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August 8, 2:15 pm EST – Square's (PrivCo Private Company Ticker: SQUAREP) latest partnership with Starbucks has broad implications beyond a simple $25 Million investment and Starbucks' switch of its credit card processor, PrivCo research concludes. PrivCo also concludes the deal brings in an estimated $120 Million in annual revenue to Square's top-line for 2013 which will boost Square's current $3.225 Billion valuation to $5.5 Billion by the end of 2013. Starbucks' partnership helps the coffee chain solve one of its most vexing problems: how to solve its "peak hours capacity" problems during which customers walk away from long lines and wait times by accepting payments well before reaching the counter.  According to a PrivCo source familiar with Starbucks' thinking, this was the key motivating factor for Starbucks. And more broadly, from venture capital investors and mobile startups to large financial institutions, mobile-payments have instantly gone from a niche novelty to a mainstream payment option with far-reaching implications, disrupting both local retailing and payments business models forever.

PrivCo breaks down the momentous nature of this day's far-reaching deal between Square and Starbucks:

What's In It For Starbucks: 

  • Solving peak-time capacity problems: Starbucks' adoption of Square is not motivated by saving money (in terms of processing fees, as Square will be charging a 2.05% processing fee, about what Starbucks pays now all-in including swipe fees). Instead, Starbucks sees Square as a tool to get payments in front of the counter. Starbucks recognizes Square as a solution for its peak hour capacity question, where long lines can turn away customers. Although this will not be implemented over night (devices needs to be distributed, tested, observed), as CEO Schultz acknowledged today, Starbucks is aiming to begin processing transactions in line as soon as 2013.  Even a modest improvement in lost customer rates will have a materially positive impact on Starbucks and other retailers who will soon replicate and implement the technology.

  • Investment: ​Starbucks hopes that its $25 Million investment will reap a 2X or 3X return. However, they stand to gain the most by solving their peak hour capacity question. 

What's In It For Square:

  • Top-Line: According to PrivCo data, Square'spartnership with Starbucks will increase its 2013 revenues by approximately $120 Million.
  • Bottom Line: PrivCo estimates Square's direct bottom line benefit from the deal will be no more than $5 Million a year as it is providing its service to Starbucks nearly 'at cost'. However, the indirect benefits from marketing and from rapidly accelerating mainstream adoption by other merchants will pay for itself many times over, and that's the key financial benefit to Square.
  • Valuation Consideration: The top-line revenue growth will have a significant impact on Square's valuation, with the potential of increasing its 2013 valuation to $5.5 Billion. At this valuation, Jack Dorsey's 26% stake would be worth $1.43 Billion by next summer.
  • Most Important Take Away: Square has gone from a niche product to mainstream adoption for the average consumer. The company is entering the "physical location" realm, which previously was unpenetrated by mobile payments. Even if Square does not profit a dollar on this partnership, it has altered the payments landscape forever.
  • Square's entrance into a physical location, under the trusted brand of Starbucks, diminishes any previous skepticism about the product, or its niche applications.
  • Sam Hamadeh, PrivCo CEO and Founder emphasized that Starbucks' partnership is a statement in itself, "August 8, 2012 is the day mobile payments went mainstream.   And one thing is also certain: there are meetings being held today up and down Sand Hill Road in Silicon Valley getting their heads around the significance to their portfolio companies - and to investments opportunities that must now be made asap - for mobile, for payments, and for local e-commerce. The Square-Starbucks partnership is without question a disruptive game changer."

Note to Readers: Square's card reader made its first public debut in January 2010 at a Congressional fundraiser hosted by PrivCo (and Vault.com) Founder Sam Hamadeh at his New York loft, and co-hosted by Square's Jack Dorsey and Facebook's Sean Parker, where Square was used for the first time to accept attendees' campaign contributions by credit card via an iPhone.

 

Click Here For PrivCo's Private Company Financial Report On Square, Inc.

  

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