Luckin Coffees Earnings Weighed Down By Costly Battle With Starbucks

Luckin Coffee Inc posted a bigger-than-expected quarterly loss in its first results as a public company, hurt by soaring costs as it opened stores at a rapid clip and invested aggressively to take on Starbucks Corp.

Luckin’s U.S.-listed shares, which have gained about 44% from its May IPO price, tumbled 15% to $20.84 by 1415 GMT on Wednesday.

Luckin has gone toe-to-toe with Starbucks in China since it opened its doors early last year and the results highlight the Chinese company’s high cash-burn rate as it offers cut-price alternatives.

Luckin’s operating expenses surged more than three times in the June quarter, as it opened 593 new stores taking its total to 2,963, about 1,000 fewer than Starbucks.

On an adjusted basis, Luckin lost 48 cents per share. Analysts expected a loss of 43 cents, according to IBES data from Refinitiv.

In a conference call, Luckin’s CEO Qian Zhiya said the company is on track to reach store level break-even point during the third quarter of 2019, after a 55.8 million yuan operating loss in the second quarter, “thanks to better bargaining power due to scale benefit, and higher store level sales.”

Ben Cavender, Shanghai-based principal at China Market Research Group, cautioned that might prove a tall order.

“It’s difficult because they have trained consumers to only want to go to the stores when there are big discounts,” said Cavender.

“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.

Qian said the company is also testing feasibility of launching coffee vending machine business in places such as small office buildings and gas stations.

Last month, it signed a preliminary deal to set up a joint venture with Kuwait’s Americana Group to launch a coffee business in the Greater Middle East region and India.

Charles Lu, Luckin’s non-executive chairman, said the company is also talking to potential partners in other parts of the world.

“We believe our business model can be applied to other parts of the world. We wouldn’t rashly do it ourselves, we look for good partners,” he said.

Starbucks competition

Luckin’s rapid expansion is in stark contrast to Starbucks, which opened its first store in China in 1999 and has spent two decades reaching its current store count.

The U.S. chain, responsible for the rise of coffee drinkers in largely tea-drinking China, has witnessed a sharp rise in competition over the last two years and Luckin stands out as its most aggressive rival.

Starbucks has countered with a coffee-delivery partnership with Alibaba (BABA.N) 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.

Analysts reckon both coffee companies will soon see more competition from smaller rivals.

“At home Luckin is facing increasing competition both from quick service restaurant brands like KFC that are placing greater emphasis on coffee, as well as smaller chains like Manner Coffee that are using somewhat similar business models to interact with the consumer,” said Cavender.

Luckin’s total net revenue surged more than seven-fold to 909.1 million yuan in the June quarter.

For the current third quarter, it expects revenue between 1.35 billion yuan ($192.4 million) and 1.45 billion yuan. Analysts were expecting revenue of $229.4 million.

Reuters