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Club Med PDF
Club Med PDF
PREPARED BY:
N IR MAROM
A NNIE DUDKIEWICZ
JEHAN COYAJEE
IFTAH YAIR
MATTEO CARLI
A DAM C LOSENBERG
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 Olympique’s 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 Med’s 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 Med’s 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 Med’s 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
According to Club Med, 20% of members visit every year and 83% to return every three years.
2
These numbers include permanent and temporary villages and do not account for any closures.
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 Med’s
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 Med’s 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, multi-
brand competitors.
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 Med’s Offering .......................................................................... 12
Competitors’ Offerings ............................................................................................ 13
Club Med’s Reaction ............................................................................................... 14
Current Financial Situation...................................................................................... 16
Main Causes of Decline........................................................................................... 16
Conclusion ............................................................................................................... 17
LIST OF REFERENCES:............................................................................................ 18
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 Olympique’s 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, Blitz’s 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.
3
“General Organisers” are Club Med employees who coordinate social activities at the resort.
It is interesting to analyse, ex post, the level of risk inherent in Club Med’s initial
launch and subsequent expansion strategy. 4 Using the “Innovation-Risk Profile”
framework, we defined Club
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.”
These four pillars became the hallmark of Club Med’s 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 Med’s 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.
twice a year!)
• 1960: Mini Club for kids
• 1964: Professional, intellectual entertainment by writers, poets and actors
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.
Club Med’s 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 Graphic 3: Crossing the Chasm
developments that enabled Club Med to
cross the chasm and provide a product that
had mass-market appeal: Early
Majority
• 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.
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.
• 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 Med’s 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:
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!
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 Med’s 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.
Club Med’s 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, Graphic 4: Evolution of Club Med’s Offering
this “push upmarket” strategy Club Med’s
Offering
opened the door for competitors
Functionality
The Sandals and SuperClub resort chains are two good exa mples of competitors that
successfully exploited this gap in Club Med’s strategy.
Even Sandals’ product looks to out-innovate Club Med – featuring bigger and better
rooms, better food served by waiters compared with Club Med’s buffets. It even
exploited a gap at the heart of Club Med’s successful “all-inclusive” offering: not
only did they include beer, wine and soft drinks, but also alcohol.
Unlike Club Med’s 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 company’s niche travel
products such as spa and scuba. Agents also gain access to extensive marketing
support.
Finally, unlike Club Med’s more “geographically scattered” approach, Sandals chose
to focus mainly on the Caribbean Islands, making it easier to protect its domain from
would-be competitors.
During the 1980s and 1990s, Club Med’s 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, “It is not that Club Med underestimated its
reflecting the relative comfort (or age) of the competition – it didn’t see the competition
coming. When the competition gets stronger
resorts. In the late 90s, however, one of the
and stops being a clone of what the founding
first decisions of the new CEO, Philippe
company has done and starts innovating, it’s a
Bourguignon, was to renovate more than 70 little late to react.”
resorts at significant cost to the company and – 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
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 Med’s 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 Med’s brand and member loyalty are still
superior, however, and represent its most valuable assets in this increasingly
competitive market.
Sandals
Low
Relative Offering
Tour
operators
Low
Hotel
High Chains
Club Med
Low
Trusted brand
style services
Comfort level
Food variety
Membership
All inclusive
Recognized
Geographic
Segmented
Concierge-
coverage
Activities
location
Central
culture
guests
loyalty
80 71
negative €62m in 2002. Operating 60
59
50
39
40
26
income has also declined, reaching
€ Milions
20
5
0
€103m in 2000, €50m in 2001, and 1998 1999 2000 2001 -32002
-20
-60
-62
-80 -70
While Club Med’s 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 Med’s 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.
model constrains ts
i ability to dynamically adjust its Number of customers 2,052,800 1,811,000 -11.7%
è incl. Club Med customers 1,782,300 1,534,000 -13.9%
è incl. Jet tours customers 270,000 277,000 +2.6%
offer to changing demand. In spite of a significant
Capacity in hoteldays 16,922,000 14,941,000 -11.7%
capacity reduction in 2002 (i.e. negative 11.7% Hotel days sold 12,184,000 10,309,000 -15.4%
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 segment-
focused multi-brand competitors.
“Beaches for all,” Travel Agent, Vol. 303, Issue 12, 04/30/2001, James Shillinglaw
www.clubmed.com