Club med

Main Causes of Decline
While Club Med’s recent performance can, in part, be attributed to the general
economic recession and the aftermath of September 11, several of the underlying
problemsoriginate from before. Specifically, we have identified four main causes of
decline: a high fixed cost base, excess capacity, non-performing low-end resor ts, and
its brand extension/acquisitionstrategy.
High Fixed Costs: Club Med’s operating structure is burdened by extremely high
fixed costs, which are due to the fact that it owns some 50% of its villages’ real estate
and has verticallyintegrated into such capital-intensive areas as reservations and
transportation. Beyond the inherent risks of its high operating leverage (i.e. high
elasticity of operating income to changes in revenues),Club Med has had to incur
capital expenditure upwards of €350m to renovate its older villages, not to mention
the strain that servicing debt has placed on cash flow. In addition, Club Med incurredIT costs of nearly €60m to upgrade its booking system.
Excess Capacity: Club Med’s integrated business
model constrains its ability to dynamically adjust its
offer to changing demand. In spite of asignificant
capacity reduction in 2002 (i.e. negative 11.7%
10/31/01
16,922,000
12,184,000
72.0%
1,782,300
Capacity in hoteldays
Hotel days sold
Occupancy rate
Number of customers
èincl.Club Med customers
èincl. Jet tours customers
% change
-11.7%
-11.7%
-15.4%
-3.0 pts
-13.9%
10/31/02
1,811,000
14,941,000
10,309,000
69.0%
1,534,000
2,052,800
270,000 277,000 +2.6%Graphic 7: Club Med Capacity Utilisation, 2001
59
71
103
50
-3
26
39
5
-70
-62
-80
-60
-40
-20
0
20
40
60
80
100
120
1998 1999 2000 2001 2002
€ Milions
Group OP income Group Netincome
Graphic 6: Club Med Operating Income and Net Income
HTES: Club Med Page 17
represents almost 2 million hotel days) the occupancy rate at Club Med declined to
69% from 72% the previous year....