Un-Luckin Coffee?

Before heading on to how the ‘Un’ –Luckin Coffee rushed towards its fall out let’s get a brief background of this company.

Luckin Coffee, which is based in Fujian, China, was incorporated around three years ago in June 2017 and began operations in October 2017. In the next 18 months, it grew from a single trial store in Beijing to 2,370 wholly-owned stores in 28 cities. Within a very short span of time, it contested Starbucks in China in a race to become the leading Coffee-Chain.

Starbuck then accounted for almost 80%

It targeted the Chinese Gen-Z and made optimum utilization of technology to standardize their operations through the use of AI to analyse consumer behaviour and to provide consumer-choice centric products and services. Luckin further delved into their “Mobile Only” approach which allowed Customers to place orders only via the Luckin mobile app.

This app removed almost any store-interaction which worked for Chinese Millennials who wanted their coffee on-the-go. Staff training focused more on order fulfilment which gave another cost-benefit and advantage while Luckin was scaling.

Luckin’s indefatigable growth made them go public (IPO) where it raised a whopping $561 million by selling 33 million American depositary shares (ADS), more than the 30 million it originally had planned.

Not only this but it expected to generate $732 million in revenue for FY 2019.

How it all went downhill for Luckin?

Things were as rosy as Luckin painted until a few months ago in January when an Anonymous Report started rounds accusing the company of several allegations.

According to the Anonymous Report, Number of items per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q, this figure was supported by 11,260 hours of store traffic video. The report creators mobilized 92 full-time and 1,418 part-time staff on the ground to run. The surveillance was being done on a mass scale with adequate sampling to support its claims.

According to Reports Luckin was not just fudging numbers but also showing an inflated selling price (per order). This was not it. According to Anonymous, Luckin was also simultaneously overstating its advertising expenditure and rerouting the money to recognize it as revenue on books. Sort of like paying your friend a 100 bucks and asking him to buy 4 coffee cups off of you. Clearly, Luckin was not making a profit but it sure did tick off the worries of profitability from the investors’ mind by showing their “Growth numbers”.

The report talks but provides crucial evidence not only about the above-mentioned breaches but also about :

• Accounting malpractices

• Denouncement of Top-executives

• Faking revenue from other products

• Shady management practices.

• Issues in Licenses etc

This picture shows that the store employees conveyed about skipping of order numbers but executives instructed to go ahead.

All in all, the report was an 89-page nail on the coffin for Luckin. The reports eliminated the tall claims of Luckin being profitable and sustainable business.

Once Muddy Water Research got hold of the report Luckin was caught in the act.

Luckin initially denied the claims but went on to admit on April 2 that almost half of its revenue in the final three quarters of 2019 may have been fake.

Post Revelations.

The luckin stock price plummeted by 80% after the company admitted

New York’s Stock Exchange NASDAQ sent a notice to Luckin immediately after its admission. Luckin was delisted from NASDAQ on 29th June 2020. Delisting is the removal of listed security from a stock exchange. The delisting of security can be voluntary or involuntary and usually results when a company ceases operations, declares bankruptcy, merges, does not meet listing requirements, or seeks to become private. The chain fired its chief executive Jenny Zhiya Qian and chief operating officer Liu Jian in May after an internal investigation into fabricated transactions. The company still continues to run its operations in China.

Luckin felt high in a short span of time but not far. This was too good to be true scenario and fetched scepticism from many. A sceptic is often said to be the one who knows too much for a fool, and too little for a wise man but for Luckin, the sceptics turned out to be the wiser ones.

References- The Anonymous Report. https://drive.google.com/file/d/1LKOYMpXVo1ssbWQx8j4G3-strg6mpQ7F/view

Write-up by: Kavya Johari