He took over a company losing money, changed its marketing, restored profits and now, has staff on the offense instead of defense. How did Xavier Mufraggi turn around Club Med in North America?
The secret lies in focusing on the upscale customer and shifting marketing to that affluent group, slashing mass-market ads in traditional media and instead using the less costly internet and social media to target the high-end traveler, Mufraggi told WorldCity’s CEO Club at its April 18 meeting.
“We completely changed the way we are working,” said Mufraggi, a former marketing manager at Kraft Foods in his native France before joining Paris-based hotel chain Club Mediterranee.
Mufraggi oversees Club Med’s eight resorts in the United States and Caribbean. Revenues at the hotels had plunged after the Sept. 11, 2001, terrorist attacks on the United States. At the same time, competition was rising from other all-inclusive chains such as Sandals and from cruises that also offered meals, shows and other amenities pre-paid. The bottom line for the group: red ink for years.
On taking over as regional CEO in 2008, Mufraggi’s first big decision was to cut marketing costs by 40 percent, a tough move by a former marketing chief. He then honed marketing to focus on families with children, who made up about 40 percent of clients but returned more often than other clients.
Mufraggi targeted affluent families with e-mails, e-newsletters and other Internet promotions that cost a fraction of traditional ads on TV or in mass-market magazines. New online brochures and pictures featured smiling children and parents, replacing former ads that had showed couples and singles too.
“Because people think we’re just parties like the 1970s, now we show just babies and Mom,” Mufraggi said. Those ads lure the same folks who used to party at Club Med but have aged: “OK guys, you have kids now,” he joked.
To reach the affluent family audience, the chain also invested millions of dollars to upgrade properties, adding flat-screen TVs , spas and other upscale amenities at such resorts as the Club Med Sandpiper Bay in Port St. Lucie in Florida, Mufraggi said.
But where did the money come from to upgrade the properties?, asked attorney Gary Rosen, who heads the litigation practice at Fort Lauderdale-based law firm Becker & Poliakoff.
In North America, Club Med shifted from owning and operating its properties to instead selling them and leasing them back to free up cash. It gained handsomely on property sales too, because it long has pioneered new destinations and had purchased prime real estate early, said Mufraggi.
Indeed, the company now is looking to buy land cheaply in new and underdeveloped destinations, where governments are interested in Club Med investing to jump-start their markets, he added.
And how did Mufraggi change the staff’s mentality from defense to offense?, asked Steve Bartley, managing director at Boyden Global Executive Search.
Muffragi said he likes to share information with his team and employees, including financial numbers. When times were bad, his staff and employees at the individual resorts knew the urgency for cuts and change. As properties were upgraded, he took top managers to see the improvements. At the resorts, he also meets directly with employees to explain what’s up and to get everyone involved.
At headquarters, he tries to squeeze the size of his team, so they work more “horizontally” with less bureaucracy. Now that change has produced profits, he also invites staff to help craft a new vision “in their own words,” shifting from what he calls “the stress of failure to the excitement of success.”
But if the turnaround has worked so well, then why is Club Med the only high-end, all-inclusive resort operating in the United States?, asked Jim Hogan, senior managing director for Latin America for medical device maker Medtronic. Why aren’t, he wondered, more companies jumping in?
All-inclusive resorts tend to work best where labor is cheap, usually in developing nations and not in developed ones such as the United States, Muffragi said. Club Med works in the United States partly because it keeps labor costs down through its unique labor system. Employees can change jobs or resorts every six months, keeping enthusiasm high for a chance to globe-trot, learn and advance. The average age for a resort manager is 29, younger and less costly than managers elsewhere, he said.
“In this industry, we’re a school” for hotel managers, Mufraggi said.
Challenges still remain for Club Med, including the slow U.S. economic recovery and rising gas prices that can stunt future travel in North America and the Caribbean.
Like hotels, airlines struggle with how much of their rising fuel costs to shift to consumers without crimping demand and profits. “It’s a tricky situation,” said Claudio Silva, Lan Cargo airline’s vice president of sales for Latin America and Asia. “It’s not so clear how much of the cost you can pass on.”
Yet Mufraggi is optimistic, now that affluent families represent the bulk of business in his region and revenues keep growing at his resorts. He ’s buoyed too by Club Med’s “pioneering spirit:” A Belgian Olympic volleyball player started the company as a non-profit in 1950 to help reunite families torn apart by World War II, offering them sports vacations on the Mediterranean with lodging in used U.S. Army tents. More recent innovations, he said, include “the first ski resort in China.”
The CEO Club is one of seven event series organized by WorldCity to bring together executives on international business topics. The CEO series is sponsored by the University of Miami School of Business Administration and the law firm Becker & Poliakoff. The next CEO meeting is set for May 6.