Questions over growth prospects of pick-up Luckin Coffee in China

Business | 20 May 2019 7:42 pm

Luckin Coffee Inc., a China-based company that has quickly become a key competitor to Starbucks Corp. in that country, closed up by nearly 20 percent on Friday after soaring by about 50 percent when it began trading on the Nasdaq.

Luckin’s first trade was at US$25 at 11:08 a.m, local time, 47 percent above the US$17 IPO price, MarketWatch reports.

But, Bernstein analysts question whether the company can continue to grow without the use of the heavy promotions that have bolstered its expansion.

“[T]he key controversy is whether Luckin can generate sales in the absence of discounts,” analysts wrote in a May 9 note.

Luckin Coffee, which is based in Fujian, China, was incorporated just two years ago in June 2017 and began operations in October of that year. In the 18 months since then, it has grown from a single trial store in Beijing to 2,370 wholly-owned stores in 28 cities. Its customer base totaled 16.8 million “transacting” consumers as of March 31, according to its prospectus.

Director and chief executive officer, Jenny Zhiya Quan, and an employee, Min Chen, hold 83.33 percent of the equity interest in the company.

Luckin is an emerging growth company with US$125.3 million in revenue for the year ending Deember. 31, 2018. Its net loss for the year came to US$241.3 million. It is the second largest coffee chain in China, says the prospectus, citing data from consulting firm Frost & Sullivan.

Though it has three kinds of stores, 91.3 percent of them are “pick-up stores” that offer limited seating and are located in places like office buildings and university campuses that have built-in demand. The remainder are “relax stores” and delivery kitchens.

Technology is key for the company, which Luckin says it uses to standardize its operations and, through the use of AI, to analyze customer behavior to better select products and services. It’s mobile app is also a big part of the company’s operations.

“China’s coffee market is highly underpenetrated,” the company says in its prospectus. “Inconsistent quality, high prices, and inconvenience have hampered the growth of the freshly-brewed coffee market in China. We believe that our model has successfully driven the mass market coffee consumption in China by addressing these pain points.”

In April 2019, Luckin announced plans to enter into a joint venture with an affiliate of Louis Dreyfus Company B.V. and Louis Dreyfus Company Asia Pte. Ltd., a processor of agricultural goods, to construct and operate a coffee roasting plant in China. Louis Dreyfus will also purchase “a number” of class A Luckin shares.

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