Club Mediterranee Case Study

MGMB01 - Summer 2017

Club Med (A) Case Analysis

Name: Anwar, Fareeha                                                Case Type: Problem Case

Student Number: 1002679229                                        E-mail: fareeha.anwar@mail.utoronto.ca

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Company Background and Problem Identification

Club Mediterranee or more commonly referred to as “the Club” was founded in 1950 as a non-profit sports association. Over the years Club Med grew to become the ninth-largest hotel company in the world in 1986, offering all-inclusive vacation packages to over 108 destinations. The rapid success of Club Med was due in part to the lack of competition within the industry. In recent years, however, the success of Club Meds all-inclusive vacation packages has attracted several organizations to duplicate the Club Med experience, dampening the monopolistic competition Club Med. Inc. previously enjoyed. The most prominent issue that Club Med seems to be facing is that of its mass-marketing scheme. As new competition enters the industry, there is plenty of room for them to specialize and implement niche marketing techniques, lowering Club Meds appeal to the targeted consumers.

Competitive Advantage and Defensibility

Being the first organization of its kind Club Med has a 30-year advantage over its competition enabling the company to enjoy a strong position with respect to its buyers, suppliers, and labor. Since replicating the Club Med experience would cost buyers 50% to 100% more, most buyers will opt to purchase the all-inclusive Club Med vacation package rather than a pay as you go plan. As for suppliers, since airlines and food industries are competitive industries, the cost of including airfare and food within the packages is low, enabling Club Med to make a sizeable profit through economies of scale. As for labor, there is a high demand to work for Club Med at minimal wages, and since labor is a fixed cost for Club Med, having an advantage at being able to negotiate wages with local workers allows Club Med to keep its fixed costs low. Furthermore, Club Med uses a unique system in which it measures its occupancy in terms of number of beds rather than rooms, enabling it to report higher occupancy rates in comparison to other companies.

Performance Evaluation and Competitive Environment

When analyzing Club Meds return on sales (ROE) (as shown in Exhibit 2) which is a measurement of how much sales revenue is turned into profit, it becomes apparent that Club Med only makes a $0.05 profit on every $1.00 made in sales revenue. Although this may seem like a fraction of the return on sales of Hilton that makes on average a $0.15 profit on every $1.00. When looking at the numbers from 1984-1986, it becomes apparent that although Hilton may have a higher ROS, it is slowly declining, whereas the ROE for Club Med is growing. Furthermore, when analyzing the gross margin (GM) (as shown in Exhibit 3) for Club Med which is 34.25%, meaning that for every dollar of sales made Club Med makes $0.34 and spends $0.66, we can conclude that selling general and admin expenses are driving down the profits drastically to 5% for the company. As for Return on Equity (ROE) which is a measurement of how much profit a company generates with each dollar of shareholders’ equity. We can conclude from the figures from 1984-1986 that although Club Med fares better than Ramada and LaQuinta with its 11.35% ROE, Club Med still has a long way to go before it can catch up to Marriott, Hilton, and the Four Seasons that make on average a 20% ROE. As for nonfinancial measures of the company performance, (as shown in Exhibit 11 and 12) we can conclude that Club Med is doing what the people want from its resort facilities as many of the ratings range between low 80s to high 90s. The only exception being Cancun, Mexico where external factors such as inclement weather dampened guest satisfaction for that season. However, positive comments for the GO (gentil organisateur) team during that season were at an all-time high. Although these ratings show Club Med as being a favorable resort facility, emerging competition that promises customers an even better vacation experience does pose to be a formidable threat. An advertisement from a Club Med Competitor boasts how the owner of Club Perillo, Mario Perillo, sold 10,000 tours in only 100 days and how he intends on doing it again. A closer examination of the article reveals that Perillo seems to be capitalizing on markets that Club Med with its mass-marketing scheme hasn’t been able to reach. Perillo offers his customer's luxury with amenities such as a stereo, private telephone, and deluxe rooms. Club Med, however, with its Spartan style rooms that lack privacy and traditional conveniences such clocks, TVs, radio, and telephone, cannot compare with the new competition. Furthermore, Parillo offers a truly all-inclusive experience where everything from wines, cocktails, and even tips are included in the ticket price whereas Club Med requires its customer's to pay for much amenities. Lastly, Perillo has also diversified his all-inclusive vacation experience by not only offering an island resort but a luxury cruise liner as well, capturing consumers from both markets. If Club Med wants to remain competitive within the industry, it must diversify itself and gain back the consumers from niches that its competition seems to be capitalizing on.

Company Culture and the Customer

A significant part of the company culture is the “family spirit.” Club Med believes highly in building the “family spirit” within its customer's by promoting social interaction. Everything in the Club Med villages from its buffet style meals and random seating arrangements, to assigned roommates, and semi-organized group games were organized in an effort to “transform a group of uptight, urban professionals - who started out as total strangers - into a fun-loving, relaxed group of friends and acquaintances.” This concept although awkward and strange at first, worked, because according to market research results (as shown in Exhibit 9) 74% of consumers picked their likelihood of vacationing at Club Med in the future as extremely/very. This evaluation also helps Club Med gauge its customer lifetime value as approximately 25% of all new customers become repeat customer's resulting in an average of four additional Club Med vacations per repeat customer and a contribution margin of 60%.