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Tuesday, February 21, 2006

The sex industry: are its obscene profits a thing of the past?

By Nick Louth, MSN Money special correspondent
October 29 2004
Changing attitudes are allow sex products to slink out of the closet. But will big profits follow?
A few weeks ago I wrote that Mark’s & Spencer’s decision to sack both chairman and chief executive was as out of character as the launch of a range of St. Michael sex aids. Well, perhaps character is changing.
Boots the Chemist, as we learned this month, is now planning to sell vibrators and other sex toys to its largely female customers to support flagging sales. Negotiations with Durex condom-maker SSL International are well advanced.
Lest we think this a shocking departure for a shop where everyone’s Auntie Majorie buys her lavender bath foam, a Boots spokesman revealed that the 150-year old firm already stocks a “rubber clitoral stimulator”, at £9.99 for a pack of three. If you don't believe me you can search for it on the boots.com website, assuming you're not easily offended by these things.
Everybody’s doing it
Boots’ motives are not so much kinky as mundane. It is looking for something, anything, that can help it put distance between its core health products market and aggressive supermarkets such as Tesco and Asda, or discounters such as Superdrug, which are breathing heavily down its neck.
Boots’ attempts to move into personal services have already floundered. In September it decided to close its loss-making laser eye correction, dentistry, chiropody and laser hair removal businesses.
Pedestrian performance: Boots five year share chart
Will this be the answer? Sex aids are infamously high-margin products, and with 88% of British women regularly visiting its shops, Boots is hoping that their diminishing embarrassment about sex will lift sales and improve profits.
Sizzling screens
This is part of an established trend. Already, you can buy sex aids as well as condoms from vending machines in pub toilets. Sex shops, following Ann Summers’ example, have moved out of dimly lit alleyways into shopping centres, even London’s premier shopping destination, Oxford Street. In Australia, a brothel has come to the stock market and cable TV, pay-per-view and the Internet are making our TV and computer screens sizzle.
Click here for latest share price for Australian bordello firm Planet Platinum
Between the sheets boosts balance sheet
Everyone knows that there is a lot of money in sex. It may have started with the world’s oldest profession, but the big money now seems to be at the ‘solitary’ end of the market.
According to Internet filtering software firm BSafe, about $10 billion a year is spent on cyber-pornography a year, and there are over two million Internet sex sites, with 2,500 being added each week.
Studies by Stanford and Duquesne Universities showed that 25 million Americans, overwhelmingly male, spend between one and ten hours a week on cyber-sex sites; 4.7 million of those spend 11 hours or more a week.
Pioneering role
The sex industry has always been a pioneer, both technologically as well as culturally. Pornography is frequently cited as the ‘killer application’ which powered the take-off of the video recorder in the early 1980s. For the first time it allowed adult viewing to be taken out of seedy cinemas into the privacy of the home.
Likewise, the profusion of subscription adult web sites requiring credit card verification was a huge driver of online payment, verification and encryption software from the late 1990s onwards.
The Beate Uhse story
The remarkable story of Beate Uhse, founder of a German sex shop chain which bears her name, illustrates the industry’s growth. Ms Uhse was born in 1919 and at aged 16 became a Luftwaffe test pilot. In the final days of the war she flew out of besieged Berlin to Schleswig Holstein and landed herself a new career selling contraceptives.
She started the world’s first sex shop in Flensburg in 1962, and in 1999 the company listed at a heady price on the German stock market. Though its founder died in 2001 at the age of 81, the firm continues to expand, now employing 1,100 people across Europe.
No barriers to entry
Yet though the public hunger for sex products continues to grow, there are real doubts about the durability of profits, which should perhaps make Boots and other would-be entrants think twice about relying too heavily on them.
The most important point is the fact that being more open about sex removes many of the stigmas that had previously acted as barriers to entry. In short, the market now risks becoming awash with competition.
With web technology cheaply available, anyone can set up their own adult sex site, and in the US thousands do. In the UK Ann Summers has doubled its number of stores to 117 in the last 18 months, and sex shop chain Harmony (which being licensed can stock a wider range of specifically sexual products) has opened its first Oxford Street store.
Bunnies to the slaughter
All this is taking its toll. Playboy Enterprises, the longest-listed and best known company in the industry has been loss-making for the past three years. While Boots averages only a paltry 7% net profit margin, Playboy has achieved this modest figure only once in the past ten.
Beate Uhse, meanwhile, actually has a consistently lower return on equity and poorer net profit margins than Boots. Investors in the German group have suffered as their investment has drooped by half since it listed in 1999 at the height of the bull market.
See Playboy Enterprises company report
See Playboy earnings record
See Beate Uhse five-year share chart
Newsagents: The bottom line
Cyber sex sites are hitting sales of top shelf magazines hard too. While few would mourn their disappearance, spare a thought for the hard-pressed British newsagent. If you have ever wondered why the top shelves of so many corner shops are groaning under the weight of pictorial flesh, the answer simply is money: retailers are allowed to keep half the retail price of every adult magazine they sell, and no other product they sell comes close.
Despite this, the big players in pornography are holding on to their wealth. In the UK Men Only publisher Paul Raymond, 78, is worth about £600 million. Though he started making his money from the Raymond Revuebar club and his magazine empire, his later property interests in Chelsea, Notting Hill and Soho have made him more money in recent years.
The IKEA of sex
David Sullivan, owner of The Sport and Sunday Sport, plus the biggest chain of licensed sex shops in Britain, is worth £550 million, with property again contributing a hefty chunk.
Nick Cracknell, featured on the BBC2 programme The Sex Line King is said to have made £50 million from premium-rate sex phone lines, and now has plans to open what the 37-year-old calls an “IKEA of sex”, in Chester. Perhaps he has discovered a niche for self-assembly pine-veneer sex toys.
Obscene profits hard to come by
Although customers may warm to the new consumer-friendly sex industry, investors are not likely to be impressed. Where it has come out of the closet and gone mainstream, like Playboy or Ann Summers, extra sales will come only with improved quality products, lower prices and much better customer service. Once people have the courage to return a vibrator because it doesn’t work, we will know that it has become a business like any other.

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