What’s in it for Starbucks?

That’s what I’m left with after I’ve digested the big news from last night that Square signed a deal with Starbucks to power their payments. I won’t explain it, because if you haven’t read about it already, you sure don’t care about this post.

At first, I was just surprised at Howard Schultz’s level of involvement in the deal – joining the Square BOD – given that he had just recently left Groupon’s board. Some people don’t see Square and Groupon as competitors. I’m not one of those people. Groupon aims, in the next few years, to be the ecosystem for local businesses. That most decidedly includes payments, loyalty programs, POS, and obviously deals. Those deals will likely evolve to be targeted based on what you actually buy and also be delivered in different ways, including, potentially, real-time.

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

Square, too, has much larger aspirations. Opening up their card case app and their POS systems 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.

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

Just wanted to establish why I see the overlap between Square & Groupon.

Today, I’m just not seeing what’s in it for Starbucks. Clearly they get the software and the resulting experience. Some think it’s a great experience on its own and that’s why Sbux did this deal. I find that hard to believe because I’ve been using the Sbux card (& app) for the past few years pretty religiously. It’s awesome and quick. I can see my balance, quickly pay, and see 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. They’re also not adopting Square CardCase has any kind of scale — Square’s hope is that this deal gives 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 and CC hasn’t caught yet.

So maybe they added Square because more options is just better? That would be fine, if it wasn’t potentially so harmful to Sbux in the long-run. Why? Data. Square through CardCase 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 lattes. Or maybe since I always get a beverage on my way into the office, I only 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, and so Starbucks itself sends me an offer to come in now to get 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 master this game on its own – something it’s smaller rivals can’t do (but someone like Square/Groupon/Google/PayPal can help them do 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 any competitive targeting of any kind (no poaching!). Best case, they got this included in the deal. Though, assuming that Square/CardCase gets traction, they’re still helping to create a ridiculously powerful marketing program for every other coffee shop everywhere. Increasing trial, driving up repeat visits, encouraging referrals — are all the promise of what only Starbucks could create given its 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 merchants, which drive 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. Though, really it’s a guess. I’m guessing that, shortly, internally at Starbucks there will be a ton of handwringing over this for the reasons I guess at above. I wouldn’t be surprised if Starbucks doesn’t promote this at all and this doesn’t get much adoption at all (but still another nice press bump for Square). 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.

(ZERO EDITING. Please forgive misspellings, grammatical errors, typos, and everything else. Will remove this once I’ve read & edited. Thanks.)