Carnival Corporation
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MGMT 619 Spring 2009
Carnival Corporation
Team 6
Amy Clogher Jacob Griego Ted Noble David Sciortino Deepa Sethi
1 Executive Summary
Carnival Corporation is the leading cruise line company in the international cruising industry, with 11 major cruise line brands and is clearly a winning company. It controls almost 50% of the cruise line market and is a broad line provider. The company does not face any considerable challenges within its industry and has adequately responded to all threats. Although 2008 was a challenging year due to the economic crisis, Carnival posted net income for 2008 of $2.3 billion (15.98% of sales). Carnival’s strategy is to be a broad line provider with a wide scope on a large scale. Carnival maintains this strategy by focusing on cost leadership in the contemporary and bargain lines, and then differentiating in the premium and luxury lines of their product mix.
Industry & Competition
The cruise line industry is a moderately attractive, 3-star industry that is characterized by top incumbents capturing a majority of the economic value in the industry, high fixed costs, cost savings achieved from economies of scale, and a high degree of rivalry between the top two industry incumbents. The cruise line industry has reached the growth stage after the inflection point. It is predicted that the growth stage will be longer in the cruise line industry due to frequent product upgrades and niche enhancements that forestall movement into maturity. The cruise industry has developed into a duopoly. While Carnival has 47% of the market, its closest rival is Royal Caribbean with 22% of the market. Norwegian Cruise Lines is a much smaller cruise line that is 50% owned by Star Cruise Lines in Hong Kong and 50% owned by Apollo Management.
Strategy
In addition to Carnival being the market leader in the cruise industry, they have stayed focused on the long-term and are continually looking to move their efforts into expanding their presence globally. Carnival has already taken steps towards this long-term strategy by ordering ships based on the company’s capacity expansion plan mentioned earlier. These are clear characteristics of a winning company.
Sustainability & Challenges
As the industry leader, Carnival is responsible for maintaining the image, growth and success of the international cruising industry. The three threats to sustainability; imitation, substitution and holdup, do not pose any significant issues to the success of the company. Carnival will continue to adequately respond to this challenge by building brand loyalty and increasing marketing and promotions of its “Fun Ships” brand promise.
2 Table of Contents
1.0 Industry Analysis...... 4 1.1 Emerging Trends...... 4 1.2 Industry Structure: Porter’s 5 Forces...... 5 1.3 Cruise Line Industry Summary...... 8 2.0 Industry Life Cycle...... 8 2.1 Industry Life Cycle Summary...... 9 3.0 Customer Segmentation...... 9 3.1...... 11 Customer Segmentation Summary...... 11 4.0...... 11 Key Factors of Success...... 11 5.0 Competition...... 12 6.0...... 15 Performance Analysis...... 15 6.1 External Performance...... 15 6.2 Organizational Health...... 16 6.3...... 17 Performance Analysis Conclusion...... 17 7.0 Strategy Analysis...... 17 7.1 Products and Markets...... 18 7.2...... 19 Customer Profile and Purchasing Behaviors...... 19 7.3 Competitive Premise...... 19 7.4 Competitive Premise Conclusion...... 21 8.0 Value Chain Analysis...... 21 8.1 Value Chain Analysis Conclusion...... 25 9.0 Sustainability Analysis...... 25 9.1 Imitation...... 25 9.2 Substitution and Holdup...... 26 9.3 Saturation and Slack...... 26 9.4 Challenges...... 27
3 Table of Figures
Figure 1: Five Forces Model...... 8 Figure 2: Industry Life Cycle...... 11 Figure 3: Cruise Line Industry Customer Segments...... 12 Figure 4: Competitive Groupings by Brand Strength and Market Variety...... 15 Figure 5: Operating Costs as a % of Sales vs Revenue for Top 3 Competitors...... 16 Figure 6: External Performance vs. Organizational Health...... 19 Figure 7: Value Chain...... 24
4 1.0 Industry Analysis
Cruise Line Industry Overview The cruise line industry is the business sector that straddles the leisure entertainment/travel and transportation businesses. No longer are cruise ships merely passenger ships used for transportation. The product being offered is a cruise vacation experience, in which the voyage itself, the ships amenities, and cruise activities are part of that experience.1 The cruise ship experiences and product options vary by customer preference from budget to luxury cruising packages. The modern cruise line industry experience continues to evolve from its early stages during the “Love Boat” era to the current version of cruising with larger ships, trips with shorter durations, and new emerging destinations. While the Caribbean, Alaska and Europe remain the dominant markets, many cruise line companies have announced plans to increase their presence in other parts of the world, including Asia, Canada/New England, the Indian Ocean and Africa, the Amazon and Brazil, the Middle East and the Arctic regions, including Newfoundland and Greenland. Also to counteract the need for flights and attract value-seeking consumers many cruise lines are currently offering more than 30 US domestic home ports along the East, West and Gulf Coasts and major rivers in Canada and New England and the American Midwest and West. Over half the U.S. population lives within driving distance of these “Close to Home” embarkation ports.2
1.1 Emerging Trends The Cruise Line Industry’s evolution will continue in 2009 with these anticipated trends.
Bigger Ships More Amenities: Cruise lines continue to add capacity via larger ships. Cruisers can expect a continuing evolution of shipboard experiences and amenities in the coming year. Some of these experiences include full-scale seagoing aqua parks, ice rinks; luxury spas; increased choice and options in cuisine; and facilities, including pools and recreation areas dedicated to adults, teens or children. Golf programs featuring onboard golf facilities and access to courses in many parts of the world will continue. Connectivity to the world for guests while at sea will increase with Wi-Fi capabilities and other state of the art technology.3 Global Expansion: Europe offers a tremendous opportunity for expansion with emerging locations in the UK, Scandinavia and northern and eastern Europe. More choices will be available for transatlantic vacations as well as within the European domestic market. New markets are building port around the world; from Dubai in the Arabian Gulf to Mumbai in India; from Sihanoukville in Cambodia to Iles Des Saintes in Guadeloupe.4
1Roughan, John, “The Ocean Going Stretch Limo,” New Zealand Herald, February 16, 2007, http://www.nzherald.co.nz, Accessed May 2009. 2 Cruise Lines International Association 2008 Cruise Market Profile Study , January 14th, 2009, http://www.cruising.org/cruisenews/news.cfm?NID=384 3 Ibid 4 Cruise Lines International Association 2008 Cruise Market Profile Study , January 14th, 2009, http://www.cruising.org/cruisenews/news.cfm?NID=384
5 Booking patterns: Historically the majority of cruises were booked five to seven months ahead. More recent trends have shortened that lead time. Consumers are deferring the booking commitment closer to the sailing date.5 HOW MUCH CLOSER? Budget/Promotional offers: Many cruise line industry member lines have responded to the economic crisis with hard-to-resist offers and special pricing promotions. Some of these offers include kids sailing for free, flex payment terms, free excursions, free airfare, etc.6 International sourcing of passengers: The number of international cruise passengers on cruise lines increased by 30% year over year from 2007 to the third quarter in 2008. Guests sourced from international markets in 2007 accounted for 18.4% of the industry total. This is a result of the expanded presence in Europe, which represents a potentially large emerging market.7 Going green: As new ships are introduced, cruise lines are taking advantage of the latest technology to produce environmentally-friendly vessels. Even on older ships, every effort is made by many lines to conserve resources and recycle. Newer ships will include: “advanced wastewater purification, air emission reductions, LED lighting, solar power, high efficiency appliances, energy efficient windows, products made from recycled materials, “Eco-speed” and other environmentally-friendly hull coatings, low sulphur fuels, solid and liquid waste procession, water pollution education programs, fuel conservation, food byproduct management and other environmental initiatives.”8 Increased focus on family and multi-generational travel: Cruise line operators carried an estimated 1.6 million children in 2008. The number of adults traveling with children continues to increase as many families are traveling together. Families typically travel with multigenerational groups (aunts, nephews, grandparents, etc.). Outstanding value is consistently cited as their reason to take a cruise.9 Use of travel agents: Cruise line vacationers continue to use travel agents. Roughly 85% of all cruises are sold through the 16,500 cruise line industry alliance travel agents. Some cruise line operators have reported 97% of their bookings occur via agents. However, CLIA data shows a trend towards an increasing use of the cruise lines’ reservations sites among those who are not first time cruisers, bypassing the traditional travel agent.10
5 Ibid 6 Ibid 7 Ibid 8 Ibid 9Ibid 10 Ibid
6 1.2 Industry Structure: Porter’s 5 Forces The Cruise Line Industry is moderately attractive, with the major players capturing a majority of the revenue. Figure 1 below shows the five forces in the industry.
Entry Barriers + High barriers to entry + Economies of Scale +Government policy +Brand -Proprietary Product Differences
Suppliers Buyers Rivalry -Buyer Information (TV-Internet- +Ship Builder Concentration (3) +Industry Growth (16.9% CAGR 5 Media) +Travel Agencies (16,500 year) + Brand affiliated CLIA agencies) +Brand + Non-Concentrated +Food, Tours & Entertainment - Product Differences -Switching costs of suppliers +Unbalanced Competition +Economies of Scale -Fixed Assets/Costs/High Debt
Substitutes + Proprietary Product Differences - Many indirect competitors -Buyer propensity to substitute
Figure 1: Five Forces Model
Barriers to Entry Barriers to entry in this industry are high and favor incumbents. The industry is essentially a duopoly between Carnival and Royal Caribbean. Incumbents benefit from cost savings achieved through economies of scale since they can leverage fixed costs across bigger fleets and larger ships.11 A major disadvantage of being an incumbent in this industry, is that there are no major proprietary product differences, since most amenities, excursions, and ships can be imitated by competitors.
Rivalry The Cruise Line industry is the fastest growing segment of the leisure travel market with 5- Yr CAGR Revenue at 16.9%. It is highly concentrated at the top with three incumbents (Carnival, Royal Caribbean, and Star) splitting 79% of the market. It is also relatively un- balanced between Carnival (47% market share) and Royal Caribbean (22% market share).12 The remaining market is highly fragmented with hundreds of cruise lines in operation. Competition is fierce between the firms in this industry. The high cost of fixed assets promotes rivalry. Utilization rates must be maintained at 100% for cruise line companies to be highly successful. Companies in the cruise line industry must leverage fixed costs across their fleets in order to increasing operating profits.
11 Miller, Warren. Carnival Corporation Morningstar Report, April 8, 2009.“Morningstar Report – March 24, 2009” 12 “Cruises – International – June 2008. pg1” Mintel Report 2008, 3 May 2009, website neededts
7 Buyers Buyers hold some power in the cruise line industry. The increased access to information for customers via trade press, TV and/or the Internet has diluted the power of cruise line operators and travel agents. Customers have large amounts of information to make decisions. In general, most travellers know exactly what they want when they visit a travel agency and/or book a trip online.13 The percentage of passengers booking cruises online still remains much lower than was originally predicted in the UK (as in the US). However, there is an increasing awareness that a proactive Internet presence will be key to a retailer’s success in this sector.14 Brand is a major factor for incumbents in the cruise line industry. Consumers are attracted to the large brands and can be enticed by loyalty program offerings. Also, well known incumbents are more attractive to 1st time cruisers (33% of cruise travelers are 1st timers).
Suppliers Supplier concentration is increasing as consolidation of ship builders continues. The specialized cruise sector exhibits the most volatility in the global shipbuilding industry. In the 1990’s, over 90 cruise ships were built by 14 shipbuilders. However, the 52 ships expected to be delivered in 2010 will be built by just 4 shipbuilders.15 The average number of ships being built annually has not changed very much since 1990. The average annual new tonnage was 400,000 in 1990 but in this decade the amount increased to about 900,000 tons.16 Orders for new ships are highly dominated by Carnival Cruise Lines, Royal Caribbean, Star, and MSC. The cruise line industry incumbents maintain power due to volume and long term purchasing behavior. Incumbents also hold power over travel agencies. Eighty-five percent of travel is booked via travel agenciesy’s , of which there are over 16,500 Cruise Line Industry Association certified travel agencies. 17 Also, online booking continues to increase for frequent cruisers from 12% in 2006 to 26% in 2008. This further diminishes travel agencies power over the market.18 Cruise lines are increasingly looking to decrease their risk by establishing long-term contracts with food suppliers. This is particularly troublesome for suppliers of fresh produce when the price varies on a minute basis. According to an article by Anne Kalosh, about 80% of NCL's food and beverage purchases are under contract for at least 6 months.19
Substitutes There are many substitutes, such as Las Vegas, Club Med, and alternative vacation packages. However, market research indicates that cruise lines provide higher customer satisfaction than land based vacation packages. Cruisers express an overall 94.8% satisfaction rate with their experiences. The two highest rated vacation experiences are all inclusive (46%) and cruisers (44%) which generate the highest levels of extreme satisfaction. Yet, the numbers of past
13 Euromonitor International “Travel and Tourism World” April 2008 14 “Cruises – International – June 2008. pg5” Mintel Reports 15 Iibid 16 “Cruises – International – June 2008. pg7” Mintel Reports 17 Cruise Lines International Association 2008 Cruise Market Profile Study 18 Cruise Lines International Association 2008 Cruise Market Profile StudyIbid 19 Agri-Food Trade Service “Trends and Opportunities for Exporters 2003” http://www.ats -sea.agr.gc.ca/us/4120_e.htm. Accessed in May 2009.
8 cruisers (45%) are more than doubled as compared to all-inclusive (21%).20 This trend has fueled the continuing evolution of the cruise vacation experience. Over the years, cruise lines have expanded itineraries to include more diverse ports of call and have introduced innovative onboard amenities and facilities to compete with land based travel. These onboard experiences include cell phone access, Internet cafes and wi-fiWi-Fi zones which allow passengers to feel as if they are connected on land. They have also added onboard experiences such as rock-climbing, bowling alleys, surfing pools, multi-room villas, multiple themed restaurants and expansive spas, health and fitness facilities that easily rival land-based options.21 Although there are many substitutes to the cruise line industry, they can not replicate the cruise line experience. As noted above, the cruise line industry continues to expand its offering such that it can imitate land based vacations.
1.3 Cruise Line Industry Summary The cruise line industry is a moderately attractive, 3-star industry that is characterized by: top incumbents capturing a majority of the economic value in the industry, high fixed costs, cost savings achieved from economies of scale, and a high degree of rivalry between the top two industry incumbents. There are a large number of substitutes available to buyers; however they can not imitate the product offering of the cruise line industry.
2.0 Industry Life Cycle
The cruise line industry as seen in Figure 2 below has reached the growth stage after the inflection point. There are substantial barriers to entry in this industry. The acquisition/purchasing costs of equipment grow more expensive while the dominant design of the industry (enormous customized cruise ships) has reached its final stages. The dominant design is to build ships that have large scale and scope. These cruise ships are large enough to provide the economies of scale (passenger volume) to increase profitability for incumbents. Also, these ships are large enough to meet the scope and demand of activities/amenities that attract and retain customers.
20 Cruise Lines International Association 2008 Cruise Market Profile Study pg. 25 21 Ibid
9 Embryonic Growth Mature Decline
Inflection Point
Figure 2: Industry Life Cycle
The industry continues to consolidate at the top; however the industry is highly fragmented within the remaining 21% of the world wide market share as entrants continue to try and capture customers in this growing and emerging market. The growth of the industry, as previously discussed, has grown at 16.9% CAGR for the last five years. The industry continues to expand globally as competition increases, new markets emerge and older markets (Caribbean/North America) become dominated/saturated by Carnival and Royal Caribbean.
2.1 Industry Life Cycle Summary In the growing cruise line industry we see consolidation. Still there is room for growth and new privately held entrants emerge in this industry year after year. Industry leaders must focus on marketing and production of ships for expansion. In the growth stage, marketing efforts need to differentiate a firm's offerings/features from other industry competitors incompetitors in order to increase brand awareness and attract first time cruisers.22 and attract first time cruisers ,.23 Cruise line operators continue adding market share and increasing capacity by building new ships, entering new emerging markets, and acquiring smaller privately held lines.24 It is predicted that the growth stage will be longer in the cruise line industry due to frequent product upgrades and niche enhancements that forestall movement into maturity.
22 Miller, Warren. Carnival Corporation Morningstar Report, April 8, 2009.“Morningstar Report – March 24, 2009” 23 Porter, M. Competitive Strategy. New York: Free Press, 1980 24 Encyclopedia of Small Business “Industry Life Cycle” http://www.enotes.com/small-business- encyclopedia/industry-life-cycle
10 3.0 Customer Segmentation
The Cruise Line industry has been segmented in to six highly defined customer groups as can be seen in Figure 3.
Figure 3: Cruise Line Industry Customer Segments25
Marketing to these segments is critical for success for the top incumbents who are broad line providers. The six segments in this market are the middle class, generation Y (18-26 years of age), baby boomers, DINKS (double income no kids), singles, and the ever growing niche customer segment.26 Per demographic data it is believed that 20% of cruise line travelers are single; generation Y accounts for < 6%, baby boomers account for 41% of cruisers, middle class cruisers account for 14-42%, with the remainder split between DINKS and niche segments.27 It is impossible to determine the exact percentage because there is overlap within the customer segments. The key is to understand the purchasing behaviors of each segment. Typically the DINKS and baby boomers purchase cruises which fall under the luxury category. They have more disposable income since they do not have children and are typically more established than other customer segments. Singles purchase in a semi-concentrated fashion as they purchase in small groups and typically do not travel alone. Singles are attracted to action tours and arenas which allow for social networking. Middle class cruisers typically travel with families which are
25“Cruises – International – June 2008 “Sector Developments” Mintel Reports. pp. 1-4 26 Euromonitor International “Travel and Tourism World” April 2008, page needed 27 Cruise Lines International Association 2008 Cruise Market Profile Study 2008, p. 21
11 historically the most price sensitive group within the industry (excluding the up and coming generation Y). Middle class cruisers are key customers since they do have strong spending power and account for a large percentage of the customer base. They seek life experiences for themselves and their families. They typically purchase within the budget to premium categories of cruise lines. Niche markets continue to emerge and cannot be overlooked as cruise operators have diversified and identified different niches. These niches increase revenue and provide an opportunity to introduce cruising to a younger generation.28 In order to manage these needs and segments, the top players in the cruise line industry have essentially become brand managers. They align the marketing message with their respective brand portfolios to attract each segment.
3.1 Customer Segmentation Summary As travel and tourism activities become increasingly intertwined, thus driving down prices for the entire tourism industry, it is increasingly difficult to build brand-loyal consumers. Intensely competitive environments resulted in consumer segmentation. This has turned into a successful strategy to capture the attention of prospective customers through price/cost and product differentiation. Consumer segmentation in the cruise line industry has increased revenue and enhanced consumer loyalty by segmenting cruising as well as tourism products and services tailored to meet the specific needs, wants, and purchasing behaviors of cruisers.29
4.0 Competition
Direct Competitors As shown in Figure 4, Carnival and its competitors in international cruising can be placed in 3 main groupings. They are major direct competitors, smaller scale direct competitors, and niche market competitors. The cruise industry has developed into a duopoly. While Carnival has 47% of the market, its closest rival is Royal Caribbean with 22% of the market.30 The Star Cruise Lines group, which owns 50% of Norwegian Cruise Lines (NCL), controls about 10% of the market, mainly through the NCL brand.31 Star and NCL operate only in the contemporary market segment.32 The remaining 21% of the international cruise market is served by smaller cruise lines that typically operate as an extension of existing travel business or in niche markets.33
28 Euromonitor International “Travel and Tourism World” April 2008 29 Ibid 30 “Cruises – International – June 2008 “Market Share Growth Levels Off for Top Three” Mintel Reports. Pp. 1 31 IbidIbid 32 “Cruises – International – June 2008 “Industry Structure and Developments” Mintel Reports. Pp. 1 33 “Cruises – International – June 2008 “Case Studies” Mintel Reports. Pp. 20
12 Figure 4: Competitive Groupings by Brand Strength and Market Variety
Royal Caribbean operates five brands in all four of the market segments with a global reach. However, they operate on a smaller scale than Carnival.34 While Royal has been profitable for the past few years, their margins are consistently lower than those of Carnival.35,36 The Royal Caribbean brand itself has been a leader in larger ships and on board activities, being the first to introduce their famous rock climbing wall on the superstructure of their cruise ships.37 At 220,000 tons, their latest ships being introduced next year are 50% larger than the previous generation of cruise ships.38 Within the contemporary market, Royal is a strong competitor to the Carnival brand. The next largest competitor, Norwegian Cruise Lines under the management of Star and Apollo Management, a private equity firm, struggles more than its two larger competitors. It operates only one brand and on a more limited scale and scope.39 It has not been profitable for the last two years, with a significant loss of $210M in 2008 on revenues of $430M stemming from a failed attempt to create an NCL America unit operating out of Hawaii.40 The operation incurred high operating and management costs and failed to win business from foreign
34 “Cruises – International – June 2008 “Market Share Growth Levels Off for Top Three” Mintel Reports. Pp. 1. Need website 35 Royal Caribbean Cruises Ltd., 2008 Annual Report, p. 58. 36 Carnival Corporation and plc, 2008 Annual Report, p. 5 37 Kwortnik, Robert J., Jr. “Carnival Cruise Lines: burnishing the brand.” Cornell Hotel & Restaurant Administration Quarterly. August, 2006, p. 2 38 Royal Caribbean Cruises Ltd., 2008 Annual Report, p. 5 39 “Cruises – International – June 2008 “Industry Structure and Developments” Mintel Reports. Pp. 1 Need website
13 competitors.41 Ownership of Norwegian by Star Cruise Lines, based in Hong Kong, seems to have done little to help improve Norwegian’s or Star’s operations nor to allow either company to capture any advantage of scale. While Star operates its own brand in Asia, it too is operating at a loss.42 Carnival enjoys economies of scale that its major competitors do not. As show in Figure 5 below, operating income as a percentage of sales is 81%, as compared with 87% for Royal Caribbean and 107% for Star/NCL. It appears that Carnival’s major competitors pay higher commissions, on board expenses, payroll, and SG&L as a result of not being able to compete on the same scale.
Figure 5: Operating Costs as a % of Sales vs Revenue for Top 3 Competitors
The remaining 21% of the international cruise market is served by smaller cruise lines that operate as an extension of existing travel business or in niche markets. For example, TUI AG operates Thomson Cruise Lines in Germany along with a travel agency and vacation tour package business.43 Disney Cruise Lines operates two ships out of Port Canaveral. Disney is an
40 Norwegian Cruise Line, 2008 Consolidated Statement of Operations, p. 1, http://www.ncl.com/csimages/1001/14/NCL_Earnings040709.pdf. , Aaccessed April, 2009. 41 “Cruises – International – June 2008 “Market Share Growth Levels Off for Top Three” Mintel Reports., p. 14 Need Website 42 Star Cruise Lines, 2008 Annual Report, p. 63, http://www.starcruises.com/Investor/Releases/2008/Ar/E012AnnualRpt2008dated9Apr09.pdf, accessed April, 2009 43 “Cruises – International – June 2008 “Case Studies” Mintel Reports. Pp. 20 Need Website
14 example of a niche player because most Disney Cruises are part of a larger Disney Vacation and their customers are seeking a Disney experience.44 Although they are competitive offerings, cruise lines like Disney are viewed by many of the larger cruise lines to be good for the industry.45 While offering a different value proposition, they introduce many to the cruise vacation experience.
Indirect Competitors Carnival’s indirect competitors are river or regional cruises, destination resorts, such as Sandals, destination locations such as Las Vegas, and other vacation packages. The CLIA estimates that cruise vacations have grown as a vacation choice among vacationers, while other segments, such as resorts, have been stagnant. Survey results indicate that 55% of potential vacationers expressed an interest in taking an international cruise vacation sometime over the next three years. Of those with an interest, the ones that responded with definite or probable intent represent 34 million adults from the target market.46
Competitor groupings Carnival enjoys strong brands across its brand offerings and overall has greater brand strength.47 This brand strength, combined with its scope of offerings in the four major market segments, allows Carnival to maintain its market share and prevent competitors from making inroads into any major market. Brand strength also leads to cross channel market effects. As the brand gains strength, they exert more influence over the decisions of customers and travel agents, directing more traffic to them and further strengthening the brand.48
5.0 Key Factors of Success
Based on the industry, customer segmentation, and competitor analyses, the key factors of success for the industry are: • Economies of Scale and Scope – Top Incumbents within the industry benefit by cost savings achieved by economies of scale. They can leverage fixed costs across larger fleets and bigger ships thus creating higher economic value for the firm. Operational efficiency is therefore enhanced by economies of scale allowing incumbents to reinvest cash into more ships and drive growth. The top incumbents in the industry are broad line providers with multiple fleets and brands of cruise lines to meet the various customer demands and scope of needs. Brands within their portfolios have different equities and serve different customer segments. • Marketing/Brand Management – Leveraging cruise lines (brand management) with focused marketing strategies based on regional and customer segment differences is key.
44 Ibid, p. 18.- check this 45 Cruisemates, Disney Cruise Line, http://www.cruisemates.com/articles/reviews/disney/index.cfm, accessed April, 2009 46 Cruise Lines International Association 2008 Cruise Market Profile Study, p. 25. 47 Cruise Reviews Online, http://www.cruisereviewsonline.com/ratings.htm, Aaccessed April 2009. 48 Ibid
15 Customer segmentation increases brand awareness, enhances customer loyalty, and provides a means to capture niche markets. • Brand Equity – Customers in the cruise line industry are attracted to the brand promise. Since 33% of cruisers are 1st time passengers, this becomes increasingly important for revenue and market share growth. • High Quality Customer Service and Value – Customers in all segments value customer service. In addition they are highly informed, expect a high level of service and maximum value for their money. Long term growth depends on the successful conversion rate of 1st time passengers to 2nd and 3rd time travelers. This also creates free “word of mouth” advertising for firms in this industry. • HRM - It is imperative that HRM acquires the proper talent and staff to ensure customer needs are met. Training programs are critical to ensure that the service and benefits employees offer to customers match the values and align with the brand of the corporation (brand ambassadors). Employees are key players in helping to create the experience for the customer. 6.0 Performance Analysis
6.1 External Performance
Market Share With 47% market share, Carnival is the largest cruise operator in the global cruise market. The company generated more than $14 billion in revenue in 2007, compared to $6 billion that of its closest competitor, Royal Caribbean. The company's 85 ships take passengers to destinations around the world with approximately 70% of ticket revenue coming from United States departures.49 For the past two years, the “Fun Ships” of Carnival Cruise Lines has been voted #1 cruise choice in Southern Living Magazine’s annual readers’ poll.50
Financial Health Carnival is in solid financial shape. The company has achieved and sustained strong operating profit margins, which often exceeds that of Royal Caribbean. Revenue growth for 2004-2008 was at 16.9% compared to 11.2% for competitor RCL. Profit margin is at 16.4% for the past year versus 7.2% for RCL. Carnival’s return on equity for 2008 is 12.1% compared to 6.8% for Royal Caribbean. Return on assets for Carnival is at 5.1% and 2.9% for Royal Caribbean. From these numbers, it is clear that Carnival is at a significant advantage over its main competitor RCL. The company increased its international capacity by more than 20% in 2007.
6.2 Organizational Health
Human Resources
49 Miller, Warren. Carnival Corporation Morningstar Report, April 8, 2009. 50 http://www.carnival.com/CMS/Static_Templates/Awards.aspx. Accessed May 2009.
16 Carnival Corporation & plc is a global company with over 80,000 employees including more than 65,000 shipboard employees. The company is headquartered in Miami, Florida and London, England. The company’s cruise brands also have headquarters in the USA in Miami,Florida Seattle, Washington and Santa Clarita, California, as well as in Southampton, England; Genoa, Italy; Rostock, Germany; and Sydney, Australia.51 Employee benefits are attractive and plentiful. Carnival offers programs for development to ensure guest experience corresponds with the brand offering. Also, there are numerous employee growth opportunities within the company. In addition, Carnival has employees fill out comment cards. Employees have the ability to self-evaluate all aspects of their job, including employers, subordinates, and much more.52 From this information, Carnival ensures their employees are happy. Carnival created the first payroll deduction cruise vacation benefit for employee voluntary benefits program. Shipboard employees are able to travel to exotic locations, meet new people and do not have to pay for rent or food. Through its cruise companies, Carnival Corporation supports and encourages the extraordinary efforts of its employees whose involvement in a wide variety of programs provide aid, donations and services to a huge array of charitable organizations.53
Management
Being in the business since Carnival’s inception in 1972, the management team brings a wealth of experience. The entrepreneurial spirit and pioneering vision of Carnival’s founder, the late Ted Arison, provided a solid foundation for the company’s future. 54 The 11 brands under Carnival’s umbrella remain independent, with each brand having its own CEO, President, Directors, and distinct Sales and Marketing teams. Senior management believed that this internal competition was good for the parent company, as it forced each brand to maintain an edge in the marketplace and to clearly define a unique value proposition.55 This allows each of the 11 brands to maintain market specific messages.
Operational Performance
Carnival endured a challenging but successful year in 2008. Company earnings were roughly in line with the prior year and had strong revenue growth offset by skyrocketing fuel prices. Globally, most of the company’s brands performed well, resulting in a 3.7% increase in corporate-wide net revenue yields for 2008. In addition, the company prides itself on its lean operating structure. They have been successful at maintain their margins and renewing their cost-control efforts. The company has strong cash flows from operations (5 year operating
51 http://phx.corporate-ir.net/phoenix.zhtml?c=200767&p=irol-careers. Accessed April 2009. 52 Jacobs, D.G. “Shipping Magnate: How Bob Dickinson used the power of a brand to make Carnival Cruise Lines’ the largest in the world” Smart Business Miami. October 2006 53 http:// phx.corporate-ir.net/phoenix.zhtml?c=200767&p=irol-history. Accessed in April 2009. 54 http://phx.corporate-ir.net/phoenix.zhtml?c=200767&p=irol-history. Accessed in April 2009. 55 Applegate, Lynda M. et. al. “Carnival Cruise Lines” Harvard Business School Publishing. Jul 7, 2005, p. 6Carnival Case Study
17 margin of 21.6%), 15.9% net margin profitability, a strong balance sheet and a secure liquidity position.56 Debt ratio for 2008 is at 40.5% and long term debt ($ mil) is 7,735.00.57
6.3 Performance Analysis Conclusion
Carnival Corporation is a successful company. Although 2008 was a challenging year due to the economic crisis, Carnival posted net income of $2.3 billion (15.9% of sales) and trend from previous years. Revenues also increased 12% for the year to $14.6 billion.
Troubled Successful CCL
Crisis Complacent
Organizational Health
Figure 6: External Performance vs. Organizational Health
In addition to Carnival being the market leader in the cruise industry, they stay focused on the long-term and are looking (already taken steps) to move their efforts into expanding their presence globally. Carnival has already taken steps towards this long-term strategy by ordering ships based on the company’s capacity expansion plan mentioned earlier. These are clear characteristics of a winning company.
7.0 Strategy Analysis
Goals
56 Carnival Corporation and plc 2008 Annual 10-K report p. 57 Carnival Corporation Profile” Hoover’s – April 2009. Pp. 26
18 Carnival plc’s mission is “to deliver exceptional vacation experiences through the world’s best- known cruise brands that cater to a variety of different lifestyles and budgets, all at an outstanding value unrivaled on land or at sea.” 58 The company is also pursuing the following goals: Continued expansion through the introduction of 22 new vessels in 2012, and a 25% increase in capacity.59 Focus on the long term to gain market share, by expanding their global presence. Be a sustainable company: Carnival will require sustainability reports for all brands by 2010. Carnival formed a Health, Environmental, Safety and Security Committee in 2006.60 All subsidiaries implemented and certified their environmental management systems to the ISO 14001 standard.61 Create a culture of fun and variety, where employees are corporate brand ambassadors. Cost leadership: Carnival aims to continue to provide a wide range of engaging and fun cruising experiences for the most value. In numerous online reviews of Carnival’various brands, customers have said that Carnival provides the best cruising experience for their money.”62
7.1 Products and Markets Parent Company Carnival plc’s product mix offers a variety of cruise vacation experience packages to locations around the world through its 11 cruise line brands. 50% of ticket revenues come from U.S. markets and 3% of North Americans cruise annually.63 Carnival’s core brand categories are:
Contemporary Appeals to mass markets offering a lower cruise package cost and fulfills the needs of many former budget cruise line customers. This sector is the main source of new build orders. The sector is reacting to customer’s blending of the three primary cruise experience offerings: contemporary, premium and luxury by accommodating to a wide variety of customer needs. 64
Premium These specialized, niche markets offer high quality service, and are also building large ships of contemporary size. For example, Princess built premium ships to appeal to the customer’s preference for intimate cruising and their desire to have access to numerous facilities
58 “Carnival Cruise Lines Mission and History” (Source: http://phx.corporate-ir.net/phoenix.zhtml? c=200767&p=irol-history) As Accessedof May 19th,in May 2009. 59 “Carnival Corp–Travel and Tourism–World” Euromonitor International: Global Company Profile, Jan 2009 pP. 1 60 Carnival Corporation and plc 2008 Annual 10-K report p. 3 61 “Carnival Corp–Travel and Tourism–World” Euromonitor International: Global Company Profile, Jan 2009 pP. 1 62 “Cruise Reviews Online” Carnival Cruise Line Reviews. Accessed in April 2009.
19 that mega-ships provide. Due to this accommodation, there is overlapping of passenger demand from the contemporary and luxury sectors.65
Budget This niche market is popular in Europe and consists of smaller companies who operate more intimate cruises for customers who don’t want to travel on large ships. This sector is shrinking because companies are looking to build larger ships to gain economies of scale.66
Luxury This market serves the upper class and charges an expensive ticket price. These brands are more recession-resistant than the rest of the industry because their customers are not impacted as much by economic pressures. The number of potential luxury customers went from 4 million to more than 9.5 million between 1998 and 2004 and the demand for luxury brands is exceeding supply. It will continue to grow. However, the luxury brand is only 5-6% of the market. The luxury market brings higher ticket yields, but they are also increasing ship capacity to be able to include more in the ticket price.67
7.2 Customer Profile and Purchasing Behaviors
Purchasers of the Carnival cruise vacation experience range from people with families, to singles, honeymooners, and multigenerational families. The average age of buyers is 46 and 1 in 3 guests are 1st time cruisers. The majority of repeat cruisers have been on a Carnival cruise twice, repurchasing every 12-25 months on average. The age distribution of cruisers is as follows: 24% of guests are 55 or older, 40% are between 35 and 55 and 36% are 35 or younger. The average annual household income of cruiser is about $65,000 and 55% of passengers are married. Carnival customers are looking for a cruising vacation experience that offers a variety of activities and a fun atmosphere.68 The “fun” psychographic of the target market consists of customers of all ages. This allows Carnival to be a broad-spectrum provider as discussed above.
7.3 Competitive Premise
Generic Strategy Carnival’s generic strategy is to be a broad line provider with a wide scope on a large scale. They have 11 cruise line brands that target low-income bargain hunters to the wealthy luxury seekers. They maintain their focus on cost leadership in the contemporary and bargain lines, and they differentiate themselves in the premium and luxury lines of their product mix. 69
65 Ibid. 66 Cruises – International – June 2008: “Sector Developments. Crew in increasing demand”” Mintel Reports Need website 67 Ibid. 68 Applegate, Lynda M. et. al. “Carnival Cruise Lines” Harvard Business School Publishing. Jul 7, 2005, p.. 6 69 “Cruises – International – June 2008” Mintel Reports p. 3 Need website
20 Brand Identity and Marketing To maintain the Carnival brand identity and continue to attract different market segments, Carnival has maintained their notion of the “fun ship” since 1972. As Carnival has added brands, they’ve stayed true to their corporate image.70
For example, Carnival has different marketing campaigns for each brand, with each campaign embodying a fun image. Carnival’s foreign cruise lines use phrases like “The most famous ocean lines in the world.” – Cunard and “Enjoying the European experience- both on an off the ship. The world’s #1 cruise line” – Costa. 71 Carnival’s North American “Let the Fun Begin” marketing campaign sells the product of the cruise experience by emphasizing its boats as the primary destination and the ports as secondary. Carnival offers cruises to nowhere, where the boat travels in international waters for a period of time before returning cruisers back to their original port of departure. The Carnival Cruise line brand is characterized by its signature bright colors, neon lighting and variety of cruise experience options. Carnival has integrated their brand experience into port excursions, online cruise blogs and advertising opportunities.72
Strategic Alliances Carnival has created the World’s Leading Cruise Line Alliance: a marketing alliance to steadily construct trade and customer awareness, as well as loyalty and confidence in the Carnival Corporation and North American plc cruise lines. This alliance makes the most of Carnival’s diversity, ships, destinations, length of trips, styles and quality for excellent vacation choices.73 Carnival also had alliances with top chefs, such as Georges Blanc to enhance the quality of its culinary offerings.74 Another excellent example of brand-consistent innovation is their alliance with Coca-Cola to offer Coca-Cola Club teen social centers with branded amenities such as a "Coke-tail" lounge.75 The purpose of these strategic alliances is to promote brand loyalty by offering a wide variety of activities on and off the ship and to attract more customers who are brand loyal to their alliance partners, such as Coca-Cola and Georges Blanc
Economies of Scale Carnival has had lower commission, transportation, onboard and other expenses in proportion to their revenue than their competitors. One could infer that because of their large size, Carnival is able to take on these expenses at a lower cost because it costs them less per unit of output. Carnival’s management team also allows them to gain economies of scale because they spend a significant amount less than Norwegian Cruise Lines on payroll and other related expenses
70 Kwortnik, Robert J., Jr. “Carnival Cruise Lines: burnishing the brand.” Cornell Hotel & Restaurant Administration Quarterly. August, 2006, p. 5 71 “Our Brands” Carnival Corporate Website. http://phx.corporate-ir.net/phoenix.zhtml?c=200767&p=irol-products Retrieved on 15Accessed in May, 2009. 72 About World’s Leading Cruise Lines and Carnival Corporation and plc. http://www.worldsleadingcruiselines.com/AboutUs.aspx Retrieved on 20Accessed in May, 2009. 73Ibid. check 74 “Exclusive Alliance With Master Chef Georges Blanc Continues Carnival’s Fleet wide Dining Enhancements Jul. 06, 2008 PRLog Free Press Release
21 (10% of revenues vs. 18% of revenues). It seems that the more Carnival expands, the more value they are getting from each employee working for the company. Overall, Carnival’s expenses as a percentage of revenue have consistently beat out the competitors over the past three years, proving them to be the most profitable company.767778 Carnival has achieved greater economies of scale than its competitors. Through their large size and mass purchases, they are able to invest a small amount per bed for less. Their competitors pay 25-30% more. Carnival is also able to see a wide range of customer data through their high- tech reservation system, which allows them to predict the exact time when they should drive prices down to fill ship, spa or excursion tour capacity.79
7.4 Competitive Premise Conclusion Global vision, economies of scale and high quality service and value (HRM) are all stars in the value chain as well as key success factors, which Carnival has used in its competitive premise. They are remaining competitive in the market by expanding their fleet 5.5% with 5 new ships to be launched in 2009. Sales of Carnival tickets serve as a feeder to all other cruise lines by getting customers hooked on cruising. High quality service and value (HRM) is achieved by allowing each cruise line to have control over marketing and sales to promote competition within the company. Carnival also strives to maintain teamwork in the organization by structuring coordination among brands through synergies to pay dividends.80
8.0 Value Chain Analysis
Despite the differing preferences in consumer markets, Carnival does not need to alter its value chain to please different customer segments. Each cruise line brand is able to add value by offering the same brand experience with slightly different price points and cruise line experience offerings. The value chain, shown in Figure XX, is focused on giving customers high quality vacation packages, a wide variety of vacationing options and a delightful overall cruise vacation experience. In fact, 94.8% of cruise customers are completely satisfied with their experiences.81 The infrastructure, human resource management, extraordinary procurements, operations and marketing and sales activities create more value and are therefore the stars of the value chain.
76 “Carnival Corporation Profile”” Hoover’s – April 2009. Pp. 25 77“ Star Cruises Profile” Hoover’s – May 2009. . Pp. 11 78 “Royal Caribbean Corporation Profile” Hoover’s – May 2009. pP. 15 79 Applegate, Lynda M. et. al. “Carnival Cruise Lines” Harvard Business School Publishing. Jul 7, 2005, p.7 80Applegate, Lynda M. et. al. “Carnival Cruise Lines” Harvard Business School Publishing. Jul 7, 2005, p.7 81 Cruise Lines International Association 2008 Cruise Market Profile Study. Pp. 25
22 **Infrastructure: Acquiring new cruise lines from countries of strategic interest and building new ships. Customer “Delight” **Human Resources Management: Training programs, constant employee development opportunities, cultural intensity, sensitivity to diverse cultures.
Knowledge Development: process automation, reservation system innovation, eCommerce, innovative information systems **Extraordinary Procurements: strategic alliances, mergers and High value acquisitions of other companies, super-liners. vacation packages Inbound **Operations **Marketing Service: Logistics: : and Sales: High quality Strong supplier Minimal Brand service. relationships docking and specific Focus on with few loading times. marketing hospitality. FigureWide 7: Value range suppliers, vast “Sign and campaigns. ofChain vacation port access. Signal” card. offerings Infrastructure Travel Cost control Carnival agencies & efforts. Corporation online focuses on bookings. creating value by acquiring and assimilating new cruise lines from countries of strategic interest. As stated above, they are also building new ships, upgrading current ships, offering more entertainment and activities and expanding their ports to novel locations.82
HRM Carnival trains its employees to deliver the utmost value to customers. They offer programs for development through local universities to teach 30,000 employees how to ensure that the guest experience corresponds with the experience the brand is offering. Along with these programs, there are constant employee growth opportunities within the company and a strong sensitivity to diverse cultures. Carnival also has employees fill out a comment card, where they evaluate all aspects of their job: employers, subordinates, the quality of their lodging, amenities, etc. The information provided from the staff allows Carnival to measure metrics and ensure that their employees are happy so that they can devote more time and energy into making guests 83 happy. Knowledge Development Carnival’s automated reservation system allows travel agents access to the customer’s travel and activity preferences, where they’ve traveled in the past, contact information and
82 Bird, M. (2008). Value Chain Analysis and I.T.’s Role in the Supporting Activities. Published Article 6
23 demographic data. This information allows Carnival to more effectively offer e-commerce applications where customers can book shore excursions and spa appointments. Carnival’s innovative reservation system alsosystem also allowed them to upgrade the technology used in their ships and make efficient use of the Internet84 Through advertising and allowing people to plan and book cruise trips online with their core state-of-the-art reservation system. Carnival has the ability to gather detailed information on cruisers and use that data to form direct relationships with customers through more focussedfocused marketing. Since Carnival is the largest cruise line in the industry, their extensive customer profile data enables them to target their market more effectively.
Extraordinary Procurements Strategic alliances and Carnival involvement in numerous mergers and acquisitions enabled them to expand broadly. They were still able to maintain a superior brand image with expert staff managing the sales and marketing of each line. Carnival formed a joint venture with the Spanish Orizonia Corporation to serve the Spanish cruise market in 2008, and has a superior portfolio of brands, which also cater to markets in the UK, Germany, Italy, France, Australia and N. and S. America. Carnival’s innovation of super-liners enhances the customer experience by offering more amenities and on-board entertainment offerings to allow customers to get much more for their ticket price at a minimal cost to Carnival.
Inbound Logistics Maintaining trusting, long-lasting relationships with few suppliers add value because these suppliers have the experience and expertise to make ships based on Carnival’s exact specifications.85 Carnival would rather buy from one supplier who can provide logistics and sourcing for the highest quality products (i.e.: food).86 .” Carnival has also formed positive relationships with travel agencies who consist of major websites like Travelocity and Expedia as well as independent at-home agents. Carnival’s direct marketing channels, Carnival.com and 1-800-Carnival add value because they allow customers to initiate the buy and provide leads for personal vacation planners.87 As online cruise reservations become more popular, travel agents are only used by 74% of cruisers.88 However, 85% of Carnival customers book through travel agents, and the other 15% book through direct channels, allowing Carnival to have stronger relationships with travel agents than its competitors.89
Carnival started an outbound channel for booking cruises in 2002. Telemarketers, or personal vacation planners (PVPs), called leads coming from the Carnival.com website and other
84 Applegate, Lynda M. et. al. “Carnival Cruise Lines” Harvard Business School Publishing. Jul 7, 2005, p.10. 85 Cruises – International – June 2008 “More Consideration Ahead for Specialist Cruise Shipbuilders?” Mintel Reports Source: Aker Yards Need website 86 Christie, S (2009). “Cruise line looks for solution to rotten produce problem” Fresh Cut: The magazine for value- added produce. Sparta, MI: Great American Publishing
24 customer inquiries. The PVPs add value because they are able to be an effective sales channel for Carnival, especially for moving unsold inventory as sailing dates drew near.90
Operations Carnival’s minimal docking and loading times allows them to turn its ships around in just a few hours. This provides more time for guests to enjoy all the cruise liner has to offer, thus increasing on-board sales. The embarkation process also enhances Carnival’s value because customers receive a “Sail & Sign” card at check-in. This card is a one-stop-shop for all on-board and excursion purchases. It serves as a form of photo I.D. so crew members can make the guest feel like they are part of the “Carnival family.”91 Carnival’s superior cost controls on a unit basis have stayed flat and helped the company remain competitive during the recent economic crisis. Each operating company (Carnival, Cunard, etc.) has made efforts to contain costs by conserving fuel and maintaining tight spending practices. In 2008, Carnival had an operating margin of 18.6%92, about 6% higher than its closest competitor, Royal Caribbean.93 They are also adding value by focusing on fuel saving strategies; which continue to be an increasing cost for the company.94
Marketing and Sales Carnival engages in brand specific marketing campaigns. Its most recent Carnival cruise lines campaign “Let the Fun Begin” has built brand loyalty and remains consistent with the customer’s need for fun. To build brand loyalty, Carnival has an onboard program called ‘Circle C,’ for 12- 14 year-olds and featuring high-tech spaces with game boys and arcade games as well as numerous activities led by very energetic hosts. They also offer Camp Carnival for children ages 2-11, and Club-02 for teens, as well as Water Works Waterslide Park as part of their Evolutions of Fun program, offered on certain ships. The cruise vacation experience is marketed online, through Carnival’s scrap-blog partnership to share photos, and vacation stories.95 Carnival also uses targeted marketing for onboard activities by gathering consumer profiles and marketing specific activities to those consumers who are most likely to buy them.96
Service Carnival provides high quality service by offering a large range of cruises: from 3 days to many weeks, on ships for the middle class to the very wealthy. They also aim to provide the highest quality service to all customers by hiring and instructing an effective and diligent staff to maintain a consistent brand image and values set. Carnival teaches its employees to focus on hospitality and interacting with guests to ensure they are having fun at every moment of their cruise experience.97
90 Applegate, Lynda M. et. al. “Carnival Cruise Lines” Harvard Business School Publishing. Jul 7, 2005, p.7 91 Ibid, p.8 92 “Carnival Corporation Profile” Hoover’s – April 2009. P.p. 25 93 “Royal Caribbean Corporation Profile” Hoover’s – May 2009. Pp. 15 94 Carnival Corporation and plc 2008 Annual 10-K report p. 3 95 “Carnival Corp-Travel and Tourism–World” Euromonitor International: Global Company Profile, Jan 2009 Pp. 5 Need website 96 “Cruises – International – June 2008 “Market Share Growth Levels Off for Top Three” Mintel Reports. Pp. 1 Need website
25 8.1 Value Chain Analysis Conclusion Carnival’s economic value matches up with the customer’s need for fun and variety. Their value chain activities are aligned because Carnival focuses on developing employees so that they ensure the guests are having a great time. They also have been able to achieve economies of scale and provide more value to their customers at a competitive ticket price.
9.0 Sustainability Analysis
Carnival has remained true to its competitive premise and brand promise since 1973 when it originated the Fun Ships concept.98 Its continued cost leadership and differentiation strategy have propelled the company to become the “800 pound gorilla” of its industry with 2008 revenues of $14.7 billion. This is over twice that of its next largest competitor, Royal Caribbean (RCI). Even though Carnival is clearly the industry leader, it still faces threats to sustainability from imitation, substitution and holdups. Sustainability is not at risk from slack or saturation.
9.1 Imitation Each successful innovation in the cruising industry is often copied by rivals. Imitation occurs on the hardware level, (the ships themselves) and the actual products and services offered to customers. Looking at the ships specifically, imitation is often combined with one-upmanship which is clearly visible between RCI and Carnival. For example, in 1996 Carnival launched Destiny, the first 100,000 ton, 2,642 guest capacity cruise ship and in 1999 RCI answered with Voyager of the Seas, a 137,000 ton, 3,114 guest capacity cruise ship.99 Each new ship built will often contain anything available on competitor’s ships like spas, casinos, ice skating rinks, bowling alleys, basketball courts, fitness centers, mini golf courses, etc, leading to no real sustainable advantage for the innovator.100 Beyond the actual ships, imitation can also exist among the products and services. Several of Carnival's signature elements, from the showpiece atriums to the in-cabin towel animals, are now commonplace.101 Critics also have noted that when RCI launched the Voyager ships in 1999, RCI’s and Carnival’s onboard products had become similar.102 This encroachment on the actual brand has continued with RCI’s adventure- theme rebranding and the inclusion of the first water park at sea in their next generation ship.103 Carnival has responded to imitation threats by continuing to differentiate itself by building new ships, expanding globally, offering new services to build brand loyalty and investing more in marketing and promotions. Carnival has plans to launch twenty-two new ships by 2012 which is a 25% increase in total capacity [maybe need RCI’s new build number].104 Carnival has
97 Jacobs, D.G. “Shipping Magnate: How Bob Dickinson used the power of a brand to make Carnival Cruise Lines’ the largest in the world” Smart Business Miami. October 2006
26 expanded globally through mergers and joint ventures compared to RCI who has chosen to grow organically through existing brands.105 For example, Carnival merged with P&O Cruises in 2003 to gain access to the UK market and completed a joint venture with Orizona in 2007 for access to the Spanish market.106 Through its Costa brand, Carnival has plans to double Asia capacity in 2009.107 In 2008, Carnival offered new services to build customer loyalty such as, Camp Carnival for 2-11 year olds, ‘Circle C’ for 12-14 year olds and Club-02 for teens.108 Carnival also increased promotions [Data $$ amount spent on promotions] with its updated branding campaign in 2008 to promote “Fun Ships” cruising.109
9.2 Substitution and Holdup Substitutes indeed are a threat to Carnival’s sustainability. Land based vacations like packaged trips to Las Vegas, Club Med and Disneyland all compete for customers’ time and expenditure of money. Carnival responds to this threat by continuing to offer and promote bargains compared to substitutes. As calculated in the latest CLIA annual report, 95% of cruisers rate their cruise experience as satisfying and 44% claim “extremely satisfying” making a cruise among the best in meeting and exceeding expectations.110 Passengers have the opportunity to visit multiple destinations and access to many amenities at very competitive prices.111 Another threat to sustainability is holdup. Carnival operates in multiple countries and deals with many governments. Therefore, any material change in international laws, taxes, border patrol regulations or customs could pose a threat to Carnival. Environmental groups could also threaten a holdup by excessive lobbying or facilitating substantial public support of legislation that would impose a hardship on Carnival. Carnival has responded to this threat by promoting economic impact studies.112 These studies highlight the positive local economic impact to agriculture, manufacturing, wholesale and retail trade, hospitality, financial and business services, etc., for countries that participate in the cruising industry.113 As for the environmental groups, Carnival showed its commitment to environmental sustainability by forming an internal health, environmental safety and security committee in 2006 and has pledged to provide environmental sustainability reports for all brands by 2010.114
105 “Cruises – International – June 2008 “Market Share Growth Levels Off for Top Three” Mintel Reports. Pp. 10 Need website 106 “Carnival Corp-Travel and Tourism–World” Euromonitor International: Global Company Profile, Jan 2009 Pp. 12 Need website 107 Ibid, p. 3 108 Ibid, p. 13 109 Ibid, p. 3 110 Cruise Lines International Association 2008 Cruise Market Profile Study. Pp. 51 111 “Carnival Corp-Travel and Tourism–World” Euromonitor International: Global Company Profile, Jan 2009 Pp. 1 Need website 112 “Cruises – International – June 2008 “Financial Benefits Justify Port Developments” Mintel Reports. Pp. 1 Need website 113 Ibid 114 Carnival Corporation and plc 2008 Annual 10-K report p. 1
27 9.3 Saturation and Slack Carnival’s sustainability is not being threatened by saturation or slack. Carnival is the market leader in an industry where only 3% of North Americans cruise each year.115 The CLIA estimates a US target market of 128.6M people (25 years or older and household income greater than $40,000) of which only 44.6% of those people have ever cruised.116 The total European market is also growing and has grown from 1.3M cruise passengers in 1997 to 4M in 2007.117 For the first time ever, experts believe the Asia market is set to become an important market.118 As for slack, it’s difficult to find any evidence. Carnival outperforms its rivals on virtually all financial and operational measures.119 Carnival has successfully developed a cost leadership strategy that allows it to offer high value vacations to price sensitive customers and continues to produce gross profit margins over 35%.120
9.4 Challenges To sum up the analysis; imitation, substitution and holdup are all threats to Carnival’s sustainability,sustainability; however saturation and slack are not. Each of the threats is being handled with appropriate responses, as mentioned previously. Only imitation, rises to the level of being considered a challenge. As the imitation continues between RCI and Carnival’s products and services and along with RCI’s encroachment on Carnival’s “Fun Ships” brand, it’s becoming difficult for consumers to discern any differentiation.121 Carnival will continue to adequately respond to this challenge by building brand loyalty and increasing marketing and promotions of its “Fun Ships” brand promise. As the industry leader, Carnival is responsible for maintaining the image, growth and success of the international cruising industry.
115 “Cruises – International – June 2008 “Global Sourcing: The Key to Sustained Growth” Mintel Reports. pP. 1 Need website 116 Cruise Lines International Association 2008 Cruise Market Profile Study. Pp. 13 Need website 117 “Cruises – International – June 2008 “Global Sourcing: The Key to Sustained Growth” Mintel Reports. Pp. 5 Need website 118 “Carnival Corp-Travel and Tourism–World” Euromonitor International: Global Company Profile, Jan 2009, p P.2 Need website 119 “Carnival Corporation Profile” Hoover’s – April 2009. Pp. 28 120 Ibid 121 Kwortnik, Robert J., Jr. “Carnival Cruise Lines: burnishing the brand.” Cornell Hotel & Restaurant Administration Quarterly. August, 2006, p. 13 Need website
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