Royal Caribbean International: The Italian StrategyProject work of “International Management”

Francesco Cortoni (ID 052040)Nicolò Degl’Innocenti (ID 048790)Michele Tremori (ID 051491)

Lecturer: Prof. Lorenzo Zanni

Academic year 2013/2014

Presentation of the firmRoyal Caribbean Cruises Ltd. is the world’s second largest cruise company and also offers land-tour vacations in Alaska, Asia, Australia/New Zealand, Canada, Dubai, Europe and South America.The company owns six brands, Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisières de France, as well as TUI Cruises through a 50 percent joint venture. Together, these brands operate a combined total of 41 ships globally with a selection of itineraries that call on approximately 460 destinations worldwide. Onboard the ships, the brands offer an extensive array of activities, services and amenities, including simulated surfing, swimming pools, sun decks, beauty salons, exercise and spa facilities, ice skating rinks, in-line skating, basketball courts, rock climbing walls, miniature golf courses, gaming facilities, lounges, bars, Las Vegas-style entertainment, cinemas and Royal Promenades, which include interior shopping, dining and an entertainment boulevard. The company’s brands will introduce five more ships by the end of 2016, increasing the fleet to a total capacity of approximately 105,000 berths.

Brief History1968: Foundation of Royal Caribbean Cruise Line by Anders Wilhelmsen & Company, I.M. Skaugen & Company, and Gotaas Larsen, Norwegian shipping companies. First ship: Song of Norway.1972 – 1982: Expansion, acquisition of other vessels: Nordic Prince, Sun Viking, Song of America.1986: Lease of a coastal property in Haiti, called Labadee. As private use for its guests.1988: Launch of Sovereign of the Seas, the largest passenger vessel afloat at the time.1990: Continuing expansion, two other vessels and another private destination: Little Stirrup Cay, an island in the Bahamas, which they rechristened "Coco Cay.”1990-1993: Two new vessels, Monarch of the Seas, Majesty of the Seas.1993: Market share is growing, Royal Caribbean became a public company, on the NEW YORK STOCK EXCHANGE.1993-1999: New vessels, new headquarter in Miami, Florida. Company merged with the Greek cruise line Celebrity Cruises. Name changed in Royal Caribbean International. Transiction to a more strictly modern line, retirement of older vessels: Song of America and Sun Viking.1999: Presentation of Voyager of the Seas, the line's newest and world's largest cruise ship entered service with much attention from the news media.2000: Creation of Island Cruises as a joint venture with British First Choice Holidays.2001: Explorer of the Seas, Adventure of the Seas, new cruise tours in Alaska.2002 – 2003: Navigator of the Seas, Brilliance of the Seas, Serenade of the Seas, Mariner of the Seas. Born of the typical “Rock-climbing walls” on every RC ships.2006-2008: Freedom of the Seas, largest passenger vessel in the world. Indipendence of the Seas, Liberty of the Seas.2006: Purchasing of Pullmantur Cruises, the largest Spain-based cruise line. Onboard product are custom-tailored for Spanish tastes, Spanish is the main language.2007: Foundation of Azamara Club Cruises, a luxury brand of cruises, born as subsisdiary of RCCL. Foundation of CDF (Croisieres de France) as a subsidiary of Pullmantur Cruises, with French as the primary language used onboard.2008: Island Cruises’shares have been sold to TUI.2009: Joint venture with TUI AG (German Tourist firm) and foundation of TUI Cruises. Onboard product are custom-tailored for German tastes. German is the main language.2009-2010: Oasis class: Oasis and Allure of the Seas, guaranteeing Royal Caribbean the ship size lead for years to come (Oasis is 225,282 GT, 361.6 m overall, with space for 6,296 pax and 2,394 crew members).2013: New Oasis class has been ordered. Presentation of Quantum class, Quantum of the Seas and Anthem of the Seas.

Region 2006 2007 2008 2009 2010 2011N. America

10.38 10.45 10.29 10.40 10.78 11.52

Europe 3.44 4.05 4.66 5.00 5.57 6.18Rest of world

1.29 1.37 1.45 2.18 2.40 2.91

Total 15.11 15.87 16.20 17.58 18.75 20.61

Data in the table shows that European market is the second biggest market in the World, characterized by an increasing growth in the last years.The first European market in terms of volume is United Kingdom (but now is expected that will be exceeded by Germany). South-European Countries are very important as number of guests, and Italy is the third market source of Europe. Royal Caribbean is present throughout the World, and about 10 years ago decided to start its South-European Strategy, with the aim to enforce its position and compete with its main competitors in the Mediterranean Sea: Carnival (owner of Costa Crociere) and the new born MSC, an Italian-Swiss Cruise Company.

Source: CLIA – Cruise Lines International Associations –Data in million of guests.

World Market Overview

Italian Market Growth

Despite the crisis, Italian market is growing fast, from about 300.000 guests in 2004 to a forecast of more than 800.000 in 2014.This is one of the main reasons for the Royal Caribbean’s investements in our Country, but we cannot forget the tourism driving capacity of Italy for foreign tourists. During the years some different strategies have been followed by the Company, with huge investments in the Italian structure, both in marketing and deployment, capable to reach some important objectives, but not in terms of profitability if compared with other markets. The American governance has decided to re-organize the Italian branch since 2013.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

GuestsYear

Source: CLIA – Cruise Lines International Associations

Channel MixItalian Market is highly fragmented, with more than 12000 travel agencies, grouped in Consortia, Network, Tour Operator, Web Specialist and Independent.Costa and MSC own WelcomeTravel and BluVacanze respectively.Royal Caribbean is investing a lot in Direct Sales, with some important benefits (e.g. No commissions, loyalty, easier to communicate RCCL values) and “selected independent” agencies with dedicated over-commissions plan (to increase loyalty).

Consortia Web Specialist Tour Operator Selected In-dependent

Other Inde-pendent

Direct Sales0%

10%

20%

30%

40%

50%

20132014

Since 2010 the share of Direct Sales is growing steadily.

Italian Market ShareItalian Cruise Market Share

 Brand 2011 2012 2013 2014Costa 61% 57% 55% 56%Msc 30% 32% 35% 36%RCI 5,5% 7,5% 5,5% 2,7%

Market (‘000 Guests) 923 835 800 827

Δ Market   -10% -4% 3% Source: CLIA – Cruise Lines International Associations

This graph shows the Cruise Market Share in Italy from 2011 to 2014. Costa holds the biggest share of the market, even though there has been a decrease from 2011 to 2014 in the portion of its shares (forecast of 56%). Msc is the second most important company in the Italian cruise market, as we can see from its market share (forecast of 36%), and it is also the only one that has grown from 2011 to 2014. Finally, the smallest part of the market is held by Royal Caribbean: it has had a peak in the 2012 the year of Concordia’s tragedy (7,5%), but the forecast market’s portion in the 2014, it is supposed to be very small: only the 2,7 %.

Main Competitors PerceptionIt is important to know what is the Italian perception of RCCL’s main competitors and what are their main characteristics:

• NATIONAL PRODUCT: Italian Company for Italian people

• PROXIMITY: Easy and widespread embarkation (more ports of call allow customers to comfortably reach their ships)

• DOOR to DOOR SERVICE: COSTA is a real tour operator, taking care of all aspects of vacation

(transfer, pre and post stays, etc). MSC is disinvesting from this kind of activity aiming at local

market

• PRICING POLICY: Aggressive/low prices, lower NCCF&taxes, early booking privileges, last minute offers, family promotions, net rates and aggressive group policy, higher commissions& bonuses to Trade and extremely flexible, sales at € 99 at the pier.

• MSC and Costa strategy will pursue the full occupancy of the ships going as far as giving cabins free

RCCL PerceptionSurveys show that most of the Italian people that have tried a cruise with Royal Caribbean, have been satisfied with the quality of the service offered by the company, mainly for the following reasons:

• Large and amazing boats with innovative and esclusive spaces inside (as the internal walkaway that we can find in every RCCL’s boats).• International food, characterized by a big variety of meals.• Cheap wine and analchoolic drinks, free water and soft drinks• Various leisure activities , such as casino, swimming-pool, enterteinments organized by the staff of the boat especially during the evening.• The director of the cruise and the staff are always Italian people, which means easier relationships with them.• Free distribution, in a specific building inside the boat, of fruit and sweets.

On the other hand, most common complaints about the cruise are the following:

• Difficult relationship with crew due to English language (25% of boat speaks Italian)• A lot of noisy and impolite people (Italian style, yes “culture matters”).• The staff tends to be more polite and helpful with foreign people.• Not high level of cleaning standards.

Italian Market Characteristics1. Demographics:

• Italian population is increasing due to immigration• 1/3 Italians is over 55 years old• Lower number of Italian children • More singles or divorced couples• Low level of English speaking people

2. Last minute market: Italy has the latest booking market, more than 50% book in last 5 weeks before departure

3. Highly fragmented market: 12k point of sales and no real multiple agents4. Low cruise penetration 5. The bad economic environment has impacted tourism market

determining a slow demand in cruise industry too: 2010 was the first year in which cruise industry has not grown at the same level as past years, but since 2011 an upturn is started again.

6. Tour operators starts to look at cruise companies as competitors rather than the past and offering heavy discounts.

7. High concentration among Costa and Mediterranean Shipping Cruises, more than 90%, that allow them to have strong influence on the sales’ channels

RCCL Italian TargetRoyal Caribbean identify as its target what they called “Active socializer”.They are, following the definition gave by the company itself people who:• Have done, at least, a 7 days

holiday in the last 12 months• Prefers holidays on the move

rather than in one place• Likes the pleasure of meeting

new people on holidays• Loves anything is new

On a basis of about 51.000.000 adult people in Italy, they identify 6.500.000 persons with those characteristics, people with an high average income and an age between 25 and 54 years old, so they speak about “young active socializer”.

ADULTS51.860.000

25 – 54 YEARS26.175.000

ADULTS/ 25 – 54 YEARSHIGH SOCIAL/INCOME 6.180.000

ACTIVE SOCIALIZER6.500.000

Marketing Mix – How to reach the Active Socializer?

During the years Royal Caribbean has undertaken different marketing actions with the aim to create a brand awareness and to gain market share in a difficult market as the Italian, where demand is driven by price, concentration is high (similar to a duopoly) and competitors are very aggressive and with a strong brand, in particular within the Italian boundaries.The main investments have been:• TV campaign on national and cable tv.• Key focus on social media (Facebook, Twitter, etc)• Co-marketing with top Italian industries (Findus, Unicredit, mail service)• Co-marketing with football team (Inter FC, AS Roma)• Testimionial from the sports world (Karoline Kostner)• Different theme cruises (cooking, dance, children)• Focus on differentiation with competitors (Royal is different, why?)• Focus on the message that an American company can offer to Italians

services of high quality also for Italian tastes (e.g.: food, wine, Italian-speaking crew)

• Child free campaign, to align with competitors (is not common in U.S.A)

SWOT AnalysisStrenghts

• Good overall quality product• Trade and consumers awareness is

up• Smart pricing and promotions• Differentiation from main

competitors• New marketing strategies• Re-organization of offices and sales

channel

Weaknesses• Less vessels and ports• Onboard language capability• Difficulty to communicate the high

value product offered• Suspicion of American brand by

Italian people• Less funds from the head office

Opportunities• Economic crisis is going to finish• Cruise market is increasing• Oasis of the Seas in the

Mediterranean Sea• Leverage on high level brands

(Celebrity and Azamara)• Different target of guests• Focus on direct sales

Threats• Price war competition• Late booking demand• MSC and COSTA new ships in the

Mediterranean Sea• Fragmented sales channel, strong

influence of competitors on agents• Low profitability for the Company

Main indexes used by RCCLThese are the main indexes used by the Company to measure the performance of its branches. It is fundamental to know them very well, because it would be impossibile to understand strategies and problems without.• NTR => Net Ticket Revenue: Revenue (net of fees (to agents)

• PCDs => Pax Cruise Days: Number of passengers by the number of cruise nights

• APD => Average per Day: Average revenue per passenger per cruise night.

• APD => NTR / PCDs

• S&M => Sales and Marketing

• G&A => General and administration

• Acquisition cost: % on the revenue of the sum of S&M and G&A

Indexes and Results (1)2013 Italy vs Other Markets

ITALY SPAIN FRANCE GERMANY

Guests 40.712 43.096 26.317 66.405

S&M per PCDs ($)14 14,1 15,5 11,6

G&A per PCDs ($)21,5 19,6 19,9 11,1

APD ($)127 137 131 128

Acquisition cost33,30% 35,10% 41,00% 29,60%

Net Contribution per PCDs 92 103,7 95,5 105,2

• Acquisition Cost is in line with the other South European markets, but still too high.

• S&M per PCDs is double respect the avg. of the company

• G&A per PCDs is the highest in the world (and triple than the avg. of the company)

• In terms of Net Contribution per PCDs Italy is less profitable than other markets (25% respect avg. of the company

• APD is the smaller among the other South European Markets

Indexes and Results (2)• Guests: after year by

year of increasing in 2013 there is a reduction of 43%

• Expenditures: substantial cut of expenditures regarding S&M and G&A

• APD is still too low, but is going to increase.

• 2014 estimation: less guests, APD higher, decrease of acquisition cost.

ITALY 2011 2012 2013 2014E

Guests 50.700 63.100 40.700 23.100

S&M ($) 13.200.000 14.600.000 4.100.100 2.400.00

G&A ($) 5.200.000 5.900.000 6.300.000 3.500.00

APD ($) 117 110 127 153

Acquisition cost 47,80% 45,50% 33,30% 27,50%

Budget AnalysisThe graph, taken by the Italian branch budgets, shows that:o In 2012 there was a peak in

the guests number, followed by a quick decrease in 2013 and with an additional decrease in the previsions for 2014

o The APD is constantly increasing since 2012, the best year for the company in term of guests but also the year with more investments and lowest APD, with a 20% difference between 2013 and the previsions for 2014.

o S&M is decreasing since 2012, and the same is for G&A, with a decrease of 45% for both between 2013 and 2014

o Acquisition costs will be very low in 2014, (due to new re-organization strategy) and the net contribution per PCDs constantly increasing.

Huge investments, poor resultsRoyal Caribbean has invested a lot in Europe and in particular in Italy as we analyzed before. Budgets have demonstrated that when the Company decided to increase investments (Italy in 2012 was one of the Country with higher S&M budget) it reached good results in terms of guests although there are two main problems:• the profitability that is too low, measured with APD,• acquisition cost that remains the higher in the World.Italian market cannot guarantee huge volumes of guests (the best result was 7.5 % in 2012) due to the strong competition of Costa and MSC. It is clear that with small volumes is impossible to reach profitability’s targets of the Company.Despite various marketing campaigns and a set of “tailor-made” services for Italian customers, Royal Caribbean has not been able to take advantage of the growth of the cruise market (e.g. as MSC has done in few years).It’s hard to say why Italian customers don’t appreciate very much RCCL. It could be due to:• For Italian behavior is hard to trust in an American Company when there is

a strong made in effect guaranteed by Costa and MSC• Italian market is driven by the price, that are too much low for Royal

Caribbean standardsAlthough these issues, Royal Caribbean wants to remain in the Mediterranean Sea and Italian market, because it remains one of the most loved destination for guests from all-over the World and also because the market is growing.It is clear that to achieve this aspiration the Company needs a drastic change in its strategies.

Future StrategiesIn 2013 Royal Caribbean decided to change drastically its strategies in the Italian market, due to a low profitability of this market and a too much high acquisition cost:

1. Increasing profitability: Less guests, higher prices= GREATER APD

2. Different deployment strategy: Only two home-ports, not interporting

3. Strengthen leadership in direct sales4. Increase Rest of the World products, to

increase APD.5. Leverage of luxury brands: Celebrity and

Azamara6. Decreasing of acquisition cost: re-organize

Italian branch, externalization of call center in Romania

7. New marketing investment8. New Sales organization9. Creation of a cluster of top partner among the

travel agents10.Build a brand preference instead of awareness

References• Cruise Lines International Association - http://www.cruising.org/

• Annual Operating Plan of Royal Caribbean Italy 2011

• Annual Operating Plan of Royal Caribbean Italy 2012

• Annual Operating Plan of Royal Caribbean Italy 2013

• Annual Operating Plan of Royal Caribbean Italy 2014

• Royal Caribbean Official WebSite - http://www.royalcaribbean.it/

• Wall Street Journal - http://www.wsj.com/

• EUROSTAT, ISTAT

• Various specialized forums and blog (crocieristi, liveboat, tripadvisor, crocierepercaso, universocrociere)

• All 2014’s datas are forecast

• Many thanks to Royal Caribbean Italy for their help