The Growth Secrets of Canada’s Hottest Startup

With STARTUP 50 winner Shoes.com, Roger Hardy and Sean Clark are once again working to build the perfect e-commerce company, one big, bold, potentially risky but possibly lucrative step at a time

 
Written by Michael McCullough

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Shoes.com CEO Roger Hardy and founder Sean Clark at the online footwear retailer and STARTUP 50 topper’s Vancouver head office. Photo: Amanda Skuse

It’s a warm July afternoon, and about 50 Shoes.com employees are picnicking in Vancouver’s Stanley Park, just a few blocks from head office. Everybody is dressed in rock band merchandise. CEO Roger Hardy is in a simple black T-shirt bearing the distinctive logo of the Doors. Founder and chief revenue officer Sean Clark is in a Metallica baseball shirt. It’s all to underline the theme for the company’s third quarter: rock and roll.

“The essence is that a rock and roll band creates beautiful music together,” Clark explains. The members may all play different instruments, but what’s important is how they sound as a group—not unlike the staff at a company.

These themed celebrations, which follow a financial and strategic update, happen every quarter, not just in Vancouver but also at Shoes.com’s U.S. outpost in Seattle and its warehouses in Ohio and Mississauga, Ont. They’re not a new idea—they represent one of the “Rockefeller habits” codified by management guru Verne Harnish. They were also an institution at Coastal Contacts, where Hardy and Clark worked not too long ago.

In fact, a lot of the things that have contributed to Shoes.com’s astonishing growth—sales grew 7,403% from 2013 to 2015, which places the firm in the top position in the 2016 STARTUP 50 ranking of Canada’s Top New Growth Companies—have been recycled from that earlier venture: senior personnel, key expertise in e-commerce and, well, the money. Where Coastal Contacts (known as Clearly since its 2014 acquisition by French eyewear multinational Essilor) sells contact lenses and eyeglasses over the Internet, Shoes.com sells footwear.

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Both types of products, Hardy explains, are actually ill-suited to be sold in bricks and mortar stores. Each comes in so many brands, sizes and styles that no one outlet can ever hope to have what every customer wants in stock. By selling online, his team can offer an enormous catalogue and, with the help of artificial intelligence (Shoes.com has invested in an AI engine from the same company that developed Siri for Apple), the task of finding exactly the look and fit customers want should get easier. Merchandise returns, currently running around 20% company-wide, should dwindle to almost nothing among repeat customers.

Hardy makes it sound easy, which it definitely is not. Not only is Shoes.com up against a US$30-billion industry in traditional shoe retail, but it’s also in competition online with U.S. category leader Zappos.com, as well as a little outfit called Amazon.com.

In fact, it was a press release from Zappos in 2011 that provided the impetus for what would become Shoes.com. The pioneering footwear e-tailer announced it was pulling out of the Canadian market; it simply couldn’t provide the level of service north of the border that its American customers had come to expect. Clark, a one-time Coastal Contacts intern who was then helping set up its operation in Australia, emailed the release to Hardy, Coastal’s founder and then CEO.

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“There is a dominant online footwear player in every advanced economy,” Clark pointed out to his boss: Zappos in the U.S., Zalando in Germany, Styletread in Australia. Clark knew somebody was going to do it in Canada and thought, Why not us? Hardy had his hands full at the time with Coastal Contacts, but he was so intrigued he granted Clark an honourable discharge and agreed to become a seed investor in the venture.

The sole initial focus of the company, called ShoeMe.ca, was Canada, where just 2% of shoe purchases were made online at the time (compared with 15% in the U.S.). Clark got a website going—“My experience at Coastal meant I knew what it was like to build, maintain and run a cutting-edge e-commerce site,” he says—and leased a modest warehouse in Mississauga, Ont., to enable quick cross-country shipping. And for the first two years, the eight-person team at ShoeMe enjoyed the kind of exponential sales growth you might expect when starting from nothing and selling to enthusiastic early adopters.

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The challenge to maintaining the momentum at higher volumes, Clark foresaw, was offering the kind of selection—including exclusive lines—that would attract shoppers away from traditional stores. That proved a hard nut to crack. Then, in the spring of 2014, Coastal Contacts received an unsolicited, higher-than-expected takeover bid from Essilor of $450 million cash, leaving Hardy and the board with no choice but to recommend the offer to public shareholders. The deal was done, and by the summer, Hardy was out with a huge payday that he funnelled into a private investment company, Hardy Capital. That’s when Clark invited his old boss to come over to ShoeMe as CEO.

After thinking about it for a few months, Hardy agreed—injecting new money from Hardy Capital into ShoeMe in the process—and eagerly took on the merchandise challenge. His idea was to form a partnership with an American shoe seller. After talking to a few, he settled on an outfit in nearby Seattle, OnlineShoes.com, which carried more than 200 brands unavailable in Canada and, as fate would have it, had a founder who was ready to retire. ShoeMe ended up buying the operation outright.

The goal at the time was simply to make more selection available on ShoeMe, Hardy says; no further acquisitions were planned. But then he learned that another online vendor he had approached, Shoes.com, might also become available. It was owned by Brown Shoe Co., a publicly traded fashion brand from St. Louis now known as Caleres. Its digital sales arm had been struggling, dragging down Brown Shoe’s overall growth.

“I realized there was a bigger opportunity than the one we were executing,” Hardy says. Instead of focusing on the Canadian market, the business could build a presence on both sides of the border, with each operation having access to a consolidated inventory of 500 shoe brands and the best domain name in the category: shoes.com.

In fact, that’s all ShoeMe bought—the URL. It didn’t pick up any hard assets or take on any staff. (According to Brown Shoe’s regulatory filings, the price was US$4.7 million.) All of this meant that, in the 45 or so days it took for the deal to close, ShoeMe—which would soon adopt the Shoes.com name as its corporate banner—had to build a back-end operation to ensure there was no disruption to customer service. That involved leasing a 265,000-square-foot warehouse in Ohio that would not only serve U.S. customers but also send a daily truckload north to a now larger warehouse in Mississauga, enabling 24-hour shipping to Canadians.

“It’s been a sprint,” Hardy says of the past two years. Swallowing two bigger operations certainly accelerated the growth curve, he allows, but “whether you do it organically or by acquisition, you still have a complexity problem—in marketing, inventory, logistics. The people you have in a $3-million business are different than those you have in a $50-million business. It’s different again at $100 million and $250 million.”

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Fortunately, Shoes.com was able to tap many people who had already experienced similar growth at Coastal Contacts. One by one, they left Essilor to get the band back together at Shoes.com: vice-president of marketing Geoff Henshaw, CTO Dominic Uy, vice-president of enterprise architecture and data analytics Hussein Waljee and CFO Nick Bozikis among them. (Under the terms of the sale of Coastal, Hardy could not actively recruit these staffers; they each came on their own, Clark says.)

Today Shoes.com has two very different businesses: a fast-growing startup in Canada that is the national market leader, and a more mature, slower-growing, but higher-volume operation in the U.S., where it ranks third among online shoe sellers after Zappos and Amazon. While the strategy in Canada is to introduce consumers to online shoe buying, ensure their satisfaction and rely on word of mouth to keep it growing, the challenge in America is to carve out a niche distinct from its larger competitors.

Boldly buying its way from a relatively protected environment in Canada to a highly competitive one in the U.S. may be shrewd, says Paul Cubbon, a marketing and entrepreneurship instructor at the University of British Columbia who, in 2014, invited Hardy and Clark (one of his former MBA students) to participate in a case study on the venture. The key to Shoes.com’s U.S. strategy will be to compete on different criterion than price, where the larger player always has the advantage, he says. “If they can get [that] figured out, then when the inevitable competition in e-commerce in shoes happens in Canada, they will be in a good position.” (Indeed, Amazon.ca now offers some 25 shoe brands.)

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“How we differentiate ourselves is we tell a better story,” Clark explains. Shoes.com will do a better job of representing shoemakers’ brands, he vows. And for consumers, Shoes.com will strive to provide a higher quality experience than Zappos and Amazon. It intends to use customer data and AI to get to know its customers better and make simpler, more relevant offerings to them. It means to take the work out of shopping for shoes and amp up the sense of discovery of new styles. By contrast, “when you go on Amazon, it’s not a shopping experience. It’s a shopping transaction,” Clark says.

To Cubbon, such tinkering is exactly the right approach for Shoes.com. “E-commerce is a data game,” he says. “It’s a continual game of daily experiments—running tests on which offers will work on which people.” Growth will come from little things like moving the rate of shopping cart conversions up a fraction of a percentage point, upping the average shopper’s total purchase by a few dollars or narrowing the lag between repeat business from a year to nine months. “That means millions of dollars,” Cubbon says. “The people who really understand how to manage customer data are the ones who succeed in e-commerce.”

By the time Hardy sold Coastal Contacts, the company accounted for one in five contact lenses sold in Canada, and he believes Shoes.com can achieve the same kind of market penetration in footwear. “That’s about a $600-million, $700-million business,” he says, leaving alone the still larger market opportunity stateside. He expects to follow the same formula as he did at Coastal, financing expansion with the cash flow from a steadily growing profit core. If market conditions permit, he might stage an IPO, both to give employee shareholders some liquidity and to further accelerate growth. So you can see why Shoes.com might put the question to its people: Are you ready to rock?

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Originally appeared on PROFITguide.com

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