A lot of analysts are saying Luckin Coffee, which has filed paperwork to go public on the Nasdaq with the ticker LK, is “about to beat Starbucks (NASDAQ:SBUX) at its own game.”
But Luckin is playing a different game.
As its F-1, the foreign corporate equivalent of an S-1, makes clear, Luckin is not about relaxing, holding meetings or spending quality time on comfy couches. Most of the 2,380 stores it had at the time of its public filing are kiosks, and most of its coffee drinks are delivered.
Luckin is for the “996” people so beloved by Alibaba Group Holding (NASDAQ:BABA) CEO Jack Ma. The 72-hour work week — 12 hours a day, 6 days a week behind a desk — cries out for regular shots of coffee, brought straight to you.
Luckin sells coffee as a drug, not a lifestyle.
The Business Model for Luckin Coffee
Luckin’s aim is to use equity investors, to quickly scale beyond its larger rival, locating its outlets around every Starbucks, then destroy it through lower prices and speedy delivery.
That could work, if Starbucks is only selling coffee. But Starbucks is selling relaxation.
On the surface, Luckin looks like Starbucks on steroids. Starbucks has an app. Luckin sells only through an app. Starbucks sells baked goods. Luckin sells many food items. Starbucks is delivering through Alibaba. Luckin is delivering through SF-Express and Meituan Dianping.
Luckin is everything Starbucks pretends to be, and less. While Starbucks targets upper-class executives who can afford the 30 minutes it takes to meet and talk in comfortable surroundings, with huge roasteries in major cities, Luckin targets their harassed underlings who don’t have that time or that money.
Class vs. Class
Starbucks CEO Kevin Johnson says Luckin is aimed at short-term growth, and that its discounts are unsustainable.
Luckin did lose more than it brought in during the first three months of 2019, a loss of $82 million on sales of $71.3 million. But for all of 2018 it managed to lose much more, $132 million, on sales of just $12.9 million.
There are better reasons for disquiet.
Luckin’s books are mixed through not one, not two, but three tax havens — Hong Kong, the British Virgin Islands and the Cayman Islands. The company is also focused on paying its top people first, through stock options. Chairman Charles Lu is already a Luckin billionaire, with a 30.5% stake. Founder Jenny Zhiya Qian, who was COO of Lu’s previous start-up, a car rental outfit called Car Inc., holds a 20% stake.
Luckin has grown on the backs of equity investors like Blackrock (NYSE:BLK). It raised $500 million in its first “angel” funding round. Its latest round, just completed this month, valued the company at $2.9 billion.
To keep the cash flowing Lu himself recently took out a loan of $200 million from companies that might handle the IPO, like Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS), secured by mandates on the IPO.
People are getting very rich on Luckin, very fast, before analysts have any idea what the company is worth, how big it will get, or its current health.
The Bottom Line on the Luckin IPO
Luckin has slowed Starbucks’ growth.
Same-store sales for Starbucks in China grew at just low-single-digit rates last year. Luckin may also be more in touch with how China lives than Starbucks. Out of its over 2,000 stores only 109 look anything like a Starbucks — they’re called “relax” stores. Some 98 of the stores are delivery-only.
Luckin may eat Starbucks’ lunch, with its investors’ money, but there are plenty coming behind it to eat its own.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.