China’s Luckin Coffee believes it has overcome its “darkest moment” two years after being expelled from the Nasdaq for accounting fraud and stated it remains committed to U.S. capital markets as it grows its store and sales.
After blazing a trail as a domestic rival to American coffee giant Starbucks, Luckin confessed in 2020 that roughly $310 million of its sales were faked in the previous three quarters, driving the coffee producer to the verge of collapse (SBUX.O).
“Luckin’s darkest hour was at that point. At the time, the business was dealing with a severe problem “David Li, the chairman, and CEO of the Chinese private equity firm Centurium Capital, spoke about the accounting scam to Reuters.
Following the financial scandal, Luckin was delisted from Nasdaq, startling Wall Street investors. The corporation is exercising its muscles once more after going through ownership and top management changes and paying hundreds of millions of dollars in fines.
Luckin’s (LC0Ay.MU) turnaround would support the company’s new owners and senior management, who have pushed the chain to grow in China’s fiercely competitive coffee industry.
Luckin announced its first operating profit for a quarter in May. It announced a 72% increase in net revenue for the June quarter on Monday. Comparatively, Starbucks reported a 44% decline in comparable sales in China for the third quarter last week.
‘The Centrurium’
Centurium, a significant early investor in the coffee chain, took the lead in a consortium that paid more than $400 million for shares that had previously belonged to two of Luckin’s founders, and as a result in January became the company’s majority shareholder.
Next to the scam, Centurium sent seven professionals to work with Luckin’s management team for several months. The following year, Centurium invested $240 million in the company to help finance its restructuring.
In order to make sure there are no “data silos,” which Li claimed were to blame for the accounting debacle, it has also compelled Luckin to develop a more open and integrated database.
Even while many catering chains in China have been compelled to be more careful about expansion in the near future by the country’s strict COVID-19 limitations, Luckin plans to keep opening additional stores, according to the company’s chief executive Guo Jinyi.
He declared that Luckin would open more locations all throughout the nation, especially in prestigious cities like Beijing and Shanghai.
‘Return New York’
Compared to Starbucks’ 5,761 locations as of early July, Luckin, which was started five years ago, currently has roughly 7,200 stores in China.
Even though Luckin has expanded to 230 Chinese cities, more than 5,000 of the outlets are concentrated in the 50 to 60 largest cities, according to Guo. “We feel the potential of the China market remains enormous,” Guo added.
Luckin continues to be traded via the pink sheet. This off-exchange trading platform mostly deals with penny-stock businesses that don’t fit the requirements for listing on the major exchanges, even after the Nasdaq delisted it.
Retiring from his position as a chief financial officer but continuing in his capacity as chief strategy officer, Reinout Hendrik Schakel informed analysts on Monday that the company was still dedicated to the U.S. markets.
Regarding a potential Nasdaq return, Guo stated, “We don’t have a particular schedule yet. “But we’ll keep an eye on and a focus on the American capital market. We haven’t thought about (re-listing) in other markets as of yet.”
Despite having more stores than Starbucks in China, Luckin is still lagging behind in terms of market share, with 28.9% in 2021 compared to 31.2% in 2020, according to Euromonitor.
Luckin’s market share increased from 6.3% in 2020 to 7.8% last year.
Guo responded when asked how Luckin intended to win back investors’ trust: “To regain their trust, we can only rely on Luckin’s business success and the release of (strong) quarterly and annual reports. It requires time.”
