No. Unequivocally, I am not.
However, it is possible that Starbucks’ latest announcement about repositioning its stores to reflect a new reality wasn’t just the result of the novel coronavirus, but had something to do with its Chinese competition.
What Could SBUX Possibly Learn From a Fraudster?
There’s no question Starbucks’ finance department isn’t about to welcome accounting tips from Luckin. However, think back to Luckin’s halcyon days, when growth was the only thing on the minds of investors.
“Luckin said in November 2019 that it would have the most coffee shops in China by the end of 2019. And Chinese citizens are quickly becoming enthralled with coffee. In May 2019, NPR reported that the country’s coffee market was worth $10 billion and would jump to $43 billion in 2020. That’s truly explosive growth,” InvestorPlace’s Larry Ramer wrote in December 2019.
Many InvestorPlace contributors were hot and bothered about Luckin’s growth. I, too, was cajoled into turning slightly bullish about Luckin in early January, suggesting “Luckin’s success in 2019 also doesn’t mean the coffee chain’s best days are behind it.”
For context, only a few months earlier, I had called Luckin’s IPO one of the worst of 2019 and put it on a list of 10 stocks to short. I finished my January article about Luckin by stating, “In 2020, I plan to give Luckin far more credit. I just hope it doesn’t disappoint.”
Oh, it disappointed all right.
To-Go Service Makes a Lot of Sense
InvestorPlace’s Luke Lango stated something last December that stuck in the back of my mind as I assessed the value of owning LK stock at the time.
“Luckin Coffee is at the epicenter of this expanding Chinese retail coffee market. They operate small retail coffee shops that are designed for consumers to order their drinks ahead of time on their phones, and simply pick-up their coffee in the store a few minutes later. It’s a unique concept which is attracting a lot of Chinese consumers because it optimizes convenience,” Luke wrote on Dec. 6, 2019.
Luke wasn’t the only journalist to point out that Luckin was focusing a big chunk of its business on the “grab-and-go” segment in China. In March 2019, in an article recommending SBUX stock, I commented on Luckin’s business model.
“Luckin’s business has little to do with the customer experience and everything to do with low prices, discounting through two-for-one offers, and speedy delivery and takeout. For example, a coffee costs $3 at Luckin, 50 cents cheaper than at Starbucks. Take that to the next level with a two-for-one deal, and the price for a cup of joe drops to $1.50,” I wrote on March 15, 2019.
“It’s the dollar store of coffee.”
While Starbucks stock was my coffee bet, the idea of selling coffee from a small real estate footprint did make a lot of sense. A lot of people are busy and just want to get their coffee and keep moving.
Of course, in hindsight, we know that Luckin was fabricating those online order volumes. But the premise is still a good one.
A Letter to Stakeholders
In Starbucks’ June 10 letter to all stakeholders, it made the following comment:
“Prior to the COVID-19 outbreak, approximately 80% of Starbucks transactions in U.S. company-operated stores were “on-the-go” occasions. This dynamic led our leadership team to reexamine our U.S. store footprint to determine how we might evolve our retail presence over time through targeted store renovations, relocations and new stores, a process that has been underway for two years,” the company’s regulatory filing stated.
“We have since introduced a new store format, Starbucks Pickup, to enhance the “on-the-go” customer experience and improve operating efficiency across Starbucks stores in certain major metropolitan areas in the Americas.”
Certainly, Covid-19 crystallized management’s views about its store footprint. This is why it is closing 400 company-operated stores over the next 18 months in the Americas.
Lesson Learned Despite LK Stock Issues
In locations where it makes sense, like Toronto’s Commerce Court office tower, it will have Starbucks Pickup stores. There will be no seating and just enough space for staff to safely get the coffee made. In other places, a drive-through without seating might make sense.
The point is, Starbucks is adapting its store footprint to meet the needs of customers. And if it can save money on real estate at the same time, even better.
Starbucks has competed with Luckin in China for almost three years. The fact that it has added 10 Starbucks Now stores (mobile ordering for pickup and delivery) suggests the company is paying attention to its competitors’ business model.
The Bottom Line on LK Stock
Given all the fraud that’s taken place at Luckin, I find it hard to believe that InvestorPlace contributor Louis Navellier rates LK stock a B (Buy) at the moment. Different strokes, for different folks, I guess.
While Starbucks wouldn’t admit it, I do think the company learned a thing or two from Luckin. And if you can learn from a business built on fraud, imagine what you could learn from something legitimate like Black Lives Matter.
I’m still long SBUX. Luckin, not so much.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.