What’s in it for Starbucks?

That’s the question I was asking after I digested the big news from last night that Square signed a deal with Starbucks to power their payments. I won’t detail the deal, because if you haven’t read about it already, you definitely don’t care about this post.

First, I’m surprised at Howard Schultz’s level of involvement in the deal: Joining the Square Board after recently leaving Groupon’s BOD. Some people don’t see Square and Groupon as competitors. I’m not one of those people. Groupon’s aim is to become the ecosystem for local businesses. That most decidedly includes payments, loyalty programs, POS, and obviously deals. The evolution of deals is likely to be in 1)targeting based on what you actually buy and 2) delivery, potentially in real-time based on time, location, weather, who you’re with, etc.

Groupon aspires to be a lot more than just an email deal company.

Square, too, has much larger aspirations than processing payments. Firing up their Cardcase app or their Point of Sale system you quickly see that w/this level of integration, Square will own the data on where you shop and what you buy. All of this will be used to get you to try new places, to come back more to existing favorites, and to buy more (everywhere).

Square aspires to be a lot more than just a dongle-based payments company.

That establishes why I see overlap between Square & Groupon.

With this deal, I just don’t see what’s in it for Starbucks. Obviously they get the Square software and the resulting experience. It’s a great experience on its own and some think that’s why Sbux did this deal. I find that hard to believe because I’ve been religiously using the Sbux card & app for the past few years. They’ve worked great. I can see my balance, quickly pay, and how close I am to my reward. I find it hard to believe that Sbux couldn’t just add the geofencing functionality for pay by name. Starbux isn’t adopting Square CardCase because it has scale — Square’s hope is that this deal will give them that scale and adoption. Outside of SF, my friends have never even heard of CardCase, and based on everything I’ve read, this is true across the country.

Maybe Sbux added Square just to give customers more options? That would be fine, if it wasn’t so potentially harmful to Sbux in the long-run. Why? Data. Square will now have data on how often you go to Sbux and what you spend. If the integration ever goes all the way, they’d also know the kind of drinks you get, etc. This data is massively valuable in the future.

Example: I always get Venti Chai’s from Starbucks. (If I’m feeling fancy, I go extra-hot, no water, & whole milk.) In a future CardCase world, it’d make sense for me to get offers from other shops to try their Chai’s. Or maybe since I always get a beverage on my way into the office, I start to get offers between 7-7:30 AM because that’s exactly my purchase window. Or maybe it’s been 3 weeks, and I haven’t been back, so Starbucks sends me an offer to come in for a free drink to re-start my habit. Any of these, or some variation, are all powered by the data. And Starbucks is now sharing that data. As the gorilla with scale, Starbucks was in a position to dominate this game on its own. This is something it’s smaller coffee/tea rivals can’t do with out the help of  the Square/Groupon/Google/PayPal’s of the world, through aggregation and building scale. With this deal, Starbucks euthanizes that advantage.

Starbucks is a smart company. So let’s assume they thought this through: They don’t want Square using any of the data from any of their transactions to be used for competitive targeting of any kind (no poaching!). Best case, they got this included in the deal. But assuming that Square/CardCase gets traction, helped by this deal, Sbux is helping to create a really powerful marketing program for coffee shop’s everywhere. Increasing trial, driving up repeat visits, encouraging referrals — are all the promise of what only Starbucks could create on its own given their scale, but now will be available to all because Starbucks helped drive adoption of CardCase by consumers. So even w/an exclusion for its data, this puts them in a tougher competitive environment. They go from having a strong competitive advantage to a level playing field that they helped level.

It’s clear what’s in it for Square. If Starbucks puts their back into it, this is a grand slam for Square. It drives massive adoption of CardCase by consumers, which in turn will drive adoption by smaller merchants, which drives more usage by consumers, and so on. The flywheel takes off.

For Starbucks? Here’s the best I could come up with:

– Starbucks thinks they won’t be able to create a consumer experience anywhere close to Square’s, so why not embrace the inevitable. (Find this hard to believe). Though as Owen points out, maybe this is a “stick to your knitting” strategy.

– Starbucks is desperate for “cool” and Square is very much that. (Schultz is too savvy for me to believe this)

– Starbucks got some kind of massive savings from Square on all the fees on the backend that makes this all worthwhile. This would mean Square is going to eat a ton of $ in fees in the coming years. (This seems to be the most likely, even if it doesn’t make much sense to me. At Sbux scale, this is a very serious amount of money for Square to eat indefinitely)

I could also just be giving Starbucks way too much credit:
– Starbucks got way caught up in the “magic” of the CardCase “experience” and made a deal without thinking through the long-term implications of what it was signing up for. From reading his books (which are very good), you clearly see how much Schultz cares for and values the magic of in-store experience.

I’ll end with a prediction/guess: In the near future, there will be a ton of handwringing internally at Starbucks over all of the above. I wouldn’t be surprised if Starbucks doesn’t end up promoting Square and this goes away. Then again, Pay w/Square is a pretty awesome experience so maybe they’ll put their full weight behind it and it’s going to be huge. I just think that’ll be a big mistake for Starbucks. But huge for Square. If this turns out to be the case, I believe it’ll be a textbook example of how a large, successful “old-school” company didn’t get how technology was eating the world and they’ll pay the price for it. Technology isn’t an adjacency or a feature for almost every business today, it’s core-competency for the successful ones.

5 Responses

  1. SY, does being on a BOD come with benefits (financial?)–does being offered a spot on the BOD of another company create a conflict of interest when considering a merger? seems outrageous given the compensation they already have, but wonder if it comes into play.

    1. Yeah, for regular folks these can be lucrative gigs. But for someone as rich as Schultz, they’re a drop in the bucket.

  2. starbucks really didnt have a good qtr. maybe they decided to get back to delighting consumers with their core coffee, snacks and drinks rather than make technology investments to make the in-store consumer experience better. to your point, i dont know why they picked Square out of all the other players out there with more scale, but the partnership approach make sense.

    the other thought might be to have baristas come to the customer to take orders rather than having long lines form. doing this with square might make sense.

    1. yeah – assuming there isn't more here than meets the eye, "sticking to your knitting" has to be it. guess we'll see soon…

  3. Re: the data issue – my guess/hope is that they will exempt Starbucks from their current policy of not sharing customer information with businesses, since they're a trusted partner. Seems like an appropriate tradeoff for the massive distribution they'll get in return.

    Also a fan of the "sticking to your knitting" argument, since ultimately Starbucks would additionally benefit heavily from reducing POS transaction time from ~15-25 seconds to a few seconds.

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