Luckin Coffee: can China’s Starbucks win back investors?

Luckin CEO Guo Jinyi says ‘the business approach, the operation, the team, the company culture — which was responsible for the financial problems — have all changed’ since its delisting

The company declined to comment on its proposed relisting plans, but one senior executive said it was now “in a position where we’re more comfortable re-engaging with public investors” and that it wanted to “regain credibility”.

Luckin says it has turned a new page. “Almost everything about Luckin — apart from the name — has changed over the past two years,” says Guo Jinyi, who took over as chief executive officer in July 2020, two months after it was delisted. “The business approach, the operation, the team, the company culture — which was responsible for the financial problems — have all changed.”

Since the company was delisted, Luckin claims to have been on a tear in China. Revenues have more than doubled to $364.7mn year on year in the latest quarterly earnings report. Luckin now has more than 6,000 stores across China, about 500 more than Starbucks. The rapid growth story that global investors initially bought into when the company started trading in the US in 2019 appears to have been borne out.

The question is “whether the fraud was hiding a permanently flawed business, or if it was lying on top of something legitimate that had long-term viability”, says John Zolidis, president of the New York-based equity research firm Quo Vadis Capital. Zolidis says Luckin’s shares are “attractively valued given the overhang of fraud”.

Two years on, Luckin says things have changed. A senior executive says its internal controls have been improved by hiring personnel from the Big Four accounting firms to conduct internal checks and report directly to the audit committee, which corporate governance experts say is a crucial step for any company that is planning to attract new international investors.

Li and Guo’s turnround strategy includes closing down underperforming stores and increasing the price of a cup of coffee by 60 per cent to an average of $2.50 — still half the price of an equivalent Starbucks coffee. Luckin claims it has reduced property and staffing costs through the use of an “in-app” purchase system and has started using franchisees to expand the number of its stores rather than owning them all outright.

China’s coffee wars

Coffee Chain Number of stores Regular latte price Revenue Q3 2021 Signature drinks

Luckin Coffee 6,000+ Rmb15 $364.7mn Coconut velvet latte

Starbucks China 5,500+ Rmb28 $905.2mn Red bean matcha latte

Manner Coffee 194 Rmb15 N/A Osmanthus latte

Source: company websites, financial reports, prices from Luckin Coffee and Eleme app

To relist on the Nasdaq centralised exchange Luckin needs to first formally exit bankruptcy proceedings, which according to an individual involved in the process should happen in the next few weeks.

As investors question whether they can trust Luckin’s turnround story, one former US regulator says the fact that the company is under such intense scrutiny means it may be less likely to repeat past crimes. “Sometimes the safest place to eat is a place that’s just reopened after the health department shut them down.”



Leave a Reply

Your email address will not be published. Required fields are marked *