Royal Caribbean’s Strategy in China

May 10, 2014

Royal Caribbean International’s plan to position the Quantum of the Seas in the Chinese market in 2015 unleashed a wave of travel agent speculation and indignation.

Cruise lines operating in China have generally entered the market with lesser ships in terms of capacity and onboard features. The strategy is to cultivate the market and observe consumer response before bringing in more advanced hardware. Royal reversed that pattern by dedicating to the China market its first new ship in four years — the debut vessel of its much-anticipated new Quantum class — after a New York season.

That decision set off a domino effect. Last November, Royal Caribbean announced that Anthem of the Seas — its second ship in the Quantum class — would sail from Port Everglades for the 2015/16 Caribbean season after an inaugural season in Southampton. Now Royal will put the Anthem in the New York area, sailing to the Bahamas and Caribbean for winter 2015/16 before moving to Europe.

This means that Port Everglades, which has the line’s two Oasis ships, will not homeport either of the two new Quantum vessels.

Some U.S. agents said they are disappointed about losing the opportunity to sell a Quantum-class ship from a Florida port. While they understand that China is an emerging market and that the share pattern in the global cruise market is changing, Royal’s reversal of its original decision to position a Quantum-class ship in Florida caused resentment.

“We felt it was like, ‘I got a better date for the prom,’” said a top selling Florida agent who asked not to be identified.

Why would Royal remove Quantum of the Seas from what is still the dominant North American cruise market to place it in China, which is generally thought to be a source promising enormous but slow development?

UBS analyst Robin Farley noted that the Caribbean overall has come in less profitable than expected while Royal’s operations in China are already profitable. UBS believes there has been strong growth in yield in the China market in the last year.

Challenges in the Market

China’s potential to dominate the world cruise market has been a hot topic in the industry for many years. Expectations have been tempered by the reality that consumers in Asia will need a lot of education about the cruise experience, and that the cruise industry will need to better define the short and often hard-to-anticipate openings for vacation time among Chinese workers.

Participants on a deployment panel at Cruise Shipping Miami noted that the Chinese do not yet fully understand cruising and that their vacations may be cancelled at the last minute because of work demands. Based on those two considerations, the panelists suggested it could take five to 10 years to cultivate the Chinese market for cruising.

Royal’s experience with the ships it currently has in the region — Voyager of the Seas and Mariner of the Seas — indicates that this view may be underestimating a very important element: the feeling among growing numbers of middle-class and wealthy Chinese that they are part of a huge and powerful market that’s entitled to the newest and best of everything, including luxury goods, hotels, resorts and cruise ships.

In understanding that sentiment and responding to it by placing a brand new Quantum-class ship in China, Royal may take the head seat at the table as the upscale Asian market makes the transition from buying things to buying experiences.

The Chinese Cruise Market

While travel agents have suggested that casinos and gaming are a big draw for the Asian cruise market, Royal is not promoting its onboard casino operations in the Chinese market as a way to generate interest in cruising. The casinos are reportedly full, but Royal said the greater draw is onboard shopping for high-end goods. Accordingly, the company is stocking shops on its ships in China with many top-shelf luxury items the line does not normally carry.

Susan Bonner, vice president of onboard revenue for all three Royal Caribbean Cruise Lines brands, said the Chinese are extremely savvy consumers who are willing to pay for top-quality goods from the West — including the ships themselves.

The Chinese cruise market’s thirst to buy extends to shore excursions, which are designed to include at least a half-day of shopping, which is often the focus of the excursion. Bonner said passengers are using the excursions to buy the very best of all sorts of goods, from rice to watches.

Travel agents, analysts and the rest of the cruise industry will be keeping a watchful eye on how Royal’s strategy in China plays out. By placing one of their newest and best ships in China, Royal is throwing down a gauntlet in an emerging market with enormous potential, a move that will force a response from other cruise lines.