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Sex and the Strip Mall

Durham, N.C.- The shopping center on Chapel Hill Boulevard in Durham, N.C., is like many you would find across the country. SUVs troll the parking lot. There’s a tanning salon and a barber shop and, nearby, a Macaroni Grill and a Toys “R” Us. And today there’s a special appearance by porn star Nina Hartley. The performer has drawn a crowd of about 80, equally split between men and women. She blindfolds a slim, tall college student, sits him in a wing chair, and caresses him with a feather. The crowd titters. Later, Hartley signs autographs and poses for Polaroids. When a fan asks for a hug, she encourages him to squeeze her butt.

No, the local Radio Shack hasn’t begun sponsoring a sex club. The venue for Hartley’s “talk” is a 2,350-square-foot Adam & Eve store, part of a chain of five that constitutes the latest offering from PHE Inc., the country’s largest mail-order peddler of porn and erotica. The company’s founder, Phil Harvey, dreams of opening as many as 200 more stores nationwide in the next few years.

Building a brick-and-mortar brand is, Harvey believes, the best way to secure his place in a market where competition has become brutal: While the advent of the Internet has created more porn consumption, many porn companies are struggling. Harvey’s revenue, which used to grow 10% a year, has been stuck at $80 million for five years now. Digital piracy is one reason for the slowdown, but ultimately, the big problem seems to be that Harvey’s willingness to sell things other people wouldn’t–long his competitive advantage–is suddenly commonplace. Amateurs offer lots of hard-core stuff online, and deep-pocketed media companies like Comcast and Time Warner are distributing soft-core material over their vast networks.

These large players are particularly dangerous to entrepreneurs like Harvey because they enjoy access to the public capital markets, while he does not. “If there were dildos in every Wal-Mart,” Harvey says, “we’d probably be out of business.”

Perhaps that fear is why, in the words of one Adam & Eve executive, Harvey wants to build “the Gap of the adultmarket.” But the evolution from catalogs to storefronts is just the latest unlikely metamorphosis in Harvey’s unique business career. The Harvard alum started the company in 1970, at the same time he was studying for a master’s in public health. From a school project, he got the idea to sell condoms by mail order in the U.S. (which happened to be illegal at the time, although he was never busted). Soon thereafter, Harvey–a one-time CARE worker in India–started using his revenue to fund a pet cause: subsidizing birth control in the developing world. From there, he got into selling porn videos, and eventually he began producing his own porn films at budgets of as much as $200,000 per flick.

Harvey’s reputation is that of one of the heroes in the porn industry. He enjoys this reknown both because of his philanthropy, which now extends to nine countries, and because “he treats people well.” Hartley concurs: “Adam & Eve is an honorable company,” she says. “The checks come on time, and they don’t bounce.”

Although Harvey was prosecuted for obscenity at the behest of Attorney General Edwin Meese in the 1980s, he was not convicted. And in the industry, Adam & Eve is seen as “taking a very safe, vanilla approach” with its content, Connelly says. “It’s about as mainstream as you can get.”

But is it so mainstream that soccer moms, latte in hand, will browse a store full of its merchandise? That’s the goal. When retailing was first proposed, everyone at Adam & Eve agreed that the objective had to be to bring in new customers. “We didn’t want to simply redistribute our sales among the different channels,” says Bob Christian, who was an executive in a pizza delivery chain before becoming Adam & Eve’s director of new business development.

Women, specifically, are the new customers that the company has zeroed in on as it fine-tunes its retail offerings. They are the holy grail of the industry these days, Connelly explains, because their tastes are said to dictate porn spending among couples. So to draw women in, Adam & Eve stores promote lingerie and vibrators more prominently than the catalog and website do. And the stores are “comfortable, clean, well-lighted, and nicely merchandised,” says Christian.

But as Harvey well knows, a clean store may not be enough. In the early days, he ran a small shop in Chapel Hill, a quaint college town filled with white churches and leafy lanes. It sold condoms alongside novelties such as chastity belts and lasted about two years. “It just wasn’t a big enough community, and we weren’t able to bring a lot of retail expertise to the experiment,” he says.

This time around, he thought of his first five stores as test labs that would reveal to him through trial and error how a porn chain might achieve the same appeal as, say, a Barnes & Noble. Since he purchased his first location in 2000, for example, Harvey has learned that an Adam & Eve needs to be adjacent to a major shopping center to work, even if that means toning down the product mix to comply with zoning rules.

He also learned that porn-star appearances are a must. At first, Adam & Eve shied away from them for fear of turning off women. Trouble was, the stores weren’t generating nearly enough foot traffic. But once Hartley and another leading lady named Carmen Luvana were brought in to promote the videos, “the response was enormous” from all kinds of shoppers, Christian says.

Retail remains an inherently risky business. For Harvey, the most foreign aspect of it is that it is capital intensive. One of the blessings of pornography is that the standard distribution model–a mix of catalogs and the Internet–has fairly low fixed costs. So far, Harvey admits, stores aren’t “returning the kinds of profits that we hoped they would at this point in their evolution.”

“But,” he adds, “I’m optimistic.”

To fund quick expansion, Harvey is now turning to franchising, “which would lower the start-up costs and improve the financial picture.” Adam & Eve claimed to have fielded about 40 inquiries by early March, but no one has committed to date. Christian estimates that a franchisee will pay between $90,000 and $150,000 per store, including fees plus construction and fixture costs.

Meanwhile, Harvey’s hedging his bet by continuing to invest in an entertainment website and a new division that sells about $1 million in sex toys annually through Tupperware-like parties. But neither of these ventures offers the potential rewards of the brick-and-mortar stores, including a truly national brand name. Nor do they pose the risk. “Store retailing is tough,” Harvey says. “Every time you get one part of it right, something else eats you up.”


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