Adult businesses face retail strategy changes.

When it comes to mainstream retail outlets the adult entertainment industry is getting hit from all sides.

First came the bankruptcy and closure of the Tower Records chain last year. This month the Virgin Megastore on Sunset Boulevard shut its doors in the face of plummeting music sales and high rent, with talk the same fate awaits one store in New York City.

Video store chain Movie Gallery filed for bankruptcy in October and is now reorganizing to stay in business.

While the industry strategy has shifted to focus on online distribution, adult production companies from the San Fernando Valley haven't turned their backs on brick and mortar stores just yet.

Store closures and bankruptcies are an indication of what both adult and mainstream studios are up against these days as viewers turn to alternative ways to view their favorite content and cut into the profits generated from sales of physical discs.

"We have to face it head on and look at other avenues to create revenue," said Steven Hirsch, a co-founder and co-chairman of Vivid Entertainment.

Just five years ago, 80 percent of Vivid's business came from DVD sales. Last year, it was about 30 percent, Hirsch said.

National figures also show a drop in DVD sales.

According to AVN Online, sales and rentals of adult videos dropped from $4.3 billion in 2005 to $3.6 billion the next year. Online sales, on the other hand, increased from $2.5 billon to $2.8 billion in the same years.

Product from Vivid and other major Valley adult companies that were sold at Tower Records are still carried at the remaining Virgin Megastores and Movie Gallery Outlets.

While the Tower and Virgin sales were not huge business it was solid, said Joone, a cofounder and director at Van Nuys-based production company Digital Playground.

"The Virgin Megastore is down the street from the Hustler store," Joone said. 'Tm sure the customer who would want to walk into (Virgin) is now walking into Hustler to pick up their adult material."

At year's end, Virgin has presented a mixed financial performance.

The chain as a whole had a successful 2007 with same store sales increasing by 6.6 percent in December and by 11.5 percent for the final quarter of the year. Music sales were up 1.2 percent and DVD sales were up 18.1 percent.

In explaining why the chain was closing its West Hollywood store, executives pointed to dropping music sales and the high rent.

The chain scaled back in 2007 by closing its Chicago and Salt Lake City stores.

The Virgin store in Burbank closed in 2005 after the roof collapsed from heavy rain and never re-opened. The Hollywood Boulevard store is the last remaining in the Los Angeles area.

Virgin Megastores are owned by Related Cos., a New York-based real estate company.

The new strategy is to rely less on CDs and become a lifestyle store with other products--clothing, video games, and books.

Adult bookstores, also facing declining revenues from DVD sales and rentals, are taking the same route.

While the main reason to go to such a store is for a DVD, it's important to have other products available for customers to purchase, Hirsch said.

"You need to find another hook to come into the store, which is why you find them becoming more lifestyle oriented," Hirsch said.

Internet distribution and video-on-demand through cable providers are methods adult content producers are using to replace the brick-and-mortar retail stores.

Vivid has a wireless business currently only available in Europe, though Hirsch expects U.S. carriers to come on board in a few years.

When the Apple iPhone became available last year, Digital Playground became the first adult company to make content available for download to the device.

Regardless, mainstream outlets remain an important part of the industry's strategy in order to reach different audiences.

"Because of these choices we have expanded our market," Joone said. "Not only can we reach people in the U.S. but people all around the world that may not have necessarily been able to get this product due to no stores being near them or government rules."

BY MARK R. MADLER

Staff Reporter