Serenity Cruises is a cruise company currently operating in the US, UK and Canada, specialized in cruises for the third age. The company is looking to expand into the German-speaking market (i.e., offering cruises taking place in different parts of the world to German-speaking customers); this would require significant effort as spoken language is a key part of the cruise experience and the company now offers its services only in English. The German-speaking market looks attractive, as around 1/6 of Germans, Austrians and Swiss over 60 years old take a cruise each year.
The company would like to size its “German-speaking” market opportunity and understand whether its German-speaking business could be profitable.
- Volumes: First of all, the candidate should estimate the overall market size of the German-speaking business, to understand how many revenues the company could make from the market expansion (assuming pricing is similar to the one of other cruise companies).
- Costs: Secondly, the candidate should identify the main cost drivers of the industry, thus computing the total profitability of the German-speaking business.
- Other factors: The candidate should qualitatively discuss other factors that must be taken in consideration when assessing the market entry.
This part of the case should be led by the interviewee, based on the information given at the beginning.
Market size estimate: Total German-speaking population is the one of Germany (~82 million people), Austria (~9 million people) and German-speaking Switzerland (~5 million people). The interviewee is expected to have a sense of the total number of German-speaking people in the world and we will round this number to 100 million people.
A reasonable assumption is that population is evenly distribution over an average life of 80 years. Thus, the number of German-speaking people over 60 years old is:
It was stated at the beginning that 1/6 of the people over 60 go on a cruise once a year, thus the potential customers are 25*(1/6) = ~4 million people.
Market information to be shared:
German-speaking market for third age cruises is currently dominated by one large player with loyal customers having 60% market share, while four other smaller players share the remaining 40%.
The interviewee should assume that it would be very hard to steal customers from the leading player. The company could instead take customers from the smaller players. A reasonable estimate of potential market share is 20%, corresponding to 0.2*4 = 0.8 million customers per year
2. Pricing and Revenues
Brainstorm with the candidate the pricing and the sources of revenue:
- As there are several direct competitors, he should be able to understand that pricing must be based on competitors’ pricing;
- He should be able to state that cruise revenues may be split into ticket revenues and revenues from extras sold on the cruise (e.g., drinks, excursions, etc.)
The interviewee should enquire about the positioning of the company with respect to competitors and the share of revenues coming from extras sold on the cruise.
Brainstorm with the candidate the main cost items of a cruise company:
- Depreciation of ships
- Payroll costs
- Other operating costs (e.g., food, etc.)
- SG&A costs
The candidate should estimate the additional number of ships that must be ordered by the company:
Additional information to be shared together with the table:
- Fuel and other operating costs may be assumed to be equal to the sum of yearly depreciation and payroll costs
Yearly payroll costs may be computed as follows (assuming each employee works on one ship for the whole 40 weeks per year):
Fuel and other operating costs are thus equal to 200 + 150 = 350 EUR millions per year.
Finally, SG&A costs are equal to:
1,120 𝐸𝑈𝑅 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟∗10%=112 𝐸𝑈𝑅 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
Total costs are thus:
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠=200+150+350+112=~810 𝐸𝑈𝑅 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
Total profitability is thus:
𝑃𝑟𝑜𝑓𝑖𝑡𝑠=𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 −𝐶𝑜𝑠𝑡𝑠=1,120 −810=310 𝐸𝑈𝑅 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
The German-speaking business seems profitable and an EBIT/Revenue ratio of 25-30% seems a very good number.
- Prompt the interviewee to reason on the nature of the costs in the cruise business. After thinking about that, ask to the interviewee what is the single most important business parameter, given this cost structure, and how he/ she would address the related risk.
- Finally, the interviewee should summarize the case in no more than two sentences.
In order to sustain high occupancy, the keys are:
- Segmenting well the customers in order to address many different segments through targeted offers/ experiences
- Exploiting variable pricing and promotions (e.g., prices should be significantly different between high-season and low-season)
The German-speaking market seems like a very good market mainly because of its size, 4 million customers a year over 60 years old, and the fragmentation of the competitors behind the market leader. The recommendation is to enter the market, provided that the company quickly adapts to satisfy the needs of the new German-speaking customers, in order to maintain high occupancy on the ships.
5. Other factors
- Barriers to entry: how will the company overcome the barriers to entry it will encounter (e.g., cruises are often sold by local agencies that want to know the brand they are selling, customer preferences are different, etc.)?
- Possible alternatives for the market-entry: The company is evaluating market-entry “from scratch”; how about thinking to a joint-venture or to the acquisition of a small local player?
- Financing of investment: Building five new ships requires a significant capital expenditure; how will the company finance this investment? What will be the financing cost?
- Growth opportunities: What is the long-term growth outlook for the German-speaking cruise market?