The Rise and Fall of Luckin Coffee

The Rise and Fall of Luckin Coffee
Case Code: BSTR611
Case Length: 19 Pages
Period: 2019-2020
Pub Date: 2020
Teaching Note: Available
Price: Rs.500
Organization : Luckin Coffee Inc.
Industry : Food & Beverage
Countries : China
Themes: Ethical Decision Making, Digital Marketing, RetailTech
The Rise and Fall of Luckin Coffee
Abstract Case Intro 1 Case Intro 2 Excerpts

Abstract

Right from the time it was started in late 2017, China-based Luckin Coffee Inc. (Luckin) had attracted customers and investors alike with its technology-driven coffee business. Luckin developed an innovative model using mobile technology, aiming to bring in major changes in the transaction structure and user experience in the coffee industry in China.

Luckin’s technology-driven retail model was built on mobile apps and store network. The entire purchase process, right from finding a store, selecting a product and ordering it, to paying for it, took place through the app. After placing the order, the customer could opt for it to be delivered to a specified location, or pick it up from the nearest Luckin store. All the transactions had to be done only through the Luckin App.

Through Luckin, its co-founder and CEO, Qian Zhiya, tried to address a huge gap that existed in the coffee market in China. In the predominantly tea-drinking country, coffee started gaining popularity only in the late 1990s. Due to its luxury positioning, high prices, and general perception that coffee drinking was a social activity, the beverage was not consumed very frequently. Qian Zhiya, through Luckin, aimed to make coffee affordable and available to all. The company started operating in Beijing in October 2017 with a single trial store, and soon gained popularity.

The high growth that the Chinese coffee market projected along with positive reports about Luckin’s growth prospects helped it to attract investors. In May 2019, within 18 months of launching the business, Luckin went in for an IPO at NASDAQ and raised US$ 561 million., The company was valued at US$ 3.9 billion in the IPO.

However, over the next few months, Luckin failed to turn profitable and its losses continued to mount. Analysts were also not convinced about Luckin’s decision to offer huge discounts to attract customers. They were of the view that in the absence of such discounts, Luckin’s sales would only drop further. However, Luckin continued to show an increase in sales volumes, and soon surpassed the global coffee house giant Starbucks in terms of the number of stores.

In January 2020, Luckin raised US$ 778 million from additional shares and convertible bonds. By the end of the month, a shortseller in the US came out with a report that Luckin was reporting excess revenues, overstating the number of orders, and inflating the selling price. The report expressed serious doubts about Luckin’s business model, and illustrated several ways in which the company was manipulating its numbers. Though Luckin refuted the allegations, several class action suits were filed by investors in the US against the company.

By April 2020, Luckin announced that it had found some suspicious records during audit. It was reported that revenues had been inflated by RMB 2 billion. This led to a rapid fall in its stock price and the government authorities in China initiated a probe into the matter. NASDAQ said that it would impose tighter listing standards for companies originating from countries that did not maintain transparency in reporting their business.

In June 2020, Luckin received a delisting notice from NASDAQ. Luckin’s fall was expected to deal a major blow to Chinese technology-driven companies and impact the future listing of Chinese companies not only on NASDAQ but also in other international stock exchanges. Though Luckin was planning to revive the business through continuous expansion and by opening more stores and installing vending machines all across the country, its future remained uncertain.

Issues

The case is structured to achieve the following teaching objectives:

  • To understand how customer-centric businesses are built
  • To examine the nuances of new-retail
  • To analyze new-retail and the role of technology in building customer-centric business models
  • To analyze the main reasons for the rapid rise and fall of start-ups

Contents

Keywords

Chinese Companies; Coffee market in China; Rise and Fall; Business Ethics; Ethical Decision Making; Fraudulent Business practices; Inflation of sales; Fake buyers; Fabricated Transactions; Failure; Strategy; Business failure; Rapid expansion; New Retail

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