Luckin Coffee Or Starbucks?
There are certain ironies to this case of fraud. For example, there is the name of the company: Luckin Coffee. I will let it pass without comment. However, I imagine the investors undoubtedly uttered a variation or two of the name when they realized what happened.
Former COO – and then Some
The former COO of the would-be Chinese contender to Starbucks, Luckin Coffee, was Jian Liu. Liu has apparently disappeared. According to SEC details, Liu “may have inflated revenues of the company by an early estimate of more than $300 million. Expenses are believed by the board to be similarly inflated.”
The company’s marketing concept is actually clever. Operating solely by a phone app, the company had pick-up locations only; no drive-thru’s or “lobbies.” The varieties of the drinks and the quality of the beans are virtually identical to Starbucks. The chain has supplanted Starbucks in many of the Asian markets.
However, the fraud perpetrated by the COO led the price of the stock to dive more than 80 percent, and the market cap went from approximately $4 billion to about $1billion. To make matters worse, according to the Wall Street Journal (April 6, 2020) “Banks stand to lose more than $100 million from a loan they made to the chairman of Luckin Coffee Inc., whose share price plunged after the Chinese coffee chain said much of its 2019 sales were fabricated.”
Then there is the margin loan extended bank credits to Luckin Coffee Chairman Charles Zhengyao Lu to the tune of $518 million. Major investors are trying to salvage anything they can from the situation.
Rally ‘Round the Flag
Despite the widespread fraud, customers are remaining blindly loyal as more ethical businesspeople have entered the situation. The Chinese news network SupChina reported:
“On Chinese social media, most individuals — especially loyal customers of the coffee chain — were unfazed by the scandal, saying that they would appreciate every second of Luckin while it lasts. ‘As someone living on a limited budget, I don’t care about whether the company’s financial practices are illegal or not. I just don’t want to lose an affordable alternative to Starbucks.’”
The affordability factor, in addition to nationalism, fueled Asian growth, but reportedly even that was seen to be a scam. The company practiced heavy (and apparently) unsustainable discounting – including free coffee and discounting, to keep its numbers inflated. Luckin Coffee also made use of couponing that offered amazing bargains on certain drinks.
The large pool of unclaimed coupons may eventually threaten the company to seek bankruptcy protection. Customers may love the coffee drinks but only so long as it is cheap. However, the bigger ethical questions have not been fully answered as of yet.
The Luckin coffee organization was not listed on a Hong Kong Exchange but on NASDAQ. As a result, they had to follow the accounting rules of the U.S. In fact, Luckin raised $650 million on a IPO in this country. The stock was heavily traded among investors and brokerage firms. Presumably, there were certified auditors who should have been savvy enough to have spotted some significant irregularities. They didn’t – or couldn’t.
Despite the massive numbers and market valuation the fraud in this case followed typical and painful ethical paths: an unethical COO, president and presumably their accountants, duped investors.
Whether the lack of oversite was based on a knowledge of blind nationalism or simply a drive to get cheap, quality coffee is a moot point. The executives had a need for money and they took it. Those who rationalize the company’s behavior in favor of cheap coffee is not the issue. The issue is whether unethical behavior matters.
LEAVE YOUR COMMENTS!
