Starbucks’ biggest competitor in the Chinese market, Luckin Coffee, has restructured and stabilised its finances after a massive accounting fraud two years ago. The company announced that it is once again a major player in the Chinese market and set the course for future capital raisings.
In 2020, the company was delisted from Nasdaq and entered negotiations with the bankruptcy courts, shareholders and creditors, both in USA and China.
The scandal erupted after a detailed investigation by a research firm uncovered some $330 million in inflated sales figures. Since then, the company shook up “its senior management” and paid millions in fines. Now, it says, it is ready for long-term growth. This time, however, with a legitimate business model.
By settling their debts and paying the fines imposed by the Securities and Exchange Commission (SEC), the way is clear for them to relist in the US if they choose to do so. In a recent filing settling the investors’ outstanding claims, the court said:
The Court-appointed Class Representatives, Sjunde AP-Fonden and Louisiana Sheriffs’ Pension & Relief Fund, on behalf of themselves and the Class, have reached a proposed Settlement with Luckin Coffee, Inc. (“Luckin”) for $175,000,000 in cash (“Settlement”). The Settlement, if approved, will resolve all claims in the Action.
https://www.luckincoffeesecuritieslitigation.com/
Since opening in 2017, Luckin Coffee has pursued an almost unimaginable growth strategy: opening shops “at lightning speed”. By January 2020, with more than 4,500 shops across the country, several hundred more than its main competitor Starbucks, which has been in the Chinese market for two decades.
But now, in 2022, Luckin faces a different competitive environment. Several local and foreign speciality coffee shops are shaking up the Chinese coffee scene. Manner, for example, is a speciality coffee brand that targets the urban middle class and has the digital capabilities Luckin lacks.
Luckin Coffee has relied on costly marketing campaigns to boost business. While Starbucks favoured the community, the Chinese chain was more or less just a pick-up point for mobile coffee orders. It also relied on short-term sales tactics like giveaways and coupons, a costly strategy that may not generate long-term loyalty. “In 2018, marketing costs represented nearly 90 per cent of Luckin’s revenue.” Allegedly, many customers became so accustomed to the discounts that they were no longer willing to pay full price.
In 2018, marketing costs represented nearly 90 per cent of Luckin’s revenue.
David Li, chairman and chief executive of Centurium, one of Luckin Coffee’s early backers and the new majority shareholder after the scandal, said they were working hard to “clean up the mess”. According to the Wall Street Journal, Centurium has hired six financial experts to fix Luckin Coffee’s problems. The company has also “invested another $240 million in Luckin to support its restructuring and business expansion,” on top of the $177.5 million before the accounting irregularities.
Dr Jinyi Guo, Chairman and Chief Executive Officer of the company, who replaced co-founder Jenny Qian, thanked stakeholders for staying loyal to them and “helping us achieve this positive result and become a stronger company.” The question remains, however, whether the company can transition from a low-cost brand to a more sustainable long-term business model.
