Luckin Coffee: The number of stores in China has surpassed Starbucks

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Despite the financial fraud scandal, Luckin is still a deserving coffee unicorn in China. By the end of 2021, its total number of stores had reached 6,024, surpassing Starbucks China's figure of 5,557, for real.

In 2022, if you ask a Chinese consumer what “Luckin Coffee” stands for, they will think of the “coconut latte” that has been popular in the Chinese market for the last year, the new spokesperson Eileen Gu, and the fact that the number of stores of the local coffee chain is already far higher than Starbucks.

The only thing they don’t recall is that the Chinese coffee chain was notorious for financial fraud 2 years ago. Because it seems to have become “so distant” that it is “not worth mentioning”.

This seems to mark that Luckin Coffee has fully emerged from the shadow of the financial scandal in early 2020.

As we mentioned in our previous article, in early 2021, there was a battle between the old management and the new management within Luckin Coffee for control of the company, which ended in a victory for the company’s Chairman and CEO, Guo Jinyi.

On March 24, 2022, Luckin Coffee released its unaudited financial results for the fourth quarter of 2021 and fiscal year 2021. According to the report, Luckin Coffee’s total net revenues for the fourth quarter were RMB 2,432.7 million (About $381.9 million), an 80.7% increase year-over-year. The total net revenues for fiscal 2021 were RMB 7,965 million (About $125 million), a 97.5% increase year-over-year.

The company added 353 net new stores in the fourth quarter of 2021, bringing its total number of stores to 6,024 by the end of 2021, including 4,397 self-operated stores and 1,627 affiliated stores. At this point, Luckin Coffee has become the largest coffee chain brand in China, with more stores than Starbucks China’s 5,557.

Luckin Coffee’s main business has also emerged from the effects of the financial fraud and is once again in a phase of rapid growth.

The success of Luckin Coffee’s breakthrough is inextricably linked to the business strategy it adopted in 2021: In fiscal 2021, Luckin Coffee invested more in new product development and product marketing, launching a total of 133 new ready-made beverages throughout the year.

Among them, the coconut latte launched in the summer of 2021 received extremely high attention, and the product was so popular that once in short supply. Luckin’s coconut latte even made it to the top of the Weibo search because it was out of stock. The word “coconut latte” has also become an internet buzzword with its own definition: “Suddenly the whole world is saying that coconut latte is good, am I the only one who sees it sold out every time? When will I get the chance to read the phrase: a cup of coconut latte, ice-free and sugar-free.”

In April of the same year, Luckin Coffee signed a contract with Lelush, who became popular in the talent show “Chuang 2021”. The latter became the recommendation officer of Luckin Coffee, which contrasted with Lelush’s persona of “not wanting to work” and once created several hot searches on Weibo, One of the largest SNS platforms in China.

Luckin Coffee also signed skier Eileen Gu as its spokesperson, which also gained a lot of attention during the 2022 Beijing Winter Olympic Games. On March 7, Eileen Gu again endorsed Luckin’s Pink Cherry Bubble Coffee and other new products.

In terms of corporate structure, the management headed by Guo Jinyi reorganized the entire operational management structure of the company in 2021: the regional level management structure was abolished, and Cao Wenbao, senior vice president of the company, was responsible for the overall management of the Affiliate Center, Expansion Center, Construction Center, Operation Center, Quality Management Department and 20 branches. Senior Vice President Zhou Mingwei is in charge of the product line and is in charge of the product center and supply chain center, etc. CGO Yang Fei is in charge of managing the growth line and is in charge of the marketing center, growth center, e-commerce center and PR department.

The new organizational structure has enabled Luckin to focus more on products, stores and users, and its market competitiveness has been significantly improved.

In addition, Luckin is also actively dealing with the subsequent punishment of the financial fraud fiasco. On March 7 of this year, Luckin Coffee ended its more than one-year liquidation status and officially exited the liquidation process. According to the company, it expects that its losses and expenses related to the financial fraud and restructuring will also be reduced in the second quarter of 2022 as the winding-up process ends.

According to the Financial Report, the charge was RMB 109.4 million in the fourth quarter of 2021, an increase of 21.8% year-over-year. The charge was primarily for professional and legal fees for U.S. securities litigation, negotiations and claims, reimbursement of professional fees and expenses for the Joint Provisional Liquidators (“JPLs”), and five other categories.

The end of the liquidation status means that the governance structure of Luckin Coffee is basically back to normal and can continue its expansion.

The financial scandal at Luckin Coffee erupted in April 2020, just after the early days of the Covid-19 outbreak. But in the past 2 years, hardly any other scandals have emerged at Luckin Coffee. Despite the loss of access to financing, Luckin Coffee has not defaulted on its employees’ salaries, has not defaulted on its suppliers’ payments, and has not closed its stores on a large scale.

This seems to be an embarrassment to the short-selling report from 2 years ago – yes, Luckin did inflate some numbers, but it seems no influence on Luckin’s growth.

Even during the Covid outbreak, it is amazing that Luckin’s store count and revenue grew at a high rate.

The financial results show that Luckin Coffee’s operating loss for fiscal 2021 was RMB 539 million (About $84.6 million), a reduction of approximately 80% from RMB 2.587 billion (About $406.4 million) in fiscal 2020. The company’s Non_GAAP operating loss for 2021 was RMB 236 million (About $37.07 million), compared to a loss of RMB 2.494 billion (About $391.6) in 2020, a leap forward in operating conditions.

Luckin opened 353 net new stores in the fourth quarter, a 6.2% year-over-year increase in the number of stores, and its monthly average number of transactional users also increased 67.1% year-over-year to 16.2 million, a record high for the company. 2021 full-year net new store openings were 1,221, up 25.4% year-over-year, and monthly average transactional customers were 13 million, up 55.2% from 8.4 million in 2020.

Revenue from Luckin’s own stores was RMB 1.837 billion (About $288.5 million) in the fourth quarter, up 61% from RMB 1.141 billion (About $179.2 million) in the same period in 2020. The fourth quarter profit from self-operated stores was RMB 383 million (About $60.14 million), with an operating margin of 20.9%. This figure was only RMB 98.9 million (About $15.5 million) in the same period in 2020, with an operating margin of 8.7%.

Luckin`s same-store sales at its own stores increased 43.6% in the fourth quarter of 2021, compared with 9.2% in the same period of 2020. The revenue of associated stores in the fourth quarter was 449 million yuan, up 248.4% from 128 million yuan in the same period in 2020.

The company’s own store revenue was $6.193 billion (About $972.4 million) in 2021, up 78.3% from $3.473 billion (About $545.3 million) in 2020; its own store same-store sales increased 69.3% in 2021, compared to a 7.8% decline in fiscal 2020; and its associate store revenue was $1.306 billion (About $205.1 million) in 2021, up 31.125% from $316 million (About $49.6 million) in 2020.

In addition, Luckin Coffee’s self-operated store profits also turned positive for the first time on an annual basis in 2021, reaching RMB 1.25 billion (About $196.3 million), with a store-level operating profit of 20.2%. 2020 figures for the same period were a loss of RMB 435 million (About $68.3 million), with a loss rate of 12.5%.

“The recently completed provisional liquidation plays an important role in advancing our growth strategy, as it allows us to operate from a stronger financial position and to fully realize our potential.” Guo Jinyi said in the financial report.

Over the past year or so, Luckin Coffee has truly come back from the dead, and the company’s operations are finally back on track again. With more than 6,000 stores, Luckin Coffee has surpassed Starbucks and has officially become the largest coffee chain brand in China.

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