Fraud + Fundamentally broken business of Luckin Coffee.

As we all know already Luckin Coffee is not anymore the fastest-growing coffee network. All because of fraud and made-up numbers.

Luckin Coffee company overview

Luckin Coffee is used to be China’s second largest and fastest-growing coffee network (number of stores and cups of coffee sold). This coffee chain is technology-driven company that based on disruptive growth model. In order to speed up orders , mobile app helped to (cover the entire cashless purchase process). Company operates own stores, cooperate with selective retail partners and self operated stores. The main focus on pick-up stores. Company gained strategic cost advantage by eliminating sitting places inside the shops. Luckin Coffee offer to customers premium coffee, tea and light meals & snacks. Company’s signature coffee blend won Gold Medal in the 2019 IIAC International Coffee Tasting Competition.

In 2019 Luckin Coffee (NASDAQ: LK) successfully completed initial public offer (IPO). Shares to the public sold at US $17 per share. Company received $607.2 million from IPO after deducting underwriting discounts, commissions and other expenses.

Company incorporated in June 2017, commenced operations in October 2017. Company’s corporate structure is overly complicated and registered in offshore islands. This is first fraud sign. Company classified as emerging growth company.

Luckin Coffee official financial data.

In this report presented financial data only for first 9 months of 2019. Looks suspicious. Financial report for fiscal year 2019 is not available. Why? Because of fraud trial.

Luckin Coffee: Fraud + Fundamentally Broken Business.

According to Anonymous report (now publicly available online) Luckin Coffee is fundamentally broken business model with fabricated financial & operational data. Because of fabricated data stock price grown 160% in just 2 months. In January 2020 Luckin Coffee raised another $1.1 billion by secondary placement. Here’s key take-aways from the report:

  1. Store sales inflated by 69% in 2019 3Q and by 88% in 2019 4Q. This figures obtained from watching 11,260 hours of store traffic video. During the research recorded videos from open till close, approximately 11.5 hours per day. Any video that was missing more than 10 minutes was discarded. Average number of sales per day is 267 only and not 450+ as claimed by Luckin Coffee.
  2. 11,260 hours of store traffic videos obtained from 981 store-days and covering 100% of operating hours. Customers who recorded videos was sitting in front of counter and also was counting how many sale done and couriers picked-up orders.
  3. “Items per order” has declined from 1.38 in 2019 2Q to 1.14 in 2019 4Q. In store mostly purchased only freshly brewed coffee. Normally Customers  purchase more for free delivery.
  4. Luckin Coffee inflated it’s net selling price per item by 12.3%.
  5. Store losses 24-28%. Luckin Coffee provided too much of free drinks or on discounted rates that thought customers that coffee must be cheap.
  6. Luckin Coffee overstated it’s 2019 3Q advertising expenses by 150%. That’s possible, money was used for inflating revenue and store level profits.
  7. Company’s “other products” sales inflated by 400%.
  8. Company’s management has cashed out on 49% of their stock holdings. This led investors exposed to the risk of margin-call induced price-plunges.
  9. Luckin company recently raised $865 million through convertible bond and follow-on offering. Money raised for development of it’s “unmanned retail” strategy.
  10. Luckin Coffee independent board member was on the board of a few very questionable Chinese companies that listed in US stock exchanges and incurred heavy losses.
  11. Luckin Coffee co-founder & CMO was once sentenced to 18 months imprisonment for illegal business operations.
  12. China’s caffeine intake per capita is 86 mg/day. 95% of Chinese consume mostly tea. This means that there’s more demand for tea than for coffee.
  13. Luckin Coffee customers are price sensitive and any increase in price & decrease of discounts will lead to reduced demand.
  14. Business concentrated on coffee instead of specializing tea. Chinese people prefer to drink tea.
  15. Customers without brand loyalty.

Anonymous report available online and it’s masterpiece of research. If you are interested in frauds than go ahead and read it.

Thanks, please follow my blog.

Leave a Reply