Scandal Hits Luckin Coffee, Shares Down 75%, but Orders Still

Last year, we published an article about Chinese coffee chain Luckin Coffee to shed some light on the companys exponential growth and popularity that swept our caffeine-thirsty nation.

For some quick context, Luckin sells 1.6 billion cups of coffee a year and once raised questions about whether they would be able to sustain their growth and survive. 

Those questions were answered on May 17th, 2019, when the company went public on the US stock market.

Established on October 31, 2017 with trial operations starting on January 1, 2018, Luckin Coffee was not officially open for business until May 8, 2018. With an official listing on May 17, 2019, Luckin Coffee not only set the world's fastest IPO record but also officially became the first Chinese coffee retail business to be listed on the international capital market.

Despite this exponential rise, Luckin Coffee reportedly lost 6 million RMB per day in the first quarter of 2019. Today, the company still relies heavily on subsidies to expand its business and scale, which begs the question: how much longer will the subsidies be extended for?

In the view of Luckin Coffee, China's coffee market presents some difficulties. Substandard quality, high prices, and inconvenience are hindering the development of new business in Chinas coffee market.

According to the company, China's rising urbanization and disposable income have become and are expected to continue to be the main growth engines of its coffee industry. More and more Chinese are beginning to consume coffee in their daily lives.

The company took on its ambitious mission to become China's largest coffee chain by increasing its number of stores by the end of 2019.

Qian Zhi Ya, founder, and CEO of Luckin Coffee

As of March 31, 2019, the total number of Luckin Coffee stores increased to 237 in just 18 months. At the end of last year, the company announced that it would open another 2,500 stores.

Speaking of stores, Luckin Coffees business model operates using express stores with only a small number of seats and are usually located in areas where there is high demand for coffee, such as office buildings, business districts, and university campuses.

What's more, the cost of owning and operating an express store is lower, hence why the size of its stores has grown so quickly.

In other words: good things were brewing for Luckin.

That is, until a scandal around fabricated sales worth $310 million (RMB 2.2 billion) from as early as the second quarter of 2019 hit the coffee company, which is now under investigation by Chinese authorities. Once news broke out, their shares plummet 75% on April 2, 2020.

According to the company, Luckin Coffees investors should no longer rely upon its previous financial statements over the last three quarters of 2019 for having been faked by its COO Jian Liu.

Luckin Coffee could face a class-action lawsuit from investors and a hefty fine from the Securities and Exchange Commission (SEC).

For fear of losing coupons and pre-deposits, consumers rushed to place coffee orders on the companys Mini Program and their app on April 3, which quickly led to a very slow order processing system.

The reason? 

According to their official Weibo account, the app crashed around noon. Their team of developers had to fix the issue as promptly as possible to resume operations and bring in some additional revenue during these troubling times.

Have you ever ordered fro Luckin Coffee? 

What do you make of the financial scandal that the company is facing? 

Source: weibo

Editor: Crystal H