Industry Committee on May 30th, 2013

[François Morin]

Thanks a lot. Goodbye.

[The Chair, Conservative, David Sweet]

Thank you.

[The Chair, Conservative, David Sweet]

Okay, folks, we're back in order now. Before us in person we have Gary Collins, who is the president of Coastal.com, and joining us via teleconference is Paul Preston, associate director of innovation policy with the Conference Board of Canada. I believe the clerk has advised you that you have around six minutes for your opening remarks.

Mr. Collins, we'll allow you to go first with your opening remarks, and then we'll go to Mr. Preston afterwards. Please begin.

[Gary Collins, President, Coastal.com]

Thank you, Mr. Chairman and honourable members. I'd like to thank you very much for the invitation to attend your committee hearings today.

From what I can see from the list of eminent individuals and presenters the committee has had over the last little while, you're no doubt receiving significant input, and public policy input in particular, that you'll consider and reflect on as you formulate the report and recommendations. I'll confess at the front that I am not a technology expert, so don't ask me any really tough technology questions. My days of developing public policy are also long behind me. However, as the president of Coastal, I thought I'd offer you a glimpse into a Canadian company that has used technology to become a global player in a very large optical category.

Coastal, known in Canada as Clearly Contacts, was founded in Vancouver in the year 2000 by Roger Hardy and his sister Michaela Tokarski. Roger started the business with his Visa card, with a $5,000 spending limit and his life savings, which gave him a balance sheet of $6,000. The company last year had total sales of over $200 million. Roger remains active in the business as CEO, and Michaela sits as a member of the board of directors and now resides here in Ottawa.

Coastal's original business concept was to utilize the Internet to create an efficient method of connecting consumers with contact lenses. Historically, the category was categorized by high prices and mixed levels of service. The company remained privately held until 2004, when it undertook a small initial public offering on the TSX exchange. Last October, we listed on the NASDAQ in the U.S., and we trade on both the TSX and NASDAQ under the symbol COA.

Funds raised in that initial public offering were used to acquire a similarly sized business in Sweden that was essentially a contact lens mail order business with old-fashioned paper catalogues, etc. Coastal then moved that Stockholm-based company online and has since grown that business manyfold. We're the market leader in northern Europe, and a full 33% of all contact lenses sold in Sweden are sold through our website.

Since then, through additional acquisitions and organic growth, Coastal has grown to become the leading international online retailer of eyewear, including contact lenses, prescription eyeglasses, and sunglasses. Our business philosophy rests on providing world-class customer service, the convenience of ordering over the Internet, and extremely fast delivery, in most cases overnight. Coastal inventories everything we sell, with about 15,000 SKUs of contact lenses and about 3,000 SKUs of eyeglass frames, and has an unconditional 365-day customer return guarantee.

Coastal sources its contact lenses from the market leaders, such as Johnson & Johnson, Ciba Vision, Bausch & Lomb—now a Quebec-based company, if you saw the transaction last week—CooperVision, and Alcon. Over the years, we have developed strong working relationships with these suppliers. We are able to negotiate excellent terms based on high volumes, and we pass those savings on to the consumers. We typically offer consumers savings of approximately 20% to 40% on contact lenses, when compared with traditional optical retailers and eye care practitioners.

Approximately four years ago, Coastal entered the prescription eyeglass market with the same philosophy of offering convenience, speed, and great value. Coastal typically saves consumers up to 70% on eyeglasses when compared with traditional channels. To create a competitive business model in eyeglasses, we invested in the latest world-class manufacturing technology and have facilities located in Vancouver and Stockholm. The business strategy is working. Last year we shipped approximately one million pairs of eyeglasses, and we continue to grow.

To date, Coastal has shipped over one billion contact lenses globally. As a point of reference, we estimate that Coastal has now captured approximately 20% of the entire Canadian contact lens market and is approaching 10% of the Canadian eyeglass market based on units. Those are both online and off. We continue to invest in growing the nascent eyeglasses category with a strong focus on export. The online glasses market in the U.S., for example, is estimated to be penetrated less than 3% by the online sector. This is a market with $19 billion in revenue in this year. We think our online presence in this market has tremendous opportunity for growth.

Along the way, Coastal has also become a significant employer, with approximately 500 employees based in east Vancouver and approximately 750 employees worldwide.

Coastal is playing a key role in driving down the cost of vision care for Canadians and others around the world. We've developed a number of relationships with insurers and business customers, offering our strong value proposition to their employees and customers while at the same time reducing their costs and providing eye care benefits to their employees.

We recently signed an agreement to provide eyewear to persons supported by B.C.'s Ministry of Social Development. These are clients on income assistance or with disabilities. We'll deliver a higher level of benefits to these citizens at a lower cost to government. Find me another area of health care spending where the costs are going down.

But the benefits of these efforts don't flow only to the consumers or employees and our shareholders. One of Coastal's core values, posted on the walls in lunchrooms across the company, is “Do some good.” We've been active in our community, providing eyeglasses to those in need through our “Change the View” initiative. Our belief is that eyewear should be accessible to those who need it, and that traditional channels keep prices high, reducing access to those who need it most.

Some examples of this program in action are: providing those living in Vancouver's downtown eastside with eye exams and free glasses through Providence Health Care and the Union Gospel Mission; providing eyeglasses to elementary students in Ontario through the Toronto Foundation for Student Success; and providing eyeglasses to women in career transition through the Dress for Success organization.

Recently, we also undertook a mission to Kenya, in partnership with the Me to We foundation and Free the Children organization, an initiative that was a tremendous success. We delivered over 17,000 pairs of glasses and supplied equipment and training to set up a dispensing facility in a remote region in Africa, where previously these people had no access at all to any form of vision care.

Coastal is proud of its Canadian roots and is optimistic about the potential of the Internet and other technology to provide greater access to much needed vision care products around the world while creating a very successful Canadian export business and employing hundreds of Canadians.

This is just a quick example of how technology is changing the world by increasing the productivity of a sector and providing benefits and lower costs to government, businesses, consumers, and people in need across the globe.

Thank you very much for your time.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Collins.

Now we'll move on to Mr. Preston.

Mr. Preston, go ahead for approximately six minutes, please.

[Paul Preston, Associate Director, Innovation Policy, Conference Board of Canada]

I want to thank the committee and the chair for asking me to provide my perspectives today as well—especially via this medium of video conference—on this important topic. We've done a lot of work in this area, and plan to do much more, so it's our privilege to be here today.

As a not-for-profit organization, we call ourselves a think tank, which sort of conjures up the image of us sitting behind closed doors and thinking up solutions to some of the issues and challenges facing the country. While we do some of that, a lot more of what we do is engagement with a multi-stakeholder group of leaders from across the country in academia, industry, government, and other organizations. What I'm going to try to do today is provide a holistic perspective from these different stakeholder groups. That might provide value to your group.

In looking at ICT adoption among SMEs, we really see a maturity continuum, with some important considerations. At first we see automation as the simplest form of adoption. Really, it's about automating those existing business processes. It's mainly about bringing control and efficiency to the business. Of course, examples would include things like ordering, supply chain activities, inventory control, and so forth.

The next level of maturity along that continuum is around improved decision-making. Really, it's about bringing intelligence to management in this area and helping them to make better, more informed, and more timely and relevant decisions. In effect, ICT is providing that up-to-date real-time data to allow management to get themselves above the complexity of individual transactions, to see the bigger picture, hopefully leading to improved decision-making. There are a lot of examples in this area.

I know, for example, of a sawmill in Atlantic Canada that has applied CAD systems and other management systems to how they process lumber. They have this virtual technology that shows them how to optimize their processing to get the maximum yield from each timber coming through the plant. It's an SME, a small business, but it's a great example of an organization that understands the value of adopting technology for improved decision-making.

At the further end of the continuum, we see that adopting ICT in its most mature form really is about opening new markets and opportunities. It's really about identifying and exploring new markets, whether those are domestic or global markets. Really, at this level, ICT investment moves beyond infrastructure. It moves beyond simply being a method of efficiency to becoming an integral strategic asset for the business. SMEs are able to offer, for example, e-commerce solutions—as my colleague from Coastal just talked about—to reach global markets. It's about really seeing the strategic value of ICT investments in order to take advantage of global supply chains and global markets.

What we see as businesses progress through each of these levels is that they move from looking at ICT as a means to efficiency to really using ICT to be more productive and more innovative, hopefully leading to growth and export opportunities. It really allows management to step up, to be more strategic, and to leave the more transaction-based, simplistic forms of the business to a technology step.

What we've identified as a productivity gap in Canada is about $7,000 per capita for us compared to the U.S., related again to that productivity gap. We see innovation and, within innovation, ICT adoption as important drivers to help improve this productivity gap.

We also see that government can be a good catalyst for the adoption of digital technologies for SMEs. One example is CICP, the program under Public Works that is really helping businesses to gain that first sale within government. That can help to create a vibrant ICT community within the country that will hopefully translate into growth, into more adoption among other SMEs.

Another important program we've seen recently is DTAPP, the digital technology adoption pilot program, which is an Industry Canada program, obviously in partnership with the NRC. We think it's an important step towards helping SMEs adopt digital technologies, especially when you couple a program like that with some of the services offered by BDC. Really, we see some of these programs as important steps.

The key point in driving this digital technology adoption is that these programs need to be delivered under a coordinated, effective digital adoption strategy.

Thank you very much.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Preston, and Mr. Collins as well.

Now we're going to our rounds. I'm going to have to stay pretty tight if we want to get the same amount of questions as we did last time.

Madam Gallant, for seven minutes.

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

Thank you, Mr. Chairman.

With regard to the contact lenses and the eyeglasses, I want to ask about the eyeglasses first. Do you just provide the frames, or do you provide the lenses as well?

[Gary Collins]

We purchase those products globally, the frames as well as the lenses. About 70% of the products we sell are our own brands. About 30% of the frames we sell are other proprietary brands—Ray Ban, Gucci, etc. Those frames we secure globally. We bring them to our facility. In our facility, somebody goes online and chooses the pair of glasses they want. There's a method by which you can upload your photo and try on glasses virtually. They then type in the prescription.

In our plant, as soon as they hit the button to buy, it spits out a form. They pull the various lenses from a part of the facility along with the frames. They match them. Those lenses then go through a robotic edging machine. They cut the shape to fit the frame. They then go out. They are assembled, checked for quality, and then they are shipped. If you order a pair of single-vision glasses, we can manufacture and ship those in about 0.6 days.

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

How does the consumer provide you with the information from their optometrist?

[Gary Collins]

There are two components to eyeglass purchases. We have a feature on our website called the “Perfect Fit” tool. For those of you who are wearing glasses, if you pull them off and look on the side, you generally can see three numbers. Of course, now that your glasses are off, it's harder to read, but they are there, trust me. These are measurements for the length of the side and the bridge of the nose. You fit those numbers into the system. It will go through our 2,000 to 3,000 frames, scan through all of those, and pull up the ones that will fit you. It's essentially like a shoe size, a 6A, or whatever it is. Then you enter the prescription that you received from your eye-care practitioner. All of that goes into your file, and from there on it's fully automated. If you come back another time to purchase a pair of frames and you hit the button, all that information pops up right away.

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

That's provided your eyes haven't changed in that time.

From the outset your company was Internet-based, so anyone who is naturally inclined to order something over the Internet would do so, and you found a way to overcome the biometric input barriers. But we're also looking at companies who haven't adapted to ICT yet. Would it be of benefit to current optometrists, people who sell frames and glasses, to go online in addition to their storefronts?

[Gary Collins]

Yes, it would, and many have done that, some of them more effectively than others. My experience is that businesses adopting technology, particularly the Internet and the web, often think they need a website. But they don't really know what that means, nor do they know how to make it work. So they will commission somebody's teenager to come in and set them up a website, and then it sits there, never interacting with customers. It's a far more comprehensive process to make that an efficient channel of marketing. You need to pay a lot of attention to the customers, and you need to keep on top of it all the time.

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

You mentioned you have a place in B.C. as well as in Sweden. Do you use your own computers, or do you use cloud computing?

[Gary Collins]

Most of our information, our servers—we use outside servers. One of the biggest companies we use is Rackspace, which I believe is based in Texas, for our server.

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

Rackspace is based in the U.S. and your customers are in Canada, Sweden, wherever. The data in your cloud system then is subject to the Patriot Act.

Have you encountered any difficulties, or have you made provisions somehow to ensure that personal information, especially medical information, is not delved into unnecessarily?

[Gary Collins]

Yes. There's a myriad of legislation regulations on eye health and protection of privacy, and we comply with all of that. We have hundreds of thousands of customers in the U.S. as well, and we comply with the U.S. privacy provisions.

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

For the Conference Board of Canada, I see you have many products that are available over the Internet. You have your e-books, and so on. Do you conduct business using cloud technology?

[Paul Preston]

Currently, we have a local host provider for a lot of our IT services, so we do have some internal, but most would be a local provider, yes, within Canada.

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

Are you aware of the number or the availability of cloud services based in Canada, or is the vast preponderance situated in the United States?

[Paul Preston]

The vast majority would be in the U.S. We do a lot of work with chief information officers, CIOs, from across the country, and the issue of creating a cloud for Canada, hosted in Canada, is of paramount importance to them. The vast majority of cloud infrastructure tends to be in the U.S.; however, there are some providers in Canada that are very close, if not there, with a true Canadian cloud offering.

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

Are there any policies that we could implement to create an environment more favourable to developing this cloud technology in Canada?

[Paul Preston]

I think if you were to develop a policy, a set of guidelines or principles would be helpful for the SME community, especially those that are in supply chains for things like aerospace, defence, some of those national security relevant industries. I think a set of guidelines would be quite helpful.

The reaction has tended to be “I can't go to the cloud because it means I'm going to have to be hosted in the U.S. and subject to the Patriot Act.” There are offerings coming. There is a major telco in Canada that I'm pretty sure is there with their cloud offering, hosted in Canada, but there's still a lot of fear there.

[The Chair, Conservative, David Sweet]

Madam Gallant, that's really all the time we have.

We'll have Madam LeBlanc now for seven minutes.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Thank you.

Thank you very much to the guests.

Mr. Preston, at Tuesday's meeting, digital technology analyst Michael Geist criticized the government for its failure to present a cohesive digital economy strategy. According to Mr. Geist,

That failure is plainly hurting all aspects of our digital economy. It creates business uncertainty, it undermines consumer adoption of e-commerce, harms innovation, and sends an unmistakable signal that this is simply not a [government] priority.

Do you agree that the government's failure to present a digital economy strategy is negatively impacting the Canadian economy?