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.


Frank Kane’s Davos diary: Swiss efficiency lapses, but so far Davos lives up to the cuckoo-clock image

Updated 22 January 2020

Frank Kane’s Davos diary: Swiss efficiency lapses, but so far Davos lives up to the cuckoo-clock image

Davos comes and Davos goes, but over the last five decades, the one thing you can rely on is Swiss efficiency, right? The trains run on time, the cuckoo clocks chime on the hour, and the snow is swept from the pathways within minutes of the first fake falling. That is the common (even cliched) view of the Alpine nation and its showpiece event, the World Economic Forum (WEF) annual meeting in Davos.

But — and whisper it very gently beneath your breath — maybe the legendary standards of Swiss efficiency are slipping as the WEF celebrates its 50th birthday. Evidence of a lapse from the highest levels of attainment came at Zurich Airport, when the luggage belt seized up inexplicably, and a full 10 minutes elapsedbefore a maintenance man came to attend to it. Tut tut.

Further signs of falling standards were on display at the railway station. The booking desks were besieged, as usual, by WEF delegates keen to complete the final leg of their journey up the Magic Mountain — a two-hour rail journey involving two stops at increasingly higher altitudes.

But only two of the 10 grills were manned, and the line grew longer and more grumpy with each passing minute. The mood was not helped when some trains were canceled and an extra hour was added to the journey. There was much muttering and dark looks shot when the train finally pulled into Klosters.

But thankfully, once you got to the heart of WEF-land, normal service was resumed. There had been a reasonable fall of snow that morning, which gave the place its usual fairytale appearance, but no traffic snarl ups as in previous years, when massive snowfall had caused the place to grind to a halt.

The shuttle buses that are the arterial life-channels of Davos — for those whose budgets do not extend to the black Mercedes limo — were running with their usual Swiss punctuality: Every 10 minutes or so, or even more frequently during peak rush hours.

These, in my experience over the past few years, are becoming frequently extended. Having battled through the registration process and attended one event at the nearby Seehof hotel, I imagined it would be easy to catch a ride on a virtually empty shuttle back to Klosters at around 9.30 p.m. But even at that hour, there was a long queue of unhappy souls waiting to make the same 20-minute trip to the other side of the mountain and their warm, welcoming hotel rooms.

It was the same thing on the opening morning of the annual meeting. I left my hotel — the homely and comfortable Cresta in Klosters — at 7 a.m. in the dark, and at minus 5 degrees Celsius. Again, there was a crowd of people standing huddled at the shuttle stop, shivering and stamping their feet.

The WEF shuttle service was up to the job, however, and I got into the Congress Hall with little trouble. The airport-style screening process — maybe a little more thorough than usual in view of the impending arrival of US President Donald Trump — passed smoothly. One request though: Please WEF, install some hot-air machines in the security hall. The body shock when you remove outer clothing to pass through the metal detectors was wicked.

Then down to business, which for a journalist at Davos means finding somewhere in the congress complex where you can rest a laptop while also providing a good people-watching vantage point. Over the years, I have learned that the Central Lounge — strategically located between the main plenary meeting halls and the (private) members lounge and bilateral rooms — is the perfect spot. Now, who will come my way in Davos 2020?