Luckin Coffee - Spectacular Rise, Fraud Bursted & Incredible Comeback
Hell of a ride
Summary
Busting the Luckin Coffee Fraud
The investigation unveiled Luckin Coffee's financial fraud, significantly affecting its stock and intensifying the Sino-American trade war.
Founded in 2017 by Charles Zhengyao Lu, Luckin Coffee began opening shops in Beijing in January 2018.
The company mainly focused on small shops where customers order via an app and pick up coffee, in contrast to larger Starbucks outlets.
Aggressive discounts and promotions were used to gain prominence.
Six months after opening, they secured a $200 million investment from major entities like BlackRock and the Singapore sovereign wealth fund.
By May 2019, the company went public on the US stock exchange, reaching a valuation of up to $12 billion.
Impressive Q3 2019 results displayed a 50% store expansion from Q1 and a 300% growth from the previous year.
However, Muddy Waters Research, a short-selling firm, released a report alleging various financial discrepancies in Luckin's reporting.
To verify the claims, an extensive surveillance was set up on 620 Luckin stores, and 25,843 customer receipts were collected.
The data showed inconsistencies in reported vs. actual sales and prices.
On January 31, 2020, following the exposure, Luckin Coffee's stock dropped, but it briefly recovered.
On April 2, 2020, Luckin admitted to fabricating $310 million of revenue in the previous three quarters, causing its stock to plummet 95% in 51 days.
The scandal sparked demands for transparency from Chinese companies listed in the US and influenced discussions on auditing Chinese companies by the US.
The report was likely produced by Snow Lake Capital, but the firm hasn't confirmed its involvement.
How China's Largest Coffee Chain Surpassed Starbucks
Luckin Coffee has over 9000 stores, surpassing Starbucks' 6000 in China.
In 2020, Luckin fabricated nearly half of its revenue, leading to a 97% drop in share price and bankruptcy.
Despite this setback, Luckin posted profits for the first time three years later.
Luckin's original business model emphasized app-based orders and self-pickup or delivery, cutting costs.
Their aggressive pricing, often much cheaper than Starbucks, attracted customers but led to substantial losses.
They justified these losses as a "loss leader strategy" but struggled when prices were raised due to customer preference for affordability.
After the accounting fraud exposure, new management took over and initiated a turnaround strategy.
Cost-cutting measures included reducing store count, discontinuing unprofitable ventures, and decreasing marketing expenses.
Revenue growth was achieved through product innovation, with drinks like the Brown Sugar Boba Latte becoming hits.
Effective marketing targeted young consumers, with celebrity endorsements like Eileen Gu boosting brand popularity.
Implementing a franchising business model, Luckin rapidly expanded in lower-tier cities.
Starbucks, which operates all its stores directly in China, couldn't expand as fast as Luckin.
China's "zero-Covid" policy hurt Starbucks' in-store experience model more than Luckin's pick-up/delivery model.
Luckin's consistent innovation and strategic decisions positioned them as China's top coffee chain.