High Tech and Entrepreneurship Strategy

Professor Ron Adner

Club Med: From Value Innovator to Follower

FEBRUARY 13, 2003

HTES: Club Med

Page 1

” Philippe Bourguignon.“A parallel universe where every day is beautiful. where there are no locked doors. where the body is cause for celebration and the mind runs free. no more barriers between people. CEO Club Med (1997–2002) HTES: Club Med Page 2 .

Club Med started small but scaled fast. 59 in the seventies. A few years after the war. The innovation of its business model was in the combination of: (1) the “all-inclusive” concept. These numbers include permanent and temporary villages and do not account for any closures. transportation. (2) a members club which brought some subscription revenues but. In total. more importantly. but World War II broke out before this policy could set the tourism industry alight. a Belgian. which required that Club Med control the entire vacation value chain (sales and marketing. 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. the French government introduced the paid vacation.” Little did he know that Club Med would assume to mantle as “Value Innovator” of the all-inclusive vacation industry. 20% of members visit every year and 83% to return every three years. add family -friendly facilities. 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. at best. The innovation of its product was to provide young adults. encouraged repeat business 1. This rapid growth was made possible by loyal guests who were willing to prepay for their vacations. HTES: Club Med Page 3 . Gerard Blitz. at family-run inns. and invest heavily in establishing Club Med as the trusted brand in family vacations. championship-level athlete and resistance fighter. So 1 2 According to Club Med. Club Med opened 19 resorts in the fifties. At tha t time. Club Med’s innovativeness extended beyond its product to its business model. with somewhere exotic to vacation. lack of any direct competition.EXECUTIVE SUMMARY In 1936. food and entertainment). extend sales and marketing efforts outside France. The latter required management to replace its original tent villages with more comfortable hotels and bungalows. and (3) “cash free” resorts which boosted guests’ spending on alcohol and other extras. vacations were predominantly local and usually involved staying with relatives or. and 29 in the eighties 2. and Club Med’s ability to “cross the chasm” into the mass tourism market. 32 in the sixties. like Blitz. destination.

and exotic locations) but improved on its mistakes (different brands and products targeted specifically for singles. Club Med’s response to the competition has fallen short of a complete segmentation and multi-brand strategy. multibrand competitors.to late 1980s and it reflects the company as a “Value Innovator” and undisputed leader of the all-inclusive tourism industry. or for low. In this paper we evaluate Club Med in two parts. it made sense for Club Med to adapt the product into something more suitable for families. Thus far. competitors finally realised that Club Med’s 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.S. by the late 1980s. 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.when its original guests matured from singles and young adults into parents. and Caribbean. to achieve critical scale and to attempt to fill its excess capacity. its this strategy has not translated into improved performance. who learned from Club Med’s successes (all-inclusive. Instead.” In addition. HTES: Club Med Page 4 . organised entertainment. Club Med faces intense competition from other all-inclusive resorts like Sandals and SuperClub in the U. it has renovated its older resorts and re-classified all its resorts in terms of the different level of facilities it provides for babies.or high-end resorts. Today. And Part Two – “Competing with the New Breed of Innovators” – considers how Club Med was out-innovated by its more segment-focused. “Oyyo. Club Med is currently testing a resort for college students under a separate brand. Part One – “The Rise and Rule of Club Med” – spans from its creation in 1950 until the mid . adults and families. as well as those resorts that are suitable for adults only. toddlers and unsupervised children. However. and free alcohol!). deeper rather than broader geographic coverage.

....................................................................................................................................................... 12 Competitors’ Offerings ............... 7 Understanding and Mitigating Risk..... 6 Classifying Innovation ...................................................................................................................................................................................................................................................................... 10 Geographic Expansion ........................TABLE OF CONTENTS EXECUTIVE SUMMARY.................................................... 14 Current Financial Situation.......................................................................... 9 Crossing the Chasm ..................................................................................... 18 HTES: Club Med Page 5 ................................ 3 PART ONE: “THE RISE AND RULE OF CLUB MED”............................................................................................................................................... 6 Identifying and Capturing the Opportunity ............................................................. 12 Evolution of Club Med’s Offering ...... 13 Club Med’s Reaction ...................................... 16 Main Causes of Decline.......................................................................................................................................................................... 17 LIST OF REFERENCES:........................................................................................ 11 Business Model.......... 16 Conclusion ............................................................................................. 11 PART TWO: “COMPETING WITH THE NEW BREED OF INNOVATORS”.

Until then going on vacation meant staying with relatives. 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. in June 1950.300 guests – refusing nearly 10. and even a hairdresser under the coconut tree! Over the next fifty years. a bank with currency exchange. at a family-run inn. And so. 300 guests arrived at the first Club Med “resort” – a no-frills tent village on a secluded beach on Alcudia.PART ONE: “THE RISE AND RULE OF CLUB MED” Identifying and Capturing the Opportunity In 1936. a bar. or camping. 3 “General Organisers” are Club Med employees who coordinate social activities at the resort. a first aid station. but World War II broke out before this policy could set the tourism industry alight. Blitz welcomed 2. HTES: Club Med Page 6 . a post office. Gerard Blitz.O-led3 sports and entertainment. a Belgian. with G. two weeks at an exotic location. in 32 countries.000 other reservation requests! For a hefty 16. rich and varied cuisine. After the depressing war-torn forties. Blitz’s concept for Club Med was as a club where friends could socialise together in exotic locations. championship-level athlete and resistance fighter. conviviality. on 5 continents. guests were treated to an all-inclusive Paris -to-Paris package.” 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. Club Med applied this same formula to grow to over 70 resorts. That summer. and it almost never meant going abroad. after a long journey by train. the French government introduced the paid vacation.800 FF. boat and bus. in the Baleares. A few years after the war.

from A to B and A to C. 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. This implied medium risk given the potential for dilution in the Club Med brand and loss of management focus. 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. the level of risk inherent in Club Med’s initial launch and subsequent expansion strategy. 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.Classifying Innovation It is interesting to analyse. Move C to B: Finally.” C Its initial launch (at point A) held medium risk: a new product for Identifiable Market an identifiable market (young B A French Adults). please refer to the section: “Understanding and Mitigating Risk. ex post. Club Med innovated in “triangle -like” fashion. 4 Using the “Innovation-Risk Profile” framework. we defined Club Med’s product as an “all- Graphic 1: Club Med Innovation-Risk Profile Existing inclusive international vacation. its Club Med adults” extended “young product into new geographic markets.” HTES: Club Med Page 7 . 4 For a more detailed assessment of how Club Med was able to mitigate many of its innovation risks. Thereafter. 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.

” which include transportation. modify the details of the pillars to account for technological developments and the different requirements of new locations.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. By integrating these four pillars.) 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. Some of its most noteworthy innovations include: • • • Graphic 2: Club Med’s 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.” even if this integration strategy was largely driven by necessity as all the components for an international tourism industry were not sufficiently developed. food. Club Med established itself as a true “value innovator. concept • Emphasis on trusted brand ELIMINATE Tertiary factors REDUCE Secondary factors • Expensive central locations • High-end hotel services (e. food evolved from hunting and fishing to a choice of international cuisines. accommodation evolved from tents to hotels and bungalows. and sports and entertainment. (Club Med did. intellectual entertainment by writers. These four pillars became the hallmark of Club Med’s value proposition: the ability to provide guests with an end-to-end. room service) COSTS • Offer acceptable comfort levels 1964: Professional. transportation evolved from chartered boats and trains to airplanes. For example. accommodation. 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. however. and entertainment evolved from simple games on the beach to golf and tennis.O. poets and actors HTES: Club Med Page 8 .Club Med defines its core capabilities as the “four pillars.

transportation. He was largely able to mitigate these risks by managing each new village as an independent project. HTES: Club Med Page 9 .• • • • • • • 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. And it’s not costing me that much. transportation. getting guests to pre-pay for their vacations long in advance.” With all due respect to Mr. but I want to expand to as many exotic locations as possible. and by controlling all strategic components of the value chain: sales and marketing. 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? Blitz’s Possible Answers: Who cares? I’m having fun. including site selection and development. What organisation? It’s just me. What rivals? There’s no tourism yet. Blitz and Club Med. Blitz probably never explicitly dealt with the five questions around “making sense of uncertainty. I have no idea. and demand generation. and entertainment. The primary risks inherent in his model were associated with managing the multitude of interdependencies. financing. and certainly no all-inclusive packages. driving loyalty and repeat business. In truth. we have taken the liberty of trying to predict what his answers to these questions might have been. Young adults like me who are looking to put the war behind them and have fun. destination.

Club Med has encountered financial difficulties on more than one occasion.In reality. HTES: Club Med Page 10 . 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. Crossing the Chasm Club Med’s overall business strategy centred on satisfying the desires of its original members – principally young adults. And. a few years later. giving it access to the newly created mass tourism market. facilities and services. • Mini Club: Its young adult members became parents and they demanded more family -friendly facilities and services. family vacations. By default. this strategy enabled Club Med to cross the chasm. rapid growth placed a severe cash drain on the Club and Blitz was forced to bring in Edmond de Rothschild as majority shareholder. and drove economies of scale and learning. the company listed on Paris stock exchange. • Geographic expansion: Opened up the doors to new guests and ensured that its existing guests never got bored with the Club Med concept. • Permanent sites: Helped justify more significant investment in comfort. By the 1960s. the brand became globally synonymous with trusted. • The Club Med brand: Through principally word-of-mouth.

By 1987. China. Guadeloupe. (Hawaii). Club Med grew to 19 villages across Spain. Martinique. and activities. 2. The business model comprises the following three highly integrated elements: 1.. freeing up guests to enjoy their vacations. and Japan. 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 . Romania. and it opened a sales office in Japan. in addition to consolidating its position in its existing markets. Business Model Club Med’s business model is driven by its desire to create the most value for guests. France. Tunisia. Membership: Still today. and Switzerland. rather than acting as a deterrent.S. Bulgaria. Club Med operated 66 villages. • In the 1950s. it entitles guests to a colour brochure of all resorts and entices them to return to a Club Med at every opportunity. serving over 1 million guests. and generating more than 6 billion FF in sales. Morocco. Egypt. Mexico. No Cash: In reality. food. Polynesia. but more significantly it brought the first villages in mainland U. Montenegro. and Tunisia. Italy.S. Club Med built 32 new clubs in far off places like USSR. • In the 1970s. at a predictable price.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 1960s. Israel. 3. Club Med guests pay a nominal membership fee. it expanded to Latin America (Brazil) and the U. it opened 59 new resorts – a rate of almost 6 per year! • The 1980s saw growth of “only” 29 new villages. 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. In all. But. All-Inclusive: Club Med assumes the hassle of arranging transportation. Greece.

and Club Med was not. By the 1980s. In so doing. C clusiv All in essib . 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.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. C essib ons. K Serv Club Med did not develop a Time market segmentation strategy that could defend it against its more focused competitors. driven by the changing circumstances of its original customer base. This move was. and almost most certainly not with the same brand. Acc ca ti Adults s only otic lo rt. Acc here osp un atm nly. it pushed an essentially undifferentiated product to all three customer segments. F ive Singles ults o clus Ad All in ons.S. however. E osph y atm . By the 1990s. This is that story. sex . to some extent. Adults and singles do not want a resort overrun with kids. . Evolution of Club Med’s Offering Club Med’s offering quickly evolved from a singles/young adult product into one that was more family-friendly. Club Med’s reign lasted from the 1950s until the late 1980s. Fun s only ingle S id ice. 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. HTES: Club Med Page 12 . the industry was evolving. this “push upmarket” strategy Functionality Graphic 4: Evolution of Club Med’s Offering Club Med’s Offering s. iti e activ opened the door for competitors like Sandals and SuperClub in the U. Ex amilie F omfo e Sandals’ Offering ility. just as families and adults do not want drunken singles disturbing their relaxing vacation. lusive c locati All in Sandals’ Offering xotic ere. nienc onve ility. This opened up an opportunity for a new breed of innovators to try to assume the mantle as king of all-inclusive vacations. Rather. e.

Sandals Chairman more upscale properties (Signature Spa). but also alcohol. plus receive continuing education on the company’s niche travel products such as spa and scuba. better food served by waiters compared with Club Med’s buffets. there were almost 9. Beaches for adults.” . with Beaches he says he has emulated Club Med’s concept by targeting specific resorts for families and couples. Unlike Club Med’s more direct sales model. and “Our goal is to have a product that all travel agents can book and know they’re going to have a happy client. the Sandals’ chairman. with low -end inns (Sandals Inn and Beaches Inn). wine and soft drinks. Even Sandals’ product looks to out-innovate Club Med – featuring bigger and better rooms. and Grande Sport for the more active vacationer. mid-range resorts.Competitors’ Offerings The Sandals and SuperClub resort chains are two good exa mples of competitors that successfully exploited this gap in Club Med’s strategy. The Certified Sandals Specialist (CSS) programme was established in 1998 to train agents to more effectively sell Sandals and Beaches products. Sandals developed close relations with travel agents and tour operators. acknowledges its debt to the all-inclusive pioneers like Club Med. but took it a step further: both core brands (Sandals and Beaches) are subdivided to appeal to different income levels. HTES: Club Med Page 13 . Agents also gain access to extensive marketing support. Indeed. Stewart. making it easier to protect its domain from would-be competitors. all of which participate in a one-day workshop. Finally. It even exploited a gap at the heart of Club Med’s successful “all-inclusive” offering: not only did they include beer.000 CSS agents. Under the Beaches brand it offers three types of resort each targeting a specific need: Beaches for kids. Sandals implemented a highly granular segmentation strategy. unlike Club Med’s more “geographically scattered” approach. By 2001. Sandals chose to focus mainly on the Caribbean Islands.

a product targeted at college -aged singles under the separate “Oyyo” brand. Club Med’s lack of “innovation and renovation” caused many of its older resorts to deteriorate below its members’ expectations. a range of product innovations: a number of “adults only” resorts. including nude bathing and wet t-shirt contests. including intensive marketing efforts. “Breezes” resorts target more active travellers. however. 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). it’s a little late to react.400 per week. Club Med acquired Jet Tours.000 a week at SuperClub. and wakeboarding. reflecting the relative comfort (or age) of the resorts. the fourth largest tour operator in France. Club Med introduced the Trident grading system.” – Bourguignon Throughout the 1990s Club Med refocused its geographic expansion on North America. and several new activities like circus school. Philippe Bourguignon. And.600 a week compared with $1. ClubMed also introduced. When the competition gets stronger and stops being a clone of what the founding company has done and starts innovating. it introduced the Millesia “It is not that Club Med underestimated its competition – it didn’t see the competition coming. and “Hedonism” resorts promote a spring break-like offering for the out-of-college traveller. It positions its “Grand Lido” resorts to serve the luxury end of the market. And. since it lacked the necessary cash to renovate. SuperClub has employed a highly segmented strategy. This acquisition was intended to strengthen the positioning of Club Med as the number one tourism group HTES: Club Med Page 14 .Similarly. was to renovate more than 70 resorts at significant cost to the company and to close down several under-performing 2Trident resorts. one of the first decisions of the new CEO. inline skating. In 1999. Club Med prices itself in the middle at around $1. In the late 90s. A vacation at Sandals starts at $1. loyalty card. to promote member loyalty. Club Med’s Reaction During the 1980s and 1990s. with varying success.

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 HTES: Club Med Geographic coverage Segmented guests Activities Central location Page 15 . however. that Jet Tours continued to operate under its own brand. gastronomy and talent. with a chain of Club Med gyms. Though Club Med fiddled with its product and segmentation strategy. acknowledged that the brand was “clouded by misperceptions. Club Med is vastly different from tour operators and hotel chains. it was not effective at communicating the changes to existing and target customers. Based on the recent financial results. Bourguignon. Former CEO. offering more cultural/exploratory vacations. Club Med looked to capitalise on its strong brand by stretching it into new markets such as health and fitness. thereby expanding the Club Med offering. Club Med’s brand and member loyalty are still superior.” an indoor facility in Paris that includes activities on travel. but it does face a significant threat from segment-focused all-inclusive operators like Sandals.in France. It is interesting to note. and represent its most valuable assets in this increasingly competitive market. these acquisitions are still to prove themselves financially. and “Club Med World. however.” The “Value Curves” (below) are useful to compare and contrast Club Med’s value offering with those of its competitors.

In addition. Club Med has had to incur capital expenditure upwards of €350m to renovate its older villages.184.7% Hotel days sold Occupancy rate HTES: Club Med Page 16 . reaching €103m in 2000. we have identified four main causes of decline: a high fixed cost base.800 1.9% +2.941.0% % change -11.309.782.300 270.534.000 1. several of the underlying problems originate from before. Specifically.000 277. be attributed to the general economic recession and the aftermath of September 11.000 14.000 72.6% -11. -40 -60 -80 -70 -62 Main Causes of Decline Group OP income Group Net income While Club Med’s recent performance can. negative 11.7% -15. Overall profitability of the Club Med Group. In spite of a significant capacity reduction in 2002 (i.4% -3. and negative €3m 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. high elasticity of operating income to changes in revenues). and its brand extension/acquisition strategy.000 12.811.e.052. Jet tours customers Capacity in hoteldays 10/31/01 2.0% 10/31/02 1.000 16. Graphic 7: Club Med Capacity Utilisation. deteriorated throughout the late 1990s to reach only €5m in 120 Graphic 6: Club Med Operating Income and Net Income 103 100 80 2000. not to mention the strain that servicing debt has placed on cash flow.e.Current Financial Situation Club Med’s deteriorating competitive position is reflected in its financial performance. 2001 Excess Capacity: Club Med’s integrated business Number of customers è incl.000 10. Club Med customers è incl. in terms of Group Net Income. negative €70m in 2001.0 pts model constrains ts ability to dynamically adjust its i offer to changing demand. Beyond the inherent risks of its high operating leverage (i. excess capacity. Club Med incurred IT costs of nearly €60m to upgrade its booking system. which are due to the fact that it owns some 50% of its villages’ real estate and has vertically integrated into such capital.922.intensive areas as reservations and transportation.7% -13.000 69. and negative €62m in 2002. in part. non-performing low-end resor ts. High Fixed Costs: Club Med’s operating structure is burdened by extremely high fixed costs. €50m in 2001.

e. the Agnelli family) increase the challenge Club Med faces in restoring the brand to its former glory. Club Med acquired both players in the value chain (e. Club Med has been the undisputed innovator of the tourism industry. 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.g. Conclusion For over thirty years. but this has yet to be reflected on the bottom-line.g. Club Med has adjusted its capacity by closing several of these lower -margin villages. In terms of its product mix. 2Trident villages).represents almost 2 million hotel days) the occupancy rate at Club Med declined to 69% from 72% the previous year. The soft travel market and its current corporate woes (exit of CEO Bourguignon and distress of its major investor. HTES: Club Med Page 17 . Ironically. Aquarius). Brand Extension / Acquisition Strategy: As discussed previously. The rationale behind these acquisitions was to provide Club Med with additional scale. JET Tours) as well as competitors (e. challenging the brand may be its best strategy for triumphing over its more segmentfocused multi-brand competitors. but since the late 1980s it has paid the price for losing touch with the changing market.

04/30/2001. Issue 12.” Club Med “Club Med Trident.clubmed. James Shillinglaw www.mbajungle.” Printemps-Ete 2003 Interview with Mr. Julien Renaud-Perret. Club Med (INSEAD MBA 1998) HTES: Club Med Page 18 .com “Once Upon A Vacation: Club Med 1950-2000.LIST OF REFERENCES: “Club Med Case Study: A Sharper Trident. 303.com “Beaches for all. Regional Vice-President Development.” Travel Agent. Vol.” www.

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