Abu Dhabi, UAESunday 12 July 2020

Luckin Coffee removes chief exec and operations head following internal probe

The company revealed last month that much of its 2019 sales had been fabricated

Customers wearing face masks at a Luckin Coffee store in Beijing. Shares in the company had fallen in value by 90 per cent since the start of the year. Activist investor Muddy Waters Research accused the firm of accounting irregularities in January and it admitted sales for 2019 had been inflated last month. Reuters
Customers wearing face masks at a Luckin Coffee store in Beijing. Shares in the company had fallen in value by 90 per cent since the start of the year. Activist investor Muddy Waters Research accused the firm of accounting irregularities in January and it admitted sales for 2019 had been inflated last month. Reuters

The firings of Luckin Coffee’s chief executive and her lieutenant in an escalating scandal over faked transactions is another blow for the Chinese chain, which expanded at breakneck speed trying to supplant Starbucks as the dominant barista in a booming coffee culture.

Chief executive Jenny Zhiya Qian and chief operating officer Jian Liu were terminated and also resigned their board positions, according to a Tuesday filing by the US-listed company. Six others either were suspended or placed on leave. Jinyi Guo, a board member and senior vice president, was named acting chief executive.

The dismissals reflect the increasing turmoil at a company once considered among China’s brightest growth stories. The Xiamen-based retailer faces scrutiny from regulators in the US and China, and the firings of top executives signal the financial wrongdoing may be more deeply rooted. The scandal is a black eye for China, which already faces headwinds from the US trade war and proposed legislation in Washington to delist Chinese companies from US exchanges.

“Ms Qian’s departure is a signal Luckin wants to send to investors and regulators that the company is saying goodbye to the past and hopes to get operations back on track again with the new management team,” said Jason Yu, Shanghai-based general manager of Kantar Worldpanel, a consumer-industry consultant.

That may be even more difficult if Luckin Coffee didn’t repay a 45 million-yuan ($6.3 m/Dh23.2m) loan from Zhongguancun Science-Tech Leasing by the March 31 deadline. The company pledged more than 1,000 coffee machines as collateral, according to Tianyancha, a website providing company registration information. Luckin Coffee didn’t immediately return a request for comment.

Mr Guo has been a Luckin Coffee director since June 2018 and served as senior vice president in charge of product and supply chain since October 2017. The company also named two new board members.

Luckin’s shares have been halted for more than a month after the company said it was investigating whether senior officials were involved in fabricated transactions of about 2.2 billion yuan. That announcement sent shares plummeting more than 75 per cent in a single trading session.

The company suspended Mr Liu last month and said investors shouldn’t rely on financial statements for the nine months ended September 30. The transactions under investigation, which allegedly occurred last year, would represent a significant portion of the company’s total revenue.

Its offices in China were raided by authorities last month as part of a multi-agency investigation into its finances, Bloomberg has reported.

Luckin Coffee is trying to scrape itself out of trouble just as the Trump administration and fellow Republicans push for a harder stance against Chinese companies because of the trade war, security concerns and the coronavirus. On Monday, the administration moved to block investments in Chinese stocks by a government retirement savings fund.

Luckin Coffee, founded in 2017, raised $645m (Dh2.3bn) in its US IPO last year and counted BlackRock among its backers. Its strategy against Starbucks was to open more stores in two years than the Seattle-based heavyweight has in two decades.

The business just didn’t get enough time to grow at a normal pace

Jason Yu, Kantar Worldpanel

Chief executive Ms Qian and chairman Lu Zhengyao employed a strategy they used with CAR, a vehicle rental business, more than a decade ago: burning money - $130m in a year - from investors to grab market share quickly. The company lured patrons with generous discounts: first-time customers got a free cup of coffee and six vouchers for 50 per cent off future purchases.

While that raised concerns among some analysts, the strategy proved successful in boosting the stock price. In January, shares reached $50, more than double its IPO price.

Luckin Coffee operated about 4,500 stores in China by the end of 2019, with plans to reach 10,000 locations by the end of next year in a market valued by Euromonitor at $5.8bn in 2018.

Trouble emerged earlier this year, however. The shares plunged after Muddy Waters tweeted on January 31 that it had a short on the stock after receiving what it called a “credible,” unattributed 89-page report that alleged accounting issues with the chain and a broken business model. Luckin Coffee denied the allegations.

Getting the company back on track may be a daunting challenge. Luckin has released only two quarters of results, the most recent in November, when it reported better-than-expected revenue and said it plans to break even this year, even as its net loss widened.

Luckin delayed its annual results, saying it was unable to prepare the financial report due to the coronavirus pandemic. It began closing most of its stores in late January as the outbreak escalated in China, but it has been able to resume some operations as lockdown restrictions eased. As of March 31, about 85 per cent of its self-operated stores reopened.

Still, it will be “very difficult” to maintain operations as the cash-burning model won’t last without more capital being pumped into the company, according to Mr Yu.

“It’s a pity it expanded too aggressively and sought an IPO in such a short time,” he said. “The business just didn’t get enough time to grow at a normal pace.”

Updated: May 13, 2020 07:56 PM

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