Surf or Sink: Royal Caribbean’s Digital Challenge
Royal Caribbean will have to reinvent itself in order to compete in the art of cruise ship supply chain and tourism operations.
The cruise industry has been surfing in very profitable waters for the past years. Projecting 25.8 million tourists to go onboard cruise ships in 2017, the Cruise Lines International Association currently expects capacity to increase by more than 4 times by 2025 . For Royal Caribbean International, one of the three major cruise line companies in the world, this success story is reflected on its stock . Since November of 2012, its stock price has increased by more than 200% . Going against most industries, the cruise ship business hasn’t created much technological innovation but for amenities improvements since the times of the Titanic. Therefore, why should Royal Caribbean innovate in an industry that is expecting great growth and doesn’t technically need to cannibalize itself? The reality, however, is that the 21st century’s digitalization revolution is set to bring lasting changes in every industry-especially those that are not ready for it. Changes in supply chain management, in addition to disruptions in the vacation industry, are expected from different applications and virtual reality technologies. With increasing competition and regulations, Royal Caribbean shouldn’t be surprised if the growth projections don’t become true. In order to prepare against these threats, the Miami-based company recently announced that it has been investing in technologies that will help it better manage its floating cities .
According to one of its most recent press releases, Royal Caribbean is preparing a wave of revolutionary digital innovations, which will be “most visible to consumers through a guest-empowering app that will blanket the company’s 48-ship fleet over the next two years, the surge of innovation will also banish check-in lines at ports, equip crew members to anticipate guests’ needs, and enable giant cruise ships to sail through the water on a fuel-saving curtain of air” . With a 19% operational margin, Royal Caribbean surely has space to improve its cost structure . Since the whole beauty of this business goes around the management of an incredible supply chain to keep this gigantic metal city floating, the technologies announced can come in hand. With a more intuitive app and website, for example, commission costs, which represent 27% of total operating costs, can drastically decrease as middle men (such as travel agents) can be cut from the supply chain. Furthermore, food costs, which represent 10% of operating costs, can have its supply chain optimized once Royal Caribbean uses its Big Data information provided by its drinks and food ordering app .
However, in order to be better prepared for the digitization disruptions, Royal Caribbean cannot be a follower of trends. It must move forward and be a disruptor in the entertainment industry. The applications and technologies mentioned above are reactions to the ones we already see in the market. Other innovations such as Virtual Reality and Augmented Reality technologies will most likely transform the entire industry . Even though Royal Caribbean has mentioned its intend to invest in such area, it will have to most likely cannibalize some of its businesses with something beyond ordinary . While we still don’t have a precise idea of the dimension of the VR revolution, there are some ideas that Royal Caribbean can develop. For instance, it can invest in historical Augmented Reality tours for its destinations. Imagine, for example, a tour in 1500’s Venice or 800’s Chichen Itza. Surely, that would cannibalize its traditional excursions, but would also disrupt the entire supply chain of tourism services. Furthermore, it would put the company in the vanguard of this revolution, thus making sure it doesn’t have the same fate that Kodak had in the photography industry. Furthermore, with the development of its applications’ Big Data and innovative technologies, Royal Caribbean will be able to optimize supply chain costs much beyond food and commissions. Optimization of labor costs, in addition to sensors that can improve energy and fuel expenses, could be expected as medium-term results of these innovations.
As Royal Caribbean gets onboard of the digital revolution, many questions still float around the company. How will Virtual and Augmented Reality impact the cruise industry or, more broadly, the entire entertainment and tourism economy? With changes in consumer tastes, new regulatory burdens, and margin pressures, how will digitization optimize cots for cruise ships? However, more importantly, will cannibalization from new technological developments and supply chain improvements protect Royal Caribbean from the powerful virtual entertainment torpedo? Or will only luck prevent it from sinking?
 “2017 Cruise Industry Outlook”, Cruise Lines International Association, 2016, https://www.cruising.org/docs/default-source/research/clia-2017-state-of-the-industry.pdf?sfvrsn=0, accessed November 2017.
 “Cruise lines 2017 Q3 Breakdown: Record Revenue, Strong Ticket and Onboard”, Cruise Industry News, November 13, 2017. https://www.cruiseindustrynews.com/cruise-news/18104-cruise-lines-2017-q3-breakdown-record-revenue-strong-ticket-and-onboard.html, accessed November 2017.
 Royal Caribbean historical stock price, via Bloomberg LP, accessed November 2017.
 Royal Caribbean. “The frustration-free vacation is arriving on Royal Caribbean”. Press Release, November 7, 2017. http://www.rclcorporate.com/investors/press-releases/press-release/id/1334/, accessed November 2017.
 Royal Caribbean. 3Q 2017 Quarterly Report. http://www.rclcorporate.com/wp-content/uploads/RCL-6.30.2017-10Q.pdf, accessed November 2017.
 Segal, Tobey. “5 Virtual Reality Travel Experiences That Are Almost As Good As The Real Thing”. Condé Nast Traveler. June 22, 2017. https://www.cntraveler.com/story/virtual-reality-travel-experiences-that-are-almost-as-good-as-the-real-thing, accessed November 2017.
Student comments on Surf or Sink: Royal Caribbean’s Digital Challenge
I have been on 13 Royal Caribbean cruises and can attest to very few of the ships being innovative. Recently they have created the largest cruises in the world with some significant innovations, but until then the upgrades were not impressive. We largely were choosing cruises for their destinations and affordability for the entire family. Not only will the digitization improve margins through cost reduction, but it will improve margins through revenue expansion. One way that they have already implemented is the use of digital photos instead of printed photos and humans holding them. This increased their photo revenue significantly. Excited to see the additional changes that will improve my experience.
Daniel, I am impressed by potential implications that digitalization could have on the cruise industry, you did a really good job on assessing them on a broadly way. I totally agree on the examples you mention, such as inventory savings on F&B unit by better forecasting customers demands and DTC sales by using the owned app to bypass travel agencies. However, it is important to mention that, in the latter case, cutting the middlemen implies that RC would have to take the responsibility to fulfill some travel agent’s functions in order to satisfy its customers (i.e. the possibility to book both flights and cruises jointly).
Moreover, I think that digitalization and Big Data could help Royal Caribbean to further become a more cost efficient player by, for instance, better forecast weather patterns so that they could plan their routes in a more efficient manner. I believe such tech improvements already serve to save a lot of fuel at maritime shipping industry.
Daniel, thank you for the interesting article. I was about to drown with all your ship terms floating around.
When thinking about cruise ships, I could imagine how digitalization could help in cutting costs, such as building ships that had better hydrodynamics making it more fuel efficient, or having better control of their food supply chain management, but I had never thought about it in the sense of whole new experiences for costumers. For example, the AR/VR aspect that you mention in your article is very interesting. When I think about services in cruise ships, I actually felt that there really was no need for innovation. Of course, customers will always enjoy a higher quality of services, such as better pools, cleaner rooms, better restaurants, and so forth, but not necessarily an innovation in the services. But learning about some of Royal Caribbean’s ideas, such as using AR/VR to transform ship spaces into virtual environments, it convinced me that there are still a lot of areas where innovation can take place to provide different values and experiences to the customers. I am really excited to see what kind of innovative experiences Royal Caribbean can bring to us in the near future.