December 23 (Bloomberg) -- (This story has been corrected to change the description of the deal in the third paragraph to show it was a licensing deal, not a distribution deal.)
When Justin Ross first showed Keith Caggiano his business plan in 2005, Caggiano thought he was joking. Inspired by a Brazilian girlfriend, Ross, a former portfolio manager at New York City hedge fund Millennium Partners, wanted to start a sex toy distribution business.
Ross eventually persuaded Caggiano, a serial entrepreneur he knew through a mutual friend, to make the leap with him, and the duo invested $120,000 in combined personal savings and a loan from Ross’s parents. Today the 20-employee Torrance (Calif.) company, which imports most of its products from China, is profitable. Ross projects $15 million in revenue this year, mostly through adult novelty retailers and online.
Screaming O's desire now is to sell through mainstream channels while maintaining its racy branding. In late 2009, Walgreens signed a licensing deal to sell one of Screaming O's brands in 7,000 drugstores. Their products, with bright, explicit packaging, are also sold through Amazon.com, Drugstore.com, and RiteAid.com, as well as stores in 27 foreign countries. “We stand right at the edge. We want to market and brand ourselves as a company that sells fun,” Ross says, “without becoming so demure" that customers overlook the products.
It’s a tricky balance to achieve. Trojan, which has sold condoms for more than eight decades, first introduced vibrators to its product line a year ago. It’s taking a low-key approach, with television commercials that feature girlfriends chuckling knowingly over their “personal massagers” and packaging designed to disappear on the grocery store conveyor belt. In contrast, with a name like Screaming O, Ross, 38, and Caggiano, 44, can hardly be accused of subtlety.
“When people see our brand, the barriers go down and we melt their defenses,” says Caggiano, who developed the company’s online advertising and offline promotions, which mostly center on sponsoring international sporting events, spring-break hot spots, and safe sex forums on college campuses. “We want to find a way to help people be comfortable with themselves and their sexuality,” he says.
Despite cultural bias and a handful of states that ban the sales of sex toys under obscenity laws, the duo is adamant that mainstream America will buy its wares. Hamilton Beach patented the first electric vibrator in 1902, about a decade before it introduced the electric iron and vacuum cleaner. Surveys from 2009 conducted by Indiana University and the Kinsey Institute for Research in Sex, Gender, & Reproduction show more than half of women and nearly half of men ages 18 to 60 reported using a vibrator either alone or with a partner.
Accurate revenue numbers for the entire adult industry are elusive, since business research firms do not track the market. Joanne Cachapero, communications director at the Free Speech Coalition, an adult industry trade group, says that until five years ago, the industry estimated its own revenues at $14 billion worldwide. But overall revenues are down about 30 percent since 2008, she says, led by a 50 percent drop in DVD sales. A handful of outside research studies a decade ago put total U.S. adult revenues between $1 billion and $4 billion.
Dave Levine, a 43-year-old Los Angeles man who founded $13 million sex toy wholesaler CNV.com in 1995, estimates the U.S. sex toy business alone at $750 million to $1 billion annually. His 25-employee company supplies products and also does direct sales through SexToy.com. He says adult film companies are now getting into novelties in a “big way,” partly to make up for revenue lost to piracy and the availability of free porn online.
Ross and Caggiano’s first product was a pack of disposable vibrating rings priced as an impulse buy at $5. The two men began attending adult industry trade shows and found distribution at adult novelty retailers on the third try, when they secured one-on-one meetings with 27 distributors at the Pasadena Novelty Expo in 2005. By the end of the show, they had $70,000 worth of orders, but only $10,000 worth of product in a guest house garage. “We had to spend $18,000 in air freight from China to fill those first orders,” Ross recalls. But once the product hit retail shelves, “it started steamrolling. We paid off all our debt within nine months.”
Screaming O’s newest line, The Studio Collection, could appeal to merchandising managers at big-box retailers, the duo hopes. With cleverly disguised packaging, the collection hides sex toys in lipsticks, eye shadow, and face powder containers. The collection includes high-quality materials and stylish designs that justify a higher price point and higher margins than Screaming O's earlier merchandise, Ross says.
Screaming O is frequently approached by competitors — it estimates that half a dozen companies are in the same business — pitching mergers and investors inquiring about getting a piece of the action, Caggiano says. The partners want to stay independent for now, convinced, Caggiano says, that “our brand has the potential to make a space for itself in pop culture.”
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