Square CEO Jack Dorsey is a big fan of Caviar, the food delivery startup his payments company bought for a rumoured $90 million in 2014.
So when Square fielded offers for Caviar earlier this year, and possibly sought to sell it for around $100 million, Dorsey pushed against a deal, creating tension with some members of Square management who wanted to sell, sources told Business Insider.
Dorsey further elaborated his thinking on Caviar during Square’s earnings call on Tuesday, describing it as an important part of the business to expand in the massive restaurant market.
In short, he believes Caviar solves the biggest problem every restaurant owner faces (physical space constraint), and helps them sell more, which could ultimately turn them into Square customers. Once they get hooked on one of Square’s services, it opens up more upselling opportunities to other products, like its accounting software or loan packages.
“Caviar has been phenomenal for us in serving restaurant sellers, driving more sales to them, removing the constraints of a number of tables they have in their physical space and allowing them to deliver whatever they make all over town.
Any of those Caviar restaurants could eventually take advantage of Square services as well, and this is how we think about our ecosystem — it’s not just one product but they all work better together.”
Square doesn’t break out sales from Caviar, looping it under its “Software and Data Product” revenue instead. That segment, mostly made up of Caviar and Square Capital, generated $35 million in third-quarter revenue, up 140% year-over-year.
The company also noted Caviar’s weekly order volume has grown 11-times since the acquisition in 2014, while the service is drawing in the largest Square customers, with an average annualized gross payments volume of over $500,000.
Unclear strategic position
Restaurants has been one of the core markets Square has been going after lately. Square Capital recently struck a big partnership deal with Upserve, a card payments startup with 7,000 restaurant customers, while integrating its API with TouchBistro, a point-of-sale solution maker for restaurants.
Given the food delivery market itself is valued at $210 billion and there are millions of restaurants across the country, it’s no surprise Square is targeting it.
Still, some investors are not sure if it’s necessary to keep Caviar under Square’s business. On-demand food-delivery is a capital intensive business that costs a lot and takes a long time to reach scale. It’s why some of the once-hot delivery startups like SpoonRocket shut down, while Postmates struggled to raise money.
“The strategic position of the business remains unclear,” Pacific Crest’s analyst Josh Beck wrote in a note about Caviar on Wednesday.
Beck believes it’s best for Square to move Caviar outside of Square, as it will remove a lot of the heavy costs and allow the company to better focus on its bigger growth drivers like lending and software — not to mention strong competition from startups to bigger players like Uber and Amazon.
“We concluded that divesting Caviar was the best strategic option for Square based on our proprietary survey results, challenging unit economics and intense competition,” Beck wrote in a previous note published last month.
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