When a Deal Goes Sour – Square and Starbucks

After losing $71M from their 2012 deal with Starbucks, Square has revealed that they don't expect to work with the

With Square filing its S-1 report with the SEC and stating its intention to go public, out came scores of details about the mobile payment company. Notable among the details is that Founder and CEO Jack Dorsey controls voting rights of the firm (even with an equity position of slightly less than 25%), revenues were $470 million for the first half of 2015 after being below $200 million for all of 2012, and that their deal with Starbucks was a flop.

Known for their (literally) square card reader that could enable any mobile device to accept card payments, the firm has grown its product base to include a wider array of payment solutions. These include both mobile and wired card reader terminals as well as credit card processing infrastructure.

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Having gained strong traction among small merchants who gained additional flexibility in accepting payments using Square than from traditional credit card solutions, Square secured a partnership with Starbucks in 2012. With the deal, Starbucks agreed to use Square to process the firm’s credit card payments with transaction fees that were lower than what the coffee chain had been paying. Although the terms of the partnership meant that it would be difficult to make a profit from it, there were several positives for Square.

Firstly, the deal provided Square with its first major enterprise customer, and additional brand recognition for further such large scale partnerships. Secondly, Starbucks become an investor in the payment startup, providing $25 million in cash, which was needed by Square. Finally, Starbucks Founder, Howard Schultz, agreed to take a board seat with Square and was expected to provide key insider experience.

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Square would have a tough time monetizing Starbuck’s transaction volume

Fast forward three years, and the question is whether Square achieved any of its goals. From the outset it was known that Square would have a tough time monetizing Starbuck’s transaction volume. Ultimately, Square failed to achieve any profits from the deal, resulting in $71 million of accumulated losses from Starbucks since 2012. This has caused Square to announce that they are raising fees and they expect Starbucks to leave them in favor of another credit card processor.

In terms of brand recognition, the deal did raise awareness of Square, but it failed to provide the firm with significant inroads into other large enterprise customers. In addition, as part of the deal, Starbucks agreed to begin to accept payments from users using Square’s mobile wallet. At the time, Square Wallet was Square’s major component for providing services to consumers, and adding Starbucks was supposed to increase the number of locations accepting the mobile wallet. However, even with Starbucks accepting Square Wallet payments, the product failed to gather much interest and was shuttered last year.

Due to the losses and perceived failure of the deal, within their S-1 Square is aiming to position themselves as a much stronger company without Starbucks. As such, financial results were detailed to show revenues and expenses both with and excluding Starbucks. For example, for the first half of 2015, Square reported a net loss of $77 million, with $27.9 million of that related to Starbucks.

Like many corporate deals that fail to achieve remarkable results, the partnership between Square and Starbucks is expected to be one that will be debated for years to come. On the one hand it provided brand recognition to Square. On the other hand, this came at a huge cost, and may not have provided Square with much traction in converting customers beyond the small and medium business market.

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