Enterprise: O e-Canada!

TORONTO (04/27/2000) - The new information economy supposedly offers boundless, globalized riches to the Net-savvy business that masters the difficult art of delivering customer satisfaction. In today's hyperactive and hyperefficient business environment, customer service and customer loyalty are emerging as key competitive advantages. It's a simple idea: keep customers happy and they'll keep coming back to you, again and again. The Internet offers an array of options for delivering happiness to demanding, time-pressed on-line customers, ranging from creating rich and deep multimedia customer experiences to intimate one-to-one marketing to customer relationship management solutions. But what alchemy is needed to transform warm, fuzzy feelings into cold, hard cash in the digital world? What strategies are Canadian companies using to satisfy their on-line customers? Do Canadian businesses have the right stuff to cash in on the Internet's promises? What are the features of Canada's emerging e-business landscape? A bewildering number of surveys, studies and statistics have been released recently in an attempt to quantify and measure Canada's e-commerce development. A June 1999 study by IDC Canada Ltd., funded by IBM Corp. Canada and the Retail Council of Canada, found that Canadians spent CAN$688 million on-line in 1998, about 0.28 per cent of retail spending in Canada. Only 26 per cent of Canada's top retailers are conducting e-commerce, compared to 50 per cent of major U.S. retailers. And Canadians consequently spent 63 per cent of on-line dollars at U.S. sites. A February 1999 poll conducted by Angus Reid found that 90 per cent of Canada's on-line shoppers would prefer to buy from Canadian Web sites, but only 38 per cent had done so because few e-commerce sites are based in Canada. Interestingly, an updated Angus Reid poll conducted in December 1999 found that 70 per cent prefer to purchase from Canadian sites, but 52 per cent had made their last purchase from a Canadian site. A September report by Toronto's J.C. Williams Group and Los Angeles-based BizRate.com estimated on-line sales in the United States at $53.8 billion by the end of 1999, while Canada's estimates were just $1.14 billion -- a far cry from the usual 10-to-1 U.S.-Canada economic ratio. Many studies have concluded that the Canadian on-line market lags the United States by as much as 18 to 24 months.

Pronouncements have been made by an equally wide array of industry analysts, experts and digital gurus about the woeful status of e-commerce development in Canada. David Pecaut, senior vice-president with the Boston Consulting Group, says there are three main culprits for the mediocre on-line performance of Canadian retailers: their failure to recognize on-line shopping as either a threat or opportunity; the lack of entrepreneurs devoted to on-line retailing and the capital to support them; and the absence of a high-traffic Web site in Canada to emerge as a place to serve as a jumping off point for consumers. Says David Marcus, managing principal for IBM Canada's retail consumer consulting practice: "The sad part is Canadian retailers are not doing much about it."

David Ellis, president of Toronto communications consulting firm Omnia Communications Inc., says, "On-line retail's lack of visibility in Canada has left Canadians less likely to trust on-line retailers or give out their credit card numbers on-line. In fact, Omnia's studies show that Canadians trust on-line retailers about as much as they do politicians and arms dealers."

Toronto retail consultant Anthony Stokan offers the following assessment:

"E-commerce will be the junk bond of the new millennium. The Web is a great tool for marketing and brand-building but will never catch on as a mainstream shopping medium, especially in Canada where people aren't as voracious consumers or catalogue shoppers as Americans are." Opinions and surveys by third parties abound, but one voice is conspicuously absent in this wall of e-commerce noise: what do Canadian businesses that are actually involved in e-business and plying their trade on-line have to say about it all? What are the ways and means they've adopted to attract and satisfy their on-line customers? What are the challenges they face in the Canadian market place? We spoke with a number of leading lights in the Canadian e-business landscape to get some first-hand, horse's-mouth insight about what people who are immersed in the new economy think, observe, and do. We spoke with: Rick Segal, president of Chapters Online, on-line bookseller and leading Canadian powerhouse Web site; Ted Boyd, president of Indigo Online, rival Canadian bookseller with potent on-line offerings; Colleen Moorehead, president of E-Trade Canada, one of Canada's leading on-line investing services; Jim Moskos, president of technology, and Mark Wallace, COO, of Bid.com, Canada's primary on-line auction house; John Travis, former e-commerce manager at Canoe, a major Canadian portal Web site; and Neil McPhedran, vice-president of Procure.com, an innovative e-commerce/logistics solutions provider, in a duet with its client, Kathy Woodward, director of distribution services at Great Earth Vitamins, a U.S. vitamin manufacturer/distributor looking to expand into Canada.

BUYERS AND SHOPPERS: TARGETING CUSTOMERS Who are these on-line businesses trying to reach? Rick Segal of Chapters Online makes a crucial distinction between on-line shoppers and buyers, based on his observations of his customers' behaviour. He says, "Chapters Online has top-tier folks in its economic profile: college-educated, affluent, upper-middle class, educated, two kids -- that's the same demographic as Chapters itself. They're the same customers at a generic level. The key distinction on the Internet -- and I stand alone in the wind on this -- is that people are buyers, not shoppers. The number of people who come home after a hard day's work, crank up the browser and say, 'Let's check for new and interesting books,' is statistically small. Most people don't do that on Web sites -- people go to bookstores to wander up and down the aisles." Ted Boyd of Indigo Online has a different mental picture of his bookish customer: "Our Web site is designed to reach book lovers -- people for whom books form an integral part of their lives. Our target market is 55/45 per cent female/male, higher income, university educated, probably but not necessarily living in a large urban centre. That's in fact the demographic profile of 'book-lover'. We want to reach the book-lover wherever he or she may be." In an area such as on-line book-selling, which is arguably the most "mature" (in Internet time) and where several on-line players have emerged, businesses are already carving out their niches from subsets of the intersection between the Internet population and book purchasers. In Chapters's instance, it is book-buyers; for Indigo, it is book-lovers. The picture is similar and yet different for Colleen Moorehead of E-Trade Canada, seller of financial products and services as opposed to a physical good. She says, "We're essentially trying to reach independent investors who are comfortable on the Web. Our customers are more likely male, work in knowledge industries, and are probably younger than traditional brokerage firm customers. All 'Net companies are in similar situations: we're trying to reach that 40-year-old male working in a knowledge industry. It's the same guy who's reaching for that channel changer." The first wave of successful on-line offerings needs to provide services and products that will appeal to a large segment of the current Internet population. In E-Trade Canada's instance, there is a significant segment of independent investors and techno-enthusiasts that can be reached via the Web. For Canoe, a portal Web site, the mental picture of the customer is all-encompassing. In an interview prior to his departure from Canoe, John Travis said: "Our customers are virtually all Canadians: male/female, 18 to 40 years old, educated with disposable income.

That's probably 90 per cent of the Internet population, and you end up with Canoe representing the average 'Net user. We're a portal network, not a niche Web site. We offer strongly branded, niche products through our affiliated partners, but we want Canoe as a brand recognized by that large population bubble." As a portal Web site, Canoe has to focus on having broad, universal appeal to attract as many Internet users as possible, and to segment and steer them towards appropriate affiliated partners once they're onsite.

Interestingly, this offers opportunities to e-commerce solutions providers such as Procure.com. Says Neil McPhedran: "Our clients are manufacturing/distributing companies that want a Web presence. Rather than commoditizing their products, they want to retain their brand identity by keeping their own Web site rather than going through a portal." It will be interesting to see how this tension plays out in the future, as portals strive to aggregate retailers, and small and mid-sized retailers mindful of their brand identity set themselves up as direct destination Web sites. Canadian Internet usage is on par with the United States: according to a recent PricewaterhouseCoopers consumer technology survey, the rates of home Internet access -- 43 per cent -- are the same in both countries. For on-line banking, Canadian usage is in fact higher. As Chapters's Segal suggests, mere usage does not necessarily translate into buying. Clearly, other factors need to be considered when defining the target customer who will purchase a product on-line.

WHAT ARE THEY SELLING, REALLY?

We asked our participants what they offered that a bricks-and-mortar business doesn't. The real product, in all instances, is inextricably bound with intangibles such as time, convenience, control, feelings and entertainment.

Says Boyd of Indigo Online: "We want to surround book-lovers with the things they love in books, gifts, and music on-line. We want to duplicate the same experience on-line and off to the extent that's possible. How does one recreate the ambient atmosphere -- the smell of latté, sitting comfortably in a leather chair with nice music -- on a Web site? The answer is in the visual vocabulary, the set-up of the store, which is represented on-line through deep and rich editorial content. We don't have sniff fans recreating the smell of latté on-line, but we have that analogous capability of recreating the experience. We try to envision what book-lovers would want in their lives." Chapters Online's Segal has a different vision of his offerings. He says, "The number one thing I'm selling my customers is an extension of their time. If you need to get something quickly, I'm there for you. I offer that, and great customer service, prices and selection. A store is a warm inviting place to come and enjoy the passion of reading, but not a Web site. Warm and fuzzy stuff like the colours of your Web site is important to a point, but I'm more concerned, today, with utility. Maybe when high-speed connections are available, people will spend their disposable time browsing on-line. On Chapters's Web site, I focus on providing utility, speed, ease of use, and convenience, so people can buy what they want and they're out of there. If price were the only concern, Loblaw's would lose out to No Frills. There are different mindsets in those two areas, but there are customers who shop at both stores. I'd like my Web site to be like IKEA: functional, efficient, looks good, works good." Both responses are consistent with Chapters's and Indigo's fundamental view of their target audience, and reveal polarized visions. For Segal, a utilitarian approach is needed for his time-pressed, book-buying target customer; the "warm and fuzzy" factor is secondary. For Boyd, the sensorial experience is the key to appealing to book-lovers, who are less likely to be motivated by a desire to buy a book as quickly as possible. For E-Trade Canada, cost savings are a significant draw. Says Moorehead: "One of the main reasons people invest on-line is they can access information they couldn't in the past, and make independent decisions. Plus they get cost savings, and it's not trivial in the investment world. An online trade is $27 on 1,000 shares vs. $600 for an average TSE-listed stock purchased through a traditional brokerage -- compared with the 10 (per cent) to 20 per cent potential cost savings on books purchased on-line.

We will continue to bring innovative technology to our customers with the goal of empowering individual retail investors to be their own advisors." The cost savings of disintermediation are so compelling it is not surprising the Internet has had a dramatic effect on the investment industry. However, to enjoy cost savings, customers need greater information and control over their desired stock purchases, so on-line brokerages need to offer interrelated bundles of information services. The growing trend towards consumer control in today's retail climate is a frequently recurring theme. This begs the question: what has caused it? Canoe's Travis touches on some of the reasons: "I believe people don't buy things, they buy feelings. You can't sell that on-line with all products, only with things like music, books, and videos where you know what you're getting. In the olden days, store clerks were product-knowledgeable; today, they're just money-takers, so you'd better know what you want. At Canoe, we offer the ability to search at your leisure and research your product so you can make better use of your time." The retail industry has experienced several decades of right-sizing, restructuring and upheaval in general. On-line consumers, smarting from their bad customer service experiences at bricks-and-mortar stores over the years, are turning to the Web as a way to regain the feeling that the customer is king.

CUSTOMER SERVICE MECHANISMS

We asked our participants what customer service mechanisms they had in place to ensure on-line customer satisfaction and loyalty. In a fledgling environment with unreliable technology and a multitude of intangibles wrapped up in product offerings, e-businesses are adopting a variety of approaches. The automated, self-serve approach is at its zenith at E-Trade Canada. Says Moorehead: "We've been a good leader in Canada in customer service because, ultimately, we design things to maximize customer control over their financial future. We try to do everything on the Web for communication; if it doesn't work there, then it isn't our business model. We can and do talk to our customers, but we try to envision it as a Web-based experience. A consumer advocacy position is needed in a self-serve business model -- it's our brand essence. Our customers are techno-optimists and come to us for innovation. We're the first brokerage firm in Canada to use Balisoft Live Contact, which allows our customers to look at their screens and speak with our reps at the same time. Techno-optimists will forgive you, because they know technology can and will fail. What's important is: How well did you remediate? How honest are you about what happened? How well have you learned your lesson and will plan for it in the future?" Indigo Online has adopted an automated approach that is consistent with its desire to offer book-lovers an analogous on-line experience. Says Boyd: "Our philosophy is if you focus unrelentingly on your customer and stick to your knitting, then you'll be rewarded with good business. There's a 'virtuous cycle' if you pay attention to basics. We have a customer service call centre with a dedicated e-mail program that collates by type of issue. It handles both store and on-line calls and is 100 per cent integrated -- we can switch back and forth between phone and e-mail as needed. We also just embarked on a relationship with a data mining company. Our job is to provide services, products and relevance. People's tastes change, they get married, they move on. We want to know that on an ongoing basis, so permission-based marketing is key for 2000."

For Bid.com, where entertainment is key and graphics abound, optimization has been used to its fullest. Says Moskos: "We offer an entertaining shopping experience. For us it's about fun, engaging the user. We use bidding avatars, cartoon auctioneers and an on-line game show format, supported by real-time video streaming events. Our Web site is faster because we try to optimize everything. We compress every image on our site, no matter how small. If we do the little things, then cumulatively, it has a big impact. We're the only ones who've tried to capture the fun and entertainment aspects of auction. It's a competitive differentiator. Unlike Sears, you can shop quicker but can also participate in compelling entertainment." For a portal Web site such as Canoe, fostering a feeling of trust in its viewers is essential. Says Travis: "What we have is content and community, and we're trying to bring e-commerce capability to our viewers. How we do this is by going to retailers and offering them our community. We become brokers of relationships. The only thing of value we have is our viewers. If we offer products, we negotiate trusted retailers. We vet their services and ability to fulfil customer needs. If they blow the relationship, our name is mud. So we ask for feedback directly. If customers are dissatisfied, Canoe will go to bat for them and ensure a refund or whatever is needed." For small and mid-sized organizations setting up shop on the Web, basic customer service mechanisms are a major headache when making the transition from an off-line business model. Says Kathy Woodward of Great Earth Vitamins: "We experienced a lot of customer service problems with the old Web site because there was no real distribution method set up. It was a manual process that took two to three days before the product even left the warehouse.

Procure.com came in and solved that problem." Outsourcing customer service mechanisms to third-party providers such as Procure.com is increasingly the solution for organizations that lack the expertise and customer service mechanisms to compete on the Web. Says Procure.com's McPhedran: "For Great Earth Vitamins, we provided integrated Web order management services and back-room functionality for both their franchisees and customers. All orders coming in electronic format are now capable of being processed by their system, be it store, on-line, mail-in or call centre. We also have a returns module under development -- we see this as the big issue for 2000. We also approached them with the idea of avoiding conflicts with their franchise network by running a corporate site and crediting their franchisees for on-line sales in their territories."

COMPETITION: LOCAL VS. GLOBAL?

The Internet has been touted over and over as a global playing field. We asked our participants if they agreed with this assessment, and if they felt they were competing with U.S. sites to attract their customers. What are the advantages and disadvantages of being a Canadian e-business? In spite of the supposed rivalry between Chapters and Indigo, Amazon.com was nominated as Chapters's biggest competitor. Says Segal: "My biggest competitor is Amazon.com but I have several advantages. I have the home team advantage -- I have the same advantages Jeff Bezos did when he started. Plus I'm in a culturally protected industry. But when 51 per cent of Amazon's sales come from products other than books, when Amazon becomes a Wal-Mart, that's when they can roll across the border. The clock's ticking on that. However, we'll always be $5 cheaper than Amazon because there's always a surcharge. Our idea is to be successful in Canada first, then put the money into the physical requirements of expansion. The reality is if you're selling physical goods, it's not global unless you're selling downloadable software." Bid.com's Moskos also spoke to first-mover advantages within the Canadian market in his response: "The exchange rate is a significant localization factor. Logistics are easier if you ship within Canada. Some people may shop at Amazon, but buy from Chapters or Indigo. We compete in the U.S. as well. We have both a U.S. site and a Canadian site. Our Canadian business is growing rapidly, as we have no real competitors here." These first-mover advantages were also echoed by Moorehead of E-Trade Canada: "U.S. on-line investment organizations do offer products and services to Canadians. But we have rules in Canada that don't apply to U.S. firms. For example, all trades in Canada must be vetted before they can be executed, so we're constrained by the human capacity required to check each trade against the customer's risk profile. But the first-mover advantage is still important in Canada. We have corporate advantages at E-Trade Canada: we know what's worked for our U.S. parent, so we have some footprints we can walk in to avoid mistakes. But the ability to do that will decrease as the Canadian market catches up." The idea that the Internet's potential is still largely untapped in Canada was also expressed by Travis of Canoe: "If you look at department stores like LL Bean and Land's End, they don't exist in Canada. The Gap doesn't even ship to Canada. We're competing with the U.S. for eyeballs, but Canadian content is a big draw for a portal network like ours. Canoe is an on-line publisher, unlike competitors like Yahoo and Sympatico. We feel our equivalents are more like the Wall Street Journal and CNN. The U.S. doesn't bother with Canadian content, so we have a big advantage there." A range of pluses and minuses exist in the Canadian e-commerce environment. The regulatory environment works in favour of organizations such as Chapters that are in culturally protected industries, but poses challenges for financial service organizations such as E-Trade that compete with less-regulated U.S. firms. Most agreed first-mover advantages still exist, as few U.S. firms have aggressively targeted the Canadian market, but the window of opportunity is shrinking.

Cultural differences between Canada and the U.S. are a localization factor, as Canadian content is a big draw for sites such as Canoe, Chapters and Indigo.

Participants agreed the logistics involved in shipping a physical product are the biggest localization factor that militates against the view of the Internet as a global selling medium. Says Indigo's Boyd: "If you look at the unknowns in cross-border shopping -- shipping, taxes, exchange rate, delays -- it's better to stay home. Patriotism has less to do with it than good old-fashioned good business."

DIGITAL CANADIANA OR "TOTO, WE'RE NOT IN KANSAS ANYMORE" We asked our participants if they agreed that Canada lags behind the United States in e-commerce development, and what elements they might like to see changed to close the gap. This question generated the greatest passion and the liveliest responses. Most participants agreed, to a point, about lagging behind the United States -- except for dissenting Segal of Chapters. "I don't agree there's a lag. I wish it were true. I would know what works and could avoid mistakes. There are less on-line players because the Canadian retail infrastructure lacks a distribution system. It doesn't have a mail order culture that has customers clamouring for alternate ways of doing business. For innovators, this is like the California Gold Rush. I like the Canadian environment just the way it is. Maybe I'd change the tax laws to allow more risk to be taken. Right now, you can't get tax relief if you get a bunch of venture capital and wash it down the drain." The rest of the participants felt Canada lagged behind the United States, although most said the gap was closing, and vented some frustration about various features of the economic environment.

Says Travis of Canoe: "It's harder for Canadian companies to get independent capital. We have a lot of big boys like Quebecor and Bell doing the investing.

The U.S. is a less regulated, less risk-averse environment, and e-commerce is driven by independents who can access a larger pool of capital to act on their ideas. Bell Canada -- you don't get more risk-averse than that. What you end up with in Canada is traditional off-line business driving on-line traffic, and trying to mould it to off-line models. Plus Canada has a really complicated provincial and federal tax structure that requires mucho administration. No wonder we're behind." Says E-Trade's Moorehead: "The Canadian population is more PC literate and Internet usage is about on par. The difference is in the percentage that have actually transacted on the Web. The issue is choice -- the situation will improve as more products move to the Web. The securities regulatory environment is onerous in Canada. We have regulators in each province and territory, plus the exchanges and self-regulatory organizations like the Investment Dealers Association, compared to the small handful of regulators in the U.S. Plus we're required to perform a suitability check on all trades, but discount brokers in the U.S. aren't currently subject to such a requirement. It's just more efficient in the U.S." Boyd of Indigo Online says:

"I feel we're catching up. Access to venture capital has been a problem, though. Many entrepreneurs in the U.S. are Canadian; the ideas came from Canada, but the environment where they flourished was in another country. So this leads me to believe it's not about Canada, it's about the environment. I don't agree that we lack the critical mass here. We've led the U.S. in terms of Internet usage, but it hasn't translated into on-line buying. It's a chicken and egg thing. Demand is clearly there, and supply is rising to meet it."

Bid.com's Moskos adds: "The U.S. was first to make the cultural shift to e-commerce. The success of the U.S. economy, especially dot-coms, has helped.

The lack of venture capital is a huge chasm between the U.S. and Canada. We're seeing more venture capital and Internet incubators springing up, but we don't have the seasoned pros here." Says McPhedran of Procure.com: "Historically, Canadians are slower in taking to new technology, like ATMs and debit cards.

But once they catch on, they're used in much higher proportions than U.S. counterparts. Based on technology acceptance in the past, Canadians will start using the Web at a hugely accelerated rate. Logistics and fulfilment are the next big issues. We'll hear more horror stories about dot-com executives rolling up their sleeves and working in the warehouse before the issue is fully addressed." "Think globally, act locally" is a philosophy that definitely applies to e-business development. National borders, with their associated cultural and economic barriers, have yet to melt away on the Internet. In terms of logistics, the laws of physics are not suspended on the Internet, and any retailer wishing to ship products in Canada needs a local presence. Most on-line businesses are only beginning to explore the opportunities of new customer-facing technologies to fulfil that time-honoured requirement: know thy customer. Satisfying Canadian consumers requires a number of local elements: knowledge of subtle cultural differences; expertise in dealing with the regulatory environment; a logistics management system that meets customer expectations; and of course capital, talent and elbow grease. Last but not least, Canadian consumers have repeatedly expressed a preference for shopping at Canadian Web sites in a number of studies, and many shrewd on-line retailers are successfully appealing to this tribal instinct.

Andrzej Jablonski is a manager and e-business specialist within PricewaterhouseCoopers's Global Risk Management Services (GRMS) Canada group.

Rosie Lombardi is a consultant within the same group.

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