There is much to talk about in the erotic market: the status quo, the future, and the current developments, both positive and negative. EAN recruited Simon Smith, Vice President Business Development of WOW Tech Group, and Samir Saraiya, founder and CEO of ThatsPersonal.com, to do some serious market analysis.
How have emerging markets fared in 2019 compared to the strong growth in 2018?
Samir Saraiya: The developing markets continue to grow, albeit at a slower pace than expected. The macro-economic factors like smartphone penetration and e-commerce growth continue to support the industry. However, the respective government bodies have not been progressive enough and we see importers and retailers getting more creative to dodge the legal challenges in order to scale up.
The online platform continues to be the prominent distribution channel and we expect this trend to continue in the future. In many emerging countries, low-end Chinese products have gained substantially in terms of volumes due to their entry level price points. Most consumers are first-time buyers and it will take time for category maturity to set in to such a degree that well-established western products would see growth opportunities from these nations.
When it comes to growth in the western world, many people point to the (untapped) potential of sex toys in the mainstream market. However, if you inverse this argument, wouldn’t that mean that the traditional erotic market doesn’t hold much growth potential anymore – that the market is saturated and that the pieces of the pie are divvied up?
Simon Smith: The industry needs to continue to market to all segments of the population, and work towards driving them to visit the traditional online and offline shops and experience their offering. There has been a marked improvement in the knowledge base and commitment that retailers and brands have built together and are able to provide comfort to End Users and influence their decisions.
There is still a sizeable part of the population that has not entered a traditional erotic novelty store as yet. We are sure they would very pleasantly surprised by the level of expertise and professionalism that many of these stores have attained.
When industry pundits discuss the impact of the global economy on the erotic market, some maintain that this industry is crisis-proof; others argue that economic troubles can even be beneficial for the erotic market. What is your opinion?
Samir: The erotic market is here to stay and is less affected than other industries by a global crisis. The industry, like many other industries, will have its fair share of business cycles, which relate to different issues like oversupply and competition. In difficult times, the luxury segment would experience downturns due to an economic crisis, as this segment is always the first to get affected. However, many other segments are already maturing towards FMCG, consumer durables and hygiene products and the growth momentum will continue, as these products are already ingrained into our daily lives.
In terms of fads, there would be some fads which may come and go like BDSM. There is a school of thought that believes the economic troubles will be beneficial to the industry, as consumers would move towards achieving happiness and deriving pleasure at lower costs. The low and mid-range of erotic products has the potential to address this opportunity and we believe this segment would be fairly stable during these periods.
“The erotic market is here to stay and is less affected than other industries by a global crisis.” – Samir Saraiya
In light of current events, do you see any signs that international trade disputes – mainly the one between the USA and China – will have a negative impact on the international erotic market. Do you fear that our industry might suffer if this escalation continues?
Simon: Most trade disputes result in a negative impact on business. The outcome of this current situation is still unknown, but we hope that sound reasoning will prevail, and that the open global market will be allowed to continue to operate as it has.
On a positive note, these disputes and their negative potential consequences serve to push manufacturing brands to look at alternative global regions for their abilities, and thus, makes the entire supply chain more dynamic.
In the US, the media has been all over the erotic brand plusOne because their products are being sold in brick and mortar store chains such as Walmart and Target. Many experts say that this is a major step on the way to opening up the mainstream market to sex toys. What is your take on this?
Simon: Any time we can expose adult novelty toys to the mainstream market, the better it is for the growth of our industry. It is nice to see such companies like Walmart, Target, and others take progressive steps in offering their customers products that might have been taboo in the past. The next step for these large retailers will be to invest resources in training their staff on the different brands, and the safety and functional advantages of the branded products.
This exposure will also help the specialised novelty stores as it opens up possibilities for a whole new customer segment to shop at their stores, both online and offline, once they have been exposed to the products in the mainstream market.
While consumer demand for sex toys is increasing, there seem to be some setbacks when it comes to open and free discourse about sexuality, sexual education, and sex toys – especially in the social media sphere? Could this be the beginning of a regressive phase?
Simon: There has been a lot of progress over the past decade in discourse about sexuality. Additionally, the social media landscape has also been rapidly changing and expanding at an extremely dynamic rate that we believe that this tide will continue to push for the expansion of discussions on sexual education and will undoubtedly help in further progressive conversations.
In recent years, the erosion of the traditional supply chain has been a major topic in the erotic industry, but this year, fewer and fewer people are talking/complaining about it. Have we accepted this situation as the new status quo? Is there no real traditional supply chain anymore? Or is it just that other issues in the industry have taken away the spotlight from this development?
Samir: This is a natural evolution of the new connected world where the power of information has changed the landscape of the traditional supply chain of yesteryears. The erosion and disintegration of the traditional supply chain will continue as the new world economy revolves around maximising margins by going directly to consumer.
The growing e-commerce platforms and marketplaces have disrupted the traditional supply chain, especially in this industry, as they also provide a solution for consumer privacy. The situation is not reversible and over time the industry has not only accepted it but has started to reshape their business around it. However, the opening up of mainstream retail will reignite growth from the traditional supply chain especially across pharmacies, supermarkets and large format retail stores.
We believe these channels will be restricted to select brands and those who enter will gain greatly in years to come.
“The erosion and disintegration of the traditional supply chain will continue as the new world economy revolves around maximising margins by going directly to consumer.” – Samir Saraiya
You were among those who welcomed mergers of big erotic companies and the influx of investment capital in the market. In a previous interview, you stated that this development would bring money and know-how into the industry. Looking back, were you a bit too optimistic?
Samir: Yes, I was a bit too optimistic in terms of time frame as the last year has not seen the level of activity that was anticipated. I hear that there are a few large Companies that have been working on M&A deals and should hopefully announce them in the next few quarters.
I believe the influx of investment capital will come to the Industry as the economic fundamentals remain strong in terms of growth and profitability, although financial exits continue to pose a challenge. Investors are still not comfortable with this category, but recently, we have seen funds like DSG Consumer Partners featuring sexual wellness as part of their investment charter. We hope more such funds will include this category in their future funds. On the positive side, the interest from high net worth individuals (HNWI) continues as we see crowd funding platforms gaining momentum, especially in the SexTech sector.
We also expect capital to come from non-traditional sources like FMCG companies, retail chains and media companies and create strategic partnerships for accelerated growth.
Doesn’t the aforementioned development change the equilibrium of the market? Won’t it be harder for small and mid-sized companies when a small number of big players hold most of the market power?
Samir & Simon: The larger companies will continue to face challenges as there is a legacy geographic fragmentation. Additionally, the rise of Chinese manufactured commodity products will continue to pose a threat for market consolidation. Distributors and Retailers would continue to private label their products and not let the big Boys dominate their channels.
Niche players will continue to grow in their respected segments while new start-ups will launch innovative products. Smaller players with limited competencies will continue to face the heat and see their market share go southwards. Strong innovation and discipline will continue to be fundamental building blocks for all companies, regardless of size.
Those who come up with great new ideas, protect these ideas, and defend their intellectual property will have great success in our market. This will create a cycle of opportunity and growth for these successful small and medium sized companies as they will become attractive investment targets for the larger companies who value their innovation and creativity. Similar to other mature Industries, the adult industry will go through phases of mergers and there will always be a space for smaller innovation-led companies as well.
Speaking about a concentration of market power: Amazon has undoubtedly proven to be a disruptive force for the erotic market. Has the industry adapted to this situation? Has it maybe even learned to benefit from it?
Samir: The growth of e-commerce has been a boon to the industry. Amazon, being the leader in this space, has substantially grown the pleasure product business in markets where they operate, by opening up the category to mainstream consumers who otherwise may not visit traditional adult shops. The sheer scale that Amazon operates with has been one of the massive driving factors for consumer adoption.
On the supply side, there has been disruption as the entry barrier to sell on Amazon is low. We do see many manufacturers, wholesalers and retailers having price wars to grow sales. We see the industry adopting to the situation and getting stricter with legal agreements and brand authorisations to compete successfully. Over the long term, the industry will continue to adapt better to the Amazon model and those who successfully do so will greatly benefit from it.
Obviously, I am exaggerating a bit but 2019 hasn’t really been a year of extraordinary product innovation, has it?
Simon: Outwardly, we have not seen much in product innovation, but I’m confident that many companies are working internally on breakthrough ideas that will result in innovative products that continue to revolutionise the industry. There are some Companies that concentrate on duplication over innovation and continue to stunt the industry’s ability to blossom. However, many more continue to invest in new concepts that will lead to great growth opportunities in the near future.
Additionally, as larger and stronger external entities become interested in our industry, I foresee a phase of strong innovation growth in the next few years.
“I foresee a phase of strong innovation growth in the next few years.” – Simon Smith
We’ve been waiting for the big breakthrough moment for sex tech – will we have to wait beyond 2019?
Simon: Yes, we believe we will need to wait for some more time. However, there are several companies that are investing time and resources to develop new technologies that allow human interaction either with products that simulate lifelike movements or technologies that allow close interaction between people, whether they are together or far apart.
We believe we will see improvements in these areas over the next growth phase of our industry. What we cannot lose sight of, is that people are most likely not interested in sex tech, simply for the sake of new technology. As the core, remains the human interaction and intimacy, which is simply enhanced by the new technology.
The Swedish Institute for Standards (SIS) is working on an international standard for sex toys – for the benefit of the consumers, as the initiators explain. Is this step long overdue or is it unnecessary?
Simon: Setting quality and functional standards is certainly welcomed in our industry. It is critical, however, that the governing body understands how the products are used and their functionality, so that it can apply the right standards in a fair manner.
Looking at the US, one of the biggest developments in that market seems to be that sex toys are no longer marketed as ‘male toys’, ‘toys for women’, etc. Inclusion seems to be the next big thing. Will this trend also gain traction in Europe and the rest of the world?
Simon: I believe that this trend will get traction around the world as the inclusionary language breaks down barriers, and leads to acceptance not only in our industry, but overall. Perhaps the global acceptance of inclusionary marketing will be accepted at different phases in certain geographies, but I believe that is will eventually be the norm.
How would you describe the current status of the erotic market in 2019?
Samir & Simon: The overall industry is set to grow rapidly. The ‘mainstreaming’ of our industry is happening at a faster rate than expected. Many Consumer e-commerce sites are reaching out to brands to add the adult product category to their offering. This translates to retailers getting the required comfort to add this category to their offering as consumers seem to have already got the comfort to browse these products.
The retail offline stores continue to increase the level of professionalism to achieve a great customer experience that reflects well on the industry as a whole. More manufacturing has moved to China where the Chinese have moved their manufacturing capabilities from low end to higher end products. The top companies continue in their quest to bring strong IP protected, innovative products to the market, which continuously pushes the industry presence in several retail segments. Overall, these are exciting times for the industry!