Luckin Coffee had an extraordinary rise, but now it might disappear just as quickly as it arrived.
Luckin Coffee’s blitz across the Chinese market appears to have given some investors whiplash.
The startup coffee chain that more closely resembles a tech company was almost unheard of in 2018. By early 2020, it would have been difficult not to have heard of it, as the chain overtook coffee giant Starbucks to become the largest coffee company in China with 4,500 stores. By contrast, the more established Starbucks had 4,300 stores in China at the time.
But while Luckin Coffee had an extraordinary rise, it might disappear just as quickly as it arrived.
Luckin introduced a tech-focused approach to selling coffee that distinguished it from competitors. China remains a tea favoring country, but coffee has risen in popularity there and a scramble by the traditional coffee giants to enter the country has ensued in recent years.
Luckin Coffee was founded in China in 2017 and its entire business market revolves around its mobile app. Orders are not accepted in-person so if a customer wants to order from Luckin, they must order from the app. This cultivated a takeout atmosphere that proved to be popular. Few stores had sitting areas and Luckin offered delivery to its customers.
The company even began investing in coffee vending machines and entered the tea market. But perhaps the strongest selling point for Luckin is its price, which is cheaper than its rival, Starbucks. All together, Luckin’s strategy appeared to be a winning one.
However, disaster hit the company in 2020. It was not the novel coronavirus that jeopardized Luckin’s future, though, but an internal accounting scandal that led to the firing of the chief executive officer and chief operating officer. Despite their apparent success, Luckin was overselling their profitability. In April 2020, the United States Securities and Exchange Commission (SEC) alleged that US$310 million in sales from the previous year had been fabricated.
The Chinese company was penalized in the US by the SEC and Luckin agreed to pay a US$180 million fine. It was subsequently delisted from the Nasdaq. Luckin was also reprimanded in China and forced to pay the Chinese Ministry of Finance an undisclosed sum.
But not everyone had been onboard at the start when it came to investing in the coffee prodigy. Some in the US had warned against investing in Luckin, advising potential investors that it was pursuing a strategy that was too aggressive. That Luckin’s fall would come as a result of such a scandal was not predicted, nor was the recent bankruptcy the company filed.
After the firing of the CEO and COO and American and Chinese fines were settled, there was optimism that Luckin would be able to make a comeback. The company still had thousands of stores in the Chinese market and many Chinese consumers liked both the product and the fact that it was a Chinese company.
Also working in its favor was the fact that Luckin appeared to have fared well while the COVID-19 pandemic was wrecking other businesses. The company’s stock price was beginning to rise again, despite the closing of hundreds of locations and the report that only 60% of Luckin’s operating stores were profitable.
However, whatever optimism some had in Luckin may have been misplaced. On February 5, Luckin filed for bankruptcy protection in the US. While many believe this may be the nail in the coffin for Luckin, the embattled coffee chain is fighting on despite the setbacks.
Luckin released a statement promising business-as-usual in China. The Chinese state-owned CCTV released a video showing that Luckin’s customers have remained loyal and a consultant suggesting that bankruptcy is not necessarily a company destroyer.
The future of the company is not clear, but Starbucks will likely capitalize on Luckin’s failure. The American company has continued to adapt to the Chinese market and, like Luckin, it will soon offer delivery through a partnership with the Chinese e-commerce giant Alibaba.
Luckin has provided a series of lessons for investors, prompting some to write about the dangers of overexpansion, comparing Luckin to American restaurant chains Boston Market and Quiznos. Others were blunter, writing that the Luckin miracle that seemed too good to be true actually was.
If Luckin does survive, it will be competing in a market that has not learned from its mistakes, but its success. The same article that was wary of Luckin’s dramatic rise also promoted the company as futuristic and listed restaurant giants that might be learning from Luckin.
It remains to be seen whether other companies will learn from its fall.
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