Luckin Coffee
Luckin Coffee Inc. is a Chinese coffee company and coffeehouse chain. It was founded in Beijing in 2017., it managed 4,507 stores and exceeded the number of Starbucks stores in China. Most of its stores are small "pick-up" locations in office buildings or college campuses that serve for online orders' pickup and delivery.
In April 2020, the company revealed that it had inflated its 2019 sales revenue by up to US$310 million. It resulted in the stock price crashing and several executives being fired. Trading was suspended and the company was delisted from NASDAQ on 29 June 2020.
History
Luckin Coffee was incorporated in October 2017, and by January 2018 had opened its first shops in Beijing and Shanghai. The company announced the completion of Series A financing to a total of US$200 million in July 2018.The company continued its rapid growth—by October 2018, Luckin Coffee had opened 1300 stores, surpassing the number of Costa Coffee stores to become the second-biggest coffee brand in China. Luckin Coffee also signed a strategic cooperation agreement with Tencent. Much of Luckin's expansion was fueled by an aggressive marketing strategy which saw the company spend three times as much as it earned to feed its growth. In May 2018, Luckin Coffee accused Starbucks of forming a monopoly by signing exclusive contracts with suppliers and property owners. Starbucks dismissed these allegations as a marketing stunt. On 16 May 2018, the case was officially put on file by the Shenzhen Intermediate People's Court. In October 2019, Luckin Coffee unilaterally withdrew the case.
In January 2019, Luckin Coffee announced that they planned to open 2500 new stores and surpass Starbucks to become the biggest coffee brand in China. Luckin also gained exposure in the US stock market, applying to the National Association of Securities Dealers Automated Quotations and starting to trade on Nasdaq at $17 a share. After reaching $25.96 on the first day, the stock dropped to $16 on its second day of trading. By the end of September 2019, Luckin Coffee had opened 3,680 stores, and had recorded a net loss of $75 million in the third quarter of 2019.
On January 2019, Luckin Coffee appointed Reinout Schakel as CFO.
On 8 January 2020, Luckin Coffee held a press conference about their self-service retail stores operations. At the conference, Luckin announced to public that they had opened 4507 stores in past two years and as such had already become the biggest coffee chain brand in China, surpassing Starbucks. Luckin Coffee also announced their unmanned retail strategy and two new technical products in the press conference—Luckin Coffee EXPRESS and Luckin popMINI. Luckin Coffee EXPRESS venues adopt the Swiss made Schaerer coffee maker and are placed in offices, campuses, airports, train stations and communities as self-service coffee makers in the future. Luckin popMINI is the vending machine with E-commerce price.
On 13 July 2020, Luckin Coffee named Jinyi Guo as the new chairman and CEO after co-founder and former chairman Charles Zhengyao Lu was removed by shareholders.
2020 accounting scandal
On 31 January 2020, short-selling firm Muddy Waters Research published an anonymous 89-page report on Twitter, claiming that Luckin Coffee had falsified financial and operational figures. The report claimed that the number of items sold per store was inflated by at least 69% in the third and by 88% the fourth quarter of 2019, supposedly backed by 11,200 hours of video footage. Before the U.S. stock market opening on 3 February 2020, Luckin Coffee responded by categorically denying all allegations made in the report. The company argued that the report raised malicious accusations and false allegations with unsubstantiated evidence and flawed methodology.On 2 April 2020, Luckin Coffee announced that an internal investigation found that its chief operating officer, Jian Liu, had fabricated the company's 2019 sales by "around RMB2.2 billion". The next day, the China Securities Regulatory Commission said that it would investigate the company for fraud. On 8 April, the U.S. stock market halted trading on all Luckin shares over the fraud probe. In the month of April, the company's stock fell by over 80%. In mid-April 2020, American investment bank Goldman Sachs announced that it would seize and sell the Luckin stock holdings of the company's chairman, Lu Zhengyao, after he defaulted on a $518 million margin loan.
On 12 May 2020, CEO Jenny Zhiya Qian and COO Jian Liu were relieved of their positions, while Reinout Schakel remained as CFO. On 15 May the company received a delisting notice from NASDAQ.
After over a month of being halted for trading, Luckin Coffee stock was able to be traded again on 20 May 2020. On 28 May, shares of Luckin Coffee plummeted more than 20% after The Wall Street Journal released a report claiming that firms linked to the company's chairman and controlling shareholder played a central role in its accounting scandal.
On 29 June 2020, Luckin Coffee suspended trading on NASDAQ and filed for delisting, after the exchange ordered the company to delist.
The scandal could potentially have a profound impact, as the US Government is poised to pass the Holding Foreign Companies Accountable Act, which would force Chinese companies to provide audited financial statements or else face delisting from U.S. stock markets.
Operations
Luckin Coffee stores started trial operations in January 2018. The company operates shops, stores, and kiosks that offer coffee, tea, and food. As noted by sources, the company's marketing and market appeal is centered around marketing and discounts; Luckin offers freebees, where each new customer is offered a free drink and a 50%-off coupon for one cup. They also offer "buy one, get one free" coupons for loyal customers. These discounts make its price lower than Starbucks and attracted a bigger number of returning customers in the early stage of its business.The brand also has a strong focus on technology. Luckin Coffee did not open any traditional brick-and-mortar stores in the beginning. Its physical locations were only for making coffees and fulfilling online orders picked up by customers or delivery persons. Although most of its stores do not have seats or other services for customers, and are in less prestigious locations compared to Starbucks, the brand has been able to capture a new generation of consumers and rival Starbucks in China. The target customers of Luckin Coffee are white-collar workers and students near the stores who do not have much time to drink coffee at stores.
Customers need to download the Luckin Coffee App to order and pay for drinks online. Luckin Coffee also cooperates with the second largest courier in China, SF Express, delivering orders to customers within two kilometers around each store. This operation principle is suitable for Chinese people's fast-paced lives and put pressure on other traditional coffee brands.