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China's Luckin Coffee is making a comeback after accounting scandal

Aron Chen

posted on May 25, 2023 5:39 pmEditor : Boyuan Wang

Two years after being expelled from Wall Street due to a fraud scandal, the Chinese coffee chain Luckin Coffee is staging a comeback.

Following a rapid statewide expansion in the first three months of 2023, Luckin Coffee is swiftly approaching 10,000 locations in China, which is significantly more than Starbucks China's 6,200 locations.

According to weekly updates posted on its WeChat channel, the coffee chain, which prioritizes value and technology, added 1,167 locations in the first quarter, bringing the total to 9,381.

In March, the company expanded beyond China by opening two stores in Singapore.

With this launch, Luckin Coffee is undertaking its third endeavor to expand internationally, following India and the Middle East/North Africa.

Luckin Coffee will compete directly with local chains such as Starbucks, Flash Coffee, and Kopi Kenangan. According to Statista, the ready-to-drink coffee and tea industry in Singapore is expected to generate revenues of $1.1 billion in 2018.

According to reports, the company is in discussions with franchise partners in Thailand to expand into Southeast Asian markets.

The rate of store openings is at its highest point since Luckin Coffee began operations in January 2018; the outlet growth is more than double the number of stores the coffee chain opened in the first quarter of 2022 (556).

In 2022, Luckin opened an average of 6.4 restaurants per day, totaling 2,190 restaurants. After opening its first store in October 2017, Luckin will surpass 10,000 locations in the second quarter of 2023 if it continues to expand at its present rate.

Luckin Coffee reported a total revenue of RMB4.37 billion (USD646 million) for the first quarter of 2023, representing an increase of 84.5 percent compared to the same period last year.

Chinese consumers continue to favor Luckin Coffee despite the market's intense competition. During the company's second anniversary celebration in April, sales of coconut lattes exceeded expectations. Contributing to the company's extraordinary revenue growth are the increase in products sold, the expansion of the company's shop network, and the rise in the number of consumers who transact with the company on a monthly basis.

Some Luckin Coffee stores are independently operated, while others are managed by partners. In contrast, all Starbucks locations in China are company-owned.

Luckin was founded in 2017 as an alternative to the typical coffee establishment. With multiple takeout counters and contactless transactions, it aims to attract youthful people.

From its inception, the company rapidly grew to become one of China's leading "unicorns," or privately held companies worth at least $1 billion. Once, it opened nearly 2,000 stores in a single year.

In 2019, Luckin went public in New York, where it was greeted enthusiastically by investors who believed it would pose a significant challenge to Starbucks.

However, after confessing its results were fabricated the following year, the company was forced to withdraw from the stock market.

In January 2020, Muddy Waters Research, a San Francisco-based short seller, published an 89-page report claiming it was the work of a covert independent research organization. Muddy Waters Research placed substantial wagers on Luckin's demise. Muddy Waters declined to identify the research firm, but claimed that the report was the result of more than 1,500 investigators monitoring sales and collecting tens of thousands of hours of video from over 600 Luckin retail establishments. Since its Nasdaq début, Luckin has routinely inflated sales figures, according to the document.

Luckin "categorically denied" the report at first. However, while the company was being sued by debt and equity investors for misconduct, Luckin agreed to conduct an internal audit.

In April 2020, the company confessed to unlawfully exaggerating its sales by more than $300 million. The corporate premises were inspected by the Chinese police. Investors in the company's debt and equity filed a fraud lawsuit against it. As a consequence, the board of Luckin dismissed the senior executives.

In the midst of the turmoil, a new management team lead by Jinyi Guo, an early Luckin employee who supplanted Jenny Qian as CEO, and a few substantial financial supporters have labored to maintain Luckin and plan the chain's revival.

Luckin is quickly emerging from the bankruptcy court proceedings. In April 2021, Luckin raised $240 million from Centurium Capital, a Beijing-based private equity fund managed by former Warburg Pincus executive David Li. In October 2021, eight months after filing for bankruptcy, the Chinese chain settled investor class-action litigation against it for $175 million.

Due to the lack of food safety concerns, Chinese consumers do not view Luckin as a fraud. Thus, its financial tactics are irrelevant.

In reality, the scandal is obscure to the majority of Chinese consumers. The coffee chain's deception, despite being a major story, was not as significant in lesser cities outside of Shanghai and Beijing.

Since the scandal, Luckin has transformed itself in various ways. After abandoning efforts to compete with Starbucks, the company has decided to concentrate more on a lower stratum of clients.

According to analysts, Luckin realized that Chinese consumers are not as interested in traditional coffee as American consumers. So Luckin combined significant discounts with new product categories. The flagship products of Luckin are currently coconut milk and red velvet lattes, which resemble Chinese milk tea more than Starbucks lattes.

In addition, Luckin's partnership with Olympic sensation Eileen Gu last summer has had a "significant impact" on its business.

Employing Chinese snowboarder Eileen Gu as a brand ambassador is a shrewd move by Luckin to appeal to patriotic consumers.