A short story of the demise of Luckin Coffee
“Our mission is to be part of everyone’s everyday life, starting with coffee.” With this mission statement, Luckin Coffee opened its first store in China in January of 2018.
A year and a half later they went public and started trading on the Nasdaq.
In two years, Luckin had 4500+ operating stores and was proclaimed as the company that will take on Starbucks in China and reinvent the coffee business.
Last week they released a statement announcing to the world that they fabricated transactions and overstated sales by RMB 2.2 billion. That’s USD 310 million, or around half of their sales. Shares tanked by 80%.
Back in late January 2020, the short-seller Muddy Waters released an amazingly detailed 90-pages report that accused Luckin Coffee of fraud. You can read the full report here.
When the report came out, Luckin called it misleading, false, entirely irrelevant, flawed, malicious, unsubstantiated, and unsupported speculations.
But last week Luckin released another press statement acknowledging that their COO and several employees cooked the books. Basically Luckin Coffee acknowledges it fabricated transactions and inflated costs and expenses.
The next press releases will likely keep pushing for the narrative that this was an isolated case of a COO and some of his direct reports acting recklessly. No-one buys that, but who cares? Startups will keep playing with investors’ money at the casino. And that leads to the next point.
China startups playbook
Startups in China are under massive pressure to show growth no matter what. Take Didi as an example. When they entered the market to compete with Uber, we used to get rides for free. Yes, for free. In their fight to capture market share, Didi were offering free rides around town. Luckin did the same thing. I had countless free or heavily discounted lattes over the last two years. During a class I was delivering to a group of foreign students at East China Normal University, I remember I once mentioned how Luckin was guaranteeing fast delivery and low prices. So, I pulled my phone right there and then, ordered an americano, and received it within 20 minutes. The americano was free. I only paid the RMB 6 delivery fee (around USD 1).
Learning point: When faced with market challenges in China, inject more money, and hire more people. It works (sometimes).
Was this somehow predictable?
Did you know that Chinese companies that list in US stock exchanges are exempt from financial oversight?
The SEC says in its public statements that “the business books and records related to transactions and events occurring within China are required by Chinese law to be kept and maintained there. China also restricts the auditor’s documentation of work performed in the country from being transferred out of China.” So there you have it.
This is a sad ending that puts pressure on other promising Chinese startups that were planning to go public in the US.
If you want to read more about the demise of Luckin coffee, I suggest you explore the writings of Professor Jeffrey Towson that I interviewed here last year. He does an amazing job at dissecting the business failures of Luckin Coffee -and other Chinese startups.