Luckin Coffee waters down its strategy

Shutterstock photo

By Pete Sweeney

(The author is a Reuters Breakingviews columnist.)

HONG KONG, Aug 14 (Reuters Breakingviews) - Luckin Coffee is watering down its strategy. Starbucks' money-losing Chinese rival burned through more cash in its debut quarter, as marketing costs popped. Now the $5.7 billion company is diversifying into tea, vending machines and the Middle East, suggesting wavering confidence in its original strategy. Shares quickly dropped 16%. Investors, though, are still on a caffeine high.

Last quarter's sales jumped sevenfold but the operating loss more than doubled to 690 million yuan ($100 million), worse than analysts expected. That's partly due to customer-acquisition costs rising sharply, after falling for five consecutive quarters.

There was good news. Costs per cup fell, and there were signs of improved efficiency and savings from economies of scale. Delivery subsidies declined to 0.8 yuan per item, down from 2.7 yuan the same time last year.

Still, a spike in marketing expenses implies that funds previously splurged on celebrity endorsements and the like failed to build loyalty. That stokes fears that fickle clients will ditch Luckin the moment subsidies wear off - a problem common to tech startups in the People's Republic.

The company is now rolling out a line of teas. That could be a fine hedge, but Luckin sold its investors on the growth opportunities in capturing new coffee drinkers in a country where annual per-capita consumption is still in single digits. Chinese people have been swilling tea by the bucket for centuries.

Luckin is also mulling expansion overseas, including in the Middle East. It is unclear what advantage the company might have in a region that's no stranger to coffee - but building tons of stores in foreign countries would provide management with another excuse to keep postponing profitability.

The stock dropped on Wednesday to around $20 per share. That still pegs the firm's enterprise value at more than 30 times sales, according to Refinitiv data, compared to 4.6 times for Starbucks. Whether Luckin's tweaks help it get out of the red sooner or later, it still tastes like the world's most overpriced coffee chain.

On Twitter


- Luckin Coffee on Aug. 14 posted a bigger than expected quarterly loss in its first results as a public company. Operating loss was 690 million yuan, compared to 343 million yuan in the second quarter of 2018.

- Net revenue surged more than sevenfold to 909 million yuan in the quarter ending in June. Operating expenses surged more than three times, as it opened 593 new stores taking its total to 2,963.

- The company projects net revenue between 1.35 billion yuan and 1.45 billion yuan in the next quarter ending in September.

- For previous columns by the author, Reuters customers can click on SWEENEY/

Earnings presentation

This article appears in: Stocks
Referenced Symbols: LK ,

More from Reuters


See Reuters News

Research Brokers before you trade

Want to trade FX?