7 things everyone is getting wrong about the Luckin Coffee IPO

Luckin Coffee has filed for an initial public offering, and we finally got to see its numbers. And yes, there are red flags all over the place: big operating losses, funky corporate structures, speculative revenue growth, and so on.

Photo credit: Luckin Coffee

This is not uncommon in a tech/internet IPO, but I don’t recall ever seeing this picture in a retailer. The filing has lots of details about tech and financing/legal structures, but not much about actually selling coffee. Has a retail coffee company ever offered dual-class shares before?

Overall, I didn’t see any real surprises in strategy or execution. And based on that, here are seven things I think people are getting wrong about Luckin and its IPO.

1. Chinese consumers may not like coffee that much.

The whole company is predicated on a big opportunity to increase mass-market coffee consumption in China, and the filing is very clear about targeting three pain points to make this happen.

It states that freshly brewed coffee consumption growth in China is limited by inconvenience (not ready to drink), high price, and variations in quality, hence the company’s strategy of building a huge network of outlets (more convenient), offering easy ordering by smartphone, and standardizing quality. It says this will solve the main pain points and increase mass-market coffee consumption.

Low price plus increased convenience is a common strategy in the digital world. Bike-sharing (Mobike) was based on this. Ride-sharing (Didi, Uber) is mostly about convenience. Airbnb is mostly about low price (plus convenience).

If Luckin’s strategy works and it sees an increase in coffee consumption in China, its numbers will all start to look great. It is, in fact, a massive opportunity.

However, if something isn’t happening, there’s usually a reason why. Coffee consumption has been very low in China for a long time. Sometimes, low demand means consumers just don’t like it. Taco Bell has failed twice in China because Chinese consumers don’t like Mexican food that much. Krispy Kreme failed because it was too sweet. In both cases, Chinese consumers tried their products and decided they just didn’t like it that much.

So what if Chinese consumers just don’t like coffee that much (which is what the numbers kind of show today)?

The numbers I was looking for in the IPO filing were for overall traffic and same-store sales – typical retail stuff. But I didn’t really see them. Is traffic increasing? Is it falling? The overall customer traffic from Q4 2018 to Q1 2019 looked basically flat, despite lots of new store openings.

That is not good.

We’ll see.