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Square Expands Its Food Delivery Business With New Acquisition

By Chris Neiger - Apr 25, 2018 at 7:05PM

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The addition of Zesty will help build out Square's subscription and services revenues, which is quickly becoming a larger part of its business.

Point-of-sale and payment processing company Square ( SQ -4.24% ) announced last week that it had acquired Zesty, a catering platform for companies, and will roll the company's services into its food ordering company, Caviar. Specifically, Zesty will allow Caviar to expand its catering services for companies by offering menu-planning and order management tools, customization for nutrition needs, as well as white-glove catering logistics.

Square will add all of these services to the Caviar for Teams service, which focuses on serving meals to companies both big and small.

"Restaurants turn to Caviar to reach more diners and grow their businesses. Expanding our corporate catering product with Zesty enables us to offer our restaurant partners another way to boost sales through higher-margin, large-format catering orders," Gokul Rajaram, Caviar's lead at Square, said in a press release.

Man riding on bike with food delivery bag on his back.

Image source: Getty Images.

At face value, the purchase may seem like a somewhat odd acquisition for Square. After all, Square makes the vast majority of its revenue from point-of-sale transactions between customers and merchants. But Zesty could build out sales for Caviar, which is already driving much of Square's subscription and services-based revenue.

It's all about subscription and services growth

Square's Caviar is a food-ordering company that allows customers to either have their food delivered or picked up. The purchase of Zesty adds the ability for companies to order catered food for their employees and even add high-end white-glove services.

Caviar makes its money by charging restaurants a fee based on the order value, delivery charges, and service fees to customers. Caviar, Square Capital (the money-lending business owned by Square), and Instant Deposit are the primary sources of revenue for Square's subscription and services-based revenue, with Square Capital and Caviar being the some of the "largest contributors" to this revenue segment.

Why does this matter? Because Square's subscription and service-based revenues continue to climb, and it's becoming an increasingly larger portion of Square's total sales. In 2017, sales in this revenue segment spiked 95% year over year, to $252.6 million, and accounted for 11% of the company's total revenue. That's a significant increase from just 5% of sales in 2016 and 8% of sales in 2016.

Not only is the services and sales revenue segment being driven, in part, by Caviar's sales, but it's also one of the company's fastest growing and stable sources of revenue. Square said in its 2017 10-K filing that, "subscription and services-based revenue generally demonstrates less seasonality than transaction-based revenue."

The bigger picture

Square's acquisition of Zesty may not seem like a huge move, but it's clear that the company is looking to expand its food-delivery company and build out more subscription and services-based revenue. That's a wise move considering that U.S. restaurant delivery sales are expected to grow from $43 billion last year to $76 billion by 2022, according to analysts at Cowen & Co.

The purchase of Zesty will add an untapped food delivery market to Caviar's services lineup and hopefully boost sales as a result. Investors should continue to keep a close eye on how fast Square can grow its subscription and services-based revenue in the coming quarters, and take note if it continues to grab a larger portion of the company's top line. Transaction-based sales will always be the meat and potatoes of Square's revenue, but subscription and services-based revenue amount to icing on the company's cake.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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