Luckin Coffee is back and bigger than Starbucks in China

By Michelle Toh, CNN Business

Luckin Coffee, the Chinese startup that became mired in a fraud scandal and was kicked off Wall Street two years ago, is making a comeback.

The coffee chain on Tuesday posted first quarter earnings showing a jump of almost 90% in revenue and its first ever profit, despite challenging Covid lockdowns. It also ended the period with 6,580 stores in mainland China. That’s more than Starbucks, which has just over 5,650 outlets in China.

Luckin now calls itself the country’s largest coffee chain. Some of its stores are self-operated, while others are run by partners. Starbucks’ outlets in China are entirely company-owned.

The Chinese company’s latest earnings offer a look into its recovery since it admitted in 2020 to making up some of its sales numbers, leading to its ejection from the Nasdaq.

In an interview Wednesday, CEO Jinyi Guo acknowledged that many analysts may still be skeptical of Luckin’s finances.

Since 2020, “we have taken a lot of measures to clean up our own house,” he said, noting that it had brought in external lawyers to review its operations and reorganized its teams. Guo, a senior vice president of product development, was promoted to chairman and CEO during the crisis.

“Because of the pandemic, there are a lot of people not able to travel to China, to see for themselves how it looks like in our shops,” he added.

“If they’re able to see for themselves how we operate, then they would know that the figures are true, and they shouldn’t be skeptical about it.”

Luckin was founded in 2017 as a trendy alternative to the traditional coffeehouse. It focuses on catering to young people, with mostly takeaway booths and cashless payments.

From its inception, the company enjoyed a rapid ascent, quickly becoming one of China’s top “unicorns,” or privately held firms worth at least $1 billion. At one point, it opened some 2,000 stores in just 12 months.

In 2019, Luckin went public in New York, where it was welcomed by investors who believed it could be a serious challenger to Starbucks.

But the company was forced to retreat the following year following the admission that its earnings had been fabricated. Luckin was ultimately delisted from the Nasdaq, and its chairman and CEO were both fired. It was also slapped with a $180 million fine by the US Securities and Exchange Commission.

Shares in the company now trade over the counter in the United States, giving the company a market cap of $2.2 billion, compared with more than $4 billion when it went public.

The Eileen Gu effect

Luckin also has one particular person to thank for its recent performance: Olympic superstar Eileen Gu.

The company partnered with the Chinese freeski champion last summer, which has created a “sizable effect” for its business, said Guo. Gu went on to become a breakout sensation of the Winter Olympics in February, taking home more medals than any other Chinese team athlete at the Games.

In January alone, the company opened 360 stores — much “faster” than its normal rate, in anticipation of greater sales, Guo said.

“By January and February, we sort of had an inkling that she’s going to win a gold medal in the Olympics,” said the CEO.

Like most businesses, Luckin has been hit by the recent Covid-19 surge in China, with “an average of around 700 daily temporary store closures” in March and about 950 from April onward, Chief Financial Officer Reinout Schakel said on an earnings call.

But the company says that overall, it has been relatively shielded from mass lockdowns because of the locations of many of its stores.

Many Luckin outlets are in office buildings or universities, meaning “we were able to remain normal operations in these relatively closed off locations,” according to Guo.

Starbucks, however, hasn’t been so lucky: Sales at outlets open for at least a year dipped 23% in China in the quarter ended April.

In the company’s most recent earnings call, CEO Howard Schultz called the situation in the country “unprecedented,” adding that “the high level of ongoing uncertainty” would lead the coffee chain to suspend financial guidance for the second half of the year.

— CNN’s Wayne Chang contributed to this report.

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