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Square's Getting Serious About E-Commerce

By Adam Levy - Feb 6, 2020 at 8:10AM

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A partnership with UPS rounds out its suite of online services.

Square (SQ 5.54%) is best known for helping small business owners run their brick-and-mortar stores and restaurants. But over the last couple of years, the company has stepped up efforts to enable merchants to complete sales online. 

Its latest move into e-commerce is a partnership with UPS (UPS 2.61%). Square merchants that use its Online Store platform will gain access to special shipping discounts to fulfill their online sales. The move puts Square's Online Store on a path to catch up to Shopify (SHOP 5.88%), which negotiated a similar deal with UPS in 2017, or eBay, which has negotiated rates with all of the major U.S. couriers.

A smartphone and laptop displaying a Square Online Store next to a Square Register device.

Image source: Square.

Expanding the market

Square has actually made several big investments in e-commerce over the past year. Last January, it released a developer kit and payments API for mobile apps that want to use Square's back end for processing payments. A few months later, it launched Online Store, building upon its Weebly acquisition.

The partnership with UPS will enable Square to offer a more complete solution for expanding sales online. Square's suite of products and tools for in-store merchants can handle just about anything from inventory management to customer payments. Its Online Store platform should be equally comprehensive -- that includes getting items to customers' doorsteps.

Shopify actually takes shipping a step further. It's building out its own fulfillment network that will handle everything from warehousing inventory to getting it to customers. That may not be necessary for Square, however, as it focuses primarily on merchants with their own stores and supply chains. Most would likely rather manage their inventories locally.

A true omnichannel service

The advantage of Square's Online Store over competing platforms is its ability to integrate its services across channels -- in-store and online. Merchants might use eBay to sell items online, but if they also sell in-store, they'll need to find a third-party solution for managing their inventory. And while Shopify offers in-store solutions, its suite of services isn't nearly as robust as Square's.

So for merchants looking to expand from brick-and-mortar to online sales, Online Store represents a great solution; likewise for online merchants that want to leave the option open to expand to physical stores in the future.

But the real value of Square's omnichannel approach may reveal itself in its pricing. Square's pricing undercuts Shopify by about 10% for similar levels of service. Unlike Shopify, it also offers free and low-priced plans for merchants that are just getting started.

Square's ability to offer merchants lower prices for one service stems from the idea that it has a whole suite of services to sell customers. Not only do other products in the suite generate additional revenue for Square, they increase merchant retention, and therefore lifetime value.

In other words, Square can make more money than competitors like Shopify while charging less for comparable services.

Winning business from the competition

Square's omnichannel approach gives it a clear target market -- merchants that are interested in both online and in-store sales -- while enabling it to offer a more specialized product for less. That's a considerable competitive advantage for the company and may enable it to attract merchants outside of its smaller target audience, stealing business away from Shopify and other competitors.

In order to succeed in that regard, however, Square will need to keep investing in e-commerce and building partnerships in key areas like fulfillment. That's why the UPS partnership is notable. More robust fulfillment services with competitive pricing should help expand the appeal of Square's Online Store platform. With Square's expertise with small merchants and its consumer ecosystem from Cash App, it'll surely find new opportunities to continue building out its e-commerce platform.

Considering the strong growth of online shopping globally, Square's efforts to establish a foothold in e-commerce could play an important role in its future revenue growth.

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Stocks Mentioned

Block, Inc. Stock Quote
Block, Inc.
SQ
$71.00 (5.54%) $3.73
United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
UPS
$183.30 (2.61%) $4.67
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$385.23 (5.88%) $21.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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