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With mail dying, Canada Post bets its future on e-commerce

A Canada Post box outside Scotia Plaza in Toronto on July 15 2014.

FRED LUM/THE GLOBE AND MAIL

The giant jumble of items in the oversized-package sorting area at Canada Post's Pacific Processing Centre at Vancouver International Airport includes a large box of fortune cookies destined for Calgary, a motorcycle tire on its way to Victoria, a trapezoidal box from Beijing and a massage table for someone in Edmonton. But it was the naked steel torso of a truck muffler, on its way from London, Ontario, to a customer in Departure Bay, B.C., that caught the attention of Rod Hart, Canada Post's general manager for domestic parcels. "That just might be the ugliest thing we'll ship today," Hart chuckles. "Still, somebody out there will be thrilled to get it."

Hart was winding his way from the new $200-million centre's main control room, which is perched like an alternative control tower above the airport's main runway, toward the Asia-Pacific inbound airmail sorting area, the epicentre of the huge plant. The facility, Hart explained as he watched a multi-track conveyor system stream parcels—many sporting labels from Amazon, Hudson's Bay Co., Best Buy and eBay—hrough a battery of photo-scanning devices, is the western counterpart to an even-larger sister plant near Toronto Pearson International Airport. Although both locations handle large volumes of letter mail, they were designed primarily for parcels. That emphasis is part of a historic pivot under way at Canada Post: The company, as Hart puts it, is quickly moving from a focus on "mail with some parcels, to parcels with some mail."

More than 30,000 parcels arrive by air here daily from Asia, many of them containing small electronic items shipped directly from factories to online customers across Canada. "We're seeing explosive growth in inbound parcels from Asia," Hart says, noting that parcel traffic driven by online shopping is growing 30 per cent annually. "It's unbelievable what Canadians are ordering online."

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Hart's excitement about Canada Post's huge new investment in the acres of highly automated parcel handling systems surrounding him was palpable. But the logic behind the investment was sober: Despite rumours to the contrary, the post office is not dead yet. What the Internet can take, reasons Canada Post CEO Deepak Chopra, it can also give: Even as e-mail devours his company's traditional letter-delivering business, e-commerce is spawning vast new opportunities. Under Chopra's direction, a piece of nation-building infrastructure legally mandated to tie together 15.5 million addresses across half a continent is morphing into an e-commerce company. "Our plan," explains Chopra, "aims to transform our business by helping other businesses transform themselves."

For proof that salvation is at hand, Chopra, who was recruited in 2011 from postal technology powerhouse Pitney Bowes, points to a crucial set of numbers at Canada Post, a federal Crown corporation with 66,000 employees. Against 2013 revenues of $7.6-billion, postal operations lost $269-million. That is not so surprising given that paper mail volume also shrank 4.8 per cent during the year. But meanwhile Canada Post's revenues from its top e-commerce customers grew about 30 per cent, propelling its $1.4-billion consumer parcel business to deliver 7 per cent revenue growth, generating an extra $93-million. Canada Post also earned $66-million in pretax profit from its 91 per cent stake in Purolator, which dominates business-to-business parcel shipping and is Canada's largest courier company. A further $179-million in revenue flowed from SCI Group, Canada Post's technology and logistics company—which is itself increasingly devoted to servicing online retailers. On the whole, Canada Post Group (the post office and its main subsidiaries) lost $193 million in 2013, its third consecutive year of losses. Back in 2010, thanks in part to a $2.1-billion multiyear program to modernize its mail service, Canada Post reported its 16th consecutive year of profitability, with a 22 per cent return on equity that year. Between 1997 and 2008, Canada Post delivered about half a billion dollars to the federal government in return on capital and dividends.

Last December, Canada Post announced—with the tacit blessing of its owner, the Government of Canada—that it is replacing door-to-door residential mail delivery with community mailboxes. It remains a bitterly contested strategy for the Canadian Union of Postal Workers and no small number of customers, and it represents a profound shift for a company with a long tradition of universal public service that has racked up about $1-billion in federally backed debt since 2009 to modernize that service.

To survive the decline of snail mail, Chopra reasons, Canada Post must out-compete the world's most efficient, agile and profit-driven parcel delivery companies, including FedEx, DHL and UPS. The field of battle is increasingly defined by the growth and ambition of Amazon, the hydra of e-commerce that is gunning for control over seemingly every facet of life.

Heading a company that, after all, has been a weather vane for technological change throughout Canadian history—evolving mail-sorting from manual to digital, and delivery from horsepower to jet power—Chopra insists e-commerce is the right focus for the future. "It's something we can win," he asserts with the mien of a man on a mission. "When I started asking our people if they'd hugged a parcel today, they always laughed," Chopra grins. "But this is our future."

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No subject currently galvanizes—and divides—Canadian retailers like e-commerce. One camp holds that e-commerce is simply a good complement to over-the-counter sales, and even boosts it. Then there are the evangelists, like Sam Sebastian, head of Google Canada, who had this to say (or, rather, tweet) during Store 2014, the Retail Council of Canada's conference, held in June in Toronto: "You have to cannibalize your core business to go after the next best thing. Make that your business model."

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The preoccupation with e-commerce found on the conference's Twitter feed was of more than anecdotal significance, confirms Diane Brisebois, the Retail Council's CEO. Sales at online businesses worldwide totalled $1.25-trillion (U.S.) last year, up from $1.06-trillion (U.S.) in 2012, she notes, citing data from EMarketer, an American research consultancy. In Canada, e-commerce sales will grow about 10 per cent annually to $33.8-billion in 2018, up from $20.6-billion in 2013, according to a forecast from Forrester Research Inc., while online sales as a proportion of total Canadian retail sales will grow to 10 per cent in 2018 from 7 per cent last year.

In just a handful of years, says Brisebois, the digital technology that drives e-commerce "has gone from evolutionary to revolutionary. I've never seen anything so disruptive." The last big shock to reshape Canadian retail, she notes, was the advent of price-choppers like Walmart and Costco. That invasion resulted in the demise of untold numbers of smaller-scale retailers unable to compete with the behemoths' rock-bottom pricing and massive marketing and logistical resources. But the impacts of e-commerce, Brisebois predicts, will be even grander in scale because Canadian consumers are now able to shop globally and—in large part thanks to the efforts of Canada Post and its network of more than 6,300 postal stations—receive their purchases overnight, often without paying shipping charges.

As retailers direct their investments toward online, they are, inevitably, reducing the number of stores, and shrinking the size of the stores that remain open. There is no better example of the change than those retailers rooted in the antique business of stationery: This year, Staples announced it was closing 225 stores continentally in order to concentrate on e-commerce; Grand & Toy, a Canadian competitor, closed its remaining 19 outlets for the same reason.

But Brisebois believes traditional shopping will survive: She predicts e-commerce will accelerate the transformation of stores into venues that combine entertainment and hands-on shopping. It's true, she says, that stores have been hurt by "showrooming," in which shoppers visit stores only to inspect the products they will later purchase online from whichever vendor is cheapest. But there's also "webrooming"—when shoppers identify products online but purchase them from stores. "It's still experimental," Brisebois cautions, but the early evidence suggests that investments in digital marketing can expand store sales, "if the marriage of e-commerce with the store experience is done well."

Few companies are trying harder to make this marriage work than Hudson's Bay Co. "Driving digital growth," says CEO Richard Baker, is HBC's top strategic goal–one that is increasingly embedded in all its business decisions. When HBC bought iconic U.S. retailer Saks Fifth Avenue last year for $2.9-billion (U.S.), Baker says, one of the key reasons "was to gain access to its world-class online experts."

To help pay for recent investments in online marketing and distribution facilities, Baker explains, the company is "unlocking" its real estate holdings through deals like last year's $650-million sale-and-leaseback of its Toronto flagship store and an adjacent office tower. But a future in which HBC sells its stores and migrates its retail business online is a vision that Baker rejects: Sales online are similarly profitable to sales in stores, he argues. Customers who shop online but pick up their purchases in stores often purchase more while visiting. The company's focus on e-commerce, he claims, "is not going to negatively impact on stores. It will positively impact on them."

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For shareholders in HBC—and shareholders in other retailers that likewise have billions tied up in real estate and leases, Baker's vision of a happy marriage between online and in-store sales is a soothing one. Willy Kruh, head of global consumer markets at consultants KPMG, agrees with Baker that "bricks-and-mortar stores are not going away any time soon." For evidence, he points to Canadian Tire, which is aggressively joining e-commerce and its network of stores.

And none too soon. The volume of online shopping is growing fast, Kruh adds, with Amazon in particular relentlessly driving online sales through cut-throat cost competition, expanded inventories and distribution networks (the company has opened three massive distribution centres in Canada since 2010), and technological advances including the integration of shopping-centric software into its recently launched line of smartphones. There's even a futuristic push to deliver products via drones.

"Amazon is going to carry 85 per cent of what you need," Kruh forecasts. "And the product, pricing and delivery speed is already incredible." The challenge for traditional retailers with networks of costly stores and staff to sustain, is undeniable, he warns. But for shippers like Canada Post, intent on delivering the wares that Canadians purchase online, Kruh emphasizes, "the prize is huge. E-commerce is only at 5% of retail sales so far in this country. And still only 60% of Canadians have smartphones. The landscape is wide open."

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It wasn't until Nancy Morison, chief operating officer of Clearly Contacts, Canada's largest online retailer of contact lenses and prescription glasses, had descended into the company's factory on the outskirts of Vancouver that she mentioned that the building had once served as a warehouse for Eaton's—the department store chain that was an icon of Canadian retail for more than a century, in large part thanks to a mail-order business that relied on Canada Post. But Morison, who came to Clearly Contacts with a background in small parcel logistics gained at DHL, wasn't going to dwell on the irony of an online retailer occupying the onetime home of a traditional retailer. "E-commerce is the future," was her only comment.

Clearly Contacts, which has been growing its sales volumes 20%year-over-year for well over a decade and now sits on a global customer list of six million, offers compelling evidence Morison may well be right. The company, founded in a Vancouver basement in 2000 with a desktop computer, a modem and $5,000 on a credit card, was bought by a French rival last February for $435-million.

On a tour of the factory, where employees were filling orders for contact lenses and glasses, Morison emphasizes Clearly Contacts' heavy investment in manufacturing equipment, and the extremely exacting production processes that have helped it win 95% of the Canadian online optical market. But the real secret of its success, she adds, was its ability to speedily move contact lenses from manufacturers on the U.S. east coast to its Vancouver plant and then onward to retail customers across Canada and around the world. "People almost always order contacts when they are out," she explains. "Speed is far more important to what we do than, say, for a shoe retailer. We won our market share in Canada with speed." And Canada Post, with its dramatically upgraded logistical prowess, Morison freely admits, deserves considerable credit for that.

After years of indifferent service, Morison says that since 2010 Canada Post has paid slavishly close attention to Clearly Contacts' needs, giving it access to Canada Post's massive database of addresses for in-house labelling, and utilizing its close links with international postal systems, its huge retail network and its real-time customer parcel-tracking system. Add these offerings to the access that Canada Post enjoys to apartment buildings and condos, Morison adds, and suddenly the post office started to seem indispensable. The relationship is partly responsible for Clearly Contacts' recent decision to offer its customers free shipping. "They've done a very good job," she says of Canada Post. "It's turned out they have a lot of things in play. They've transformed themselves into a technology company with some very slick things to offer."

Stephen Gordon, director of multichannel logistics for Best Buy Canada, shares Morison's obsession with speed. "It's not just about free shipping," he says. "It's free shipping and you get it the next day." This observation came during a stroll around a vast distribution centre in Richmond, B.C., operated by Ingram Micro, a U.S.-based technology and supply chain giant. At its Richmond facility, Ingram Micro services U.S.-based Best Buy's Canadian e-commerce operations, which include those of its subsidiary Future Shop, Canada's largest retailer and "e-tailer" of consumer electronics. As with Clearly Contacts, Gordon says online sales volumes have been growing at least 20 per cent annually for the past five years.

Canada Post is obviously intent on making itself indispensable not just to Best Buy but to all Canadian e-tailers. After successfully piloting a same-day delivery experiment in the Greater Toronto Area last Christmas, Gordon notes, Canada Post made the service permanent and is now expanding it to the Vancouver region. The service, which included weekend delivery during the Christmas rush, is based on a mastery of logistics that some would have once found unimaginable at Canada Post. "We could choose any carrier," Gordon explains, "but they deliver to every postal code in the country every day and they also have thousands of post offices where customers can pick up parcels. A customer in the GTA can make a purchase at noon and get delivery the same evening."

But Canada Post's ambitions, says Gordon, go far beyond mere mastery of logistics. Increasingly, he explains, Canada Post is becoming a handmaiden helping companies like his own to diversify their product offerings into what he calls "the endless aisle"—an aisle containing not just what's on the shelves but what can be delivered in short order. "We're using our relationship with Canada Post to expand our network of suppliers," Gordon says. It was with Canada Post's help that Best Buy began selling child-care products from Evenflo Co. "We were the first company into the e-commerce market in Canada, and we quickly learned that you have to continuously expand your vendor networks. Canada Post also understands that."

In pursuing its own e-commerce opportunities, reflects Chopra, Canada Post is now immersed in an ever-broadening range of efforts to stimulate e-commerce itself. These include its growing collaboration with Ottawa-based Shopify, whose simple, low-cost software products have helped more than 10,000 Canadian e-tailers establish online sales channels that can be integrated with Canada Post technologies and services. (This effort might be Canada Post's best defence against the argument that it will help the Amazons of the world destroy the Main Street businesses that it once served and relied on.) As the winners among these ventures flourish, Chopra reasons, so too will Canada Post. Harley Finkelstein, Shopify's chief platform officer, credits Chopra with recognizing his company's potential to invigorate and extend e-commerce: "Deepak seems to understand the future of retail," he says. "This is not the Canada Post your grandmother knew."

The Canada Post E-commerce Innovation Awards is another of Chopra's gambits aimed at energizing e-commerce as a whole, and capitalizing on that growth. Launched in 2012, the Awards offer more than $1-million in free Canada Post services as prizes for companies that are "changing the online retail landscape through entrepreneurship, creativity, strategy and innovation" by "building a better online shopper experience" and "driving the Canadian e-commerce industry forward." Winners last year included home improvement giant Lowe's Canada, and online personal products retailer Well.ca. By hosting the Awards, Canada Post placed itself at the centrepoint of e-commerce in Canada, says Chopra. The ultimate aim, he explains, "is to create an ecosystem of partners that become our evangelists."

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With more than 50,000 posties looking over his shoulder, Denis Lemelin, president of the Canadian Union of Postal Workers, chooses his battles with great care. Which is why he first applauds Chopra's e-commerce strategy before denouncing his single-minded pursuit of it. "We have always supported the strategy to grow the parcel business, and we have enthusiastically supported same-day delivery and seven-day delivery for parcels," Lemelin confirms. "But we cannot do this at the expense of the other services, especially door-to-door mail delivery for the public."

Lemelin worries that Canada Post is taking too big a risk: Consumer appetite for online shopping could prove more modest than Chopra hopes. And while Chopra's plan to phase out door-to-door residential mail delivery is intended to cut costs, he warns that it actually threatens to dramatically further diminish revenues from general mail, which generated $3-billion in operating revenue in 2013, as well as from direct mail from advertisers, which delivered another $1.2-billion.

With its government-conferred monopoly over the letter business and its catalytic role in community and business development, publicly owned Canada Post has an obligation to provide universal service—which translates into providing residents, businesses and communities with door-to-door delivery, Lemelin argues. Once large numbers of people are forced to brave the elements to retrieve mail from Chopra's community mailboxes, Lemelin believes, Chopra may be forced to retreat. "We'll push it as an election issue, as a political fight," he warns. "Canada Post has a duty not just to serve big corporations."

Rather than betting the future so heavily on e-commerce, Lemelin suggests the company revisit its historic role, abandoned with the closure of the Post Office Savings Bank in 1968, as a financial services provider. "There are numerous examples from around the world indicating that with our retail network, this is the way to go," he argues. A survey of international postal banking by researcher Katherine Steinhoff and Geoff Bickerton, the union's research director, reinforces the idea. France's La Banque Postale, created in 2006, has emerged as a major financial institution, with 10.6 million customers, Bickerton notes. Powered by a government mandate to combat the exclusion of rural and marginalized customers by mainstream banks, La Banque Postale has paid ¤1 billion in dividends to La Poste from 2008 to 2012. Similarly startling figures come from New Zealand, where Kiwibank, created in 2002 in part to serve marginalized customers, now delivers nearly 80 per cent of postal profits.

Bickerton has no shortage of other examples. In Italy, the postal bank earned net profits of ¤343 million, or 33 per cent of Post Italiane Group's profits in 2012. In Switzerland, the postal bank delivered 70 per cent of Swiss Post's income that year. Similarly, financial services brought in 61 per cent of India Post's total revenue. Brazil's postal company recently trained 18,000 clerks to handle an expanding portfolio of banking services. With about $2-trillion in deposits, Japan Post Bank is one of the largest publicly owned banks in the world.

Last year, the United States Postal Service's Office of the Inspector General issued a report urging the Obama administration to help save USPS by allowing it to provide non-bank financial services. "One in four U.S. households lives at least partially outside the financial mainstream," the inspector general's report states, while predicting the USPS could turn a profit by offering basic services like cheque-cashing, bill payments and small loans. The report, which has been adamantly rejected by two U.S. bankers' associations, points out that more than 90 per cent of bank branches closed since 2008 are in lower-income towns and neighbourhoods where post offices generally continue to operate.

The conditions for a postal bank may be similarly ripe in Canada, says Bickerton. "There is a growing unease about the state of financial and banking services in Canada," he argues, noting that Canada had 1,759 fewer bank branches in 2013 than in 1990, with most of the closures occurring in rural and low-income areas. Financial-service corporations in Canada made an average 23 per cent profit margin in recent years compared to an average 7 per cent profit margin for firms in non-financial industries, Bickerton adds, while citing a 2005 Library of Parliament study that endorsed a postal bank, an idea Chopra's predecessor, Moya Greene (now head of the U.K.'s Royal Mail), told Parliament she thought worth studying in 2010. An April, 2014, poll conducted for the postal union indicated 63.5 per cent of Canadians would support Canada Post expanding revenue-generating services, including financial services like bill payments, insurance and banking.

Chopra is not one of them. In a letter to the union last February, he explained that after closely studying the issue, Canada Post concluded it is "oversimplistic" to assume banking can solve the company's woes. "We cannot afford to make major investments in postal banking when its ability to generate enough revenue is questionable. That would expose us to incredible risk," he wrote.

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The Canada Post pickup at Mountain Equipment Co-op's downtown Toronto store is scheduled for 3 p.m. each day. To prepare for it, four staff spend each morning sorting through online purchase orders, selecting the purchased items from the store's inventory and then packing them up and labelling them using software integrated with Canada Post's national address database. They handle about 300 such purchases daily—with products ranging from batteries to baby strollers. Canada Post doesn't (yet) handle the orders for kayaks and canoes.

Under an e-commerce strategy known as "ship from store," the Toronto team handles all the purchases from addresses that Canada Post's Toronto operations can reach within one or two days. Purchases from addresses closer to other MEC stores are handled by those stores.

Working in lockstep with Canada Post, explains MEC's manager of omni-channel sales and service, Kevin Baggs, MEC expects its e-commerce volume will soon surpass that of its busiest stores. "A year ago, the big fear was showrooming—people coming in, checking prices and then ordering from Amazon," he explains. The only way to win in this environment, says Baggs, is to provide fast, inexpensive delivery. In MEC's case, deliveries are free for purchases over $50. "I've got every carrier on the planet calling up to quote on the business," he says. "For service and infrastructure, [Canada Post] is one of the very few that offer end-to-end service."

Seen from Baggs's perspective, Canada Post now plays an increasingly instrumental role as MEC's fight intensifies with other e-tailers–especially Amazon, which has added 16 new product categories including groceries and beauty supplies in Canada since 2013. This raises questions about Amazon's potentially paradoxical relationship with Canada Post. Although Amazon does rely on Canada Post for some of its deliveries, notes parcel manager Rod Hart, it also works with other carriers, while constantly benchmarking their competitiveness in order to discipline them on price and performance. Like everyone else in the e-commerce world, Amazon is fixated on delivery speed: In the U.S., it is gunning to achieve same-day delivery for about 30 per cent of the population by 2015, according to Marc Wulfraat, president of logistics consultants MWPVL International.

Meanwhile, Amazon is signalling (Amazon Canada declined to be interviewed for this article) that it is interested in strategies that may exclude carriers like Canada Post—possibly through the use of its own drones to deliver parcels, as Amazon founder and CEO Jeff Bezos has proposed, or perhaps through the acquisition of parcel carriers.

For Canada Post, Amazon thus represents both a vast opportunity and a terrifying threat. Winning a bigger share of the behemoth's delivery business is tantalizing. But the threat Amazon poses to Canadian retailers—many of them now deeply dependent on Canada Post in their efforts to repel Amazon—affects the entire ecosystem. And if the day comes when Ottawa considers selling its post office, Amazon might be the highest bidder. Last year, shortly before Chopra announced his intention to wind down door-to-door home mail delivery, the Harper government conducted an assessment of Britain's experience with postal service privatization.

For now, the e-commerce revolution is enough for Chopra to worry about. "There's a very compelling case Canada Post will re-emerge," is all he is willing to wager for the future. On the cement floor of the Pacific Processing Centre in Vancouver, Rod Hart offers a closer-to-the ground perspective. "We'll be a target," he says bluntly. "We know that."

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