Case company to enjoy a very strong position

Case type: Problem Case


Company Background and Problem Identification

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Club Mediterranee or more commonly known 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, and they
were offering all-inclusive vacation packages to over 108 destinations. The
rapid and huge success of Club Med was because of the lack of competition
within the industry that they were in. Whoever in recent years, the success of
Club Meds all-inclusive vacation packages has attracted several
parties/organizations to copy the Club Med experience, and it has really
affected the monopolistic competition of Club Med. Inc. it previously enjoyed.
The biggest issue that Club Med seems to be facing at the moment is of its
mass-marketing scheme. When new competition enters the industry, there will be plenty
of room for them to really specialize and implement niche marketing techniques
that will help them grow and really lower Club Meds appeal to the targeted


Competitive Advantage and Defensibility

Being the first ever organization in this industry, Club Med
has a 30-year advantage over its competition. This has allowed the company to
enjoy a very strong position in the market with respect to its buyers,
suppliers, and labor. If consumers tried to copy the Club Med experience it
would cost buyers 50% to 100% more, so that is why most buyers will opt to
purchase the all-inclusive Club Med vacation package. As for suppliers, since
airlines and food industries are extremely competitive industries and the cost
of including airfare and food within the package for Club Med is low, this
allows them to make huge amount of profits through economies of scale. As for the
labor, there is a high demand to work for Club Med at minimal wages. Since
labor is a fixed cost for Club Med, this gives them a huge advantage at being
able to negotiate wages with local workers. So, in turn this allows Club Med to
keep its fixed costs very low. In addition, Club Med uses a veryunique 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



Performance Evaluation and Competitive Environment

When analyzing Club Meds return on sales (ROE) (as shown
in Exhibit 2) which is a calculation of how much sales revenue is turned
into profit, it has become clear that Club Med only makes a $0.05 profit on
every $1.00 made in sales revenue. Even though this may seem like a small
return on sales, if we compare it to Hilton that makes about a $0.15 profit on
every $1.00. When we take a close look at the numbers, from 1984 to 1986 it
shows even though Hilton has a higher ROS, it has been slowly declining and
Club Meds ROE has been growing. In addition, when we take close look at the
gross margin (GM) (as shown in Exhibit 3) for Club Med which is 34.25%, which
means that for every dollar of sales made, Club Med makes $0.34 and spends
$0.66. I am coming to the conclusion that selling general and admin expenses
are bringing down profit of about 5% for the company. Return on Equity (ROE)
which basically means of how much profit a company generates with each dollar
of shareholders’ equity. We can come to the conclusion that the numbers from
1984-1986, Club Med fares better than Ramada and LaQuinta with its 11.35% ROE, even
though Club Med had a huge ROE from 1984 to 1986 it 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. So nonfinancial measures of the company performance, (as
shown in Exhibit 11 and 12) we can come to the conclusion that Club Med is doing
exactly what the people want, from its great resort facilities and etc. That is
the reason why the ratings range between low 80s to high 90s. Even though the
ratings show Club Med as being a more favorable resort facility, emerging
competition that promises customers an even better vacation experience does pose
to be a formidable threat. A recent advertisement from a Club Med Competitor showcased
how the owner of Club Perillo, Mario Perillo, sold 10,000 tours in only 100
days and how he intends on doing it again. When we take a closer look at the
article it reveals that Perillo seems to be capitalizing on markets that Club
Med hasn’t been able to reach with their marketing scheme. What Perillo is
offering to his customer’s is basically high-end 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. In
addition, Parillo really does offer a truly all-inclusive experience, you have
access to everything from wines, cocktails, and even tips are included in the
ticket prices. So in conclusion, Perillo has really diversified his
all-inclusive vacation experience by not only offering an island resort but a
luxury cruise liner as well, it has really help get consumers from both
markets. If Club Med wants to remain competitive within the industry, it must
quickly diversify itself and gain back the consumers or else the competition
can seriously start to damage Club Med.


Company Culture and the Customer

A really vital part of the company culture is the “family
spirit.” Club Med really emphasizes and believes highly in building the “family
spirit” within its customer’s by showcasing social interaction. Everything that
Club Med villages offers from its buffet style meals and random seating arrangements,
to assigned roommates is 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 that can
be really 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. These
numbers also help Club Med gauge its customer lifetime value as approximately
25% of all new customers become repeat customers. This in turn will result in
an average of four additional Club Med vacations per repeat customer and a
contribution margin of 60% which will help the growth of Club Med.


Impact of Increased Service Quality

Happy and satisfied customers are a key to the success or
fall of a business. For Club Med, satisfied customers are an important
marketing tool because they promote word of mouth marketing which is really
important because it helps attract more people. 
So consistently improving service quality is essential to Club Meds
growth. A industry rule- of-thumb indicates that people returning from a
vacation will tell an average of ten other people about their experiences, if the
experiences from the vacation was negative, Club Med risks of losing potential
profit. The net income per guest equals to $48.00 on average, Club Med will
lose $480.00 ($48.00 x 10) of potential profit per guest if they leave with a
negative or horrible experience of their vacation. As indicated by the 25%
repeat purchase percentage, there is still a lot of room for improvement for
Club Med. Some of the opportunities for improvement are shown in Exhibit 12,
approximately 238 consumers reported rooms being uncomfortable, 41 consumers
reported theft, 190 thought the food was average/poor, and 111 thought bar
drinks were overpriced/weak. With the growth of the new competition, boasting
about their deluxe rooms, free drinks, and privacy, Club Med needs to really focus
on upping its service quality or they can lose customers really fast.


Areas of Concern and Recommendations

Some major concerns Club Med faces is of mass-market appeal Employee
(GO) turnover, and Spartan room accommodations with lack of flexibility. Even
though there is huge demand to work for Club Med, 920 employees (2000 x 46%) do
not even make it past their first season, that puts a huge amount of stress on
company resources as they will need to spend more money training their
replacements. To help reduce employee turnover, Club Med should offer its
employees potential for advancement, from being a GO (gentil organisateaur) to
a Village Chief. This will give employees (GOs) more incentive to work harder
and look forward to new experiences. Club Med has a strong bargaining position
in negotiating wages, and although this helps the company reduce its fixed
costs, low wages provide little incentive for an employee to stay with the
company and even less incentive to work hard. With other major competitions on
the rise, GOs will have greater choice in choosing their pay rate. As for Club
Med having a mass-marketing scheme, this marketing technique has its major
positive and negative effects. Even though Club Med is able to attract a huge
consumer base because of its broad market appeal it risks losing many of its
customers to other specialized organizations. Club Med has always had an image
of offering vacation packages that meet the eye of the budget conscious buyer,
with its Spartan rooms that lack basic amenities, Jacques Giraud (CEO of Club
Med) would make it extremely difficult to attract luxury consumers. Therefore,
my recommendation to Giraurd would be to diversify Club Meds product mix to
offer premium vacation packages to the luxury consumer, that will enable the
company reap profits from all target segments. Lastly, even though Club Med
focuses on building social interaction between its consumers by only offering
single beds and assigning roommates. I would recommend that since (according
to Exhibit 9) 48% of Club Meds demographic is married and 40% has children;
so, my suggestion would be to have an option to upgrade rooms at an extra cost
to allow customers to have double beds or family suites.



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