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Back on track: what is lying ahead for Luckin Coffee?

7 months after its financial fraud crisis, Luckin Coffee is seeing its stock price rise tenfold as it signed a $187.5 million letter of intent to settle a lawsuit with the US plaintiffs.

At the same time, onlookers are witnessing the new turn: Luckin is becoming more conservative. The chain opens fewer new stores, back to its speed in 2020 and earlier. As of June 30, 2021, the total number of Luckin Coffee stores reached 5,259 (including franchised stores), 75 stores fewer than in the end of 2019.

Inside one of the Luckin stores

Luckin's spending on marketing fell nearly by 30% throughout the entire 2020. At the same time, prices have significantly increased: from a heavily subsidized 10 RMB a cup in the beginning to above 20 RMB for the same cup today. As of November 2020, more than 60% of the company-owned stores were profitable at the store level.

Despite the shrinking marketing budget, some of the Luckin’s drinks saw an explosion in the sales. Since last year, some of the seasonal profucts such as iced eibock latte and raw coconut latte have went viral among urban youth customers. In June, raw coconut products sales exceeded 10 million cups in a single month, reaching 24.3 million customers a year.

Luckin’s Fraud scandal

Luckin, known for its hefty subsidies, went public in the US in 2019, breaking the record for the fastest public listing made by Chinese Internet companies. Just within six months, its market value has tripled to nearly $13 billion.

Luckin went public in the US in 2019

The coffeehouse company downfall came in 2020 when an anonymous report alleging company’s fraudulent accounting was revealed. After the months of struggle, Luckin admitted the falsifications in April, saying its total sales from the second quarter to the fourth quarter of 2019 was about 2.2 billion RMB.

Further, Luckin was delisted from Nasdaq, receiving US investors class action lawsuits. The whole management level of the company underwent drastic changes.

One year later, on September 21, 2021, Luckin issued three announcements consecutively, claiming that the company’s business was going well.

The announcement claimed that Luckin signed a $187.5 million letter of intent with the representatives of the US plaintiffs, and the two sides are expected to reach a settlement.

WSJ quotes Luckin Chairman and CEO Guo Jinyi who said that once final approval is granted, the settlement will allow Luckin to focus more on its operations and the execution of its strategic plan.

The $187.5 million compensation for the US class action lawsuit is well below legal estimates of a total of about $11.2 billion, making it a successful "bargain" for Luckin. In terms of the amount, the $187.5 million compensation is the second highest ever in a class action lawsuit filed in China. The highest case was Alibaba's $250 million settlement with the plaintiffs in a class action lawsuit filed under the US Federal Security law in 2019.

Can Luckin return to its old business model?

With the announcement of the settlement plan, some started to argue that Luckin is back on track, and the market is looking forward to its coming back. Luckin continued to trade on the Pink Sheets market after being delisted from Nasdaq in June last year. The announcement about the settlement has pushed the company's shares up nearly 10 times compared to their delisting price last year.

In the year after the fraud, Luckin opened hundreds of new stores and its overall revenue rose by 33 percent. The company reported net revenue of 4.034 billion RMB in the fiscal year of 2020, compared with 3.025 billion RMB in 2019. The revenue growth was mainly due to higher average selling price. The cumulative number of trade customers exceeded 64.9 million: an increase of 60% compared with the same period last year.

A delivery guy with the order from Luckin Coffee: the company has its own delivery app

At the same time, Luckin’s losses are growing too. It has lost 5,603 billion RMB in 2020 fiscal year, up 77.3 percent from 3.161 billion RMB in the previous year.

As of July 31, 2021, Luckin Coffee operated 4,030 self-owned stores, 1,293 franchised stores and 752 Luckin Coffee express machines in China.

According to this financial report, Luckin has gained a certain rebound after hitting the rock bottom. Although Luckin still needs capital and carries financial losses, it is certain returning back on the track.

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