Competing for the Leisure Dollar - Resort and Cruise Industries Engineer for the Future
By: Linda M. Coates - Atlanta and Lani Kane-Hanan - Miami, Summer 1996
The North American resort industry continues to set an enviable pace of growth as the interest of the capital markets revives following the downturn earlier in this decade. Resort industry fundamentals reflect the health of the US. hospitality industry at large with steadily improved occupancies and room rates since l~. Nevertheless, stiff competition arises from a number of quarters, chief among them the cruise industry. Cruise lines, which have experienced record expansion in recent years, stand as a formidable source of competition as they go head-to-head with resorts to capture the leisure and meeting group markets. The cruise industry has squarely targeted the customer base of the resort hotel community in the United States, with particular emphasis on the Southeast and California markets. The goal convert the resort guest into a cruise passenger.
To combat this attack, the resort industry is increasingly turning to 'all-inclusive" vacation packages as one of the key ways to neutralize the competitive advantages of the cruise industry. Some hotel companies also have responded by planning forays into the cruise industry itself, following the lead of companies like Radisson and Club Med. The Walt Disney Company will he a major new force in the cruise industry when it launches two cruise ships under the flag of the Disney Cruise Line. The company will launch its first ship, the Disney Magic, in January, 1998, followed by the Disney Wonder, scheduled for completion that November.
For both the resort and cruise industries, there will be intense pressure to meet the rising expectations of leisure travelers for attractively priced products. And it is the dynamic tension between these two forces that will help shape the future prospects of the cruise line and the U.S. resort industries.
The economics of U.S. resorts differ markedly from other segments of the hospitality industry. The resort industry, for example, has seen less expansion of supply, by comparison to the (non-resort) hotel sector. The high cost of resort development and amenities, combined with the scarcity of properties and potential destinations, has limited new development in the past. While a commercial hotel can be developed on a two acre site, for example, a resort may need 150 acres for the golf course alone. These factors further support the general upsurge for existing properties.
A retrospective of resort fundamentals reflects the industry's solid improvement during the last five years in the United States. From the downturn experienced in 1990-91, the industry made steady gains with average daily room rates moving from approximately $150 in 1990 and 1991, to $171 in 1995, according to Smith Travel Research. Average occupancy increased 5 percentage points between 1991 and 1995 to 68.1 percent.
Resorts in the Western states showed even stronger improvement with average daily room rates rising to nearly $180, and occupancies moving from approximately 64 percent in 1990 to 68 percent in 1995. In Hawaii, occupancy has risen to 65 percent, from a low of 55 percent in 1991, while average daily rates have remained steady at about $185. The Florida resort market also has remained relatively stable in terms of occupancies, which were near 70 percent in 1990, while average daily rates have risen sharply since 1990, when resorts posted an average of $135, to more than $175 in 1995.
Because of the investment returns currently available in the hospitality industry, and specifically in resorts, traditional and new capital sources are returning to the market. Capital sources are attracted by the significant barriers to entry, irreplaceable destinations, increased rates and utilization, and the ability to acquire existing properties at significant discounts relative to replacement cost. It is apparent that resorts are trailing other real estate product types, including lodging, in the recovery cycle, and that an 18-36 month window of opportunity remains for value -added acquisitions. If resorts follow the recent recovery cycles of other product types, however, new development activity may possibly occur beginning in 1998, but will be limited to strong U.S. resort markets such as Florida, Arizona, Las Vegas and Atlantic City.
The Cruise Industry: A Competitive Resort Alternative
As resorts have gained in strength during the last five years, the cruise industry has experienced virtually run-away growth. The worldwide cruise capacity in 1981 represented only 41,000 berths with a 70 percent load factor. Cruise capacity had more than doubled by 1991, while the load factor was up significantly to 87 percent. In the following three years, berths rose to 104,000 while the load factor remained steady. From 1996 to 1998, the industry is projected to add 10,00-15,000 berths annually.
The cruise industry is dominated by a few major players. Several of the smaller cruise lines have been acquired by the larger cruise companies in an effort to increase competitiveness and capture economies of scale. The top players in the cruise industry include 1) Carnival Corporation (the parent company of Carnival Cruise lines, Holland America Cruise Lines, Seabourn and Windstar Cruises); 2) Royal Caribbean Cruise Line; and 3) P&O Cruise Division (the parent company of P&O Cruises, Princess Cruises and Swan Hellenic). More than 50 percent of the new berths scheduled to enter the market are to be owned by these top companies. Major cruise line companies and their 1995 and projected 2000 capacity are as follows:
Historic Turning Point
The cruise industry is at a dramatic point in its history as capacity increases may outpace projected passenger volumes. Increases in supply, most notably in the mass market, will continue to put rigorous pressures on pricing. A counterforce is at work, however, with a number of older vessels scheduled to leave the mainstream cruise destinations by 1997 due to new Safety of Life at Sea (SOLAS) regulations. With approximately 25 percent of the international cruise fleet over 30 years of age, these new regulations may force withdrawal of 20,000 berths from the North American and Western European cruise market. Declining revenues, increased competition and aging fleets contributed to the closure of Regency Cruises on October 29, 1995, and Royal Cruise Line shortly thereafter. As a result, continued consolidation and financial difficulties may cause a further reduction in berths.
In general, the cruise industry will continue to search for innovative ways to increase passenger volumes, on-board expenditures and ancillary revenue streams. The keys to the cruise experience appeal include the predictability of travel cost and the ease of the vacation decision. A telephone call to a single entity - and one check - will reserve a vacation, which at a minimum typically includes on-board dining, entertainment, children's programming, accommodations, and airfare to and from points of embarkment. In addition, cruise ships have greatly improved the quality of on-board experiences with more diverse food and beverage venues, entertainment and deck activities, meeting and conference facilities, golf, tennis and gaming. Programming at ports of call is also more sophisticated than heretofore. In short, cruise packages now provide experiences that have historically been the land-based resort's stock-in-trade. Cruise companies leverage opportunities to buy airfares in bulk, take the savings and pass them on to consumers. The overall price point typically looks very appealing for a cruise package vacation. While the industry once targeted the elderly or very young, it now has the entire family in its sights, particularly the upwardly mobile couple in the 35 to 55 age group. This is the identical customer that drives resort economics.
Vigorous competition from the cruise industry has been a key factor spawning return of the "American plan" (all meals included) vacation among destination resorts. The all-inclusive concept embraced by the cruise lines has also increasingly found a home in the resort industry in a variety of forms. Hotel companies are experimenting with variations of the all-inclusive package. The full American plan hotel may include meals with the room and other types of activities such as recreational activities. The all-inclusive resort leverages the same types of benefits as a cruise package by combining rooms, dining, airfare and recreational activities. In the process, the consumer gains the benefits of predictability of vacation cost. Vacation decisions are eased with "one call and one check." Leisure guests enjoy "anxiety-free" consumption during their stay with meals and unlimited recreational activities all a part of the basic rate. The cruise industry, however, still offers the distinct advantage of providing multiple destinations, within one vacation, without travelers needing to pack and unpack.
On the operations side, the all-inclusive package offers a number of significant benefits. Operating margins are in the range of 35-40 percent (compared with an average 25 percent for resorts). Meals are served buffet style, menus are less costly and waste is reduced. Labor costs are lower and expense predictability is higher.
The downside of the all-inclusive resort is that it does not support local business, nor do they typically generate as many jobs. Guests tend not to spend in local restaurants or retail. This combination of factors tends to reduce the resort's economic impact as it is multiplied through the local economy. At the same time, the all-inclusive resort offers advantages to operators in areas in which security may be an issue for travelers, and the resort grounds provide a safe and complete vacation environment.
An Alliance of Wholesalers & Resort Operators
Some all-inclusive resort markets also achieve exceptionally high occupancies - in part due to alliances between wholesalers and the larger resort operations. For example, Puerto Plata - a 13-property resort destination complex in the Dominican Republic - operates at an average occupancy level of 90 percent or above year-round. Group packages are pivotal to the success of such properties. Western European countries, for example, make up a particularly strong market for the lower-cost, all-inclusive resorts because these guests typically have longer vacations than North Americans and must allocate leisure expenditures judiciously over a period of several weeks.
It is likely that the emergence of the all-inclusive resort will continue to gain momentum due to alliances between wholesalers and operators. Some resort operators also own wholesale and tour operator businesses, thus providing a constant flow of guests to their hotels. Because a resort tends to feature a destination, rather than the hotel property exclusively, it is possible to generate a deeper maximizing occupancy consistently throughout the year.
In response to these competitive factors, the gap between resort and cruise ship operators is closing. The entry of resort companies like Radisson, Club Med and Disney into the cruise market will mark a true blending of the resort/cruise vacation industry. Disney, for example will now provide "Cruise Vacation Packages," giving guests three or four days at a Disney resort, followed by a three- or four-night cruise. Unlike many of its future competitors, however, Disney Cruise line will not offer gambling on their vessels. The entire package may be purchased by a single phone call.
Increasing competition for cruise lines has forced a downward trend on pricing. Currently, pricing levels for a one-week Caribbean cruise, for example, largely mimic pricing levels of a decade ago. As such, companies are constantly exploring ways to increase ancillary revenues streams. Royal Caribbean Cruise Line owns two private island destinations, which are included in ports of call on Caribbean itineraries. Disney Cruise Line announced last March the purchase of Gorda Cay in the Bahamas. By including a private island destination on itineraries, the off-ship expenditures are captured by the cruise line. The link between the cruise and resort industries should continue to foster opportunities. Carnival Resorts and Casinos and Carnival Cruise Lines, for example, are exploring ways to work more closely together.
Competing for the Future
What will be required to compete successfully for the leisure dollar in the next century? A number of factors are evident. The resort industry has matured significantly from the days when it relied exclusively on the independent traveler. Today, approximately 60 percent of the U.S. resort marketplace involves groups in one form or another. The question remains - is there a future in the cruise industry for the meeting business? The answer is "yes", as a majority of major cruise lines, including the new Walt Disney ships, plan to or already have added conference space to attract the group meeting market. This will potentially erode one of the resort industry's most significant advantages. Cruise ships are offering separate dining rooms and other special programming to accommodate group meetings, including golf tournaments at ports of call. This market currently represents a key market interest to the cruise industry. Note too the majority of industry leaders surveyed in the global study undertaken by Arthur Andersen and New York University - Hospitality 2000: A View to the Next Millennium - believe that the corporate and association meeting market will not experience much growth in the years ahead. That means the resort and cruise industries may be increasingly competing against each other for a non-growth market.
Resorts and cruise ships will continue to evolve in terms of products and services as guest expectations escalate. Among these - the memorable experience. Whereas passengers and guests were once satisfied with traditional leisure activities such as shopping, golf and dining, there will be increasing emphasis in the future on developing unique "once-in-a-lifetime" guest experiences, whether that be riding in a horse roundup at a Wyoming resort or a themed cruise with Country and Western stars.
In a period of global transition, the U.S. resort industry and the world's cruise lines find themselves in a highly competitive market. Given the explosive growth in the cruise industry during the remainder of the decade, the resort industry will need to take note. What will be required for both cruise and resort operators is an intense focus on serving customer needs as guest expectations increase and competitors organize themselves to capture an increasingly larger share of the travel market.
Linda M. Coates manages Arthur Andersen's Hospitality Consulting Services in Atlanta. Lani Kane-Hanan, who works extensively with the cruise industry, is a manager and oversees the Miami office's Hospitality and Leisure Services.
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