Lucked Out Coffee
Updated: Jun 5, 2020
Founded in 2017, luckin coffee’s mission in China was “to be part of everyone’s everyday life, starting with coffee.” Selling coffee in China was inevitably going to be a challenge, as China’s caffeine intake level is almost 5 times less than that of western countries. luckin’s main competitor Starbucks defied all odds and managed to find success1 in China after 9 years of losses. Now, Shanghai has almost double the amount of Starbucks stores as New York City. However, Starbucks understood something that luckin didn’t: Chinese people didn’t buy Starbucks for the coffee; they bought it for a taste of western culture, albeit sarcastically. Despite this, on March 17th 2019 luckin coffee raised $561 million in its IPO by selling 33 million shares. The company then used the funds for aggressive network expansion and customer acquisition. luckin used promotional tactics like “buy one get two free” and ended up giving away 20.5 million cups of coffee at a significantly discounted price. And it worked. By the time December rolled around, they had opened 4507 stores in China, surpassing Starbucks.
However, soon after their short-lived success, things started to get rocky. In February, shareholder grew uneasy when Muddy Waters tweeted they were shorting LK after receiving an anonymous 89-page report that detailed luckin’s fraudulent activity. An anonymous team sent 1500 people to 620 stores across China to record and monitor the number of items bought in stores for 981 business days. The report provided evidence that luckin inflated the number of items sold per day and the price per item by ~70% and ~5% respectively. At an attempt to acquire more capital from investors, they deliberately falsified numbers and mislead shareholders to portray luckin as a growth stock. Although luckin vehemently denied the validity of the report, it was announced on April 2nd that investigations were being launched in order to look into luckin’s $300 million fraud, both internally and by China’s securities regulator. Since then, the NASDAQ stock market halted trading of LK at $4.39, putting those who want to buy or sell the stock in a sort of financial purgatory.
luckin isn’t the only loser in the this situation. Chinese and growth-without-profit businesses seeking funding will be subject to increased skepticism and will likely not reach their desired valuations. For now, it is hard to imagine luckin bouncing back any time soon. The lockdown of Hubei in late January severely disrupted business and it was only on April 8th that the ~300 stores in the province resumed business. Although the disruption due to Covid-19 may have pressured luckin to commit fraud, the company’s problems run deeper. Overall, luckin’s business model was unsustainable. Not only was the heavily discounted coffee only attracting highly price sensitive customers, but because of China’s lack of enthusiasm for coffee, the fruitfulness of this business venture was unlikely. China consumes caffeine mainly through tea and if there was going to be a company that changes that, it wont be luckin coffee.
By Mac Zhou
1 something not all western companies are capable of eg. Uber and Walmart