A prominent Chinese coffee chain, Luckin Coffee, is making significant strides in expanding its operations into international markets. Following a meteoric rise in its share price—up approximately 271% over the last five years—the company has rebounded impressively since the fallout from a fraud scandal that resulted in its shares being delisted from the Nasdaq in 2020. Under new management, Luckin Coffee is now embarking on an ambitious international growth strategy aiming to compete with industry giants such as Starbucks.
The company’s recent financial performance showcases its recovery and growth trajectory. In the third quarter, Luckin reported a remarkable 50.2% year-over-year increase in net revenue, totaling $2.14 billion, thanks to the opening of 3,008 new stores primarily in its native market of China. Additionally, same-store sales surged by 14.4%, significantly outperforming Starbucks, which reported only 1% same-store sales growth globally in its latest financial disclosures.
Luckin’s strategy underscores its focus on convenience and efficiency, diverging from traditional coffee shop models. Rather than creating cozy gathering spaces, the chain has opted for an impersonal yet convenient approach, with a mobile app allowing customers to order and pay digitally. This model has resonated well with Chinese consumers, spurred on by promotional discounts that can reach between 30% to 50% off.
As it looks beyond China, Luckin plans to first enter culturally similar Asian markets, such as Singapore and Malaysia, before making a more aggressive push into the United States. In September, the company opened five locations in New York City, strategically situated in high-traffic areas like Midtown Manhattan. These locations are crucial for establishing brand visibility and attracting potential customers, particularly among the large demographic of Chinese students abroad who may already be familiar with Luckin’s offerings.
Funding for this expansion is bolstered by Luckin’s successful and profitable operations in China, which provides it with the necessary financial muscle to offer promotions that could attract new customers in international markets. Furthermore, the company is exploring potential acquisitions, including bidding for specialty coffee roaster Blue Bottle Coffee, currently owned by Nestlé, as part of its strategy to expand into the premium segment of the coffee industry.
Despite its positive momentum and growth potential, Luckin Coffee’s stock remains undervalued compared to its peers. Currently trading at a forward price-to-earnings ratio of just 15, Luckin’s valuation contrasts sharply with Starbucks, which stands at 36 times forward earnings, and the S&P 500 average of 22. Some of this pessimism may stem from Luckin’s status in the over-the-counter market, which is typically perceived as less regulated and less liquid. However, CEO Jinyi Guo is planning a relisting in the U.S. that could enhance the company’s market valuation, potentially leading to a substantial increase in share value over the coming years.
