Submitted By: Usman Ikram

Submitted To: Dr. Sohaib-uz-Zaman

Course: Financial Management
MBA 3.5 (3rd Semester)
Karachi University Business School

CASE STUDY
LUCKIN COFFEE

Abstract
HOW A LEADING COFFEE CHAIN IN CHINA GET INVOLVED
IN FABRICATING SALES FIGURES AND THE COMPANY DESTROYED HERSELF.
 TABLE OF CONTENTS
1. Introduction

2. Timeline

3. Strategies That Made the Luckin Coffee a Powerful Brand

4. Some Astonishing Figures from the Last Financial Statement

(Q3 of 2019)

5. How Did They Inflate Their Sales

6. Expansion into the Tea Business

7. Challenge of Researching Foreign Companies

8. Impact of Fraud on the Stockholders

9. Role of Regulatory Authorities

10. Conclusion

11. Recommendation

12. References
 1. Introduction:
Luckin Coffee was founded in 2017 by a Chinese entrepreneur Jenny Qian. She noticed in her prior job
experience that working late, she and her co-workers consume lots of coffee. That is where the idea of
Luckin Coffee came into her mind. Traditionally China does not consume coffee rather the Chinese
people are more attracted to tea. The average consumption of Coffee was 6 cups per year by a person
which is way too less as compared to 300 cups by a person in US. So she came with her idea to minimize
this gap and the first store of Luckin Coffee was opened in 2017. Travelling faster on the way to success
the company had already opened 3,680 stores in China in September 2019. Later on in January 2020
they were alleged with the fraud and that all the shining sales figures are fake and fabricated. Eventually
later in April 2020 they accepted their mistake and fired their CEO, it was this time when the stock of
Luckin collapsed.

2. Timeline:

2017 2020

2019

2017- The company was incorporated in October 2017 and opened one of their first branches by
January 2020 in the two mega cities of China Beijing and Shanghai and with the fast going pace of
success it had already opened 1300 stores by the end of October 2018.

2019- By continuing the same rapid growth, the company announced that they are planning to open
2500 new stores surpassing the biggest coffee chain of the world Starbucks, it had opened 3,680 stores.
Luckin also got them listed in NASDAQ as LK, the stock market of US and started to trade its stock at $17
(It only took 2 years for Luckin to get enlisted while Starbucks, its competing company took 11 years to
do that). It was also the same year when Luckin started to show losses, it reported a huge loss of $75
million by the end of Third quarter of 2019.

2020- It was January 2020 when the fall of Luckin Coffee started. A famous investment company
Muddywater Research published an article and said that they have received a tip that Luckin Coffee is
fabricating their sales figures and window dressing their financial statements. Soon after the allegations
was charged, Luckin denied the allegations. But after a couple of months in April 2020, they announced
that they have performed an internal investigation and declared that they made up a revenue of $310
Million revenues which never existed. Soon after admission, the stocks of LK slumped down drastically
by 75% in 24 hours, depleting the $5 billion worth in stocks.

3. Strategies That Made the Luckin Coffee a Powerful Brand:

Jenny Qian, the former CEO of Luckin Coffee, using her past experience in a ride-hailing company
introduced two significant strategies which became the key factors for the success of coffee chain. These
2 strategies which made them overtake Starbucks in just 2 years are discussed below

1. Digitalization:
The main strategy that Luckin applied in their business was the cash less transactions, the customer has
to download their app or mini program to order coffee. 100% of the transactions are made on mobile
phone. Later on, this strategy was also adopted by the competitor company Starbucks.

2. Discounts and Coupons:

Following the strategies applied in the previous company where Jenny Qian worked, she offered a lot of
discounts and offers and coupons, which skyrocketed their sales. Offers like 5 free cup of coffees on
buying 5 cup of coffees, if coffee did not delivered in 30 minutes it will be served free, and much more.
This strategy also bring them huge losses as per the Financial Statements of Q3 of 2019.

4. Some Astonishing Figures from the Last Financial Statement

(Q3 of 2019):
 Total net revenues from products RMB 1,493.2mn (+557.6% YoY increase)
 Store level operating profit RMB186.3mn (+12.5% store level profit margin)
 Store footprint 3,680 stores (+717 net new stores QoQ)
 Cumulative transacting customers ~30.7mn (+7.9mn new customers QoQ)
 Average monthly total items sold ~44.2mn items (+470.1% YoY increase)
 Average monthly transacting customers ~9.3mn (+397.5% YoY increase)

5. How Did They Inflate Their Sales?

Being a super growing company it is harder to fabricate sales without getting into the knowledge of
others, so the question comes in everyone’s mind that how did they inflate their sales? The experts
answer it as the company being 100% digitalized, it may have altered the system and have made the
ghost sales.

6. Expansion into the Tea Business:

As China is culturally attracted to tea more than the coffee, so in 2019 Luckin Coffee expanded their
business in the tea products. In July, the company introduced fruit-flavored teas and tea macchiatos at
their outlets which also came as a success to Luckin. Luckin was successful to win over 8 million new
customers off tea during that period.

7. Challenge of Researching Foreign Companies:

When conducting a case study or research on a foreign company there comes a lot of hurdles and
challenges, few of them are listed below:

 Language and cultural barriers

 Lack of on-the-ground information
 Challenging to monitor product and information
 Challenging to know what the products owner are saying
 Challenging to get to know CEO and management

8. Impact of Fraud on the Stockholders:

Soon after the Luckin admitted their fraud, the stocks went from sky down to the earth and no investor
is ready to hold it. Why would someone trust a company who is not loyal to their shareholders? So the
trust of stock buyers has been vanished from the company.

9. Role of Regulatory Authorities:

After reviewing all the scenario of Luckin coffee there rises a question in the role of regulatory
authorities working in China and even in the United States of America. How did the company get itself
saved from the eyes of auditors? What did the auditing company did when auditing the accounts of
Luckin? Where was their skepticism then? These and a lot of similar questions rise which have to be
discussed in the future so that the frauds like these can be mitigated.

10. Conclusion:
The newly established company Luckin Coffee was doing spectacularly good that they surpassed the
international chain of coffee Starbucks in the China. It is very rare to see companies getting on the way
to success with this fast pace, and get their self enlisted in the US stock company NASDAQ. But the
company did not stay on that level for a longer period of time and get delisted from NASDAQ and now
trying to survive.

11. Recommendations:
 Currently US regulators are prevented from inspecting audit work and practices of audit firms in
China. They should be allowed because they have better policies regarding the securities.
 The audit companies should implied with the strict policies, and should be reminded the lesson
of skepticism.
 The real culprit should be identified with a detailed investigation. Like in this case, CEO with few
other executives is fired from her job, but the CFO is not charged with any accusation which is
almost impossible to fabricate sales without getting into the knowledge of CFO, similarly the
board chairman Lu Zhengyao is left with no charge.
 These frauds happen because there is no penalty in doing these cheating, the maximum they
can lose is the worth of their business and the trust of their customers. It should be accepted as
a crime and heavy penalties should be implied.

12. References:
I. [ CITATION Min20 \l 1033 ]
II. [ CITATION USSEC \l 1033 ]
III. [ CITATION Nee20 \l 1033 ]
IV. [ CITATION LK319 \l 1033 ]
 V. [ CITATION Yue20 \l 1033 ]
VI. [ CITATION Uda20 \l 1033 ]
VII. [ CITATION Wei20 \l 1033 ]

(The references are given through ‘Insert Citation’ of MS Word, they may not show in PDF)