In 2017, Luckin Coffee burst into the Chinese coffee scene with the aim of challenging Starbucks’ dominance. By offering affordable, convenient and tech-savvy coffee options, the company quickly gained a loyal following among young Chinese consumers.
In just two years, Luckin Coffee has become the largest coffee chain in China, with more than 4,500 stores nationwide. In January 2023, it opened another 478 new stores, surpassing its 8,400 local outlets.
However, the company’s meteoric rise was followed by an equally dramatic decline in 2019, when Luckin Coffee was revealed to have produced sales figures.
The scandal has rocked the Chinese business world and led to the resignation of the company’s CEO and CEO. Despite the setback, Luckin Coffee has since restructured and implemented tighter internal controls to restore investor and customer confidence.
Luckin was valued at US$4 billion in its US IPO
Luckin Coffee was co-founded by Jenny Qian Jia of car rental company Car Inc. and startup startup UCar, and Charles Zhengyao Lu, a serial entrepreneur who founded both companies.
Qian opened Luckin’s first store in Beijing in October 2017, and Lu helped fund the business as an angel investor. The company quickly expanded to other cities in China, including Shanghai, Guangzhou and Shenzhen.
Luckin Coffee grew rapidly, securing $200 million in funding a year after founding, and went public on the NASDAQ stock exchange in May 2019. It raised US$561 million in its initial public offering and reached a valuation of US$4 billion.
“The Chinese coffee market is highly under-penetrated,” Lakin said in his IPO filing. “Inconsistent qualities, high prices and inconveniences have hindered the growth of the freshly brewed coffee market in China. We believe our model has successfully driven the mass market for coffee consumption in China by addressing these pain points.”
In January 2020, Luckin launched vending machines, achieving its goal of having more Starbucks locations.
Luckin Coffee targets white-collar millennials, with more than 90 percent of its stores located in small “gathering” locations near office buildings or university campuses.
Its business model was based on the idea of the “new retail,” which combines the convenience of e-commerce with the physical presence of brick-and-mortar stores. It differentiated itself from traditional coffee chains by offering lower prices, faster service, and a more convenient ordering process.
Luckin’s coffee is cheaper than Starbucks, with prices about 25 percent lower and big promotional discounts to attract new customers and boost sales. After discounts, the effective price could be less than half of what the American coffee chain charges, according to the analyst.
In addition, customers could order coffee and other beverages through the Luckin Coffee app, which offered discounts and promotions to encourage repeat business. The app also allowed customers to track their orders in real-time and ensure a seamless payment process.
Removal and bankruptcy after his fraud scandal
Luckin Coffee’s success was short-lived. In January 2020, the company announced that it had discovered that its CEO, Jian Liu, had falsified sales figures by overinflating transactions by US$300 million.
An internal investigation found that the fraud had been ongoing since the second quarter of 2019 and involved several other employees.
The revelation sent Luckin Coffee’s share price plummeting, with shares plunging 80 percent. This also led to the resignation of CEO Jenny Qian and CEO Jian Liu, and several Luckin Coffee executives were also arrested and charged with fraud.
The scandal rocked the Chinese business world and led to a wave of regulatory scrutiny. The Chinese securities regulator launched an investigation into Luckin Coffee’s accounting practices, and the company was delisted from NASDAQ in June 2020 and later filed for bankruptcy.
Despite the setback, Luckin Coffee has since implemented tighter internal controls and restructured its business to restore investor and customer confidence.
The company appointed Jinyi Guo as its new CEO in July 2020, and he has since led a comprehensive overhaul of the company’s governance and compliance procedures.
Luckin Coffee also conducted an independent investigation into the fraud and has committed to implementing the investigation’s recommendations.
In November 2020, Luckin Coffee announced its financial restructuring plan, which included a debt-for-equity exchange with its creditors. The plan allowed the company to reduce debt and improve its financial position, paving the way for a future U.S. stock exchange listing.
Luckin Coffee also announced that it has settled with the US Securities and Exchange Commission (SEC) over its accounting fraud. The company agreed to pay a $180 million fine to the SEC and accept a three-year ban from trading on US stock exchanges.
It is now being made in Singapore
Today, Luckin Coffee remains a significant player in the Chinese coffee market. The company has reopened several stores closed after the scandal and continues to expand its business.
In February 2021, Luckin Coffee announced that it had signed a memorandum of understanding with Kuwait American Food Company (KFC) to expand its business in the Middle East and North Africa region.
Luckin Coffee’s expansion plans also include its entry into the Singapore market, marking its first overseas market.
It recently opened two new pick-up stores at Marina Square and Ngee Ann City Mall, with more outlets on the way. It already plans to open in locations such as Guoco Tower, Aperia Mall and Jewel Changi Airport in 2023.
Luckin Coffee plans to expand its business in Singapore with two store formats: mall stores that are less than 1,200 square feet and “relax” store concepts that are at least 1,200 square feet. The 15-seater Marina Square outlet is a “stay-in” concept, while the Ngee Ann City outlet is take-out only.
CEO Guo Jinyi said the expansion to Singapore is the first step for Luckin Coffee to expand overseas and inject new vitality into the local coffee market.
Singapore’s vibrant coffee culture and high concentration of coffee drinkers make it an attractive market for Luckin Coffee as it seeks to capitalize on the growing demand for coffee in the region.
The rise, fall and demise of Luckin Coffee is a cautionary tale for startups and investors alike. The company’s aggressive expansion and reliance on technology helped it become China’s largest coffee chain in just two years, but its decline was just as swift when accounting fraud was uncovered.
However, Luckin Coffee’s response to the scandal, including its restructuring and commitment to stricter management and compliance procedures, shows that it is possible for companies to redeem themselves after a crisis.
Luckin Coffee’s recent entry into the Singapore market is a significant step in the company’s recovery. While the company still faces challenges, including intense competition and regulatory scrutiny, its continued expansion and commitment to transparency and accountability are positive signs for its future.
Featured Image Credit: SOPA Images / Luckin Coffee Singapore