An eye for sales

Each day, online retailer Coastal Contacts of Vancouver ships 6,000 orders of eyeglasses and contact lenses to customers around the world. It’s no surprise, then, that Roger Hardy, the company’s founder and CEO, keeps bumping into Coastal’s patrons. Just two weeks ago when Hardy’s wife was in hospital to give birth, the attending physician learned where Hardy worked and said he now buys all his contact lenses through the site. “It was great to hear that kind of customer testimonial from someone in the medical profession,” says Hardy, “though the whole time my wife was there in very intense labour.”

Hardy had best get used to the attention. Coastal, which operates several vision-care websites, including Clearlycontacts.ca in Canada and Coastalcontacts.com in the U.S., has quickly emerged as the dominant force in the niche business of selling optical products online. With annual revenue last year of $153 million, Coastal sells more glasses and contacts over the Internet than anyone else, and already ranks as one of the 10 largest optical retailers in North America. According to a ranking by Internet Retailer magazine, Coastal is now the largest Canadian-based online retailer when measured by sales.

Yet Coastal has achieved all this while flying largely below the radar. Though it’s been one of the hottest stocks on the TSX since January, up more than 60 per cent, few analysts cover the company. Nor is Coastal a widely recognized name in corporate Canada. The question is, for how long? Not only is Coastal growing fast, but as online giants like Amazon try to become the Walmarts of the Internet, any company that carves a market for itself in the online-consumer sector is a potential takeover target.

Coastal’s eyeglass lab and warehouse, nestled in an East Vancouver tech park, reflect a company in frantic expansion mode. The building’s previous tenant, yoga retailer Lululemon, moved out last October, and the drywall remains exposed in many places. Cables hang from the ceiling waiting to be connected to $1.5 million worth of new eyeglass lens manufacturing machines. In the meantime, Coastal’s existing assembly line marches on 24 hours a day, seven days a week. Conveyor belts carry trays of frames and plastic discs through a series of robotic machines that carve and treat the lenses, before rows of workers assemble them into the finished product: eyeglasses that sell for 70 per cent less than in conventional vision-care stores. While independent optometry shops, which currently control half of the eyeglass market, might produce five or so pairs a day, Coastal’s cutting-edge labs can handle the same number of orders in just over a minute. “The new equipment will make us one of the top three most technologically advanced eyeglass labs in North America,” says Hardy.

It’s a far cry from Coastal’s debut as just one of hundreds of tiny online outfits selling cheap contact lenses in the late 1990s. Back then, Hardy had started work at a contact lens supplier and quickly saw an opportunity. Opticians paid $12 for a box of contact lenses, then sold them to patients for $70. So Hardy and his sister Michaela Tokarski launched Coastal with one computer and one very overworked credit card. But where so many other sites failed to take off, Hardy invested heavily in marketing and building up Coastal’s inventory of lenses. When an order came in, the product could be delivered into the customer’s hands by the next day. The focus on service paid off. Today Hardy says 40 per cent of new business comes from word of mouth.

But while the contact lens business continues to grow, albeit at a modest four per cent annually, Hardy came to see a bigger opportunity in eyeglasses. While selling something so individualized online seemed impractical, Hardy took his cue from Zappos.com, which had found success selling shoes online. For one thing, Zappos took the worry out of buying shoes that might not fit by offering full refunds. Coastal offers the same guarantee. In addition, Coastal developed software allowing customers to upload photos and virtually try on thousands of glasses, then share the images with friends. It invested heavily in new machinery and hired an industry veteran to run the operation. In 2009, its first year offering glasses, Coastal sold $9 million worth, a figure that doubled to $20 million in 2010. This year Sheila Broughton, an analyst at PI Financial, expects Coastal’s eyeglass sales to double again.

The company is pulling out all the stops to draw potential customers to its site. In a recent U.S. marketing blitz, Coastal offered a free pair of glasses to the first 10,000 new customers who signed up to the company’s Facebook page. The goal is simple—get their eyeglass information into its database. Then the company can focus on them with personalized ads. Since last fall, Coastal’s various websites have added roughly 350,000 Facebook friends.

To distinguish itself from other eyeglass retailers, Coastal has also created, and heavily promotes, its own eyeglass brands. Designed in-house, and with names like Derek Cardigan, Joseph Marc, Love and Hardy, they have all the appearances of being mainstream designer frames. It’s similar to the approach Loblaw took with the President’s Choice private-label brand. The Coastal-brand glasses are proving popular with consumers. In a recent week when Coastal sold 28,000 pairs, Hardy says the top 10 brands were all its own. Best of all, when Coastal sells a pair of its house-brand glasses, it doesn’t have to pay a chunk of the profits to big-name fashion houses like Prada or Gucci.

There have been setbacks. Optometrists took Coastal to court arguing it’s dangerous for people to get contacts without full eye exams. The B.C. government says that’s not the case and deregulated the sale of glasses and contacts. Still, the battle may flare up elsewhere as opticians see their monopoly over the market erode.

As Coastal grows, it’s likely to draw the attention of suitors like Amazon. In 2009, the Internet retailer snapped up Zappos.com for $930 million. Last November, Amazon also acquired Diapers.com, a company that sells 500 million diapers online a year. “I would anticipate there are a number of large online retailers who are quite interested in the growth that Coastal is generating,” says Broughton. “They’ve got a good base of over two million customers, a very solid database of information, and they have this fantastic, stable contact lens business which pays a lot of the bills to support their growth in eyeglasses.” Hardy is keenly aware of Amazon’s voracious appetite, as well as the precarious position of traditional vision-care chains. A takeover offer in the future isn’t out of the question, he says. But he has no interest in selling the company at this early stage in its development. “I think we’re in a very strategic position that lots of people are looking at,” he says. “But our best way to create value is to keep our heads down, keep working away, and taking the market.”

For now, with $12 million in cash and little in the way of debt, Coastal is more likely to be a buyer than a seller in any deal that comes along. The company has already completed five acquisitions, including Lensway.com in Sweden, which is now the base for its operations in Europe, and just opened up offices in Australia. Japan, meanwhile, is also proving to be a lucrative market.

Standing in the shipping area of Coastal’s warehouse, Hardy rummages through crates of contact lens and eyeglass orders with an impressive list of destinations: Kelowna, B.C., Brampton, Ont., Wexford, Pa., Charlotte, N.C., St. Thomas, Virgin Islands, Australia, Tokyo. “The market is shifting,” he says. “People aren’t going to keep on spending $400 for a pair of glasses that you can buy for $100.”