Cruise & Ferry Info | February

The European Cruise Market

North American Cruise Operators Shifting Dependence To Independents

By Ralph Grizzle

America has long admired Europe's shop-lined streets, where, at least in this American's romance-filled mind, the village populace converges to purchase bread from the baker, meat from the butcher and flowers from the florist. The retail scene is nothing like that in most towns and cities on the far side of the Atlantic, where superstores dominate the commercial hub, and where one not only could but often does conduct a variety of activities - bank transactions, pizza purchases, dry cleaning drop off, grocery shopping and automobile repair - all at one store.

That superstore model, however, doesn't stick when it comes to selling cruise vacations - in the U.S. and, increasingly, in Europe, where giant tour operators have a virtual lock on the vacation market. If you could walk the streets of America's cruise distribution system, represented by the travel agents who sell cruises, you would find bootstrap entrepreneurs operating their businesses in small shops and, increasingly, from their homes. Some even have set up virtual storefronts on the internet. Indeed, America's cruise distribution system is dominated by many small players and a few large ones.

Independent cruise-sellers operate in many small towns across America. Moreover, the North American cruise industry encourages agencies to fan out their networks by hiring outside salespeople or independent contractors, who act as foot soldiers that pitch cruise vacations directly to consumers in the neighborhoods where they live. It's not surprising then that with this array of distribution methods, 26,000 agencies sold cruises in 2001 on Carnival Cruise Lines, the world's largest cruise line.

North American cruise operators would like to see the same model applied to the European market. Europeans generate only single-digit percentages of the total annual cruisers for North American cruise lines. A spokesperson for Carnival Cruise Lines reports that only 5 percent of its passengers come from Europe. Norwegian Cruise Line and Royal Caribbean International cite similar percentages.

What's more is that only about 2 percent of Europeans have taken a cruise vacation, compared to 11 percent of Americans.  The European market underperforms, cruise executives contend, because cruise sales are funneled through a relative few general sales agents, as they are called on the Continent, and multiples, as they are called in the United Kingdom.

In Germany, which cruise executives refer to as "the most underpenetrated market in Europe," giant tour operators such as Preussag AG, dominate the market for package vacations and appear to be "more interested in selling brochure pages" than they are selling cruises, says Gary R. Bruton, senior vice president, international, for Miami-based Royal Caribbean International and Celebrity Cruises. He and other cruise executives bemoan the fact that they must pay to be included in the tour operator's brochures. It is the cost, cruise executives lament, simply to get their products "on the shelf."

There's little hope in persuading tour operators to adopt business practices that resemble the U.S. model. For starters, tour operators resist performance-based commission contracts, which is the modus operandi for the North American distribution system. "The old model of depending on tour operators for distribution will never work in the long term." Bruton says. "It's a very inefficient way for us to operate."

Shifting Alliances

That said, Royal Caribbean, which has established five offices in Europe, is working to reduce its reliance on tour operators, GSAs and multiples. The company is already seeing an uptick in bookings on Royal Caribbean and Celebrity ships by independent travel agencies in the United Kingdom. There, nearly 1,000 "storefronts" sell 50 percent of all cruise passengers originating from the United Kingdom. Perhaps not surprisingly, Bruton says he believes there are great opportunities for independent cruise-sellers to "zoom ahead" of the competition.

Indeed, faced with a glut of new cruise ships, the cruise industry is investing heavily to target Europe as a source for new cruise passengers.  Norwegian Cruise Line, which has four offices in Europe, opened a new head office in Bern, Switzerland, just last year, heralding the move as a means of targeting "market growth" through an increased presence in Europe. "We see a tremendous amount of potential for NCL to increase  our market share in Europe," says Andy Stuart, senior vice president of sales and marketing for Norwegian Cruise Line.

Much of the cruise lines' efforts are aimed at Germany, a market with a large population, a huge disposable income and six weeks of annual vacation. To that end, Carnival Corporation's European subsidiary, Costa Cruises, announced last spring a new cruise product aimed exclusively at the German market, and P&O Princess Cruises last year launched a campaign to boost its presence in Germany.

Increasingly, however, the  cruise lines' efforts are spreading south. A proposed new joint venture between Royal Caribbean International and Princess Cruises aims to target customers in southern Europe. "When you look at the two largest European markets, the United Kingdom and Germany, they have entrenched national and international brands," says Royal Caribbean's Bruton. "But the romance countries, Italy, France and Spain, still show a lot of upside opportunity. Obviously, Costa and Festival, are national brands in those markets, but we think there are a lot of opportunities for growth. The region's demographics and propensity to travel - there are a lot of things there working for cruising over the long term."

One of the challenges for North American cruise lines marketing in Europe is how to distinguish their products, particularly across borders and cultures. In North America, cruise lines can rely on a single series of television advertisements to get their message across to a like-minded public. Getting the same message across in Europe might require several different "executions," says Royal Caribbean's Bruton, "because what works in the United Kingdom might not work in Continental Europe." Moreover, in the various countries in Europe, there are differing product awareness levels and firmly entrenched national brands that make it difficult for relatively unknown North American cruise lines to make a dent in the market.

Even America's best known cruise brand, Carnival Cruise Lines, struggles for awareness in Europe. Larry Pimentel, former chief executive officer of Seabourn Cruise Line and Cunard Line, says while traveling through Europe on business he was perceived as a "celebrity" as an executive for Cunard Line but was a virtual unknown when he wore the cap of Carnival Corporation, Cunard's parent company.

As Carnival and other North American cruise companies strive to make their brands well known in Europe, they will square their aim on sprouting networks of independent travel agencies to help their industry blossom in Europe as it has in America. If they succeed, the streets of Europe better make room for one more specialty shop - the independent cruise-seller.

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Sidebar: Reaping Rewards

Clearly, there are financial incentives, in the form of commission payments, for independent cruise-sellers who work to awaken the sleeping European cruise market. North America's big six cruise lines - Carnival Cruise Lines, Celebrity Cruises, Holland America Line, Norwegian Cruise Line, Princess Cruises and Royal Caribbean International - paid North American travel agents commissions amounting to US$1 billion in 2001, according to Colin Veitch, Norwegian Cruise Line's chief executive officer.

Moreover, Veitch points out that commissions will continue to rise as these six cruise companies increase the collective number of bed nights they have to sell. Capacity is projected to increase by 45 percent over the next three years. If prices remain constant, Veitch says, the big six will distribute an additional US$500 million in commissions by 2005. "Even if prices drop by 25 percent, that's still another $100 million in commissions on top of what we're paying today," he says.

Commissions to independent cruise-sellers in Europe are based on volume as in the U.S., says NCL's Andy Stuart, "although the tiers for achieving higher commission levels may vary slightly given that cruising is a bigger business here [in the U.S.]."

What's more is that cruise products sold in Europe have even greater potential for agency profitability than for similar cruise products sold in America. That's because European cruises typically are sold as packages that include air transportation, pre- and/or post-cruise accommodations and transfers.