Four Months After the Financial Scandal, Luckin Coffee is Still Booming

Luckin Coffee held a mid-2020 meeting within its company on August 8, 2020.

The Chinese coffee chain was known around the world in April 2020 when its financial fraud was disclosed. However, in China, the financial fraud incident does not seem to affect the company’s word-of-mouth and actual business operations.

According to insiders involved in the meeting, Luckin had made a single store profit by July 2020. In addition, due to the impact of the epidemic, it has slowed the pace of opening new stores, which makes the company as a whole expected to be profitable by 2021.

Luckin Coffee is a Chinese coffee chain founded in October 2017. It took only 17 months from the establishment of the company to its listing on NASDAQ. For overseas investors, the company’s early growth rate attracted attention, but some of the growth data later proved to be bogus.

On January 31, 2020, Muddy Waters released a Luckin short report, accusing Luckin of fabricating financial and operating data to deceive investors. Luckin was suspended from trading on April 7 and was eventually delisted on June 29.

On July 31, 2020, audited by the Chinese Ministry of Finance, Luckin inflated 2.246 billion yuan in transaction volume, 2.119 billion yuan in income and 1.211 billion yuan in costs and expenses during the period from April 2019 to the end of 2019. According to the final audit results, Luckin’s real income in 2019 may be about 3.2 billion yuan.

Affected by the financial fraud incident, the company’s former CEO Liu Liao, former COO Liu Jian, former CTO he Gang, former CHO Yin Honglei have all left. And the company has reorganized its board twice in past four months.

At the same time, the company is facing a number of lawsuits from the Chinese government, SEC and investors.

But what may surprise overseas investors is that financial fraud has never affected Chinese consumers’ enthusiasm for Luckin.

As the beginning of the incident, many people called Luckin Coffee the “light of Chinese enterprises” and were more willing to use the high coupons distributed by Luckin to buy coffee in it. Because from these consumers’ point of view, Luckin Coffee has brought cheap and delicious coffee to Chinese consumers by deceiving investors in the US secondary market.

In the eyes of many Chinese consumers, it is not unacceptable for companies to engage in financial fraud in order to obtain more financing in the early stages of development.

Luckin has always been described as a strong competitor to Starbucks, but in fact, Luckin coffee has long overtaken Starbucks in the minds of Chinese consumers.

At the end of 2019, Luckin announced 4509 stores, while Starbucks had only 4292 on Chinese mainland in the same period. Coupled with the fact that the average price of Luckin’s beverage and food is only 1/3 of Starbucks’, so excluding those fake transactions, Luckin throws remain far more frequent than Starbucks.

In the first half of 2020, although Luckin reduced the number of new stores affected by the epidemic, it launched many new products and a new theme store, and began working with Haagen-Dazs, an ice cream brand owned by General Mills. It has launched 100 new SKU( stock keeping unit ) in the last three months, many of which have a similar taste to Starbucks’s Frappuccino and Teavana series, but cost only 1/2 for the same Starbucks’s.

This means that Luckin’s internal product development and business cooperation procedures are almost unaffected by financial fraud.

The company also dabbled in social ecommerce in June 2020, using Tencent’s WeChat Work to build more than 9100 local coffee groups across the country. In these groups, users can receive time-limited coupons with a higher amount of discount. According to Yang Fei, current CMO of Luckin Coffee, Luckin can sell 35000 cups of coffee a day through this channel alone.

So far, unlike the pessimism of overseas investors, Chinese consumers almost completely disagree that Luckin will go bankrupt.