French holiday company Club Med (CMIP.PA: Quote, Profile, Research,Stock Buzz) believes its shift upmarket will help it through the tough economic times ahead and is betting on expansion in the Americas and China to drive growth, its chairman and chief executive told Reuters.
Club Med also expects its operating margin to have improved in the year ended October 31 despite the Japan earthquake and the unrest that swept across Arab countries, thanks to a strong winter season, Henri Giscard d'Estaing said in an interview.
Founded in 1950, listed on the Paris bourse since 1966 and historically known as a more mass-market holiday operator, Club Med operates 75 resorts in 40 countries, ranging from Caribbean beach villages to Alpine ski locations.
Since his arrival as CEO in 2002, the son of former French President Valery Giscard d'Estaing, has put in place a deep restructuring of Club Med to boost margins and free cash flow.
Club Med notably upgraded its resorts to focus on more upscale customers with the goal of having two-thirds of its villages in its top two luxury categories by 2012.
With a market value of 353 million euros and fiscal 2009/10 sales of 1.353 billion, Club Med competes with global hoteliers such as Intercontinental (IHG.L: Quote, Profile, Research, Stock Buzz) and Accor (ACCP.PA: Quote, Profile, Research, Stock Buzz).
It also competes with tour operators such as Thomas Cook (TCG.L: Quote, Profile, Research,Stock Buzz), Europe's second-biggest, which in contrast to Club Med has suffered from its dependence on UK families whose disposable income has been squeezed by the economic downturn.
Club Med has also focused on closing unprofitable resorts and opening more villages under management contracts in order to slim down its assets and spend less cash. At the end of October 2010, Club Med owned 23 out of its 75 villages.
Our operating profitability should rise in 2010/11 despite negative elements such as the Arab spring or the Japanese tsunami, because the good start we had during winter should offset the impact of these events on costs, Giscard d'Estaing said.
Club Med reports full-year results on December 9.
Operating income at its holiday villages before depreciation, amortisation and provisions amounted to 8 percent of sales in the previous fiscal year.
Club Med is targeting a margin close to 10 percent for 2011/12, helped by the closure of more villages, the CEO said.
Giscard d'Estaing would not comment on prospects for the current 2011/12 winter season, only reiterating that business had so far been supported by early bookings.
He said it was also too early to comment on the impact of the euro-zone debt crisis on the group's business.
Today our positioning - being the most affordable of the upscale segment - and our all-inclusive upscale formula are well adapted to the times even if by definition economic difficulties have an impact, he said.
The company generated positive cash flow for the first time in 2009/10, helping it cut net debt to 197 million euros. The group repeated that in 2010/11, enabling it to reduce debt further and reducing pressure to sell real estate, the CEO said.
Club Med has 11 villages in the Americas, including five in the Caribbean, three in Brazil, two in Mexico and one in the United States, the Sandpiper resort in Florida.
Club Med has suffered in the region from a poorly defined client positioning with villages not meeting U.S. standards and competitors imitating its concept, analysts have said.
However, after closing nine villages and refocusing on high-end, all-inclusive family holidays, Club Med said recently the region would return to a positive operating margin in 2010/11.
We are in a position to have a lasting recovery in this zone because it results from the transformation of the business model, Giscard d'Estaing said.
Club Med has announced plans to open a fourth village in Brazil and is mulling a second in the U.S.
It will be a mountain resort and it will dual-season and if we do it, it will be under a management contract, he said.
Club Med is also making headway in fast-growing China. It recently announced it was opening a second village there in August 2012, which will be operated under a 10-year management contract by Taiwanese group ChinaPaoShan.
Giscard d'Estaing said Club Med was on track with its goal to make China its second-biggest zone after France by 2015 with the opening of five villages and the backing of Chinese investor Fosun (0656.HK: Quote, Profile, Research, Stock Buzz), owner of nearly 10 percent of the capital.
Club Med hopes to attract 200,000 Chinese customers by 2015.