CASE CLUB MED

Cultural turnaround at Club Med - Part I1

In 2010, the repositioning of Club Med as an

"upscale, friendly and multicultural" tour operator
was supposed to be achieved, through the
complete renovation of its portfolio of vacation
villages. However, the outcome of this strategy,
implemented since the early 2000s, when Club
Med has faced the loss of impetus of its historical
model, was still unclear. Such a repositioning
clearly clashed with Club Med’s history and
culture, generally associated with a relaxed
atmosphere, rough and ready amenities and an open-minded lifestyle.

The 2009 results showed that, even if operating

profits were finally up after several years of
decrease, revenues were still declining. Club Med’s
Chairman and CEO Henri Giscard d'Estaing
explained that the net loss [€58m;~$81m] resulted
from four elements: [1] the overall economic crisis,
[2] the H1N1 flu virus and its impact on tourism, [3]
the renovation cost of the villages, and [4] a
"limited number of property transactions, due to
the mortgage crisis". He also announced the
opening of five new villages in China between 2010
and 2015. His promise was to "deliver a new
profitable Club Med for 2010". However, the break
with Club Med’s history and culture had to
succeed: since 2004, this strategic turnaround had
cost around €1bn.

Club Med's history: the years of growth

1 ©Frédéric Fréry ESCP Europe, in Johnson, G, Whittington, _R. and K. Scholes (2012), Fundamentals of
strategy, Prentice Hall
Club Med was founded after the Second World War by Gérard Blitz and Gilbert Trigano. Coming
from a Belgian diamond merchant family, Gerard Blitz was a world class athlete in swimming and
water-polo. In 1950, he spent some days of vacation in a tent village close to Calvi, Corsica. This
gave him the idea to create a "vacation camp" under the sun. He founded the Belgian association
"Club Mediterranée" in April 1950 and opened his first village on a desert beach on the island of
Mallorca, Spain. Blitz bought his tents from a French supplier, Gilbert Trigano. Apart from owning
a family tent business, Trigano was a former resistance fighter and a reporter for the French
Communist newspaper L’Humanité. Attracted by the vacation village concept, fascinated by
Blitz’s personality, Trigano became the treasurer of the association in 1953, then president in
1963. The same year, Club Mediterranée was incorporated.

In 1955, Club Mediterranée opened a second tent village in Tahiti [Blitz’s wife was of Tahitian
origin]. In 1956, a winter village was opened in Leysin, Switzerland, and in 1965, Club
Mediterranée opened its first permanent village in Agadir, Morocco. In 1966, in order to finance
a vast international expansion plan in Northern Africa, Europe, America and Asia, the company
was listed at the Paris stock exchange. During the next twenty years, dozens of villages opened,
including two giant sailing ships, Club Med 1 and Club Med 2.

First difficulties

In 1991, the year when Blitz died, Operation Desert Storm strongly impacted the tourist industry
and Club Med suffered heavy losses. In 1993, Gilbert Trigano was replaced as chairman and CEO
by his son, Serge. In spite of his turnaround plan, Serge Trigano did not manage to put the
situation right. In 1997, upset shareholders replaced him with an external manager, Philippe
Bourguignon, the former CEO of EuroDisney. Bourguignon’s ambition was to "transform a
vacation villages company into a service company". He implemented a growth strategy, both
organic (new concepts such as a low-cost village for young people) and external (takeover of
another tour operator and of a gym clubs chain). This ambitious expansion strategy came with a
severe cost cutting plan, a shift in human resource management (in the villages, many Club Med
employees were replaced with local suppliers) and the implementation of a real IT infrastructure
(many processes were still done manually). Club Med became profitable in 1998. In 1999, net
profits grew by 48 per cent. In 2000, revenues and profits soared again [+28 per cent and +51
per cent respectively]. In three years, Club Med attracted more than 300 000 new customers. In
2001, when Gilbert Trigano died, Club Med had 127 villages, 24,200 employees and 1.8 million
customers. However, the terrorist attacks of 09/11 caused an immediate collapse of the tourist
market. Bourguignon’s volume strategy was no longer sustainable. Since he was disowned by
Club Med’s employees who criticised his autocratic management and were used to Trigano’s
paternalism - he resigned from the chairmanship in 2002. He was replaced by the CEO he had
recruited himself from Danone, Henri Giscard d’Estaing. Giscard d’Estaing was also the elder son
of the former President of the French Republic.
The repositioning plan

When Giscard d'Estaing became chairman and CEO, Club Med was facing two external threats:

 The tourist industry was heavily affected by the terrorist threat.

 Thanks to the internet, new low-cost entrants were rapidly expanding, and incumbents
were offered vacation villages, similar to the Club Med concept, but at lower prices.

All this convinced Giscard d'Estaing to implement an upscale repositioning: the closing down of
approximately 50 low-end villages, renovation of the existing infrastructure, opening of new
prestigious establishments, a significant rise in services [all-inclusive pacage, open-bar policy,
more comfortable rooms], but also a significant price rise. The number of villages decreased to
80 and a much more sophisticated advertising campaign was launched. Between 1998 and 2008,
the proportion of high-end villages went from 18 per cent to 47 per cent, whereas low-end
villages were disappearing. The clientele also evolved significantly: households with a high
revenue accounted for 63 per cent of customers in 2003, and 82 per cent in 2005. This
repositioning was mainly financed by selling property, which reduced financial costs and
amortisation, limited debt, and allowed Club Med to offer an acceptable balance sheet for
investors to finance the renovation of its villages. However, two external events weakened this
strategy: the market was still in a downturn [on top of terrorist threats, the 2004 tsunami in Asia
also had an impact] and from 2007 the mortgage crisis brutally reduced the opportunity for
property profits. In 2010, analysts were still uncertain about the results of this profound strategic
reorientation, which was disrupting Club Med’s historical culture.

The roots of Club Med's Culture

For more than fifty years, Club Med exhibited a distinct culture. Gilbert Trigano used to say that
he had created a "profoundly psychological industry". Marked by the Second World War, Blitz
had created Club Med because the thought that all Europeans deserved vacations on the seaside
and under the sun. He defined his concept as the "antidote against civilisation". According to
Gilbert Trigano:

"More than Gérard, I tried to reconcile capitalism with utopia. I remember these early
mornings when we were boldly building the world with a total madness, but we knew
perfectly what we were doing, we knew we wanted to influence people’s life and future”.

Blitz was an idealist and Trigano a pragmatist, but they agreed on "gathering people hurt by
modern society in a peaceful and soft place where they could regain their forces, an artificial
environment to teach people to smile again". To do so, they built up a culture with rich symbols,
rituals and myths. Villages were isolated from their local environment in order to break from day-
to-day life. Amenities were limited: tents at first, then huts - often without electricity - with
shared bathrooms. In this closed world, as of 1951, customers were named GMs [Gracious
Members] and coordinators GOs [Gracious Organisers]. On arrival, welcomed by GOs, GMs had
to ban professional jargon and social origins. At the restaurant, there were only eight-people
tables, in order to force GMs to make new acquaintances. As of 1956, Clud Med banned money
from the villages and implemented a payment system based on plastic pearl necklaces.

GOs were the keystone of the whole system. They were expected to maintain a permanent
festive atmosphere through shows, village dances and sport competitions. During the first years,
Blitz personally recruited them with his wife, Claudine. Gilbert Trigano insisted:

"Claudine informally played the role of head personnel, which was a key role because
everything relies on GOs. She and Gérard were the tutelary parents of the Club, they choose
children in their image and maintain family relations with them.”

From an organisational point of view, the best GO’s could become general managers of a village,
in charge of all the operational aspects, from animation to hospitality and security. The best
general managers - a job it was difficult to cope with after the age of 45, because it required an
almost permanent night and day presence with GMs - could access administrative positions at
Club Med headquarters in Paris, even if these coordinators were not necessarily good executives.
Under the trident logo [a reference to Poseidon and the Mediterranean Sea], Club Med
generated a "sea, sex and sun" alchemy which reached its apogee in the 1970s.

Towards a new culture

In the 1990s, this life in a community was no longer in line with social evolution. Loose morals
were unacceptable for families. Villages were more and more considered as ghettos, without any
contacts with local cultures. Undue familiarity between GOs and GMs repelled some customers
and the obligation to participate in all activities was seen as brigading. As a consequence, as of
2002, after having asked Serge Trigano about Club Med’s historical culture, Giscard d'Estaing
attempted deep cultural change. An ambiance charter was produced. It highlighted the core
values of the company: multicultural, pioneer, kindness, freedom, responsibility. It also spelled
out inappropriate behaviours for GOs: cronyism, hasty judgement, individualism. As thick as a
phone book, it also explained new procedures and limited "vulgar" activities such as water games
or roles played by a member of the opposite sex. A school village opened in Vittel in France, in
order to train 10,000 employees [out of a total of 16,000]. The goal was to reconsider relational
behaviors, ways of dressing and attitudes. The organisation of the village was also modified.
General managers - who used to supervise directly 15 services - were now assisted by two
deputies [one in charge of hospitality, the other in charge of leisure].

A transformation in progress

This evolution was still in progress by 2010. Even if customer satisfaction had increased, the
occupancy rate had not. Nothing indicated that shareholders would give Giscard d'Estaing
enough time to complete Club Med’s transformation: the share price plummeted from €54 in
August 2007 to €13 in January 2010. Even if Giscard d’Estaing maintained that his strategy was
beginning to bear fruit, in mid-2009 he had to react to the potential threat of a hostile takeover
bid from external investors, who estimated that an upscale repositioning was inconsistent with
Club Med’s values and business model. An increase in capital dispelled this threat, but analysts
were still cautious about the results of such strategic and cultural turnaround.