The tech-powered coffee chain may soon be ready for another public listing.

After Muddy Waters disclosed its 80-page-long report and Luckin Coffee (LKNCY) admitted that its 2019 sales were inflated by CNY 2.20 billion ($309 million), the Chinese coffee pioneer went on to achieve positive revenue growth despite the expected surge in its settlement fees and continued operating losses. More financial data from Luckin will be worth paying attention to in the near future. 

Unexpected Revenue Improvement

On Sept. 21, 2021, Luckin Coffee filed its annual report of 2020 with the US Securities and Exchange Commission (SEC), which took much longer than many market participants anticipated. Although the fraud in 2019 astonished the China tech world and the company was expected to experience a wide range of store closures and steep revenue decline, its 2020 results surprisingly improved.

In the consolidated financial statement, the previous inflated revenue of CNY 5.10 billion in 2019 was adjusted to CNY 3.02 billion. The net revenue in 2020 reached CNY 4.03 billion, a 33.3% growth rate year-on-year. Operation expenses rose by 6.2%, which was largely contributed by the CNY 475 million of losses related to fabricated transactions and restructuring, reaching a total of CNY 6.62 billion.

The company continued to be loss-making, with a net loss of CNY 5.59 billion. Yet, the figure includes CNY 2.40 billion of provisions for settlements (for SEC & equity litigants). The non-GAAP net loss, which ignores the above-mentioned expenses, was CNY 1.97 billion, an improvement from a CNY 2.79 level in 2019.

Business Expanded Despite Upheavals

Another surprise came from Luckin's growing store number under the cloud of fraud, COVID-19 lockdowns, delisting, and management team upheavals. As of July 31, 2021, the firm had 4,030 self-operated stores and 1,293 partnership stores. The former store type almost stayed unchanged (from 3,929 in 2019) in terms of numbers while the latter increased by 47.9% from 2019.

The report also shows that the coffee chain closed many under-performing stores, most of which were self-operated. This might be a hint for the brand's determination on cost-saving and a switch to a franchise model. With the closing of stores, Luckin was no longer larger than Starbucks (SBUX), but the coffee brand is still the second-largest since no other coffee chain can surpass it yet in terms of the number of stores.

Amid Intensifying Competition, Self-Operating Store Expansion Failed to Improve Per-Store Revenue

Though it was actively scaling up its business in previous years, evidence shows this strategy did not lead to improvement in per-store revenue for Luckin. In 2020, this problem was still haunting the coffee brand, as its intensive growth factor for self-operated stores (revenue per store per day) significantly underperformed, going negative (-10.1%).

Nonetheless, the company's structural adjustment to focus on franchising might be promising, as the intensive growth factor (+106.5%) for partnership stores approached the extensive growth factor (+146.6%), implying that the brand's attempts in opening more partnership stores was advancing side by side with improvement in unit economics.

Chinese consumers, especially those from first- and second-tier cities, have developed a habit of drinking coffee, providing a fertile ground for the enlargement of the fresh-brewed coffee market.

Interestingly, brought up by the trend the success of Luckin created, novel domestic coffee brands such as Manner have started to emerge, and foreign coffee houses such as Tim Hortons that covet China's coffee 'blue sea' have entered as well. Soon, Luckin should expect an even more competitive industry landscape.

In addition, the company was relying heavily on its coupons to acquire customers and expand its business. In the short-term, this strategy is cash-burning and requires a vast capital backup, and in the long-term, it may be unsustainable if their products are not favored by the target consumers, especially now that company is delisted.

Last Notes

Yet, Luckin's omnipresence in China is still unchallenged by other native and international brands, except for Starbucks. Business-wise, it seems the firm is also reacting to the sustainability problem by cutting down its coupon expenses.

In 2020, its sales and marketing expenses took up only 13% of the total expenses compared to 20% in 2019 and 31% in 2018. With opportunities yet to be explored in this coffee blue sea, it would be interesting to track the future release from this troubled Chinese coffee leader that survived all the internal and external adversities.