History
Luckin Coffee is a Chinese coffee company and a coffee house chain that was established in October 2017 and by January 2018, had opened its first shops in Beijing and Shanghai.
They also opened around 1300 stores by October 2018, surpassing Costa Coffee and planned to be the biggest coffee company in China, sending a direct challenge to StarBucks.
Business Model/Operations
The company started trial operations in January 2018 focusing on marketing, offering discounts and ‘buy one get one free’ coupons for loyal customers. They also offered discounts upto 50% which brought the price down and also repeat customers.
They also focused on technology, initially opening brick and mortar stores where they made coffee for online orders, basically ‘fulfilment centres’ driving down the fixed and variable cost.
They also partnered with courier company like SF Express (2nd biggest in China)
Scandal
There was a disparity in the financial figures shown by the company in the Western Media which troubled some secret investigators.
The organisers of the investigation set out, with around 1510 investigators at more than 600 of the company’s retail outlets counting sales and recording traffic. How? Just with a mobile phone video!
As the world was going in a lockdown, an anonymous 89 page letter report was dropped off on the Wall Street and it was a bomb! Investors that were invested in such a hot startup, Capital Group, Credit Suisse and Point72 Asset Management, which is run by Steve Cohen, the hedge fund manager who at one time ran SAC Capital were rattled by the claims of the report.
Response of the Startup
Luckin Coffee, listed in New York, of coursed disputed the claims but accepted one allegation from the Report that it had overstated revenues ( to the tune of $310 million) for 6 months. The stock of course dropped by 90%.
The firm’s share were suspended from trade on 7 April. The Nasdaq exchange said the shares would remain halted until Luckin had fully satisfied its request for additional information.
A gloomy situation for investors (unlike boom for short sellers)!
