Investors in Square Inc (SQ 5.54%) have had good reason to celebrate this year. Shares in the payment processing company are up more than 70% year-to-date. The company's meteoric rise has been powered by its strong revenue and earnings growth reported in recent quarters. In Square's 2017 first quarter, the company reported adjusted revenue of $204 million, a 39% increase year-over-year, and total payment volume of $13.6 billion, a 33% annual increase.
Fueling this strong growth is Square's subscription- and services-based revenue, which grew a remarkable 106% year-over-year. While Square does not always break down the individual components of this business segment, the first quarter's shareholder letter did state that Caviar, Square Capital, and Instant Deposit all "contributed significantly" to the division's growth. The letter also stated Caviar's order volume had more than doubled from the previous year's first quarter.
While many were skeptical of Square's purchase of a restaurant delivery service when it first acquired Caviar in 2014, Square has since proven the doubters wrong by carefully incorporating the platform into its larger ecosystem. The company's leadership has also broadened the service's scope, adding more function so that it is now much more than a simple delivery service. In March, Square introduced Caviar Pickup, a new feature that allows diners to order ahead for their food via Caviar's app or online.
From food delivery to a robust food ordering platform
Caviar Pickup brings the ability to leverage technology to smaller- and medium-sized restaurants only previously available to much larger chains. When asked why the pickup service was introduced during the company's first-quarter conference call, CEO Jack Dorsey stated:
... We acquired Caviar in order to drive more sales to a type of seller we weren't able to reach, which was a ... full-service restaurant. Along the way, we learned that not only was delivery important, but offering more types of fulfillment of food was critical as well, and it would continue to open us up to new types of restaurants ... including QSRs. So we have ... an opportunity to go beyond just delivery and to really be a food platform anytime you're hungry ... So the pickup launch represents an extension of the fulfillment type, which has been asked by us from our sellers because they do have people coming by and picking up food, and gives us a more complete and cohesive view for the restaurant so they can use us for more and more things.
One more benefit in an already sticky ecosystem
Square believes its other differentiating services, such as order management, data analytics, and lending programs, help distinguish its service from the competition. With Caviar, Square can introduce a valuable service to potential restaurant clients and use it to sell these restaurants on its other services.
With existing customers, Caviar is a way Square can deepen its relationships, helping these restaurants serve customers quicker (with its new pickup platform) and more customers than an individual location's capacity (with its delivery service). As these restaurants serve more customers more quickly, they make more money and so does Square. As these symbiotic relationships deepen, it makes it much harder for restaurants to leave Square's network of products and services for competition.
Dorsey has talked many times about Square not offering a series of disconnected services and products for merchants but, rather, a single cohesive ecosystem where every service and product complements the others. Not only do these "add-on" services, like Caviar, represent more lucrative opportunities than just its primary payment processing business, but they grow Square's moat by giving it a stickier ecosystem than its competitors.