The Rise and Fall of Luckin Coffee
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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 |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Operating Model
China had the largest mobile internet user base in the world with 817 million users in 2018. This number was expected to further grow to 1,085 million users by 2023. This proved to be a boon for technology-driven models where businesses used technology across the value chain, through selection of products, customer acquisition, procurement, supply chain, distribution, etc....
The Rise of Luckin
China, being a highly tech-savvy nation, mobile payments were highly common. This made several companies and startups come up with business models that would appeal to the tech savvy customers. In 2018, 83% of all the payments made were through mobile phones. While most of the developed countries were still managing with credit cards, China had moved ahead to mobile payment systems. The growth in mobile payments was in tandem with the growth of e-commerce and m-commerce in the country...
Trouble Brewing?
Luckin was yet to turn a profit for the quarter ending June 2019. Its revenue was at US$ 192.4 million, which was below analysts’ expectations of US$ 229.4 million. Losses also continued to mount. “Our shareholders want us to focus on revenue growth and store level profitability ... they do expect us also to get to a sort of EBIT level break-even point somewhere towards the end of next year,” said CFO Reinout Schakel...
All is Not Well
While Luckin was announcing plans to install vending machines in a number of locations, Muddy Waters LLC, a short seller in the US that focused on Chinese stocks, announced that it had received a 89-page report about fraud in Luckin. Muddy Waters posted that report on its Twitter account on January 31, 2020...
What Went Wrong?
Several law firms and Chinese authorities started investigating Luckin. Investigations into the reasons for the fake accounts showed that Luckin had booked sales on vouchers it had distributed to the employees working in companies that belonged to Charles Lu. The sales of these vouchers were much more than the sales it had obtained by selling coffee.....
The Aftermath
By the end of April, the securities and market regulators in China, the State Administration for Market Regulation, opened a probe into Luckin Coffee. The officers from the regulator visited the headquarters of Luckin and probed its accounts and other records. Though initially SEC claimed that it had limited powers to enforce regulatory action against international firms and investigating Luckin would be complex, it launched a probe and placed the company under investigation. SEC requested cooperation from the Chinese authorities....
Exhibits
Exhibit I: Coffee in China
Exhibit II: Luckin Coffee – Strategies
Exhibit III: Luckin Coffee – Types of Stores and other Details
Exhibit IV: Luckin Locations as of January 2019
Exhibit V: Luckin Coffee – Operational Details
Exhibit VI: Luckin – Selected Financials
Exhibit VII: Stock Price Chart of Luckin
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