Luckin Coffee (NASDAQ: LK), China’s technology-driven coffee chain in China, announced its unaudited financial results for the second quarter of 2019 on August 14, 2019. This is the first disclosed earnings report since luckin’s IPO this past May.
The report reveals many positives for the chain’s investors. Store-level operating losses in the second quarter decreased from RMB 81.7 million to RMB 55.8 million. Luckin CEO Jenny Zhiya Qian is pleased that the company is on track to reach its store level break-even point during the third quarter of 2019. The total net revenue from sales during the past quarter was RMB 870 million, an increase of 698.4% from the same quarter in 2018. There are multiple reasons why luckin has narrowed its losses and increased its revenue.
Customer growth
Luckin’s growth was largely driven by the significant transacting customer growth, which increased by 5.9 million during the quarter. The company strongly believes the Chinese coffee market is underestimated and has room to grow. To that end, luckin’s IPO filing report mentioned that the average person in mainland China drank only 6.2 cups of coffee in 2018, while the averages in the United States and Taiwan were 388 cups and 209 cups, respectively. Thus, luckin has continued spending on marketing and sales to attract more customers to try their high-quality but affordable drinks.
Store expansion
Unlike Starbucks China, luckin has expanded its kiosk-style store network extremely quickly. As of June 30, 2,741 out of 2,963 luckin stores were pick-up only according to the financial report. The chain’s low cost, and cashier-less stores cut its expenses and expedited its expansion. Moreover, the pick-up stores do not discourage customers. Instead, the widespread network offers customers added convenience as they only need to walk an average of 5 to 10-minutes to reach the nearest store.
Diversified product lines
China is a nation of tea lovers. As of 2017, around 500 million people reported drinking tea-based beverages, according to the China Tea Marketing Association. On July 8, luckin rolled out a series of tea-based beverages in about 3,000 stores across 40 Chinese cities. Guo Jinyi, co-founder and senior vice president of luckin, said that getting into the tea market is a visionary strategy that aligns with the consumption habits of young Chinese white-collar workers who favor both tea and coffee. He added that launching the new tea drinks was also a response to customers’ demands to increase the variety of luckin’s offerings.
Cross-border partnership
The financial report mentioned that luckin entered into a partnership with Americana Group on July 22, 2019. Americana Group is the largest integrated food product company in the Middle East. The new joint venture will launch a new retail coffee business in the Greater Middle East and India. Through this cooperation, luckin coffee aims to bring its leading technology and retail model from China to the world. On the other hand, Americana Group is very excited to bring the innovative customer experience and business model to its international market.
Outlook
On August 14, 2019, the Dow Jones dropped 800 points, the market’s worst day of the year, in response to fears about a global recession due to the slowing economies of China and Europe and the current trade war between China and the United States. It is understandable that investors are not very optimistic about lifestyle drink investments.
Reinout Schakel, the CFO of luckin coffee, suggested the company might respond by providing its customers with fewer promotions than it has over the last couple years. But according to luckin, the company expects next quarter’s net revenue from sales to be between RMB 1.35 billion and RMB 1.45 billion, which will further narrow its losses and allow the chain to surpass the store-level break-even point.
