MSC Cruises: From One Second-Hand Ship to a Major World Player

In 1970, Italian Gianluigi Aponte founded the Mediterranean Shipping Company (MSC) with a single

second-hand ship and just $5,000 in capital to move cargo between Europe and Africa. Despite a

challenging, price-based competitive environment, MSC has since prospered and grown to become

the worlds second-largest container operator behind Maersk, with a fleet of over 400 ships and

operations in 150 countries.

MSC ventured into passenger cruises in 1989 with the acquisition of Lauro Lines, a division they

would later rebrand as MSC Cruises. By 2003 they had recognized that they could not successfully

compete in the growing cruising sector with the low-cost second-hand ship approach that had

worked so well in their shipping container division, so they embarked on a substantial new-ship

investment program. Today they have 12 new luxury cruise ships in operation and are the worlds

fourth-largest cruise operator and the leading cruise brand in Europe. They plan to become the

worlds third-largest cruise line by 2025.

Reinvention of the Cruising Industry

Cruise ships were initially designed for overseas transport and were popular for that purpose up to

the 1960s, when long-range air travel became more affordable for the broader market. At the time it

appeared that the era of mass passenger ship travel was over, surpassed by superior technology of

airlines, which were able to provide faster, cheaper, and more flexible travel options. And this was

the case for the next 30 years or so, as cruise ships essentially targeted affluent retirees looking for

an up-market experience. While this may be an attractive segment from a profit perspective, the

market lacked size and growth potential. For example, in 1990 less than 4 million people worldwide

went on a cruise.

Around this time, major cruise operators started to consider how they could compete in the broader

holiday market. They certainly didnt have the speed advantages or the choice of destinations of

airlines, nor did they have the facilities of hotels and resortsso how could they compete? The

answer lay in the reinvention of the industry to be halfway between a form of transport and a resort,

essentially repositioning cruise ships from transportation vehicles to mobile holiday destinations.

This has been delivered over time through the design of new, larger ships that incorporate shops,

restaurants and bars, entertainment, swimming pools, waterslides, casinos, movie theaters, and even

rock climbing and ice skating. The bulk of the cabins are now constructed on the outside of the ships,

where most of them have their own balcony.

These resort-style facilities, combined with the experience of visiting several countries during a oneweek cruise, help provide consumers with a unique holiday experience that cannot be directly

matched by their non-cruise competitors. The result of the industrys transition to essentially be the

destination itself is that demand has substantially increased. By 2004 there were 9 million passengers

worldwide and an estimated 24 million people on cruises in 2016. The significant increase

in passenger numbers is a result of improved cruise ship facilities, the increased choice of

destinations, the growing word-of-mouth influence of satisfied customers, and an overall reduction

in price (ships have become larger, providing greater opportunities for economies of scale).

The Major Players

The other major driver of the cruise industry has been the shift towards a more concentrated

market. In the 1970s and 1980s there were around 30 cruise brands. But today three corporations

control 80 percent of the market. For instance, the market leader in the international cruise industry

is the Carnival Corporation, which runs 10 brands of cruise ships, including Carnival, Princess, P&O,

Cunard and Holland. Across these brands, Carnival operates just over 100 ships, with a combined

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passenger market share of 48 percent in 2015. Royal Caribbean Cruises is the number two player in

the market, and in third position is Norwegian Cruise Lines. MSC Cruises is now the fourth-largest

cruise line ahead of Disney, holding 5 percent market share across their ships. Unlike their larger

competitors, MSC operates their entire fleet under one brand.

Demographic Segmentation

Effective market segmentation of potential cruise passengers is an effective way to grow market

share. In the cruise industry, the common approach to demographic segmentation is to split

the market into five segments; namely, families, singles, honeymoon or romantic couples, seniors,

and the disabled.

These market segments have different preferences for the on-board facilities and processes. For

example, families seek flexible dining experiences and on-board service and activities, whereas

seniors are more price-sensitive (as they are more likely to be regular repeat cruise line passengers)

and more interested in entertainment. Singles look for social spaces (bars and cafes) and group

activities.

MSC Cruises tends to focus on the family market segment for shorter cruises and the seniors market

segment for longer cruises. And coming from an Italian heritage, they are quite Mediterraneaninspired, providing more basic on-board facilities rather than water slides and rock climbing. In

order to attract family groups, they offer children travel free packages along with kids clubs and a

family games room.

Cruise Pricing Considerations

While the operating profit margin for each cruise line will vary, the average margin in the industry is

around 10 percent. As the over-all industry revenue is now approaching $40 billion, this means that

the total industry net income is around $4 billion. Again, on average,

cruise lines only generate around 7075 percent of their total revenue from passenger ticket sales.

The remaining revenue is generated from the sale of beverages, excursions and tours, shop sales,

casino gaming, Internet access, laundry services, spa and beauty services, photos, and

premium dining and alcohol.

As in airline pricing, each cabin on a cruise ship represents inventory to be sold. Due to the high

fixed-cost structure and the relatively low cost of an extra occupied cabin, it is in the cruise lines

interest to sell as many cabins as possible (much in the same way that airlines seek to sell as many

seats at the best possible price).

And like most holiday industries, cruising has seasonal demand,withdemandhigherinthewarmermonths.

Consumersalso use a mix of buying approaches, from early planners (who aregenerallymorepricesensitive),topeoplelookingfortherightholiday(andarelessprice-sensitive),tolast-minutedeal

hunters. This mix of consumer behavior means that cruise pricing needs to be dynamic. Therefore, for

popular high-season cruises, the prices can be increased. But for low-season or poorly booked

cruises, special deals need to be offered. One way of doing this effectively (without offering low

prices to the entire market) is to offer special deals in certain countries or through selected travel

agencies.

The Case for Cost-Based Pricing

Cruise operators typically have a high fixed-cost structure. First there is the significant cost of the

ships depreciation. As the industry is moving towards larger ships with more facilities, the cost of

these newer ships are usually in the range of $500 million to $1 billion, and they are also likely to

need major refurbishments in future years in order to maintain up-to-date.

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Depending on the financial structure of the cruise company involved, another major fixed cost is the

interest expense associated with each ships capital cost. As MSC is a privately owned company, they

do not have access to public equity funds and are more likely to rely on borrowing and profit

reinvestment to help expand their fleet. The final major fixed cost is the ongoing maintenance and

running costs of the ships.

One of their major variable costs is wages. Large cruise ships usually have over 1,000 staff on board.

With around 75 percent of staff members involved in passenger-contact roles such as in restaurants,

bars, shops, and entertainment, it is difficult to reduce staff numbers without negatively impacting

customer service levels. Fortunately for the cruise lines, they are generally able to keep staff costs

down by offsetting wages against the staffs food and accommodation on board. Other significant

variable costs include fuel costs, port charges, and food and beverage. While these variable

costs would be quite substantial, their very high fixed-cost structure is likely to be far more significant

given their overall capital investment. This highlights the importance of cost recovery when setting

prices for a cruise.

The Case for Competitor-Based Pricing

The Internet has transformed how consumers make decisions, and this is also true of the travel

industry. When deciding on a holiday, consumers are no longer reliant on travel agents and instead

use review websites such as TripAdvisor to help guide their decisions. They have a greater affinity for

shopping around and comparing deals, making them more price sensitive than ever before. A firsttime cruising consumer is likely to have no real brand loyalty and perhaps even perceive that all

cruise lines are generally the same. This may mean that cruise operators offering similar cruises

may be primarily assessed on the basis of price.

And not only are cruises competing against other cruise offers, but consumers are also likely to

assess their potential holiday choice against indirect competitors such as traditional flight and resort

destinations (which are often packaged together as one deal).

The Case for Customer Value-Based Pricing

Since the reinvention of the industry, cruises have tried to position themselves as the destination

itself, providing the unique ability to transport customers through multiple countries within the

comfort of a floating hotel room.

Cruises usually offer a completely packaged experience, including accommodation, food,

entertainment, shopping, casinos, spas, fitness centers, activities, kids clubs, and the opportunity to

meet new people. This overall package of benefits means that the entire holiday is organized, usually

with something for everyone, regardless of age or interests. Obviously, this all-in-one holiday

solution would represent significant value for many consumers.

MSC Cruises Approach to Pricing

Like most other cruise lines, MSC works hard at making the up-front cost of the cruise appear

attractive while trying to maximize their other revenue streams in order to

be profitable. They usually promote their cruises using a headline price in their advertising based

upon their interior cabins (the lowest-priced cabins). As the consumer moves through the

booking process, they are offered improved cabin types and improved service packages in order to

up-sell the customer to a higher price point. There may be up to 20 different cabin

categories, depending on deck, cabin size, view, and whether they are interior or exterior and mid- or

end-ship. This is a similar approach to most other mass-market cruise lines (but not the high-end

luxury cruises that are less price-sensitive). This creates quite a competitive, and somewhat

confusing, set of prices across the various cruise offerings.

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In addition to the accommodation cost of the cruise, while most meals are included, there is an

additional charge for some specialty menu items. Beverages also attract an additional charge, with

passengers usually prompted to opt for a drinks package that is levied at a daily rate. This does not

include premium alcohol, which is usually a further charge. Moreover, on most cruise lines, including

MSC Cruises, passengers are told not to tip the staff. Instead, there is a daily charge levied on each

passenger that is then allocated to all staff members. Additional costs are also levied on passengers

for excursions and tours, Internet usage, shop purchases, casino gaming, video games, spa

treatments, and so on.

Therefore, passengers who take on a beverage package, go on tours, use the Internet,

and make purchases will have a substantial bill to cover at the end of their cruise. But this situation

would not be significantly different if the consumer was staying at a resort. However, some first-time

customers may be concerned by this approach to pricing, particularly if they had thought that

virtually everything had been paid for at the start of the cruise.

The Outlook for MSC

MSC has plans to introduce one new cruise ship per year (on average) up until 2025, when they

expect to surpass Norwegian Cruise Lines to become the worlds third-largest cruise operator. They

plan to generate most of their increased market share with an increased focus on the popular

Caribbean voyages sector.

However, one of the biggest challenges they face is getting their pricing right, against competitors

from other cruise lines and from an array of traditional holiday solutions, such as resorts, theme

parks, and tour operators. In addition, in todays Internet-based world, consumers are better

informed and are looking for new experiences and, of course, great value.

Questions

1. MSC ventured into passenger cruises in 1989 with acquisition of Lauro Lines, rebranding it as MSC

Cruises. What type of brand extension does this venture involve? What is the major benefit and risk

(discuss one benefit and one risk) related to this venture/branding choice? (15 points)

2. Among the three pricing strategies discussed in the text, which would work best for MSC Cruises,

given their overall market share growth goals? Why? (40 points)

3. Which product mix pricing strategy(ies) does MSC currently use? Discuss the benefits and

limitations of this strategy to maximize the profits from its total product mix. (45 points)