How China's Starbucks competitor deceived investors from around the world

The numbers were castles in the air, nothing but invented. The Chinese coffee chain Luckin had exaggerated the sales figures and not only misled retail investors, but also large hedge funds such as the US asset manager Blackrock, GIC a sovereign wealth fund from Singapore and commodity trader Louis Dreyfus, one of the world's largest dealers in orange juice and coffee.

Last week Thursday Luckin stated that the 2.2 billion yuan (approx. 310 billion US dollars), as sales between the second and fourth quarters 2019 had been reported, faked. Jian Liu, managing director since 2018, was subsequently suspended.

The papers of the company, which has been listed on the New York technology exchange Nasdaq since May 2019 broke after announcement by over 75 percent and pressed the still young coffee start-up from Xiamen in southern China to the brink of collapse.

More branches than Starbucks

Coffee was not the favorite drink of the Chinese for a long time. But with prosperity, western lifestyle and its habits also arrived in China. Office workers, students, and retirees especially liked to have a cup from the local coffee company Luckin, because its prices were unbeatably cheap compared to the almost five euros that the US chain Starbucks in China charges for a cup of coffee.

With so-called discount coupons that smartphone users received almost daily, a cup of Luckin coffee cost a fraction of what other coffeehouses charge for their hot drinks in the metropolises of China. In addition, the coffee was delivered to the office or home in no time. These unbeatable offers made the start-up really popular.

Im Mai 2019 ging Lucking Coffee an die US-Börse Nasdaq.

In May 2019 Lucking Coffee went public on the US stock exchange Nasdaq. Photo: REUTERS

Just recently 2017, Luckin recently had around 4500 Shops on the Chinese mainland – according to their own information about 200 more than Starbucks, which had already gained a foothold in China twenty years ago. Two years ago, sales were still at 120 million US dollars, forecast beginning analysts' annual turnover for this year was an average of $ 2 billion this year. Starbucks had recently achieved sales of $ 6.7 billion in the fourth quarter 2019 due to its growing business in China .

Pre-order coffee with your smartphone

It is not “real” coffee houses that Luckin mainly operates in cities, but rather a lot of small shops, which are only a few square meters in size, without seats, but are located directly on office buildings or near the entrances and exits of shopping centers. Customers order coffee or other hot drinks via smartphone and can pick them up just a few minutes later in the foyer of their office building or even have them delivered cheaply. Despite the good location, the rents and personnel costs of the Luckin branches are manageable mainly because the coffee is brewed “to go”. In addition, the company advertised aggressively with well-known Chinese actors and sayings such as: “Who can not love this cup”.

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The annual coffee consumption per capita is an average of around seven cups in China. For comparison: Every German drinks an average of two cups a day. Luckin's IPO was boosted by the opportunity to grow upwards with lots of air. 561 million dollars it collected, giving the company a valuation of around four billion US Dollar gave. The market value of Starbucks' Chinese rival had even tripled to $ 11 billion since going public earlier this year.

Cool coffee experience from the machine

With the onset of Corona disease, however, Luckin 200 close branches in Wuhan, but left many of its other branches in other metropolises open because they were not intended to stay anyway. Starbucks, on the other hand, had to 95 percent of its branches in mainland China and opened them only after 45 until 60 days depending on the quarantine measures taken by the local authorities.

Luckin's strategic direction was to break the status quo of traditional coffee shops. To offer the cool coffee experience without having to sit around for it. And the next step was towards self-service machines, for example at airports, in universities or in nearby office buildings. Luckin boss Ziya Qian announced at a press conference in Beijing in January that the machines would “be installed in as many places as needed”. But this should not happen for the time being.

For Swiss coffee maker Schaerer, this is a big setback. If you had been one of the largest suppliers of coffee machines for Luckin so far, the expansion in coffee machines would have meant big business for Schaerer. More than 40.000 They alone have coffee machines 2019 delivered to China. According to its own information, Schaerer has risen to become the largest manufacturer in the industry – even before the German parent company WMF, which had been the market leader for a long time.

Customers fear for their vouchers

However, for many investors, Luckin's management methods and business plan were suspicious at some point. The company, which had previously only been in the red, had promised sales growth of 500 percent.

China's party paper, China Daily, criticized that Luckin “had not only harmed investors, but also the reputation of Chinese companies abroad”. While US investors are now being cheated, Chinese consumers have recently paralyzed the brewer's platform for half a day due to their increased demand for Luckin coffee.

After the scandal became known, many customers feared that all Luckin shops would shut down and quickly ordered coffee to use up their remaining coupons. And to catch a last cup of cheap coffee before Luckin has to file for bankruptcy. Because it is spring in China and the temperatures are rising, a particularly large number of cold drinks have been ordered.