Beate Uhse wants to sell more than sex

HAMBURG, Germany Sex may sell, but selling sex can be expensive.

Germany's Beate Uhse, the world's largest sex retailer by revenue, is investing heavily to adapt its image to changing tastes and morality and plans to build its brand through new "lifestyle" products including drinks.

The company -- whose sales fell back in 2006 after a long run of growth -- is spending up to 5 million euros ($7 million) a year to revamp its stores, and putting more more money into what it hopes will be "more fashionable products".

"We have love bags, which is a bag with products that make sex more fun, exciting," Chief Financial Officer Otto Christian Lindemann told Reuters in an interview.

"Take a love bag home, have a love experience."

The love bags, with names like One-night and Sexplorer, contain lubricants, vibrators, body paint chocolate, champagne and CDs of erotic stories, among other products.

The company says the days when a sex shop's main function was selling porn to men are over. The Internet has allowed men to watch porn at home: DVD sales are down. So Beate Uhse is trying to lure more women and couples to its stores.

Porn's share of sales has fallen to about 35 percent and will decline more as erotica products gain and the company starts offering other products like wine and beer, joining other firms extending their brands deeper into people's lives.

"There is going to be a big shakeout in the sex shop retail business in Europe," Lindemann said. "Europe has thousands of sex shops, most of them strongly dependent on DVDs. Many of them will not survive.

"In the future we'll still have DVDs but not that many," said Lindemann, whose company had sales of about 271 million euros in 2006, higher than Playboy or Larry Flynt Publications, which publishes Hustler.

Finding a subsititute for the bread-and-butter DVD business and luring women to its shops will be tough, as Beate Uhse has found before with its Mae B stores aimed primarily at women. The last of three Mae B stores will close once its lease runs out.

ONE SHOP, FOUR SECTIONS

Its new store in Munich and recently renovated shop in Dortmund are divided into four sections. Near the entrance are "fun products like massage oils, lubricants", Lindemann said.

Then comes lingerie, where women can change in cabins and check their look under different lights. The third part contains DVDs and the fourth what he called "harder stuff" like dildos, handcuffs and leather attire.

Beate Uhse, started in 1946 by a former female pilot with the same name, is determining how many of its roughly 130 company-owned and franchisee stores in Germany to renovate.

It operates around 330 sex shops in 11 countries and has mail-order operations in nine.

Beate Uhse is "one of the top-selling" firms in the sector, Gregor Elze, an analyst at BayernLB, wrote in a research note.

"By expanding into countries it has declared promising new markets, notably Poland, Slovakia, Spain and the Czech Republic, Beate Uhse should generate substantial sales growth," he said.

One of only a couple of analysts covering Beate Uhse, which is 60 percent owned by five private investors, Elze rates the share a "buy" with a target of 5.12 euros based on its growth potential.

Beate Uhse shares have performed weakly, underperforming German retailers and trading between 3.3 and 6 euros in the past year. That is below their 1999 stock market debut of 7.20 euros and a peak around 29 euros during the Internet boom in 1999.

"We're in really good shape to have good figures in the future because the infrastructure is set up. 2007 will be a year of transition," Lindemann said.

"At the end of the day, whatever new direction we take, we want to earn money. Selling erotica is different than selling porn. And we are going to do it right."

But it may yet prove challenging.

At the Beate Uhse store near Hamburg's main train station on Saturday night all six customers were men. And one of them told Reuters he would never buy Beate Uhse beer.