China’s Luckin counts cost of Starbucks battle, looks to break even

Luckin aims to break even on a key metric next year. (Reuters)
Updated 15 August 2019

China’s Luckin counts cost of Starbucks battle, looks to break even

  • The startup spent aggressively and opened 593 new stores in the June quarter, its first as a public company

BEIJING: Luckin Coffee turned in a bigger-than-expected loss as costs ballooned on store openings and heavy discounts aimed at competing with Starbucks, driving the Chinese firm’s US-listed stock down sharply on Wednesday.
The startup, which opened its doors early last year and listed its shares in May, spent aggressively and opened 593 new stores in the June quarter, its first as a public company.
While the brisk spending fueled a seven-fold jump in revenue growth over the period, losses widened and costs ballooned more than three times as it offered cut-price alternatives to US coffee giant Starbucks.
Luckin, which had previously eschewed a timeline for turning a profit, told Reuters it aims to break even on a key metric next year, earnings before interests and taxes (EBIT), a target Luckin’s chief financial officer said investors were keen on.
“Our shareholders want us to focus on revenue growth and store level profitability ... they do expect us also to get to a sort of EBIT level break-even point somewhere toward the end of next year,” CFO Reinout Schakel told Reuters.
The way to achieve that would be to offer coupons more smartly and through dynamic pricing, Schakel said, suggesting the company might have fewer promotions than earlier.
The company’s stock closed down nearly 17% at $20.44 on Wednesday, but it is still about 20% above the IPO price.
For the third quarter, Luckin expects revenue between 1.35 billion yuan ($192.4 million) and 1.45 billion yuan. Analysts were expecting revenue of $229.4 million.
On an adjusted basis, Luckin lost 48 cents per share in the quarter ended June 30. Analysts expected a loss of 43 cents, according to IBES data from Refinitiv.
Luckin’s store count stood at 2,963, about 1,000 fewer than Starbucks. By year end, Luckin aims to open 4,500 stores.
Tall order
Luckin’s rapid expansion is in stark contrast to Starbucks, which opened its first store in China in 1999 and spent two decades reaching its current store count.
The US chain was responsible for the rise of coffee drinkers in the largely tea-drinking country.
To stave off competition in China, Starbucks has signed a delivery partnership with Alibaba and last month opened its first express retail store — with a barista at the concierge counter to help customers with ordering and pickup — in a direct challenge to Luckin’s pickup-store format.
Luckin CEO Qian Zhiya said the company was on track to break even at a store level at every store during the third quarter because rising scale would it give it more bargaining power to lower input costs. Store level costs exclude marketing expenses.
Ben Cavender, Shanghai-based principal at China Market Research Group, cautioned that might prove to be a tall order.
“It’s difficult because they have trained consumers to only want to go to the stores when there are big discounts,” he said, adding that each store does not attract enough customers to cover cost of operations.
“Eventually they will probably have to cut non-performing stores and find a way to convince people that they have improved coffee quality along with slightly higher prices.”
Luckin has also expanded beyond coffee, allowing customers to buy food and other beverages via its app.
CEO Qian said Luckin recently launched tea products which could complement a fall in coffee sales in the afternoon and was testing feasibility of launching coffee vending machines in places such as small office buildings and gas stations.
The company said earlier it was also looking for partners to expand in other countries.


HSBC, StanChart shares fall to 22-year lows

Updated 22 September 2020

HSBC, StanChart shares fall to 22-year lows

  • Falls follow reports on movements of allegedly illicit funds; shares fall amid wider selloff in stocks

LONDON: HSBC’s shares in Hong Kong and Standard Chartered’s in London fell on Monday to their lowest since at least 1998 after media reports that they and other banks, including Barclays and Deutsche Bank, moved large sums of allegedly illicit funds over nearly two decades despite red flags about the origins of the money.

BuzzFeed and other media articles were based on leaked suspicious activity reports (SARs) filed by banks and other financial firms with the US Department of Treasury’s Financial Crimes Enforcement Network (FinCen).

HSBC shares in London fell as much as 5 percent to 288 pence, their lowest intraday level since 2009, after the lender’s Hong Kong shares earlier touched a 25-year low. The stock has now nearly halved since the start of the year.

StanChart dropped as much as 4.6 percent in London to its lowest since 1998, against the backdrop of a broader sell-off in the market with the STOXX European banks index down 4.8 percent.

More than 2,100 SARs, which are in themselves not necessarily proof of wrongdoing, were obtained by BuzzFeed News and shared with the International Consortium of Investigative Journalists (ICIJ) and other media organizations.

In a statement to Reuters on Sunday, HSBC said “all of the information provided by the ICIJ is historical.” The bank said that as of 2012 it had embarked on a “multi-year journey to overhaul its ability to combat financial crime.”

StanChart said in a statement it took its “responsibility to fight financial crime extremely seriously and have invested substantially in our compliance programs.”

Barclays said it believes it has complied with “all its legal and regulatory obligations, including in relation to US sanctions.”

The most number of SARs in the cache related to Deutsche Bank, whose shares fell 5.2 percent on Monday. In a statement on Sunday, Deutsche Bank said the ICIJ had “reported on a number of historic issues.”

“We have devoted significant resources to strengthening our controls and we are very focused on meeting our responsibilities and obligations,” a spokesperson for the bank said.

London-headquartered HSBC and StanChart, among other global banks, have paid billions of dollars in fines in recent years for violating US sanctions on Iran and anti-money laundering rules.

The files contained information about more than $2 trillion worth of transactions between 1999 and 2017, which were flagged by internal compliance departments of financial institutions as suspicious. 

The ICIJ reported the leaked documents were a tiny fraction of the reports filed with FinCEN. HSBC and StanChart were among the five banks that appeared most often in the documents, the ICIJ reported.

“It confirms what we already knew — that there are huge numbers of SARs being filed with relatively low numbers of cases brought through to prosecution,” said Etelka Bogardi, a Hong Kong-based financial services regulatory partner at law firm Norton Rose Fulbright.