In mass-American culture, bigger hasn't always meant better to everyone, but it has certainly meant brand buzz.
While some refer to the Mall of America as "Sprawl of America," it is also the most visited shopping mall in the world. Opening in 1992, it attracts more than 40 million annual visitors and employs over 12,000 people. Complete with indoor theme park, underwater adventures, hotels and shops, the mall is a successful mix of entertainment and consumerism.
Also in 1992, the High Mobility Multipurpose Wheeled Vehicle (HMMWV or Hum-Vee) began selling to the public under the brand name "Hummer." The Hummer became the world's most distinctive SUV and an iconic brand. Its main appeal lay in its unique appearance, sheer size and the feeling owners experience driving one.
In 1999 Royal Caribbean launched the first of five Voyager class ships, the Voyager of the Seas. At 3,114-passengers it was a revolution in design and size. With on-board amenities that included an ice-skating rink, inline-skating track, basketball court, mini golf course and rock-climbing wall the ships became a brand signature for Royal Caribbean. The ship and the “Get Out There” advertising campaign opened the cruise market to new, younger and more active vacationers with an “explorer” mind-set.
Branding Royal Caribbean
The Oasis is a further extension of Royal Caribbean’s brand differentiation. In the Nation of Why Not, the Oasis seeks to continue to fulfill the brand promise of cruise innovator and "tell-your-friends you have been there" experiences.
As large as it is, only 5,400 people in the world can experience it each week. That creates scarcity, and as long as the buzz continues to create demand, that creates pricing power. Within the contemporary cruise segment, Disney has been the best by far at creating a brand consumers want to be associated with so much they are willing to pay 100% premiums. Pricing power gained through branding is the Holy Grail Royal Caribbean investors are risking their $1.4 billion dollars on.
Currently, ticket prices for a seven-day cruise aboard the Oasis start at $1,049. The Oasis features 37 different cabin types to maximize revenues by finding the right fit to various traveler budgets. This compares to a seven-day on the Norwegian Jewel for as low as $249, and eight days on the new Carnival Dream start at $599.
Maintaining higher ticket prices will be essential for shareholders. Royal Caribbean’s new ship builds have run at a cost 20% higher per berth than the Voyager, Radiance and Millennium class ships and 14% more expensive than peers. Royal Caribbean ships have been 7% more expensive to build than Carnival historically, but net yields have been 7% lower. So far, higher capital expenditures per berth have not paid off. While the higher barrier to entry makes it harder for competitors to match, it is also not a proven model others are yet willing to chase.
For all cruise lines, onboard spending has risen 25% over the past decade while ticket prices have actually declined. Moreover, onboard spending has been historically less volatile than ticket prices. So, with approximately 28% of cruise line revenues already coming from onboard spending, Oasis certainly creates the “right environment” for increased onboard spending. With the port of call faded into the background in importance, cruisers seek out the variety of onboard activities and shopping experiences. On the Oasis, these can include botox treatments, teeth whitening, and dozens of shops (including a tattoo parlor), boutiques, cafés, casinos, bars and restaurants.
The Oasis also offers opportunity for improving returns through improved fuel efficiency and other fixed costs of operation, such as payroll and victualing may be lower on a per passenger basis.
Something for everyone
Cruisers who want exotic, quaint and remote ports of call seek out luxury lines such as Seabourn and Regent. On my cruises aboard Carnival, I am genuinely chagrinned by cruisers who are willing to go different islands, yet visit essentially the same Margaritaville’s and Hard Rock Café’s that aren't that dissimilar to bars in their home towns. I prefer to seek out the uniqueness of each island. Others prefer the comfort of something familiar, while at the same time being able to say “they were there.”
If it is truly about brand differentiation, the onboard experience vs. the island destination argument is not relevant. So the Oasis is limited to ports of call that can handle 5,400 passengers debarking at the same time and dock a 220,000-ton ship. If the Oasis attracts new cruisers, ones seeking the Oasis experience and what it uniquely has to offer, then it strengthens the brand and grows the market. If the strength of that experience is such that it can continue to generate higher ticket prices, then it will reward shareholders as well.
The Oasis, however, is not an experiment. Allure of the Seas, its twin sister, is due for delivery in Port Everglades in a year.
Sources: DVB Research & Strategic Planning; Pareto Securities
Aaron, terrific insights – thanks for sharing.
Where RCI fails, in general, is that their strategy isn’t really about the branding. It’s about the product. Obviously both work together (with the brand informing the product and the product informing the brand,) but RCI has become the “bigger, better, innovator” company in terms of the product.
This equates to initial flashes of revenue related to the newest, largest, most unique ships…which then peters back to reality as the ships age. In that way, RCI isn’t really enhancing and growing the brand, nor are they capitalizing upon the brand. They have to break the rules with each new ship to create a higher profit per room. And of course, once the industry catches up in terms of size and features, the RCI ship ages and the prices drop.
Contrast that to Disney Cruise Line, a pretty standard contemporary market cruise ship offering. Because they add “Disney” to the mix, they command higher prices for their cruise ships. It’s the difference between innovating and perfecting the experience, and why Disney makes such large profits off of the intangibles.
For that matter, contrast RCI to Carnival. Carnival offers a very standard, but very complete and enjoyable cruise experience for a very reasonable price. It’s been more than a decade since Carnival had the largest ship at sea. What they’ve done is create an affordable, consistent product that sells a nearly-unbeatable value proposition. It’s why their Fantasy-class of ships are still sailing after all these years.
For the next year or so, I expect Oasis to do well, and command a premium for the experience of sailing on the innovative ship. As has happened before, I expect the other cruise lines to incorporate some of the more successful components of Oasis into their future ships, as well as retrofitting and adding said components where possible to existing ones (those zip lines are coming everywhere.) But I don’t think the premium pricing can be sustained for long.
awesome article Dave, this is a unique look at the launch of the mother of all ships. As a cruise fan and father of 2 kids I can tell you that barring a huge sale I won’t be going on this or other Royal ships simply because of the price alternatives out there