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RETAILER VIEWPOINT What worked for us at Lovehoney: how to maximise profit in the face of unprecedented discounting

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Lovehoney co-founder Richard Longhurst sets out how the retailer, ranked Top250 in the IRUK Top500 and which has just reported a 22% rise in sales and profits at the end of its latest financial year, prospers in the face of discounting from online and multichannel rivals.

It has been the most brutal year anyone can remember in retail. Closures of big High Street stores are announced weekly and the pain has not been confined to the traditional bricks and mortar household names. Even stars of the ecommerce scene have not been spared from the onslaught. Asos’s profit warning in November, causing the share price to slump on the day by 36% after they warned that sales were significantly behind expectations, was a wake-up call for the whole industry. Asos’s sales were still up 14% over the quarter, so they have been victims of their own success and the sky high expectations analysts have for the high achievers of internet retail.

At Lovehoney, the UK’s biggest online sex toy retailer, we celebrated our 16th year of operation during 2017/18 with another record year of sales and profit. Turnover was up 22% to £93 million and pre-tax profits were also up 22% to £11 million.

So how have we been able to keep it up (so to speak!) when so many others on the High Street and in ecommerce are struggling? And most importantly, how can you maintain margins and profit in the face of unprecedented discounting from e-commerce and bricks and mortar rivals? There are four things that have worked for us:

Developing our own products

Exclusivity means that you don’t have to eat into margins too much, even on key days like Black Friday, because you are the only retailer selling the product. Obviously developing your own products is not cheap but there are big dividends to be had in the long-term if you work with good manufacturers.

Grow sales outside your core areas

We have continued to expand rapidly in the UK where around 60% of our sales still are but we have found new territories were poorly served by incumbents and great places to grow sales. Sales in the US and Australia have shot up to £31.6 million in the last year – a 67% rise year-on-year. We have invested heavily – building distribution centres in both countries so shoppers are getting their sex toys and lingerie locally rather than shipped from Bath.

Great customer service

This is something we have made a huge priority from day one. The sex toy industry in those days had a bit of sleazy reputation and was dominated by the porn industry. We wanted to become the Amazon of sex toys and create female friendly sites. We now have nine international websites in four languages served from three distribution centres. We are the ‘go to’ destination for people who want to discover a fun and fulfilling sex life. Our customer service is 24/7 and fluent in multiple languages so we’re on hand to help no matter where in the world you are. If you ring us, someone friendly and knowledgeable answers the phone – you are not put on hold! It is not cheap but it is all done with the aim of becoming the world’s best known sexual wellbeing brand.

Great PR

If you are looking for a sex toy, we want people to search for Lovehoney, not for sex toys in general. Why do we want to be in the same pot as everyone else? Getting our name out there makes us a destination store for so many online shoppers. It’s why we are the only sex toy retailer in the UK to invest heavily in TV ads.

By prioritising all four areas above, we have been able to reduce our customer acquisition costs – the key to maintaining margins. Rather than continually having to ‘buy’ new customers with discounts, we find they are coming back to us anyway because they have had such a good experience.

You hear of lots of horror stories of retailers at Christmas. How they have had to choose between generating sales and clearing stock (often at a huge discount) and making a profit. In the end the discounting, particularly that sparked by Black Friday and Cyber Monday when the market forces you to offer discounts at your busiest time of the year, eats into margins and profit too much.

We listen to our customers so closely that we rarely have problems with shifting excess stock. Black Friday is the busiest day of the year at Lovehoney, as it is for most of our rivals. Would we rather have it in May or June (the quietest times of the year)? Of course – but you have to work in the world as it is. There are ways to maximise sales and not drop your trousers (compromise margins) too much.

My tips to other retailers looking to maintain margins are very simple – know and understand your customer and offer value beyond promotions. For Lovehoney, that means enhanced sexual happiness – so come to us and have the best weekend of your life.

And it all seems to be working. If our sales in 2018/19 grow at similar rate to the year before – and they are forecast to do so – we will overtake Ann Summers as the UK’s biggest adult brand by the spring. (Sexually) happy days ahead!

Image courtesy of Lovehoney

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