While Starbucks’ sales in China fell 44%, according to the company’s latest report, Luckin Coffee has gained ground, reporting an impressive 72% jump in net revenue in the latest quarter that ended in June. According to Reuters, the lift in revenue has given the company its first quarterly operating profit and sets the stage for a return to the U.S. market.
The company plans to continue its rapid growth strategy to secure market share in China, providing it with a solid financial base and validating its strategy.
Confidence in the management team is paramount if the company is to convince U.S. investors and give them confidence again. 2 years ago, the company admitted to falsifying revenues and earnings worth around $310 million.
That was Luckin’s darkest moment. The company was facing a huge crisis at the timeDavid Li, chairman and chief executive of Chinese private equity firm Centurium Capital, told Reuters.
The scandal brought the company to the brink of collapse, and I admit I was convinced there was no coming back from the financial and reputational disaster. But the support of Centurium, a major Chinese investor who pumped $240 million into the company at this critical time and facilitated a financial restructuring, gave the company time to catch its breath. As a result, on 30 September 2021, Luckin Coffee was able to settle a U.S. class action lawsuit to satisfy investors’ claims of $187.5 million.
At the same time, Centurium, which was acting much like private equity, provided a team of advisors to work with the company’s management team to remediate the accounting flaws and develop a formula that resonated with Chinese consumers.
Whether this formula translates well to the U.S. market is not a given, just as the Starbucks formula that works so well in the U.S. did not translate effectively to the Chinese market when competition emerged.
Luckin now has 7,200 stores in China, 25% more than Starbucks with its 5,761 shops, and plans to open many more, including in major cities such as Shanghai and Beijing. However, the Starbucks model sells more drinks to more people and continues to have a commanding market share of 28.9%, although this is slightly down on last year.
Luckins’ market share is in single digits at 7.8% but trending upwards from last year’s figures. Size and presence are likely important in gaining an edge in an increasingly competitive market. Other brands such as Pacific Coffee and Coffee Box are also planning their growth strategies.
We can only rely on Luckin’s business performance, rely on issuing (strong) quarterly, annual reports to restore their confidence. It takes time.Guo Jinyi, CEO on being asked how they will restore U.S. investor confidence.
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