Breaking up is hard to do, especially if you’re doing it with the EU. Like all retailers, Lovehoney is already feeling the effect of the prolonged and painful Brexit negotiations, even though the actual divorce date is 18 months away. Clearly, a coping strategy is required.
The most immediate impact that the vote had was the morning-after droop in the value of sterling against the US dollar. This hit Lovehoney because our predominantly US dollar denominated supply chain starts in the Far East - if it vibrates it’s made in China and if it doesn’t vibrate it’s probably made in China too. Overnight our product cost went up 15%.
But thanks to two key business insights - that people have sex everywhere and that the Internet goes everywhere - we had already expanded our overseas sales. 40% of Lovehoney revenue is in currencies other than sterling so we have a natural hedge through our overseas sales.
Now the Brexit impact is felt through uncertainty. In the general doom-and-gloom mood purveyed by the media, UK consumers are understandably cautious and are reining in spending. That’s important for Lovehoney because even though we have expanded aggressively overseas, the UK is still our biggest single market.
How do we cope with uncertain consumers? By sticking to our message that sex toys are a key part of sexual happiness, which is as essential to your health and wellbeing as your five-a-day. Oh - and having sex and using sex toys is the most fun you can have. It’s our job to persuade consumers that sex toys should be at the top of the shopping list.
Another of the uncertainties about Brexit is the fear that no deal will mean a massive increase in trade red-tape for UK retailers as we are denied easy access to what laughingly used to be called the common market. Any retailer that trades overseas is already prepared for this.
Yes, there may not be customs barriers between countries in EU, but what of the other red tape that business already deal with? Have you ever tried doing a VAT return in Finnish? How often do you have to submit a VAT return in Ireland? What’s the sales threshold for a UK company to register for VAT in Italy?
The VAT regime is different in every European country. We’re coping with it. We have to pay customs duties when we export to the US and Australia. We can cope with that too. Life after Brexit isn’t going to throw up new challenges, it’s just the same ones all over again.
How easy is to to do business in Europe anyway? The practicalities of language mean that it is more difficult and more expensive to do business in Europe than it is in English-speaking parts of the world.
We have a single website - www.lovehoney.com - to serve a population of 320 million in the USA. With only a few changes in spelling and verbiage (“cart” instead of “basket”) Lovehoney.co.uk became Lovehoney.com. Our English-speaking content, trading and customer care teams can do everything we need to run the site and serve our customers.
Compare that with the EU experience. We have five websites - .co.uk, .fr, .de, .es and .eu - to only partially serve a population of 740 million in the EU. For every European language website that we launch we have a massive translation job on our hands, and ongoing have to employ local language speakers in all our teams.
So why all the hand-wringing over Brexit? Our approach certainly seems to have worked.
Sales are up 31% in the last year (three quarter of which was after the Brexit vote) and pre-tax profits are up 76% to £9 million.
Yes, there’s a lot of uncertainty and a lot to think about, but isn’t there always? Business already copes with costs and red-tape that might come from leaving the EU. And anyway, there are bigger - and easier - opportunities elsewhere.
Richard Longhurst is co-founder of Lovehoney