Industry Committee on May 7th, 2013

[The Chair, Conservative, David Sweet]

Welcome to the 68th meeting of the Standing Committee on Industry, Science and Technology. Again, we're talking about the adoption of digital technology by Canadian small and medium-sized enterprises.

We have four witnesses before us. We have Harley Finkelstein, the chief platform officer of business development at Shopify Inc. We have François Bouchard, the president of The Country Grocer. We also have Jason Hamilton from S-Trip. Also, by teleconference, we have Mr. Robert Hersche, the senior director of corporate counsel and regulatory affairs of SaskTel.

I should also tell you, Mr. Hersche, that your mike is not muted. Any sounds that are happening there, we can hear here. Okay?

[Robert Hersche, Senior Director, Corporate Counsel and Regulatory Affairs, Saskatchewan Telecommunications]

Okay. That sounds good.

[The Chair, Conservative, David Sweet]

We're going to ask you for your remarks last because we are getting some static over the line and it would be hard for the translators. We have a technician coming to make sure that we clean up that line first. I'm not leaving you out because you're in by telecom; I'm simply going to buy some time while the technicians come.

[Robert Hersche]

That's no problem at all.

[The Chair, Conservative, David Sweet]

We'll go first to Mr. Hamilton from S-Trip. I understand that the clerk has notified you that you have approximately six minutes for your opening remarks.

[Jason Hamilton, Director, Marketing, S-Trip]

Hello, everyone. My name is Jason Hamilton. I work for S-Trip. We're a student travel company located in Toronto. I am officially the director of marketing for S-Trip, although since S-Trip is a small to medium-sized enterprise, my title includes web technology, communications, brand partnerships, and everything in between.

We offer travel to both university and high school students. We target a market that is very much within the digital space, both mobile technology and computer technology.

I would like to give you a brief history of S-Trip to bring everyone up to speed on what we do. In 1976, a man by the name of Inder Handa started a travel agency here in Ottawa called Handa Travel. Out of Handa Travel, Inder's son, Alex Handa, began selling student travel to his friends and to other students within the Ottawa region. In 2007, he moved to Toronto and started S-Trip as its own unique brand. Since then we have developed into one of the largest student travel companies in the country, focused on university and high school students.

That growth has come in large part from some technology improvements that we have been focusing on. I'll tell you a bit about the customer focused IT strategy that we have that has allowed us to succeed in the marketplace, particularly in recent years.

Our IT strategy could be put into a very simple formula. We leverage existing technology solutions to be efficient on the back end, and spend our development time and creativity to create real value on the front end. Recognizing our core competencies in running a small to medium-sized business are not in back end development. We do not have back end developers on staff. That's not something that we focus on. We hire back end developers who have those skills. We also use technologies that exist in the marketplace such as CRMs and content management systems.

Those technologies allow us to have a strong back end, but then we focus more on the front end. By focusing on the front end, we're able to offer a digital experience that reaches directly to our customer, something that reaches them on their terms, something that enables them to experience our product, experience travel in a way that they want to. Obviously, our customers, being between the ages of 16 and 24, are very adept and in tune with technology.

I'd like to highlight three parts of our IT strategy that I think are important for any small or medium-sized business. Number one, we are 100% on the cloud. All of our servers, all of our software, all of our documents, and anything that we would use within our business, all exist on the cloud. That allows everything to be accessible from anywhere. That allows our technology to be shifted easily. It's very easy to add somebody new into the business. Anybody new to a team who needs to find a document can easily find it through the cloud, through a search functionality that allows them to find it in an easy manner. That is one thing that certainly has allowed us to succeed.

We're also very customer focused in the way we manage our web properties. As I mentioned before, we focus very much on the front end of our website and our web properties in order to offer our customers a simple easy experience when they're online. It's amazing how many small businesses I see where you go to their website and you want to find something very simple, maybe a form that you need to download or a phone number that you need to call, and it's a nightmare even to get to that place to find that.

We focus very much on what the customer wants. We do a lot of research and a lot of focus groups with our customers to understand what they're looking for when they're on our website, and how we can best service them. It's amazing to see those businesses that are doing that. They are able to have those much quicker interactions and customers don't need to call us anymore. We certainly encourage customers to find their solutions online themselves before calling our customer hotline. We've seen as a result of that a definite decrease in the number and the length of calls we receive as a result of that focus online.

The last thing is that we have an efficient back office. We have central services located in our head office in Toronto, as well as those services that we do outsource. Once again, we focus on our core competencies and outsource those things in which we do not have a core competency.

There are a couple of business challenges to tell you about that I think are unique to any small and medium-sized business. One is communication. Technology has the amazing capability to enable faster and more efficient communication. However, being a small or medium-sized enterprise, we don't have the funds to invest in the larger IBM enterprise solutions that can often allow bigger businesses to communicate better.

We've done well with Google Enterprise as a strong solution. Google Enterprise has a much lower cost base. A simple thing like Gchat is something that all of our employees use on a daily basis to communicate with each other. We see fewer and fewer of our employees picking up the phone to call each other and more and more of them communicating over Gchat and sharing documents over Gchat. As we've grown nationally and have had to open offices across the country, it has allowed those new employees to have access to all of our resources. It also allows us to communicate with them.

We have also utilized a lot of video technology as we've grown. We have a large part-time contract team, about 500, that we hire every year. Since we are in travel, they go on our trips and run our trips. Hiring those from across the country is obviously a challenge when you can't meet them all face to face. So we have utilized Skype and other video technologies as a way to complete those interviews and trainings. Video technology has become a big part of our business from our staffing side, in terms of training, all the way through to our sales side.

Finally, the last part of our business challenge is communication. This challenge has grown as a result of international challenges. Being a travel company that sends students internationally, the technology and the web infrastructure that exist in some of the countries that you go to are a little bit slower than we experience here. So that was a bit of a challenge that we've faced, and we've been working towards overcoming that by working with local suppliers and trying to build Wi-Fi hotspots and whatnot in the places where we go. But that's a somewhat unique challenge to us because we do operate mostly in an international environment in a lot of countries that just don't have the infrastructure that we have. But as we've been able to grow, we have been able to overcome that through various Wi-Fi hotspots and whatnot.

I think that pretty much wraps up everything that I would share with you.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Hamilton.

Mr. Finkelstein, for six minutes, please.

[Harley Finkelstein, Chief Platform Officer, Business Development, Shopify Inc.]

Thank you for having me.

My name is Harley Finkelstein. I'm an entrepreneur and a lawyer here in Canada.

In 2005, I was attempting to build a snowboard shop online with some partners. We found it very difficult to sell a product online at that time. We decided we would build our own piece of software to help retail these snowboards online from Ottawa. We very quickly realized that selling snowboards was a good idea, but selling software was a great idea. Ever since that point, we've been in the business of selling software to help other people build online stores.

Seven years later, Shopify has 180 employees based out of four offices. Ottawa's the primary office; after that it's Toronto, Winnipeg, and Montreal. We have 55,000 customers, that's 55,000 active stores that last year sold approximately $750 million worth of product. This year their stores will sell $1.5 billion worth of product.

The reason I'm interested in talking to you today is that I believe Canada is lagging drastically behind in online commerce and what I like to call the “new retail model”.

Currently, about 10% of total retail sales in the U.S. are transacted online; it's about half of that in Canada. That being said, our growth rate for e-commerce penetration over traditional retail is actually higher in Canada than it is in the U.S. So we're getting better, but we are very behind.

A study came out a couple of days ago from Forrester that I want to cite a few metrics and data points from, to give you some context for why I'm concerned. Of online spending by Canadians, 25% is not happening at Canadian online stores. Of the online shoppers who were surveyed, 68% say they currently shop online outside of Canada. Of Canadian consumers, 72% say that they shop outside of Canada because they could not find what they were looking for from a Canadian online retailer. When they did shop in Canadian stores, the biggest complaint from Canadian shoppers, according to Forrester, was shipping prices, and 68% of those polled found Canadian online stores' shipping rates to be exorbitantly high.

There's a lot we can to do to help Canadian merchants to move online. My view of the future is not one where online and offline are separate, but it all being commerce. Whether you buy it in a store and have it shipped to you, or you buy online and pick it up in a store, I believe the future of retail is going to be in commerce in general, not a separation of online and offline. So far, Canada is certainly lagging behind.

When I look at our growth rates in online stores in other parts of the country—and Shopify currently has stores in more than 100 countries—our growth rate is much slower here even though we have 5,000 online stores here in Canada. The risk aversion is much higher here, and people's propensity to try out new technology is much lower. This is ironic, because we are a Canadian company, and we are currently considered to be the smartest company in Canada by PROFIT Magazine. We've been the fastest-growing company in Ottawa for three out of the last four years. So we have the motivation, and we are very much interested in helping this change happen in Canada.

We're working with great organizations like the Retail Council of Canada and Canada Post to help encourage and inspire other Canadian retailers to move online. I provided all of you with four examples of online stores that have recently joined Shopify. One of them is a local store here called La Bottega. It's a local grocery store that's been in Ottawa for the last 50 years. Until last year, they sold their products in a geography that was basically Ottawa and Gatineau. Today, because of their online store, and because they're able to retail and sell their products coast-to-coast, their business has expanded dramatically. They're selling olive oils and balsamic vinegars from P.E.I. to Vancouver.

The other store I want to profile for you is a jewellery store, Biko. This is a girl out of Toronto who had a passion for designing jewellery. The problem was nobody wanted to buy her jewellery. No retail buyer wanted to purchase her jewellery for sale in a retail store. What online retail and commerce have provided her with is an ability to go direct-to-consumer. She didn't have to convince any buyer to accept her wares; she was able to sell directly to the consumer, which is very democratizing.

Right now 5% of retail sales are done online in Canada, and that's going to grow very rapidly. The question becomes, what's going to happen to these Canadian stores? Are they going to take the plunge and move online? Are they going to close their doors? We know that over the last 10 years the labour market for retail has slumped quite a bit. Or are they going to be a little bit more ambitious, and a little bit more inspired, and try to expand their businesses in other online fields?

In October 2011, the Canadian Federation of Independent Business stated that 56% of SMEs responded that the cost of implementation does not justify the investment, as an obstacle for accepting online payments and commerce. Shopify is $29 per month. I'm going to repeat that: Shopify is $29 per month. There is no way that the cost is prohibiting them from moving online. The problems are education, inspiration, and risk aversion.

There was one more study. In 2011 CEFRIO came out with a study that said 70% of Canadian small businesses had a web presence, but only 18% were selling online. We as Canadian business owners understand that online is important. What we don't understand yet is how online is going to help our business grow.

I want to contrast that with a program that I understand is currently being undertaken in Ireland. Ireland created something called the e-commerce website development fund. They've set up this fund to provide Irish small and medium-sized enterprises—or microenterprises—with e-commerce supports to encourage these SMEs and micro-businesses to make greater use of existing web technologies. They've put $150,000 per quarter into this fund to allow these small businesses to use the tools and to learn more about how to build or expand their businesses online.

Currently we have brick and mortar and we have “click”. I believe the future is “brick and click” whereby retailers sell online and off-line. Best Buy is shrinking their stores right now with something they're calling “showrooming”. Showrooming is a fad in which people go into these large retailers; they play with the devices, but they don't make the purchase in the store. They leave the store and they make the purchases online where it's more convenient, and they can do it in the comfort of their own home.

Retail is changing very rapidly. The next couple of years will be a very exciting time for retail. I believe that right now most Canadian and small businesses are doing it alone. Shopify is trying to be the evangelist of that here in Canada, but I believe there's a lot that we can do to help.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Finkelstein.

We'll now move to Mr. Bouchard for six minutes.

[François Bouchard, President, The Country Grocer]

I'm François Bouchard. I'm the owner of The Country Grocer and OnlineGrocer.ca, so our store is a little bit different. We're very much a brick-and-mortar store that decided to go online to expand our marketplace. Our shop is here in Ottawa, in the south end. We have 10,000 square feet, 26 employees, and the grocery store has been there for 50-some years.

Back in 1996 we decided that to expand our business model we should actually go online. At the time it was more from looking at predictions of what was going to happen and what we were going to do to keep our market share. In the grocery business we run on a margin of 1% to 2% as the net bottom line, so anything we could do basically to increase our revenue stream without increasing our overhead cost was the way to go.

We were the first to launch in Ottawa and the third grocery store to launch in Canada, which we did in 1997. Interestingly enough, our marketplace has now grown, with 96% of the customers we serve online being outside of our trading area, meaning an area of more than five kilometres around the store.

We now service customers across the country and in the States. We work with Foreign Affairs for expatriates who are posted abroad, and we do a tremendous amount of business up north in Iqaluit, Resolute Bay, and other remote communities.

For us, the key was to really offer that expansion to other customers—and to do it. It hasn't been easy. Obviously, we started in 1996 when it was all dial-up and we had to go through it. We're a small store, with 26 employees. We don't have resident IT people, and we had to grow the business as we went along.

We continued to grow that business, and that business model is unbelievable. Interestingly enough, one-third of the people who actually shop online do so for someone else. For example, we have two universities and two colleges here in Ottawa and we have a lot of parents who actually shop for their children who are here. The benefit of that is that mom can be in Halifax and shop for her children who are here. The disadvantage is that when we technically show up at the dorm with the groceries they say, “I guess mom is not sending money”. So we get a lot of that.

[Some hon. members]

Oh, oh!

[François Bouchard]

Interestingly, in the marketplace we work with the hospitals here. Hospitals are actually forcing people to go back home a lot sooner. Obviously, the biggest concern for someone is, “I've had a hip replacement, a knee surgery. How am I going to get groceries?” We partner with the establishments to say that this is an offering that we do.

We partner also with a lot of people, with seniors and baby boomers who are getting to a certain age. We have customers in New Zealand ordering for their parents and doing it online from New Zealand. We actually deliver the groceries and have become more than just a shop or a grocery service. As we've discovered, on Monday the cleaning lady will show up, on Tuesday morning we will show up, on Wednesday, the VON will show up, and now every day somebody is checking on mom, who is 82. So it's become more than just a grocery shopping.

Interestingly enough, too, what we've found at that store level is that grocery shopping is an emotional thing. You've all been grocery shopping. It smells nice and it looks nice. Apparently, a lot of people said that online grocery shopping wouldn't catch on and that people wouldn't buy produce online, because there aren't these impulse things. Our average basket online is eight times bigger than it is at the store level. People are actually online, they have the time to do it, they're trying to justify the delivery costs, and on a Sunday afternoon, they have time to do it, and do it properly.

A lot of our customers are small businesses. Who is going to go out and get the lunch or the drinks, or whatever else? That is now all done online.

As I said, we have a lot of Canadian expatriate customers in the States who are homesick. They're looking for specific products, and we've partnered with different companies to be able to offer those products to them, and have gone through all the hoops and channels to be able to ship those across the borders. We're certainly able to do that on a regular basis.

We've partnered with First Air and Canadian North to actually ship groceries up north on a daily basis as well.

One of the challenges we have faced is actually keeping up with technology, because obviously customers move on. We still have some of those customers from 1996 who, I wouldn't say, are still on dial-up but are certainly on the old computers that aren't as quick and reactive. We have all these people who want to think that grocery shopping, basically, is like a video game and that they can go click, click, click, and everything falls in. We have to measure all those things.

We're also trying to get more information to our consumers because now they want ingredient listings, they want allergen listings, and they want all those things that actually matter to them.

As to consumer nutritional facts, we're working with GS1 Canada to capture all that data, to actually include it on our website as part of our service. That's key, and that's where we're certainly improving it. We're in the process of doing so.

As to some of the challenges, obviously, transportation is a big thing. To ship it up north, it's not the cost of groceries, but actually the cost of shipping the products up north to them. Obviously, it's the same thing to the States.

Payment is a big issue—Internet fraud and credit card fraud—so being a small business we have to put all of those parameters in place to try to keep ourselves....

What we see, as well, are barriers. I've talked about shipping to Iqaluit and shipping down to the States. I can't ship to the province of Quebec. We have a lot of people here in Gatineau who are requesting items, but because of barriers—milk quotas and all kinds of inspection reports and different things—we cannot ship there, unfortunately. So there is an untapped market for us to be able to ship there because it's easier for us to get to Gatineau than to Stittsville or Kanata.

Certainly, we have a lot of push-back, but we're working through those changes.

Up north it was the same idea; we had a great following, and then they changed the program from food mail to Nutrition North. No retailer in Ottawa is allowed to actually ship through the Nutrition North program.

Internally we work with all of those challenges. We see a lot of opportunity. We're very excited about the future. As my colleagues have said, there is a tremendous amount of growth; the customers do want that.

We're early adapters, and we've been there all along. We've moved along with all the technology. We're actually responding to consumer needs to try to get more information. We believe, as my colleague here has said, it's “brick and click”, not brick and mortar. Our credibility was having a store when we first started, where customers could actually come in and see us, and see that we weren't shipping out of a warehouse: we'd get produce seven days a week, everything was fresh, and we'd be there to service them.

We now have loyal customers who have been shopping with us for 13 or 14 years, and yet most of those customers we've never actually seen face to face. Our customers from up north will actually fly to Ottawa, and I'll meet them at the airport and have a discussion, but they have never actually set foot in the store.

It's a different way to do business, for us, and it's huge. That is where the growth is. We want to continue doing that. We see great opportunities with the baby boomers along the way.

I thank you for the opportunity to be here today.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Bouchard.

We will now go to Mr. Hersche, who's on video conference.

Mr. Hersche, go ahead with your opening remarks. You have six minutes.

[Robert Hersche]

Thanks very much. Again, thank you for inviting SaskTel to speak to you.

What I will focus on today is essentially rural infrastructure. Your other presenters have talked about the slower communications and about online. Again, online purchasing in rural areas could be very advantageous. We have something in the order of 65% of our small businesses in Saskatchewan located outside of Regina and Saskatoon. They're spread over something in the order of 660,000 square kilometres.

We have a number of items, and I was hoping that we could describe how we have to try to serve some of those areas. We have wired Internet in every town of over a hundred people. We have full-fibre backbone. We have over 400 towers with 4G, and we're doing satellite in remote regions. That sounds like quite a bit, but it's still not enough. We have a population density that can only support one facilities provider. There really isn't a business case to go out there and do various facilities-based providers. So what we're trying to do in Saskatchewan, with our providing the facilities, is that there is competition in telecom, in other online services, or in other services—not in the infrastructure but in the services themselves that go with that communications infrastructure.

One of the things I'd like to point out today, though, is that some of the new decisions.... For example, mandated roaming ensures that there only be one service provider in most of rural Saskatchewan; there's no longer a business case for someone else to begin to build there.

I said all those small businesses are in rural areas, and they really do need connectivity if they're going to continue to do that. Satellite will reach most of the places, but satellite doesn't always meet all of their needs because of the latency. As you heard from the Federation of Canadian Municipalities, we also need some other kinds of speed, and again they mentioned some of that latency as well for some of their businesses as they go forward.

Rural businesses also lack some of the ICT expertise. They have an option now with infrastructure that they use cloud-based kinds of services, services that can provide them with the kinds of base that they need to begin to do business.

I talked about all of the wired Internet and other kinds of things in small-town Saskatchewan—and it doesn't matter, it can be small-town Saskatchewan, Manitoba, or Alberta and most of B.C. Most of the medium-sized businesses do not live or reside right inside the town itself. They are on the peripheral because of taxes or environmental or they get the space to do that kind of thing. In many instances they are just outside of where we can provide this wired Internet. It's just because of the technology called DSL technology. When we put in fibre, it will be just outside of those areas.

So we have a real problem in reaching those medium-sized businesses, and it's very expensive to meet them with fibre or other kind of wireline. I have in our presentation that it costs us something in the order of $18,000 per kilometre to plough fibre. If your business is four or five kilometres outside of a town, that can get to be very expensive. So we're looking at other kinds of new wireless options.

As we go down these new wireless options, we need spectrum. As I said, everyone, every company, every service is running over our infrastructure. We need access to that kind of spectrum to provide that for those businesses. There was a recent decision by the federal government on the 700-megahertz spectrum, one of the most valuable rural spectrums just because it reaches very far: 30 kilometres away from a tower. A tower can cost us a $1 million to build, so we don't have a lot of people we can meet in that way. With the 700, we can meet that. We can provide the new technologies with LTE over what our entire footprint is and meet the needs of a lot of people.

The problem with those decisions that came with 700 megahertz is that the auction format favours national providers. It maximizes revenue for the country as a whole, regardless of the bids of the individual licences. So if a national provider provides a bid for all of Canada, that bid will supersede what might have been just a larger bid for Saskatchewan or that of some of the other small providers like Eastlink in the Atlantic and Vidéotron in southern Quebec.

After all the dust settles on the auction, much of that spectrum will go unused in rural areas for at least 10 years. People are buying that spectrum for urban areas. They can go...and now they have mandated roaming on SaskTel's towers. They don't have to build any more towers; they're using our spectrum. They're not going to use that spectrum. Right now, we have no way to go to Industry Canada and ask to either use that spectrum or share that spectrum at some sort of reasonable cost as we go forward.

For policies to stimulate some services in rural areas, we've got to recognize in our policies that rural can only support one infrastructure. We've got to support that rural infrastructure. The U.S. has recognized this, and it's developed policies to ensure that the rural-based infrastructure is healthy and expands in the new areas. With everyone using our facilities, we can't necessarily expand because we're not getting any revenue, or any substantial revenue, to go out and expand those services. Scarce spectrum resources shouldn't be allowed to lie unused. We should be able to share this unused spectrum until the owner wants it, and then we will go.

I'm sorry; I'm almost taking too much time.

Lastly is that national companies using existing rural infrastructure to reach businesses have to contribute to the real cost of building in rural areas. We can't leave it just to the rural providers as we do that.

With that, I think my time is up. I apologize if I've gone over.

Thank you very much.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Hersche.

Now that we've had all the opening remarks, we'll go to our rounds of questions. Our first round is seven minutes.

I'll just remind colleagues that we do expect a vote at 5:15 p.m., so we'll need to leave when the bells go.

Now we'll go to Madam Gallant for seven minutes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman.

My first question goes to S-Trip. I'm wondering whether or not, with your cloud-based storage and communications, you have any security concerns. If you do, how do you deal with them?

[Jason Hamilton]

We have security concerns, as any business would have security concerns. However, most of what we would share on the cloud would not be high-security-need resources. We deal with them in the standard ways that any business would deal with them, by password protecting them, but we don't go into a lot of depth on protecting those resources because we just don't put the resources that need security onto the cloud. That's such a minimal amount that it has never been a major concern for the business.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

I have dealt with S-Trip on a number of occasions, and we do have to key in our credit card information. Is that on another platform like a PayPal? Is it totally segregated from the cloud?

[Jason Hamilton]

Yes. Anytime you're using any credit card information, it's on a fully secured server that is securing that information.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

One of the benefits to your company of using the cloud format is that the customer has to go to the effort to get the information, be it the liability release, confirmation of payment, or itineraries. Closer to the date there are different documents to obtain.

What percentage of your profit margin would you say you can attribute to having the customer reaching as opposed to you pushing the information out?

[Jason Hamilton]

We do a combination of both push and allowing them to reach for it.

It's a tough question to answer.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

It's however you want to quantify it.

[Jason Hamilton]

I'm trying to think of how I would quantify that. I guess the only way to quantify it would be to count the time the customer spends and as a result the time that we're saving by not having our own team answering the phone and spending that two or three minutes on the phone with the customer.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Did you ever have everything by telephone, or has it always been computerized?

[Jason Hamilton]

No, no. Everything was by telephone in the beginning. If you wanted to sign up for a trip, you had to fill out a printed registration form and mail it in to our office, or somehow get it to our office. Everything in the beginning was done over the phone; there was no online profile you could go to and manage your trip, or anything like that.