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Luckin Coffee Shares plummets after a $310 million financial scandal

Luckin Coffee Inc., considered to be Starbucks China’s challenger, saw shares plummet 75.6% in Thursday trading after a special committee of three independent directors investigated “misconduct, including fabrication of certain transactions” that spanned during the 2nd to 4th quarters of 2019.

The special committee has discovered Jian Liu, Luckin Coffee COO and Founder and Employees reporting to him fabricated sales adding up to 2.2 billion yuan ($310 million).

“As a result of the investigation, Investors should no longer rely upon the Company’s previous financial statements and earning releases for the nine months ended September 30, 2019 and the two quarters starting April 1, 2019 and ended September 30, 2019, including the prior guidance on net revenues from products for the 4th quarter of 2019, and other communications relating to these consolidated financial statements,” Luckin Coffee said in a statement released recently.

The company has since suspended the individuals involved in the misconduct and will pursue legal action against them.

About Luckin Coffee:

  • The Chinese coffee chain was founded in October 2017
  • Made its public trading debut on the Nasdaq in May 2019
  • Luckin stock spiked 47% the day of its IPO and largely remained above its offering price of $17 per share until Thursday’s tumble
  • Luckin Coffee traded at $8.73 per share as of 10:05 a.m. ET Thursday, down roughly 78% year-to-date
  • To date, Luckin has over 4,500 outlets in China
  • Since going public, Luckin has added smart vending machines called Luckin Pop and Luckin Tea
Luckin Coffee Vending Machines

Luckin Coffee launches Vending Machines

Founder and CEO Qian Zhiya states that this new strategy will allow them to get closer to consumers.  They will not be restricted by the license approvals.  In what could be yet another first in China Luckin’s vending machines will serve freshly brewed drinks as well as food.

Luckin Coffee Vending Machines

Luckin Coffee launches new vending machines

Just recently, Luckin Coffee also launched a share placement and a convertible bond with a combined worth of US$821 million early January 2020.   That is according to a Reuters report which also mentioned that the proceeds will be used to open more stores and invest in sales and marketing of the brand.

Luckin coffee Stock Listing

Luckin coffee Share Price

Luckin Coffee Share Price

Luckin has recently surpassed Starbucks China, in terms of outlets count within the country.  Recently we reported on the incredible growth of Luckin Coffee and their determination to take on their key rival Starbucks.  Luckin are now operating more than 4,500 stores and growth is continuing.

Luckin Coffee’s business model focuses primarily on a coffee delivery and pickup style of business.  The venture into vending machines is seen to be a broadening of this model.  They have achieved great brand recognition and attachment in the under 30’s demographic.

It’s not luck that Luckin Coffee is beating Starbucks at their own game.

The heads at Starbucks must be worried…

Luckin Launches Tea

Luckin Tea LaunchesRocketing since blast-off in October 2017, Luckin Coffee is now set to launch a new independent business in the Chinese market.

The new offering is to be called “Luckin Tea“.

Chinese coffee chain start-up Luckin Coffee has announced that to speed up its market expansion, it will launch its Tea Business as an independent brand.

Last April, the Luckin Tea series was initially launched in Luckin Coffee shops and has experienced strong growth and exceeded company’s expectations.

Jian Liu, Luckin Coffee Chief Operating Officer said in a statement that the tea drink outlets aims to complement the existing coffee shops and will help roll out its footprint nationwide.

Luckin Tea will focus on Tier 2 through Tier 4 cities and will initially open in shopping malls.  However, Luckin Coffee stores will focus on Tier 1 and Tier 2 cities and will continue expanding in office locations.

Luckin Tea Launches Luckin app for orderingLuckin Coffee so far currently operates 2,963 stores spread across 40 cities in China. It has plans to open more than 4,500 stores by the end of 2019, making it the country’s largest coffee chain.  When it launched, Luckin Coffee stated that it aimed to displace Starbucks as the preferred brand of Coffee in China and it focussed on a Digital Ordering and Payment App to help it get mass streamlining of transactions to enable massive growth.

Fast Fact: Chinese consumption of coffee products grew at a compounded rate of 15% for the past decade and was estimated to be worth RMB 100 billion (USD 14.2 billion) in 2018.

Luckin Coffee

Luckin Takes on Starbucks China

According to CBN Data, Coffee sales will top US$43.7 billion in 2020, a 330% jump from 2015 and this seven month old start up is giving Starbucks China a run for their money.

“There can’t be only one brand for China’s coffee market,” said Qian Zhiya Luckin Founder.  Speaking to the media about their market entry in China where Starbucks has dominated (50% market share), she stated firmly, “We are willing to learn from Starbucks’ advantages, from where we can innovate.”

Luckin coffee vs Starbucks

So far, Luckin has opened 809 stores this year that is spread across major cities in China. The British coffee brand Costa has 449 outlets since entering China in 2003 and Starbucks has the lead with 3,124 since entering China in 1999; while Luckin targets to open 2,000 by the end of this year.

Unlike their rivals boasting of Stand Alone stores, Luckin has taken a non-traditional approach of opening their outlets in unusual locations including, hidden inside office buildings or just off busy streets. As of June 44% of Luckin’s locations were dedicated for takeaways and the comany has forged a partnership with courier service provider SF Express offering a 30-minute delivery.

According to the company, in the first seven months alone, total cups sold amounted to 18 million and user retention is 80% in April for stores 3 months or older.  This is primarily achieved by customers ordering via the Luckin Coffee App and accessing deep discounts and promotions such as “buy 2, get 1 free” and “buy 5, get 5 free”.

Luckin recently secured a US$2 billion series A investment.

Watch this space.