Niche Technology

While FAANG (Facebook, Amazon, Apple, Netflix and Google) gets most of the media attention for their revolutionary business models and technologies (and market share and stock market valuations), the good news is that there is lots of room for Canadian players in the e-commerce space. Profiling several of them gives us some useful lessons, and inspiration.
Niche Technology

While FAANG (Facebook, Amazon, Apple, Netflix and Google) gets most of the media attention for their revolutionary business models and technologies (and market share and stock market valuations), the good news is that there is lots of room for Canadian players in the e-commerce space. Profiling several of them gives us some useful lessons, and inspiration.

That’s not to say the FAANGs don’t deserve the attention paid to them. Google and Facebook dominate the online ad placement market, though Amazon is starting to come on strong in that sub-market as well, with about half of all American online sales now flowing through Amazon. And Netflix and Apple are revolutionizing the digital entertainment market.

My point is that it has never been a better time to start a niche-oriented business as well, given the dynamics of online commerce. Moreover, the great thing about niche businesses is that while they are modest to begin with, if a narrow business model is executed well it can grow into a substantial enterprise — so niche players are worth watching, and learning from.

Footwear E-Commerce

Take the case of Poppy Barley, an Edmonton-based shoe company. They design their footwear in Canada, and production is done principally in León, Mexico, which is a leading global manufacturing cluster for leather goods including shoes and accessories (Poppy Barley’s website indicates that León has some 3,500 leather goods makers, 700 tanneries, and 300 other suppliers that support the foregoing players). The broader point is that the globe has a multitude of these sorts of supply chain depots, that Canadians can plug into, whether it’s the making of shoes or one of thousands of other consumer (or industrial) goods.

Interestingly, Poppy Barley’s success online has led it to establish a physical store in an Edmonton mall. It also makes regular use of popup stores in cities such as Vancouver, Calgary, Saskatoon, Winnipeg, and Toronto. The combination of online and offline is powerful; shoppers do their homework online, but then come to a popup to try the shoes on for fit and comfort. The owners of Poppy Barley say that 65% of the people visiting a popup make a purchase.

Getting Online Quickly

What is key in the Poppy Barley example is that it has never been easier to start an online retail presence, thanks to a group of tech companies who specialize in hosting online e-commerce businesses. One of the leading entities in the e-commerce ecosystem is Ottawa-based Shopify, which was founded by a fellow who wanted to sell snowboards online but had trouble finding an e-commerce platform that would allow him to do that in a way that made sense to him. So, he built an online platform to serve that function, and soon found he could do better business by selling that platform (or, more precisely, the experience created by the software) than by selling snowboards.

Essentially, for about $30 a month someone can become an e-tailer by using Shopify to create a web store. Shopify manages previously complicated aspects like online presentation, fulfillment, and payment processing. And speaking of payment, services like PayPal have blossomed to help sellers do business with buyers in faraway places. Yes, PayPal earns a fee, but the cost to retailers is much lower that what used to be the case; indeed, in past decades, it was simply not viable for a small store to sell remotely to foreign customers on a sustained basis.

Getting to Scale with Supply Chain Supports

Once you have mastered customer attraction and sales, you have got to get your product to the purchaser. Again, that is easier now that it has ever been, with packaging technologies that allow you to handle larger numbers of units, and other suppliers who will help with fulfillment. Then there are the courier companies, and also, as your volumes increase, there are specialty shippers.

As you grow, there are firms that will assist with financing both your inventory and eventually your sales, including to foreign markets. Public assistance through an entity such as Export Development Canada is also available once you achieve a certain sales threshold, though EDC also has a dedicated small business division.

In short, it has never been so easy to start and operate an online business, even though few Canadian businesses have augmented their storefronts with online sales.

To the Digital Business Go the Spoils

Speaking of PayPal, that company recently did an analysis of its approximately 250,000 small- and medium-sized business (SMB) clients in Canada, and the results illustrate why SMBs should focus more on online commerce. PayPal’s customers who sold outside of Canada were found to be more profitable than those that did not; and these online savvy SMBs also experienced some 3% more growth, from sales to the US but also to Mexico, China, Australia, Japan and the UK, to name just the principal markets of the 80 countries in which their customers live.

That’s the good news. The less positive conclusion from the PayPal analysis, though, is that only 12% of the 250,000 SMBs were selling to customers outside of Canada. Moreover, this figure is largely consistent with the general finding that only one in five Canadian businesses sell online. This figure has to change soon, because the world of retail is changing as seen by the success of the FAANGs as well as by the number of global microbrands.

Many Verticals of Microbrands

The success of Poppy Barley has been repeated in many other clothing and accessory submarkets around the world, as well as in Canada. There is Montreal-based Frank and Oak, which offers a fairly large line of men’s and women’s clothing. Indochino, with headquarters in Vancouver, has created a very interesting business model for made-to-measure suits: you measure yourself at home and submit your requirements, and several weeks later your custom-fit suit arrives by courier. But Indochino also has showrooms in most major cities in North America, where you can get measured, feel the fabrics and have a high-touch experience. A made-to-measure suit is then delivered at a lower price than would be available from traditional retailers, given that most of the suits are made in Dalian, China (again, like most global e-commerce brands, Indochino leverages a global supply chain).

Many other verticals lend themselves to an e-commerce distribution channel. Perhaps you have bought wonderful jams and marmalades from Greaves. They have a busy store in Niagara-on-the-Lake, Ontario, selling preserves they make from the abundant fruit in the region. But when you need a refill, you may order from their website.

Indeed, food and beverage is a very active submarket for online microbrands. In Toronto, Nude Bee Honey is doing very well, both through e-commerce sales and through its specialty stores that carry its avant-garde honey products. Theirs is a typical e-commerce-to-physical-commerce distribution story; the brand starts by selling its niche offerings exclusively online, and then stores in the physical retail channel start getting asked by customers if they carry the brand, which the retailer then dutifully starts stocking. This is why you will find bottles of Nude Bee Honey on shelves in many stores in Taiwan.

Old World Buys the New World

If you need any more proof that the e-commerce microbrand success phenomenon is real, surely it comes from the fact that the traditional big brands are buying up microbrands with regularity. In 2017, Procter & Gamble purchased Native, a private company that makes deodorant, for US$100 million. P&G, like other large multinational consumer goods companies such as Unilever and Nestle, sell their products mainly through physical stores owned and operated by third parties. By contrast, Native sells its products direct to consumers over the internet. P&G bought Native not so much for its deodorant-making capability, but because it wanted to learn Native's secrets of selling direct-to-consumer, which will be an increasingly important channel.

Unilever had a similar rationale when it purchased Dollar Shave Club in 2016 for US$1 billion. DSC is a subscription service; as a customer, you get regular shipments of razor blades, and periodically an update to your shaver. A year later, Nestlé purchased California coffee roaster Blue Bottle Coffee, whose principal distribution model was, again, direct-to-consumer.

This model of major consumer-product companies buying small, nimble start-ups resembles that of large tech companies buying early-stage software and internet companies. This becomes an important R&D model for the sector; yes, the FAANGs still do a lot of internal R&D, but a material portion of their new product ideas can also come from the outside, through acquisitions. In recent years, about half of P&G’s new products were invented by persons or entities from outside P&G. Welcome to the new business model of entrepreneurial infusions from the outside.

Canada has had some notable successes in this new paradigm; we now need more.