Club Med Capacity Utilisation, 2001

Excess Capacity:

Club Meds integrated business

Number of customers incl. Club Med customers incl. Jet tours customers Capacity in hoteldays

10/31/01 2,052,800 1,782,300 270,000 16,922,000 12,184,000 72.0%

10/31/02 1,811,000 1,534,000 277,000 14,941,000 10,309,000 69.0%

% change -11.7% -13.9% +2.6% -11.7% -15.4% -3.0 pts

model constrains ts ability to dynamically adjust its i offer to changing demand. In spite of a significant capacity reduction in 2002 (i.e. negative 11.7%

Hotel days sold Occupancy rate

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represents almost 2 million hotel days) the occupancy rate at Club Med declined to 69% from 72% the previous year. Non-Performing Low-End Offering: Part of the deterioration in profitability can be explained by the low return on many of the lower-end/lower-margin villages (i.e. 2Trident villages). In terms of its product mix, Club Med has adjusted its capacity by closing several of these lower -margin villages.

Brand Extension / Acquisition Strategy: As discussed previously, Club Med acquired both players in the value chain (e.g. JET Tours) as well as competitors (e.g. Aquarius). The rationale behind these acquisitions was to provide Club Med with additional scale, but this has yet to be reflected on the bottom-line.

Conclusion For over thirty years, Club Med has been the undisputed innovator of the tourism industry, but since the late 1980s it has paid the price for losing touch with the changing market. The soft travel market and its current corporate woes (exit of CEO Bourguignon and distress of its major investor, the Agnelli family) increase the challenge Club Med faces in restoring the brand to its former glory. Ironically, challenging the brand may be its best strategy for triumphing over its more segmentfocused multi-brand competitors.

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LIST OF REFERENCES: Club Med Case Study: A Sharper Trident, www.mbajungle.com Beaches for all, Travel Agent, Vol. 303, Issue 12, 04/30/2001, James Shillinglaw

www.clubmed.com

Once Upon A Vacation: Club Med 1950-2000, Club Med

Club Med Trident, Printemps-Ete 2003 Interview with Mr. Julien Renaud-Perret, Regional Vice-President Development, Club Med (INSEAD MBA 1998)

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