Samir Saraiya

“There are several challenges facing the industry in this new age of business.”

For this interview, we leave Europe to take a look at the bigger picture, i.e. the global adult market. Samir Saraiya, the founder and CEO of ThatsPersonal.com, joins us on this journey, and he shares with us his extensive knowledge and understanding of the international market and the developments and fluctuations therein. And while there are still a few obstacles to overcome, Samir feels that, on the whole, the industry is on the right track.


 

Is the adult product market growing? Is consumer demand rising?
Samir Saraiya: The industry is on a good path in terms of market growth and there are many factors which are contribute to this. During the last five years, mobile internet penetration has increased rapidly in the East, along with smartphone usage which has provided most people across the world with unlimited access to adult content. This has had a positive impact on consumers, especially in developing nations, in terms of sexual openness and experimentation.

In the West, consumer interest has steadily increased as the perception of this industry has moved away from ‘hardcore sex’ to that of ‘sexual health and happiness’. This change is rapidly spreading across the world and the mobile internet has greatly facilitated the discovery, education, acceptance, and usage of adult products.

Today, consumer demand is not just restricted to Western economies, but is visible across many parts of the world, especially Asia, Eastern Europe, and Latin America. The per capita consumption will continue to rise as these products become more acceptable and this will fuel industry growth.

How is the supply side coping up with the increased demand?
The supply side has grown dramatically to cater to the rising consumer demand. The existing companies have expanded in terms of product portfolio, revenue, and geographic reach. Many new companies have entered the industry and we see a proliferation of manufacturing set-ups in China.

Consumer segmentation has brought about a multitude of products, ranging from women oriented products, men-focused products, couples products, lubricants, adult games, apparel, vitamins, BSDM, LGBT, gadgets, etc. I believe this trend will aggressively grow through identifying new niches and catering to them.

Lastly, the traditional channels like pharmacies, supermarkets, and convenience stores are opening up their retail shelves for select products. New channels like E-commerce are doing extremely well as they provide a natural fit in terms of privacy for consumer purchases. Soft products like lubricants, lotions, creams, and sprays are now considered a new FMCG product category.

Is there still a healthy balance between supply and demand in the international marketplace?
There are several challenges facing the industry in this new age of business. The internet has brought manufactures closer to consumers and there is a disruption in the traditional supply chain, especially in the fast-growing e-commerce segment. The eco-system has become competitive with business partners turning into competitors and offering a similar set of products to the consumers. Financial resources are a constraint for product innovation and brand-building which has led to intense competition and margin erosion. Unfortunately, the consumer has not evolved fast enough and is flooded with a variety of similar products.

“The eco-system has become competitive with business partners turning into competitors and offering a similar set of products to the consumers.”

You mentioned that the traditional supply chain seems to be breaking apart, the market is swamped with products, there is immense price pressure and extreme competition … In your opinion, which of these are the biggest problems facing the adult market and what is the way out?
All these problems are connected and I believe the root cause of this scenario is that companies are not focusing on their core business activities. Producers need to focus on developing new products, however, they are simply looking at the category leaders and copying their products. Distributors and Retailers should concentrate on identifying and building new distribution channels and consumer touchpoints, however, they find it more rewarding to build their own set of products and compete with existing brands.

The value chain is being compromised as supply outstrips demand. As competition intensifies, companies would be forced to build their core capabilities across many business activities to compete effectively. This phase will require deeper levels of core competencies like powerful Search Engine Marketing (SEM) or innovative and efficient supply chain management or an outstanding level of customer service, or other Unique Selling Propositions (USP’s). Leaders would need to analyse their business metrics and constantly strive towards higher levels of optimisation and competitiveness. There will be consolidation across product portfolios as both producers and retailers would focus on the 80:20 rule (Pareto Principle) to minimise the diminishing returns they make across similar SKU’s. Inefficient companies would gradually weaken as consumers get more demanding with their requirements.

Would you agree with the statement that the international adult market is still in a phase of consolidation in the sense of ‘safeguarding what you have’, or is it maybe even a phase of shrinking down to fewer, bigger players in the market?
I look at it differently, in terms of business cycles. The years 2013 and 2014 brought about substantial growth and profitability which enabled large companies in the USA and Europe to aggressively expand by adding new categories and entering new geographic zones. This resulted in severe competition as there was an oversupply in the market. The market evolved into a ‘survival of the fittest’ scenario. In order to maintain financial health, companies needed to safeguard their stronger assets in terms of markets and categories and downsize their non-core business. Companies that were not agile enough were forced to exit the market or got acquired.

While this business cycle played out, there have been many new startups entering the industry and focusing on new product niches. Overall, the industry is expanding as the number of companies is growing and we see this growth at global trade shows like eroFame (Germany), ANME (USA), AAE (HK) and ADC (Shanghai).

In our previous interview, you said the adult industry needs to improve not only in terms of product innovation, but also when it comes to brand building and distribution. Has anything changed in that regard?
Limited financial capital has had an impact on product innovation and consumer advertising. The underlying taboo associated with the industry has forced traditional media owners, including Facebook, Amazon, and Google, to put restrictions on this category. This requires people to think out of the box to achieve the desired level of brand awareness. PR has been a great vehicle for brand building and companies such as Hot Octopuss, have demonstrated powerful PR activities, the latest being their ‘Queen Bee Changing Room’ campaign in New York.

There is a huge opportunity to introduce and scale-up distribution at traditional retail outlets. We are gradually seeing a bigger range of products and brands available at pharmacies, supermarkets, and convenience stores and I believe that distributors must focus on retailers like Walmart, Tesco’s, Carrefour, Walgreens, Safeway, Boots and the like to grow the market exponentially.

The industry is perceived as a ‘high margin’ business and I believe that this will attract partnerships between opportunistic media companies, retail chains, and related consumer brands. Besides Trojan and Durex, we see other powerful consumer brands like Playboy, Penthouse, and Hustler being leveraged for their brand equity. I foresee a lot more creativity surrounding brand building partnerships similar to Amorelie in Germany and Lovehoney’s brand licensing deals (the latest being Broad City from Comedy Central).

“There is a huge opportunity to introduce and scale-up distribution at traditional retail outlets. “

We already touched upon the topic of the dissolving supply chain, but to get back to that problem once more: What is the cause of this development, and what effects will it have in the long run?
The industry is dominated by ‘Push Marketing’ as there are limited Tier 1 consumer brands causing ‘Pull Marketing’ (wherein the customer wants the brand more than the product). Large scale retailers and distributors have an advantage over manufactures in ‘Push Marketing’ as they are closer to the point of sale and can influence consumer choices. It is fairly simple to launch your own brand as Chinese manufacturers are offering their products for private label in low minimum order quantities (MOQ’s). This has lowered the entry barriers for private label products and is causing a threat to existing brands.

On the e-commerce side, it’s extremely easy to list on marketplaces like amazon.com. Manufactures, brands, distributors, retailers, and independent individuals all want to list products on there. Factors like ‘drop shipping’ enable the trade to sell on marketplaces, without investing in inventory or infrastructure. The price war results in margin erosion.
These scenarios are creating a conflict of interest, which needs to be addressed by the entities involved in order to bring clarity to core competencies. Additionally, brands must invest in ‘Pull Marketing’ and achieve customer loyalty.

In 2016, you explained that you want more venture capital and private equity in the adult industry. Has the situation changed over the course of the past twelve months?
There hasn’t been many landmark deals this year besides the private equity deal by investors and family offices in womanizer. Interest from high net worth individuals (HNWI) continues to grow as we see crowdfunding platforms becoming active in this category, for instance Indiegogo, which recently launched a vertical dedicated to sex toys, and supported new start-ups like Lovense, Autoblow, Eva, RevelBody, and eJaculator.

I reckon that the investment appetite of HNWI’s will continue as we congratulate companies like Crave (USA) which recently raised US$ 1.3 million (Series B) from Angel Investors. Sex Tech will continue to be a hot sector for start-up investments.

The industry requires large scale financial capital to grow to its full potential, however, most venture capital and private equity firms are still shy when it comes to investing in this industry. As financial exits seem limited, I predict that capital will come from non-traditional sources like FMCG companies, retail chains, and media companies which will be more strategic and create win-win scenarios for both.

Did you notice any overtures made by mainstream companies towards the adult industry? Or are we still a ways away from cosmetics or fashion brands really making inroads into the adult marketplace?
There are a number of industry estimates that value the adult product market at approximately four times the size of the condom market. Condom companies have powerful consumer brands with strong distribution capabilities across pharmacies, supermarkets, and convenience stores and this industry forms a natural extension to their core business. This lucrative opportunity has drawn interest from condom companies to launch products via brand extensions. Both the market leaders, Trojan and Durex, are slowly and steadily increasing their non-condom portfolio by offering well priced products like cock rings, vibrators, lubricants, and massage oils targeted at first time users.

I am confident that pharmaceutical companies like J&J, followed by FMCG companies like Unilever and P&G, will soon start launching soft products like lubricants in markets where there is social acceptance. Companies like Victoria’s Secret have a natural brand extension with the lingerie and cosmetics segment of the industry and it is only a matter of time before they jump in. I would not be surprised if Amazon.com launches their own products via a private label some time in the near future. On the flip side, I would like to mention the pioneering initiative taken by the LELO management to launch a variety of luxury vibrating devices under the brand FOREO for the skincare, oral care, and men’s grooming market. The high-end products are retailed across main stream stores like Sephora, Harvey Nichols, and Barneys New York. The brand has won numerous awards for their technology and design and this is a great example of an adult product focused company that has pivoted their business to enter the mainstream beauty and hygiene segment.

2016 was the year of womanizer. Which products and innovations have stuck out from the crowd this year?
I haven’t seen any game-changing innovations this year which stand out from the crowd. There has been a lot of concentration on Sex Tech, with companies focussing on features like Bluetooth, VR, interactivity, and mobile apps. However, there is nothing revolutionary on the market that is selling like hot cakes. I expect the focus on Sex Tech to continue and hope that some new path-breaking products make it onto the market soon.

“I haven’t seen any game-changing innovations this year which stand out from the crowd.”

Many producers want to achieve true innovation, but isn’t that a curse as much as it is a blessing. A curse, because the bar for new products is set so incredibly high, and a blessing because you stick out from the crowd which will also result in bigger sales? Do the producers need to be more willing to take risks and explore concepts off the beaten path?
Most producers dream of achieving true innovation and genuinely want to stand out from the crowd, to get a sense of achievement and recognition. The challenge is that new innovation is expensive, in terms of time and money, and few companies have the capability to dedicate substantial resources towards this. Many times, products fail, and if they succeed, there are difficulties in managing the Intellectual Property (IP) protection, as competing producers would replicate the product and offer it at a cheaper price.

True innovation would come from startups, as their DNA revolves around finding gaps in the market or looking at ways to disrupt the existing industry. Lovehoney’s ‘Design a Sex Toy’ competition is a great way to crowdsource fresh ideas in an economic fashion, and it would be refreshing to see more concepts like that in the future.

The industry needs to achieve maturity for IP protection and my suggestion is to create an industry body that will support quick and efficient arbitration and curb erring companies.

Everybody is talking about sex tech in all its shapes and guises, however, the industry is still waiting for the big breakthrough, that game changer that catapults the segment into the center of the market. Will we see this breakthrough in the near future, or will sex tech remain a niche product for the ‘geeks’?
There is a huge buzz in this category and it is clearly the way forward. Investor interest is high as we see a host of ideas being funded. I believe there will be a lot of experimentation before Sex Tech matures. Yes, the current set of products are still niche, but they have potential to evolve successfully. There are many existing companies that are gradually incorporating sex tech into their existing or new product range. Fleshlight Launch is a great example. Soon, we will see a lot of products on the market, which will offer personalisation and Bluetooth connectivity to apps as standard features.

It’s also good to see new partnerships emerge between Sex Tech focused companies and the industry, like We-Vibe and Kiiro. I expect to see many more such partnerships in the future.
Lastly, there is pressure on the porn industry to create new revenue streams and this will open up opportunities regarding virtual reality and interactive devices. Companies like Lovense have started building solutions towards this while Kiiro has partnered with Naughty America. I am confident that sex tech will evolve and revolutionise the industry, but at this point, it would be difficult to predict when this will happen.

“I am confident that sex tech will evolve and revolutionise the industry, but at this point, it would be difficult to predict when this will happen.”

At the beginning of last year, Lovehoney said that 2016 would be the ‘year of the male sex toy’ in an EAN interview, and indeed, the number of products for men has increased steadily. Is this truly the market segment with the largest untapped potential?
The male sex toy market has been underserved with products for the past few decades. The gap has been optimised by the porn industry. There is clearly a lot of potential in this category as we have seen a number of new companies and products focussing on this segment. Male masturbators and penis enlargement products are doing well; however, I believe the segment is still waiting for a breakthrough mass market product, something along the lines of the vibrator for women. I hope that this revolutionary product appears on the market soon.

If you were to warrant a guess, how will the international adult market develop over the next few years? More consolidation? Fewer players?
For the outside world, there is always this notion that sex sells and there are big opportunities in this business category. As consumers evolve, there will be new entrants who will look to fill gaps in the market. This is a good sign for the overall growth of the industry as it will bring in new innovations and thinking.

As the market prepares for this phase of competition, there will be a significant change in the mindset among existing companies, a need to become leaner and more cost-conscious. Companies will start focussing on building their competitive skill sets rather than just growing their top-line. Strong and well-managed companies will continue on their growth trajectory while others will be forced to downsize their operations and rethink their competitiveness. This period will see more activity surrounding organic and inorganic growth alongside mergers, acquisitions, and shut downs. This trend has already commenced as we see the sale of Laid by Standard Innovation (We-Vibe) to Eropartner and the acquisition of Scala playhouse by Walter Kroes and Trudy Pijnacker.

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