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DESPITE SOME SUCCESS, E-COMMERCE IN CANADA FACES PARTICULAR HURDLES

Source: New York Times

Posted on April 10, 2000

      Larry Stevenson, chairman and chief executive of Canada's biggest Internet book seller, Chapters Online, smiles when he talks about e-business, noting his company's Christmas season sales soared by 2,000 percent from 1998 to 1999.

      "We launched our Web site in October 1998, and looking at quarter-to-quarter growth," sales jumped from just over $400,000 (in U.S. dollars) in the last quarter of that year, to nearly $11 million in the 4th quarter of 1999, he said.

      According to the Toronto-based survey firm Angus Reid, Canadians are second only to Americans as the most active Web-surfers in the world. The 1999-2000 survey of more than 28,000 users and consumers in 30 countries found 56 percent of Canadians used the Internet between November and January of those years, compared to 59 percent of Americans.

      But the success of companies like Chapters tells just part of the story. For when it comes to expanding the e-commerce frontier, Canadian businesses have been lagging behind their U.S. counterparts. Historically risk-averse Canadian banks have turned down most requests for online merchant accounts for credit card sales, unless the company is already a large, well-established brick-and-mortar venture.

      Canada's six major banks still think of e-commerce as "risky business," said David West, senior researcher at Toronto's J.C. Williams Group, a retail consulting firm. As a result, most small- and medium-sized e-businesses find it nearly impossible to get the bank backing they need to handle credit card transactions, which are considered crucial to any online business.

      "It's not unusual for a small retailer who estimates first year online sales of $100,000 to be told they have to put up a $15,000 deposit and pay an 8-10 percent transaction fee, compared to a 2-3 percent transaction fee and no money up-front for normal businesses," he said.

      As a result, the online video seller Videoflicks "had so much difficulty getting a Canadian bank to set him up with a credit card merchant account, he went through a U.S. bank," West said. "Now, they have a Canadian store on a U.S. Web site, selling videos in U.S. dollars."

      Videoflicks is not the only Canadian company to seek greener pastures to the south. Canadian-born companies like HomeGrocer.com, the pet supplies company Petopia.com and the golfing site Book4golf.com, have all, like wintering Canada geese, made a V-line for the U.S.

      Eventually, West added, "Canadian banks will wake up to the fact they are losing business."

      Canada is lagging behind the United States in adoption of e-commerce by about "a year and a half," said Joe Greene, vice-president of telecom and Internet research at International Data Corp. in Toronto. Currently, Canada is ahead of Asia and Europe in e-business development, he added, with Canada accounting for about 5 percent of global e-commerce sales, about double its usual percentage of global business. But that advantage could vanish in the next year or so as those parts of world jump into online business.

      The United States, he explained, accounted for about 62 percent of global e-commerce in 1999, but that is expected to drop to about 44 percent by 2003.

      But Canadians' e-commerce ranking is largely due to consumers, not retailers, Greene noted.

      According to a survey from the Boston Consulting Group, only 40 of 206 major Canadian retailers had e-commerce Web sites as of December 1999, up from 12 at the end of 1998. A key reason, the report found, is a bank-like skittishness among e-commerce investors. In 1998, startups in the United States received 18 times more venture dollars than their Canadian counterparts. One factor may be that 50 percent of Canada's venture capital pool comes from labor-sponsored funds backed by government tax credits, rather than individual venture visionaries.

      While venture capital for e-businesses is rising in Canada, with $607 million in start-up money invested in 1999, almost double the 1998 total, that pool is a puddle compared to the estimated $25 billion to $31 billion made available to Internet companies in the United States last year.

      Despite this, IDC reports that 1999 e-commerce revenues (both business to business, and business to consumer) in Canada totaled $7.6 billion and are expected to hit annual sales of about $64.6 billion by 2003.

      On the retail level, that activity equals a jump to an estimated 4.5 percent of all retail sales in 2003, up from less than 1 percent in 1999, Greene said. The difference is also expected to mean that the share of Canadian households shopping online will rise to about 36 percent, up from 17 percent. By comparison, 1999 retail e-commerce sales accounted for just less that 2 percent of all retail business in the United States, and that is expected to grow to an estimated 8-10 percent of retail sales by 2003, according to the U.S. National Retail Federation,

      Jim Carroll, co-author of "Selling On-Line: How to Become a Successful E-Commerce Merchant in Canada" (Macmillan Canada, 1999), said on a recent speaking engagement in Halifax that he found the number of local retailers with an online presence numbered only about two dozen.

      "We don't have the same entrepreneurial spark as south of the border," he said. Indeed, even though Visa sponsored his book with a large volume buy for distribution to clients at its member banks, when he went to the bank seeking a merchant account to sell his volume online, "the bank manager freaked. He still thought of online types as evil geek dweebs who break into the Pentagon."

      The Retail Council study, he went on, found 66 percent of the e-commerce dollars spent by Canadians went to U.S.-based sites, for better product selection, price and variety of sites. This, even though a majority of Canadians would rather shop at Canadian-based sites.

      Banks in Toronto, Canada's largest city, are slowly coming to recognize e-commerce opportunities, but outside Toronto, "there is still a huge educational challenge," Carroll added.

      One in four Canadian retailers have some kind of presence on the Web, Stevenson explained, but most are not set up for sales.

      "It's the chicken and egg syndrome," he said. "The lack of sites means fewer online shoppers, and fewer online consumers limits the growth of e-business."

      A recent survey of Canadians' online shopping habits, he added, showed they are most likely to buy books, followed by software, travel, music, event tickets, computer hardware and clothing.

      This is good news for Chapters, he explained, as the company sells books, music, videos, some software and small electronics online, and, later this year, will add gardening supplies.

      With Internet commerce growing at near light-speed, Greene said, unless Canada's banks change their attitude toward online credit card sales, Canadian business will fall behind the rest of the world and more e-businesses will head south.

      "Maybe the Canadian government needs to encourage banks to step up to the plate," he said, because so far, "there is no sign the banks are changing on their own."




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