Luckin Coffee

Luckin Coffee Inc. (Chinese: 瑞幸咖啡; pinyin: Ruìxìng Kāfēi) is a Chinese coffee company and coffeehouse chain. It was founded in Beijing in 2017. As of January 2020, it managed 4,507 stores and exceeded the number of Starbucks stores in China.[6] Most of its stores are small "pick-up" locations in office buildings or college campuses that serve for online orders' pickup and delivery.

Luckin Coffee Inc.
Native name
瑞幸咖啡
Typepublic company
OTC Pink Limited: LKNCY (formerly NASDAQ: LK, but delisted 29 Jun 2020)
IndustryCoffee shop
FoundedOctober 2017 (2017-10)
Beijing, China
Founders
Headquarters
Xiamen, Fujian
,
China
Number of locations
3 (2019)
Area served
China
Key people
  • Reinout Schakel (CFO)
Jinyi Guo (Chairman) and (CEO)[1][2]
Products
  • Coffee beverages
  • tea
Websiteinvestor.luckincoffee.com
Footnotes / references
[3][4][5]

In April 2020, the company revealed that it had inflated its 2019 sales revenue by up to US$310 million. It resulted in the stock price crashing and several executives being fired.[7] Trading was suspended and the company was delisted from NASDAQ on 29 June 2020.[8] The company filed for bankruptcy in the US in February 2021.[9]

History

Luckin Coffee was incorporated in October 2017, and by January 2018 had opened its first shops in Beijing and Shanghai.[10][11] The company announced the completion of Series A financing to a total of US$200 million in July 2018.[12]

The company continued its rapid growth—by October 2018, Luckin Coffee had opened 1300 stores, surpassing the number of Costa Coffee stores to become the second-biggest coffee brand in China.[13] Luckin Coffee also signed a strategic cooperation agreement with Tencent.[14][15] Much of Luckin's expansion was fueled by an aggressive marketing strategy which saw the company spend three times as much as it earned to feed its growth.[16] In May 2018, Luckin Coffee accused Starbucks of forming a monopoly by signing exclusive contracts with suppliers and property owners. Starbucks dismissed these allegations as a marketing stunt. On 16 May 2018, the case was officially put on file by the Shenzhen Intermediate People's Court. In October 2019, Luckin Coffee unilaterally withdrew the case.[17]

In January 2019, Luckin Coffee announced that they planned to open 2500 new stores and surpass Starbucks to become the biggest coffee brand in China.[18][19] Luckin also gained exposure in the US stock market, applying to the National Association of Securities Dealers Automated Quotations[20] and starting to trade on Nasdaq at $17 a share.[21] After reaching $25.96 on the first day, the stock dropped to $16 on its second day of trading.[22][23] By the end of September 2019, Luckin Coffee had opened 3,680 stores,[24] and had recorded a net loss of $75 million in the third quarter of 2019.[25]

In January 2019, Luckin Coffee appointed Reinout Schakel as CFO.[26]

On 8 January 2020, Luckin Coffee held a press conference about their self-service retail stores operations. At the conference, Luckin announced to public that they had opened 4507 stores in past two years and as such had already become the biggest coffee chain brand in China, surpassing Starbucks. Luckin Coffee also announced their unmanned retail strategy and two new technical products in the press conference—Luckin Coffee EXPRESS and Luckin popMINI. Luckin Coffee EXPRESS venues adopt the Swiss made Schaerer coffee maker and are placed in offices, campuses, airports, train stations and communities as self-service coffee makers in the future. Luckin popMINI is the vending machine with E-commerce price.[27]

On 13 July 2020, Luckin Coffee named Jinyi Guo as the new chairman and CEO after co-founder and former chairman Charles Zhengyao Lu was removed by shareholders.[28]

On 5 February 2021, the embattled Luckin Coffee Inc. filed for Chapter 15 bankruptcy in New York, less than a year after the company said that more than a quarter’s worth of business may have been faked.[29] The move will protect the company from lawsuits by U.S. creditors while it reorganizes in China, where it runs several thousand outlets. All its coffee shops will remain open for business and the Chapter 15 petition will not materially impact the company’s day-to-day operations, according to a statement issued on Friday.[30]

2020 accounting scandal

On 31 January 2020, short-selling firm Muddy Waters Research published an anonymous 89-page report on Twitter, claiming that Luckin Coffee had falsified financial and operational figures. The report claimed that the number of items sold per store was inflated by at least 69% in the third and by 88% the fourth quarter of 2019, supposedly backed by 11,200 hours of video footage. Before the U.S. stock market opening on 3 February 2020, Luckin Coffee responded by categorically denying all allegations made in the report. The company argued that the report raised malicious accusations and false allegations with unsubstantiated evidence and flawed methodology.[31]

On 2 April 2020, Luckin Coffee announced that an internal investigation found that its chief operating officer, Jian Liu, had fabricated the company's 2019 sales by "around RMB2.2 billion" (US$310 million).[32][33] The next day, the China Securities Regulatory Commission said that it would investigate the company for fraud.[34] On 8 April, the U.S. stock market halted trading on all Luckin shares over the fraud probe.[35] In the month of April, the company's stock fell by over 80%.[36] In mid-April 2020, American investment bank Goldman Sachs announced that it would seize and sell the Luckin stock holdings of the company's chairman, Lu Zhengyao, after he defaulted on a $518 million margin loan.[36]

On 12 May 2020, CEO Jenny Zhiya Qian and COO Jian Liu were relieved of their positions, while Reinout Schakel remained as CFO.[37] On 15 May the company received a delisting notice from NASDAQ.[38]

After over a month of being halted for trading, Luckin Coffee stock was able to be traded again on 20 May 2020.[39] On 28 May, shares of Luckin Coffee (NASDAQ:LK) plummeted more than 20% after The Wall Street Journal released a report claiming that firms linked to the company's chairman and controlling shareholder played a central role in its accounting scandal.[40]

On 29 June 2020, Luckin Coffee suspended trading on NASDAQ and filed for delisting, after the exchange ordered the company to delist.[41]

The scandal could potentially have a profound impact, as the US Government is poised to pass the Holding Foreign Companies Accountable Act, which would force Chinese companies to provide audited financial statements or else face delisting from U.S. stock markets.[42]

In September 2020, China's markets regulators fined a group of firms including Luckin Coffee for a combined $8.98 million in relation to Luckin's falsification of financial and operational figures.[43]

On 16 December 2020, the US SEC settled the accounting fraud case with Luckin Coffee for $180 million. Luckin agreed to the settlement without admitting or denying the SEC allegations which include defrauding investors by materially misstating revenue and expenses, inflating its growth rates and understating its losses.[44]

Operations
A Luckin Coffee retail store, 2017

Luckin Coffee stores started trial operations in January 2018. The company operates shops, stores, and kiosks that offer coffee, tea, and food.[10] As noted by sources, the company's marketing and market appeal is centered around marketing and discounts; Luckin offers freebees, where each new customer is offered a free drink and a 50%-off coupon for one cup. They also offer "buy one, get one free" coupons for loyal customers. These discounts make its price lower than Starbucks and attracted a bigger number of returning customers in the early stage of its business.[45][10]

The brand also has a strong focus on technology. Luckin Coffee did not open any traditional brick-and-mortar stores in the beginning. Its physical locations were only for making coffees and fulfilling online orders picked up by customers or delivery persons. Although most of its stores do not have seats or other services for customers, and are in less prestigious locations compared to Starbucks, the brand has been able to capture a new generation of consumers and rival Starbucks in China.[25] The target customers of Luckin Coffee are white-collar workers and students near the stores who do not have much time to drink coffee at stores.

Customers need to download the Luckin Coffee App to order and pay for drinks online.[16][46] Luckin Coffee also cooperates with the second largest courier in China, SF Express, delivering orders to customers within two kilometers around each store. This operation principle is suitable for Chinese people's fast-paced lives and put pressure on other traditional coffee brands.[47]

Products

Purchases can only be made through the Luckin mobile application.[16] Luckin offers coffee-based drinks regularly found in other coffee shops, and has a selection of recipes custom-made for the palates of the Chinese consumers.[16] Luckin Coffee hired Hidenori Izaki (2014 World Barista Champion) to advise the company on recipes and store designs.[16]

See also

References
  1. https://edition.cnn.com/2020/07/14/tech/luckin-new-ceo/index.html
  2. https://www.vbprofiles.com/people/jinyi-guo-5cdec12a1dedae45eef1f8cc
  3. Luckin Coffee (22 April 2019). "Form F-1 - Luckin Coffee Inc". Retrieved 2 May 2020. (filing with the Securities Exchange Commission)
  4. "Luckin Coffee Inc. Announces Unaudited ThirdQuarter 2019 Financial Results". Luckin Coffee. 13 November 2019. Retrieved 2 May 2020.
  5. "Luckin Coffee, China's Newest Unicorn, is Challenging Starbucks' Market Stranglehold". Radiichina.com. 26 July 2018. Retrieved 30 December 2018.
  6. "瑞幸咖啡进军无人零售，直营门店4507家超星巴克". 投资界. 8 January 2020.
  7. https://www.wsj.com/articles/behind-the-fall-of-chinas-luckin-coffee-a-network-of-fake-buyers-and-a-fictitious-employee-11590682336?mod=hp_lead_pos5
  8. "China's scandal-hit Luckin Coffee ousts chairman". Asia Times. 14 July 2020. Retrieved 14 July 2020.
  9. Ghosh, Palash. "Luckin Coffee Files For Bankruptcy Seven Months After Nasdaq Delisting". Forbes. Retrieved 8 February 2021.
  10. "China's Luckin Coffee takes on Starbucks". CNBC. Retrieved 28 December 2018.
  11. "This coffee company thinks it can beat Starbucks in China". CNN. Retrieved 28 December 2018.
  12. 完成2亿美元A轮融资 瑞幸咖啡做好了长期亏损准备？ 手机金融界，11 July 2018
  13. "咖啡巨头现诸神之战 中国市场成关键". 观察者. 7 September 2018.
  14. 瑞幸咖啡与腾讯签署战略合作 中国咖啡市场及发展前景分析 凤凰网，7 September 2018
  15. 中国咖啡市场白热化 瑞幸咖啡与腾讯达成战略合作 搜狐网，6 September 2018
  16. Mary Hui (14 May 2019). "What you can eat and drink at Starbucks's China rival". Quartz. Retrieved 3 July 2019.
  17. "历经16个月 瑞幸起诉星巴克案已由瑞幸单方面撤诉". 14 November 2019.
  18. "瑞幸咖啡今年计划新开2,500家门店 取代星巴克在中国龙头地位". Reuters. 2 January 2019.
  19. Maggie Fitzgerald (16 June 2019). "Wall Street sees major growth potential for Luckin in untapped Chinese coffee market". CNBC. Retrieved 17 June 2019.
  20. "中国星巴克劲敌-瑞幸咖啡申请美国上市". 23 April 2019.
  21. Lucas, Amelia; Picker, Leslie (16 May 2019). "Starbucks' China challenger Luckin Coffee prices IPO at $17 a share". CNBC. Retrieved 17 June 2019.
  22. Janet Freund (23 May 2019). "Luckin Coffee Burns Investors With 39% Plunge". Bloomberg L.P. Retrieved 3 July 2019.
  23. Paul R. La Monica (17 May 2019). "Luckin Coffee surges in Wall Street debut". CNN. Retrieved 3 July 2019.
  24. "瑞幸咖啡"顺道赚钱"". Sina technology. 22 November 2019.
  25. "Breakingviews – China fortune hard to read in Luckin Coffee beans". Reuters. 5 February 2020. Retrieved 3 March 2020.
  26. http://www.china.org.cn/business/2019-01/07/content_74349098.htm
  27. "Luckin Coffee announces smart unmanned retail strategy, bringing Luckin closer to customers". GlobeNewswire. 8 January 2020.
  28. Pham, Sherisse (14 July 2020). "Luckin Coffee ousts chairman, names new CEO". CNN. Retrieved 14 July 2020.
  29. Business, Jordan Valinsky, CNN. "Luckin Coffee files for bankruptcy in the US". CNN. Retrieved 5 February 2021.
  30. Bloomberg Staff (5 February 2021). "Luckin Coffee Files for Bankruptcy in U.S., Will Keep Shops Open". Bloomberg. Retrieved 6 February 2021.
  31. "Luckin Coffee Responds to Anonymous Report Containing Misleading and False Allegations" (Press release). 3 February 2020 – via Bloomberg.
  32. Lucas, Amelia (2 April 2020). "Shares of China's Luckin Coffee plummet 80% after investigation finds COO fabricated sales". CNBC.
  33. "Luckin Coffee Announces Formation of Independent Special Committee and Provides Certain Information Related to Ongoing Internal Investigation". luckincoffee.com (Press release). 2 April 2020. Retrieved 4 April 2020.
  34. Zhu, Julie; Zhang, Zoey (3 April 2020). "China probes alleged fraud at Luckin Coffee, banks review IPO work". Reuters.
  35. Lucas, Amelia (8 April 2020). "Luckin Coffee's stock has been halted for pending news since Tuesday". CNBC. Retrieved 20 April 2020.
  36. Lin, Connie (12 April 2020). "Embattled Luckin Coffee sees wild surge as customers scramble to cash in on free drink vouchers". Fast Company. Retrieved 12 April 2020.
  37. https://ca.finance.yahoo.com/news/luckin-fires-ceo-coo-probing-152456763.html
  38. Kilgore, Tomi. "Luckin Coffee gets delisting notice from Nasdaq". MarketWatch. Retrieved 20 May 2020.
  39. Garcia, Tonya. "Luckin Coffee began trading again, but it will have to close stores and investors will be 'wiped out,' says Quo Vadis". MarketWatch. Retrieved 20 May 2020.
  40. Tenebruso (TMFGuardian), Joe. "Why Luckin Coffee Stock Plunged Today". MotleyFool. Retrieved 29 May 2020.
  41. Yang, Jing (27 June 2020). "Luckin Coffee Drops Nasdaq Appeal; Shares to Be Delisted". Wall Street Journal. ISSN 0099-9660. Retrieved 14 July 2020.
  42. Wei, Jin. "America's threat to delist Chinese companies could make everybody better off". Marketwatch. Retrieved 29 May 2020.
  43. Reuters Staff (22 September 2020). "China fines Luckin Coffee and linked firms a total of $9 million". Reuters. Retrieved 22 September 2020.
  44. FT Staff (17 December 2020). "Luckin Coffee to pay $180m in accounting fraud settlement". FT. Retrieved 4 February 2021.
  45. "中國「瑞幸咖啡」爆紅 星巴克惡夢？". 29 December 2018. Archived from the original on 7 January 2019.
  46. "瑞幸打败不了星巴克，但未必是下一个ofo". 华尔街见闻. 15 January 2019. Archived from the original on 16 April 2019.
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