Carnival Corporation

MGMT 619

Spring 2009

Carnival Corporation

Team 6

Amy Clogher

Jacob Griego

Ted Noble

David Sciortino

Deepa Sethi

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 (15.9% 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, the company has stayed focused on the long-term and iscontinually looking to move its efforts into expanding its presence globally. Carnival has already taken steps towards this long-term strategy by ordering ships based on the company’s capacity expansion plan. 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.

Table of Contents

Table of Figures

1.0 Industry Analysis

1.1 Emerging Trends

1.2 Industry Structure: Porter’s 5 Forces

1.3 Cruise Line Industry Summary

2.0 Industry Life Cycle

2.1 Industry Life Cycle Summary

3.0 Customer Segmentation

3.1 Customer Segmentation Summary

4.0 Competition

5.0 Performance Analysis

5.1 External Performance

5.2 Organizational Health

5.3 Performance Analysis Conclusion

6.0 Strategy Analysis

6.1 Products and Markets

6.2 Customer Profile and Purchasing Behaviors

6.3 Competitive Premise

6.4 Competitive Premise Conclusion

7.0 Value Chain Analysis

7.1 Value Chain Analysis Conclusion

8.0 Key Factors of Success

9.0 Sustainability Analysis

9.1 Imitation

9.2 Substitution and Holdup

9.3 Saturation and Slack

9.4 Challenges

Table of Figures

Figure 1: Five Forces Model

Figure 2: Industry Life Cycle

Figure 3: Cruise Line Industry Customer Segments

Figure 4: Competitive Groupings by Brand Strength and Market Variety……………………...13

Figure 5: Operating Costs as a % of Sales vs Revenue for Top 3 Competitors...... 15

Figure 6: External Performance vs. Organizational Health

Figure 7: Value Chain...... 23

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]
• 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]
• 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 citedas 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]

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.

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 disadvantageof 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.

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 onlinestill 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 shipsexpected 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 agencies,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 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-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.

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 in order to increase brand awarenessand attract first time cruisers.[22],[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.

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 Segments[25]

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 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.