Aaron Magness was ready for a change. While he loved the culture at Zappos.com, the online shoe store where he’d spent more than three years as senior director of brand marketing, he wanted to look for new opportunities at a large company in New York or a startup in San Francisco. Then one day he received a call from a recruiter on behalf of Coastal Contacts. The Vancouver-based web retailer of contact lens and glasses wanted Magness to bring some of Zappos’ way of doing business to Canada’s West Coast.
“When they first contacted me, my reaction was that I don’t wear glasses or contacts, and I don’t know this industry,” says Magness. “But at the bottom of the recruiter’s note, there was a sentence saying prescription eyewear in North America is a multi-billion-dollar industry, and less than 2% is being purchased online.” To Magness, growth of the online eyewear market seemed inevitable, and the challenge to harness it was irresistible, so he accepted the position of vice-president of marketing and moved to Vancouver with his wife, son and dog.
It’s been only seven months since Magness joined Coastal—which services 150 countries through ClearlyContacts.ca in Canada, Coastal.com in the U.S. and a family of other websites around the world—but he’s already seen evidence of that expanding market. By focusing on speed in shipping orders and investing in marketing, business has grown to $184 million in sales in its past fiscal year, up 20% from the year before. But while the Coastal brand was built on affordable contact lenses—a side of the business that grew a modest 12% last year—the company has spent the past three years trying to get the world to buy its glasses online too. So far, results have been good: the company’s North American hub shipped 83,066 prescription eyeglasses in January compared with 38,207 in same period in 2011, an increase of 117%.
This success has done little to satiate the appetite of Roger Hardy, Coastal’s CEO. Hardy co-founded the company in his basement in 2000 with one phone, one computer and a Ping-Pong table. He believes consumers are on the cusp of a fundamental shift in the way they buy eyewear—not just in North America but around the world. “When you think about categories that haven’t been disrupted by the Internet yet, there aren’t many left,” he says. “Glasses are a $50-billion-a-year category in the world, and less than 1% of that is online. Within three years, I think 10% will be online. And within five years, it might reach 30%. That’s how fast I think it’s going to happen.”
Coastal is well positioned to take advantage of that growth, not just because of its business model and longevity, but also its geographic location. Its principal Canadian lab and distribution centre is situated in what has become Canada’s online optical hub. Google “cheap glasses” or “contact lens,” and almost all the hits will be for businesses clustered on the West Coast. That’s because whether glasses and contact lenses can be deemed a medical product or not depends on rules specific to each province. Beginning in 2010, the B.C. Ministry of Health Services allowed anyone, not just optometrists and opticians, the right to sell eyeglasses. The new rules also let companies like Coastal Contacts fill prescriptions from anywhere (including the rest of Canada, where the rules may be different) and to ship orders without verifying prescriptions with the issuers.
Organizations such as the Canadian Association of Optometrists say only doctors should be responsible for issuing medical aides (which it believes glasses and contacts are), and have expressed concern this change will lead to people skipping eye exams, which could delay the diagnosis of serious eye disease. Magness isn’t swayed by this reasoning. “We want customers to have a wonderful relationship with their eye-care provider,” he says. “But that provider should be caring for your eyes, not worrying about the retail.”
Magness cites a recent episode of CBC’s Marketplace, which conducted a comparison between a pair of glasses bought from ClearlyContacts.ca and a pair bought from LensCrafters. The optometry professor conducting the test found both to be of comparable quality. “The amazing thing about that is that the glasses they featured in that episode are by Joseph Marc, one of our private label brands,” Magness says.
To make sure Coastal stands apart from its digital competition during the online optical boom, the company is investing heavily in its marketing strategy. Adding the eyeglasses division meant Coastal was committed to changing the public perception that something as personal as glasses can’t be bought online. Where contact lenses are functional, glasses dictate your style. “If you see me on the street, you wouldn’t even know if I was wearing contact lenses, but to convince someone that you can buy something online that you wear as a fashion statement on your face is a risky proposition,” says Sheila Broughton, a consumer products analyst with PI Financial. Broughton was the first analyst to cover Coastal Contacts and remains one of just three analysts who follow the company today. “But Zappos proved it could be done with boots and shoes, and since glasses are lightweight and inexpensive to ship, it was a good fit.”
Broughton uses Zappos as an example not just because it’s Magness’s former stomping grounds, but also because the online shoe company (bought by Amazon in 2009 for $928 million) was hugely influential on Hardy when he was exploring Coastal’s next phase of growth. Hardy believed global consumers had the same hesitations about buying glasses online that they’d once had about shoes before Zappos. “I went down to Las Vegas and spent a day with Tony Hsieh, the CEO of Zappos, and we talked about building this customer-centric model that allowed customers to try a product risk-free, with free shipping and a 365-day guarantee,” he says. Hardy was confident consumers would be satisfied with his product. He just needed to convince them to try Coastal out. “People had been selling glasses online for at least 10 years before we got into it, and I think many didn’t succeed because they weren’t focused enough on the customer service.” Customers want their products as soon as they click Buy Now, so Coastal drove down the average time of order placement by the customer to purchase shipment to 0.7 days.
Like Zappos, Magness insists that impeccable customer service is Coastal’s greatest asset and the most important tool to help the company grow internationally. “We’ve found that about 50% of our customers come from a referral from a friend or family member, so getting the customer experience right is really important.” The vast majority of the company’s marketing spend is online because “that’s how you get people who are closer to the decision-making process,” says Magness. With an online presence that dates back more than a decade (and includes more than a million Facebook friends), Coastal has a digital brand-equity advantage over newer competitors when curious shoppers Google eyewear-related keywords.
This year, Coastal has also invested heavily in television ads, going so far as to hire former Vancouver Canuck Trevor Linden as a spokesman. “Eyeglasses is a relatively new venture for the company, and they are really putting a lot of money into advertising to grow this business,” says Robert Gibson, an analyst at Octagon Capital. “Linden is driving brand awareness, but it’s big dollars.” There was red ink on the books in the fourth quarter of last year, with net losses that totalled $1 million. Gibson explains that ad spending was to blame for that dip. “The greatest challenge for this company, historically and going forward, is that the amount of money they’re putting into advertising to drive sales is hurting the bottom line,” he says. “They’re still growing, so they’re advertising like crazy and investing in the top line to grow market share. And because of that, margins aren’t as good as the Street would like.” Gibson thinks the ad spend in Canada might level out by the end of the year, since he expects Coastal will be satisfied with its market share by then. “That’s what I want to see, and I think that’s what investors want to see. That’s just going to happen over time,” he says.
Along with organic growth, Coastal has also explored acquisitions. “Especially in the Nordic regions, Internet adoption happens so fast,” says Hardy. “People were comfortable buying online quite early.” So Coastal snapped up Lensway AB in 2004, a leading online retailer and distributor of contact lenses based in Stockholm. The acquisition was good for Coastal, which now has dominant market share in northern Europe—one of every three contact lenses sold online or offline in Sweden, Norway, and Finland is sold by one of Coastal’s sites. The Stockholm centre also manufactures glasses now. The move wasn’t without its troubles, however. In 2010, Coastal terminated the services of Daniel Muhlbach, Lensway’s founder who had stayed on with the company (and joined as a director at Coastal). Coastal eventually took legal action against Muhlbach, alleging he had reached out to third parties and lenders to try to buy Lensway back. During this period, Coastal’s business suffered, and confidential financial information leaked out. When the verdict was announced, the arbitration proceeding in Sweden ruled Muhlbach was still owed severance pay as laid out in his employment contract. “It was definitely a hiccup,” says Broughton, “but it was one that, I think, would have been hard to predict. And I think the company is back on track now.” Hardy says the company will continue to use the same method to approach future deals. “It’s a learning process. We looked at a lot of deals before we did any,” he says. “We’ve bought five or six companies now, but to do that we had to look at a hundred.”
Coastal also had to make a choice when it noticed its business was growing rapidly in Australia and New Zealand. “We felt we weren’t servicing the market the best we could,” says Hardy. “We think speed is a key thing that differentiates us from our competitors, and one thing we try to do better than everyone else, so we came to a point where we had to make a decision: either invest in the market and grow it, or get out of the market altogether,” he says. After weighing the options, Coastal bought a distribution centre in Sydney, Australia. To Hardy, one of the greatest advantages to an online business is the ability to have a presence without making a major investment until the time is right.
Coastal also sank millions into its lab in Vancouver to scale up production. “The initial machines we bought about four years ago when we started the glasses business were at the top of the technology heap, but now those are obsolete,” Hardy says. “There was kind of a choke point for us last year. We just didn’t have enough capacity.” The company was the first to buy new high-volume machines made in Italy. Each machine can turn out 1,000 pairs of eyeglasses per day, and the company now owns 12 of them. It then bought machines to cut progressive lenses (also called no-line bifocals). “We spent $3.5 million to put in this line,” says Hardy. “Progressives retail for between $800 and $1,000, and we’re selling them for $199 online.” Coastal’s new machinery required more manpower, so the company hired and trained 250 new employees, allowing the factory to run 24 hours a day, each day of the week. It plans to add another 200 workers this year.
Gibson thinks Coastal easily could support more international websites to aid its expansion. It proved the success of this model by acquiring a Japanese company in 2006 and selling its products through that site. “I’ve been expecting them to announce a Chinese website for quite a while. Or one in India,” he says. “There’s no reason they can’t be in every country in the world.”
But Magness maintains the company is only willing to expand as long as it can continue to service customers well. “Our attitude toward continuing to expand is this: Do we think we can provide the best experience? If the answer is yes, it’s worth exploring. If not, it probably doesn’t make sense.”
That attitude may help Coastal stave off the competition. Steven Hutt, co-owner of VisionPros.ca (and .com), whose company also owns a number of other Canadian contact lens websites, only started his company two years ago but is already the second-place vendor in the Canadian market. “There are older players in Canada than us, but I think they’re choosing a different business model,” he says. “They don’t have the talent or infrastructure to build out a website that will rival Clearly. I think we do.”
Hutt is passionate about software, marketing and managing online traffic, and says that according to his numbers, ClearlyContacts.ca has 60% of all the online sales in Canada. His company has 24%, but it’s growing, and Hutt says some new business developments to be announced later this year will make them an even stronger competitor. But for Hutt, the point isn’t to dominate Coastal. “Our long-term goal is to really get under ClearlyContact’s skin so that they’re irritated with having us around and at some point the giant is going to consume us like Amazon did to Zappos.”
Competing companies like 1-800-Contacts in the U.S. are hiring new executives to grow their online presence, which is a threat, but Broughton says Coastal’s biggest competition (despite long waits and high fees) is still the mall. “Online penetration for glasses and contacts online is growing, but the biggest challenge for the company will be changing consumers’ habits to consider a purchase online.”
While Magness recognizes the threat, he’s skeptical Coastal can be dethroned. “It takes a strong company to disrupt a marketplace, but ClearlyContacts is that company,” he says. “I think success is when your customers are telling the story for you. And our customers do just that.”
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