Square's growing appetite for restaurant payments

For their own sake, GrubHub and Uber should have purchased Caviar when Square reportedly offered it to them for sale in 2016. Instead, they now have a competitor who’s looking to eat their lunch in the restaurant delivery business.

Square now sees restaurant food service management, delivery, pickup and catering as a critical element in selling its ecosystem of payments processing, capital lending and Cash App instant payments. But this fight isn't one-sided. GrubHub and Uber are also getting deeper into the world of payments, with GrubHub buying LevelUp; and Uber developing products with Barclays and Green Dot.

These companies may not seem like natural rivals, but their business models have an increasing overlap when it comes to food delivery. The restaurant business now represents a quarter of the Square’s Gross Payments Volume that it processed in the second quarter, and that business looks to be growing rapidly.

GPV was $21.4 billion in the second quarter, up 30% from a year earlier. Key to the company’s payment volume growth has been its shift upmarket to larger organizations. Square reported that for the first time, half of GPV came from larger sellers. In its Q4 2017 shareholder letter Square defined a larger seller as a business with more than $125,000 in annual GPV.

A major success story for the quarter was the growth of the Food and Drink vertical which represented 25% of the company’s Gross Payment Volume. The average annualized GPV of a Square for Restaurants seller is more than $650,000.

Square is building a restaurant payments and services powerhouse by combining Square for Restaurants, which serves the POS registers for larger businesses, with Caviar for delivery and pickup, Zesty for catering and Weebly for web design.

The company’s geographic expansion is occurring both organically through launching pickup which allows it to learn about restaurants in a particular market on the cheap as well as acquisitions such as Entrees On-Trays in Dallas.

But there needs to be a strategy behind this effort. Otherwise, merchants will still see these acquisitions as distinct businesses that happen to be under the Square umbrella.

Jack Dorsey, CEO of Square and Twitter, explained on Square's earnings call that when a merchant was onboarded with a solution such as Caviar or Square for Restaurants, they were much more likely to let themselves be cross-sold to Square Capital, Square Payroll and more. In last quarter’s shareholder letter, it states that more than half of larger sellers use multiple Square products.

Additionally, key to growth is the ability for customers to self-serve and self-onboard. Executives reported that 60% of Square for Restaurants customers have self-onboarded, which includes loading menus, table arrangements, pricing and more. All of this enables easier integration into other services such as Caviar for delivery.

An important example of this natural cross-sell is the belated integration of the Cash App within the Square ecosystem. The Cash App was originally designed as a distinct email-based P2P product; signing up for it didn't give consumers or merchants a way into the broader Square ecosystem.

Today, 30% of Caviar couriers use Square Cash to receive payment immediately after completing a delivery, and they can spend the money immediately with a Cash Card.

Square’s total net revenue was $815 million for the quarter, up 48% from a year earlier. Net loss was $6 million for the quarter compared to a net loss of $16 million from a year earlier.