Tag Archives: Luckin Coffee



Luckin Coffee (LK), the most rapidly growing retailer on the planet that we know of, lost $78M, 100M, and $82M in the first, second, and third calendar quarters of this year respectively. The market value of their equity is $8.4 billion at yesterday’s closing price. For those of you not familiar with the fundamentals, you can SEARCH for our writeup in mid 2019. Suffice to say that LK is building thousands of units annually in China, is losing a great deal of money currently, but has stated plans to leverage it’s the G&A and improve store level profitability within the next 12-24 months to the point of overall profitability.

We should interject here that we are neither long nor short this situation. We provide this commentary merely to present the possibilities, in terms of raising capital, when interest rates are suppressed around the world, producing “misallocation of capital”. We are not suggesting that LK is going to fail. The predictable prize in that regard goes to WeWork. It may well result that LK proves to be one of the wildly successful beneficiaries such as Amazon, and only time will tell.

The bulls and bears can debate the merits of this situation but management has clearly voted  that the stock is adequately priced for the moment. Though LK still had a couple of hundred million dollars in the bank as of 9/30, which should have been sufficient to turn cash flow positive within the next year or so, they have registered the sale of 12 million new shares, 7.2 million for the company and 4.8M for selling shareholders. In addition, they registered the sale of $400M worth of five year convertible bonds (no doubt convertible above the market price) and that was quickly upsized to $460M because of the demand. Tongue in cheek we say:  It’s easy to understand the appeal of this bond, because the expected interest rate, between 0.5% and 1.0%, is a lot more than the negative interest rate attached to well over ten trillion of sovereign debt that trades at a negative interest rate.

The bottom line: the management and Board of Directors of Luckin Coffee have appropriately decided that the $8.4 billion value of their equity is adequate for the time being, and it is timely to raise about $700M (call it a cushion) to pursue their ambitious growth strategy. If you are going to tell a story to the investment community, make it a good one. It’s a wonderful world !!

Roger Lipton



Luckin Coffee (LK), a Chinese company, came public on May 16, 2019, at $17.00 per share. It sold off immediately to $14.00, then rallied to $26 by the end of July, fell back and traded between $18 and $22 until last week when the stock rallied from $20 to almost $30 in the wake of their Q3 report.

Luckin is truly changing the world in terms of providing coffee, related products, and now tea to the Chinese public at bargain prices. The stores are more like kiosks or vending operations, with few operating personnel. These units require a capital investment a small fraction that of a Starbucks, a Dunkin Donuts or Tim Horton’s, and generate a fraction of the revenues. For example, a Luckin location, in Q3’19 generated about $65,000 for the quarter, increasing materially from about $50,000 in Q2 and $30,000 in Q1, as the brand has become more well established. As we described in our report back in May (which you can access through our Search function), Luckin is growing far faster than any retailer in the history of the planet. The first unit opened in late ’17, there were 2,083 units opened by the end of ’18, 3,680 locations at 9/30/19 and will be about 4,500 by 12/31/19.

Unit level profitability and the bottom line corporate return on investment, after corporate G&A support, of course represent the sustainability of this model. The chart below provides the reported corporate income statement, down to the Operating Loss which closely resembles the bottom line Net Loss, after other income, financing and foreign exchange adjustments, and other relatively minor items. The Company does not tell us the average capex per location, so we have divided the quarterly capex by the number of stores opened in the quarter, and find that the cost per store was about $70,000 in Q3, for some reason up from $51,000 in Q2, both numbers down substantially from $139,000 in  Q3’18. The highest number ($139k) was much earlier in the growth cycle when LK went from 290 to 624 locations. We are not drawing a current conclusion in terms of the cash cost going up from $50k to $70k recently, because the money spent relates not only to the stores just opened but also the upcoming locations. We conclude only that the average capex, in order of magnitude, is well under $100k, a great deal less than a typical competitive location. This relatively modest investment corresponds to the much lower sales/location, compared to a Starbucks, Dunkin, or Horton’s.

It is clear that Luckin intends to continue along its incredibly rapid growth path, even augmenting it with Luckin Tea locations that will involve operating partners/franchisees. They have stated that they will be profitable from a bottom line corporate standpoint by Q3’20. With over $700M in cash on the balance sheet as of 9/30/19, if a new location costs about $70k, without allowing for the continuing quarterly losses, that would allow for 10,000 additional stores. No doubt the $82M Operating Loss in Q3, with $15M of depreciation reducing the cash outflow to $67M. We conclude therefore that the resources are in place to continue opening at least 750 locations per quarter, which would bring the total at 12/31/20 to close to 7,000 locations  and perhaps 10,000 by 12/31/21.

It is instructive at this point to look at the numbers over the last three quarters.

You can see that expense line items are “leveraging” nicely, as one would expect with such rapid growth. Cost of materials have come down from 57.6% to 46.8%. Store Rental and Other “ have come down from 59.0% to 31.0%. Depreciation is down from 17.5% to 7.0%. Sales and Marketing are about the same at 35-36%. G&A is down from 36.1% to 16.0%. The reductions in Cost of Materials, Store Rental & Other, Depreciation, and G&A, have allowed the Operating Loss to be reduced substantially, from 110% of Revenues to “only” 38.3%.

The question is: where do we go from here, in the short run and longer term. We expect most of the expense line items to continue “leverage”, with the exception of Sales & Marketing, which the Company has said will remain “relatively high, returning to normal starting in Q3’20”. Overall however, with the Operating Loss have been reduced by almost $20M in Q3’19, it seems possible that  further leveraging of most expense lines could bring the Company close to breakeven by Q3’20.


The Company has said that store level profitability was 12.5% in Q3’19. We point out that: subtracting store expenses of 46.8% CGS, 31% from Store Rental, etc., and 7% Depreciation, leaves 15.2%, but there was an additional 1.5% of CGS, 1.0% Store Rental, and 0.3% of Depreciation that was apparently included in Sales or G&A that could have, or should have, been charged to four wall store operations, bringing the “store profits” down to 12.5%.

Whether the store level profit was 12.5% or 15.2%, revenues were supported by a huge 36.2% of revenues spent on Sales & Marketing. It’s possible also that some portion of G&A was directly supporting store level operations, so the “four walls” were heavily subsidized. We can’t help but conclude that it remains to be seen what the sustainable four wall economics of a Luckin Coffee look like. We are not saying it won’t work. We just don’t know.


The total market value of LK equity is currently about $6.3B, with the stock trading at $26-$27/share. There are about 240M shares outstanding, fully diluted. If we a assume that a very rapidly growing profitable retailer would have a P/E multiple of about 50x expected fully taxed earnings, the $6.3B valuation is discounting expected earnings of $120M after taxes, perhaps $160M pretax. Assuming the $83M Operating Loss can be reduced steadily by $20M per quarter, it would take 12 quarters to get to the $160M pretax earnings run rate. In that case, the current market value is something like 3 years ahead of the fundamentals.

We have no idea to what degree CGS, Store Rental, Depreciation, Marketing, or G&A can be reduced further. Most important, we have no idea what level of Sales & Marketing is necessary to create and hold brand awareness, market by market. We have no idea how successful the competition will be in resisting this insurgency. It is impossible to know how much further sales per location will build. We have no idea how well tea will sell within Luckin Coffee stores or how well the planned Tea partnered (“franchised”?) stores will work.

What we do know is that analysts and money managers will take each quarterly report apart, analyzing “the second derivative”, that is whether the “rate of unit growth or comp growth” is decelerating, whether the Marketing or G&A is leveraging or not, and whether the bottom line profitability (loss) is improving at the predicted rate. Investors are tolerant until they are not. Witness the investor  disillusionment recently relative to Uber, Wayfair and the most famous unicorn of all, WeWork. An example we have personally studied is Chewy’s (CHWY), a pet product supplier which we view as a very fine company with a compelling selling proposition, growing very rapidly but a couple of years away from profitability. CHWY has run up against a newfound concern about the exact timing, and extent, of profitability. After running from its IPO price of $23 in June’19 to a high above $35, CHWY has retreated steadily to $23. Though there has been no material disappointment in terms of progress. Investors have just decided that there is plenty of time to get involved with CHWY.


We are open minded. There is a possibility, for sure, that Luckin has invented, and will successfully exploit, a revolutionary approach to retailing caffeinated beverages and related products. At the same time, we read today that Bandit, a Luckin lookalike founded by an Uber veteran, is about to open its first store in Manhattan. It’s a big world, no doubt more than large enough to support many competitors in this space. Bandit is far from a threat, but we wouldn’t write off Starbucks, Dunkin or Horton’s,  each of which is capable of opening “express” locations. It will be interesting.

Roger Lipton

P.S. For what it’s worth, below is an article regarding Bandit, referred to above:

An Ex-Uber Employee Wants to Swarm NYC With ‘Mobile-Only’ Coffee Shops

Bandit’s first coffee shop in Midtown Bandit [Official]

A longtime Uber employee has his eyes set on New York City for another start-up: a “mobile-only” coffee shop.

The term “mobile-only” when it comes to food and drink is a bit of a misnomer. By nature, the new company called Bandit needs physical locations where people can pick up their coffee; there’s currently one at 466 Lexington Avenue between 45th and 46th streets. It serves a standard menu of cafe fare, like coffee, espresso drinks, and matcha lattes, plus seasonal specials like a peppermint chocolate latte. Pastries and other snacks come from Colson Patisserie and Three Owls. There’s life-sized Jenga and Connect Four.

But co-founder Max Crowley, who left Uber last year, is calling Bandit mobile-only because people can only buy coffee through a corresponding app — or as he tells Eater, “We are coffee at a push of a button.”

That means anybody showing up to the new coffee shop with only cash, a credit card, or a phone without an app store won’t be able to buy a latte until they download the Bandit Coffee app on an iPhone or Android phone, create an account, upload a profile photo (required so that the barista can recognize them), and put in a payment method. It’s similar to the first pickup-only Starbucks shop and the fast-growing Chinese company Luckin Coffee, which is the biggest competitor to Starbucks in China and the inspiration for Bandit.

Though there’s just one outpost now, Crowley plans to open at least five or six in the city or New Jersey within the next year. The goal: “We never want to be more than five minutes walking from someone who wants coffee,” he says. He’s targeting density in Midtown first, with hopes that there will be one “on every corner” soon.

Bandit’s cafe in a vacant space Bandit [Official]

Crowley’s banking on landlords with vacant spaces who might want a temporary coffee shop on their properties.

Instead of building out existing spaces, Bandit constructs its coffee shops in factories in Michigan and California, as 11 by 11 “modular, self-contained units.” (In a blog post, Crowley calls it one of the company’s “core innovations.”) They work with New York landlords who have vacant commercial spaces that have yet to be filled, and instead of a traditional lease, Bandit signs licensing agreements where the landlord gets a percentage of the sales for rent, a common practice for commercial tenants. (Crowley calls this “activating vacant spaces with modular, movable coffee shops.”)

The shop can be up and running within four hours, Crowley says, ideal for a landlord who needs a vendor fast. The same timeline could be applied to co-working spaces, hotel lobbies, or any store that wants a coffee component. When the landlord leases out the space to a longterm tenant, Bandit can hop out of it just as quickly.

The existing Lexington location, for example, is in a vacant space, and Bandit may eventually move out of it.

“We really see ourselves as flexible from a landlord perspective,” Crowley says.

A bonus for the customer, he argues, is that the coffee is “really good” and “cheaper than Starbucks,” possible because of lower build-out costs and roasting at Pulley Collective in Red Hook. Drip coffee is $2, cold brew is $3, and everything else goes up to $4.50. (A FiDi Starbucks charges $2.35 for a tall drip coffee and $4.95 for a tall eggnog latte, also before tax.) For frequent buyers, there’s also membership plan, where for $20 a month, members can get unlimited drinks for $1 a piece.

“It’s about speed and convenience, and at an affordable price point,” Crowley says.

Bandit [Official]

So far, Bandit has raised money from more than 30 investors, mostly Crowley’s fellow ex-Uber employees, though he declined to name the amount. He’s also partnered on the project with James Gallagher, who used to be COO at tech start-up Good Uncle, an app that delivers restaurant food to college campuses.

It’s a risky proposition — plenty of tech people have recently come into the food and drink world and quickly failed despite millions in investment and claims of innovation. Automated quinoa restaurant Eatsa, the supposed “robot” lunch spot, shut down, as have most of the tech-fueled delivery-only restaurants, like Maple, Ando, Munchery, and more.

And New Yorkers — particularly those working in Midtown, where Bandit is targeting — can already get coffee in under five minutes from third-wave coffee shops, bodegas, restaurants, and Starbucks, which has its own mobile app and tons of existing real estate. None of these places require downloading a new app to get coffee, and Bandit’s prices aren’t significantly lower than competitors.

Plus, there’s talk in New York about banning businesses that don’t accept cash. Many people also go to their coffee shops out of habit and proximity, and for now, by nature of the business model, Bandits will be in their locations temporarily.

But Crowley believes that Bandit is “the future of retail design and build.” He says people are already going to Bandit’s current location, with more than 60 percent of customers returning. (“Thousands” have downloaded the app, a spokesperson says, and “hundreds” of customers come in daily.) Some of the locations could eventually become permanent, too, with potential for the Lexington one to go in the lobby or elsewhere with the landlord, the real estate company RXR Realty.

And if the company expands quickly enough, Crowley thinks that Bandit will be ubiquitous enough that people will feel compelled to install the app on their phones.

“Our goal and model is to have these everywhere,” he says. “If Bandits are everywhere, it will make sense to [download the app].”



Below is our report from 4/24/19, the only ANALYSIS of Luckin’s operation that has been made public, to our knowledge. We’ve analyzed the store level economics below, such as they are at this formative stage. As we’ve described, if it’s a store it’s more like a convenience store than a retail store. It’s certainly not “experiential” which is one of the more necessary ingredients these days if you are going to satisfy public demand in a retail setting these days. Not everything is going to be ordered on Amazon and potentially delivered by a drone.

The presumed logic regarding Luckin Coffee as an investment is that it is a “data driven” food and beverage delivery company, more like a ‘cloud kitchen’, as one (excellent) analyst put it: “using technology to successfully reinvent the coffee market, something Starbucks can never accomplish with its asset heavy business model”.

Perhaps. First of all, while Starbucks is more asset heavy than Luckin, the Starbucks unit level economics are good enough that $857 million of Operating Income was delivered in the first quarter alone. There are other contributions to that number than the stores alone, but the stores are the base. Secondly, Starbucks has used technology extremely well, with their mobile app and loyalty program, to best serve the constantly evolving customer base.

Getting back to Luckin, they may change the world, like Tesla, Uber, Lyft, or WeWork (still private) might, just as Amazon has over the last thirty years. The equity marketplace has just provided Luckin with over $500 million to pursue that dream. However: they will go through most of that capital within a couple of years and it will be a race of capital availability versus fundamental progress. One of the reasons that Tesla, Uber, Lyft and even Theranos (“Bad Blood” is a great read) have raised so many billions is that investors (both equity and debt) have been forced to reach for performance and yield in a zero interest rate environment. There is still 11 trillion of sovereign paper selling at a negative yield and that will not go on forever.

There is no “right” valuation for the above listed unicorns, including Luckin Coffee. If any one of them becomes another Amazon, any valuation under $100 billion will prove to be attractive. For our money, however, it’s very much of a long shot.

Roger Lipton

Published 4/24/19


Conclusion: Short and Sweet: Pass

Luckin Coffee, Inc., domiciled in the Cayman Islands, operating in China, has filed a preliminary prospectus which indicates  an IPO of $100M. However, that number is supposedly just a “place holder”. The talk is about raising $700-800M, with a total market value of about $5 billion. The last capital raise, including prestigious investors such as Blackrock, reportedly valued Luckin at about $3B.

The Chinese are drinking increasing amounts of coffee, as evidenced by the rapid development of Starbucks in China, now with 3500 stores on the way to 10,000. In terms of store growth, though, that’s nothing ! The Chinese know how to do it right. Sixteen months ago, at 12/31/17 there were 9 Luckin Coffee locations. As of 3/31/19 there were 2,370. In Q1’18: 281 locations opened (that’s on a base of nine), followed by 334 new locations in Q2 followed by 575 new locations in Q3 followed by 884 in Q4. The growth has scaled back in Q1’19 to only 297 new locations. Not to worry: 2500 new stores are planned for 2019. Talk about a fire drill  😊 Who needs Starbucks when you will soon be able to participate in the growth of Luckin Coffee?

There are three types of Luckin stores: pick-up stores (91.3%), relax stores (4.6%), and delivery kitchens (4.1%). The dominant category, pick-up stores, are only 20 to 60 sq meters in size, with limited seating,  typically located in office buildings, commercial areas and university campuses. Relax stores are generally larger, more than 120 square meters in size. Delivery kitchens are often used to enter a particular market, only deliver, and are sometimes closed once other stores are opened. The 2370 stores are located in 28 cities across 16 provinces and municipalities Delivery was a big deal here at first, 61.7% of sales in Q1’18 and 62.2% in Q2, decreasing to 51.4% in Q3, 40.8% in Q4, and 27.7% in Q1’19.

There is a 200 page preliminary prospectus, plus exhibits, and we haven’t had time to read much of it yet, but the following summary financials provide a “flavor”. The good news is that, as you might expect, costs are being leveraged as Luckin grows out of its infancy. Financials are provided for calendar 2018 and the first quarter of 2019. Comparing the first quarter of 2019 to the full year of 2018, cost of goods is lower, store rental and “other” costs are lower, sales and marketing is a lot lower, G&A is lower, pre-opening expenses is lower, the (to be expected) loss as a percentage of sales is not much more than half of what it was for all of ’18.

Before reading the following paragraph: For those of our readers that are not familiar with line by line economics of restaurants, be aware that (generally) Cost of Goods runs about 30% of revenues, Labor (30%) and Other Operating  Expenses including Rent (20%), which would total to 80% of Revenues. Marketing might be as much as 5%, G&A might be 12-15% when a chain is growing rapidly, Pre-Opening expense could be 3-5% depending on how fast the growth is.  Pretax Income could be slightly positive, depending on G&A, Marketing and Pre-Opening, even at an early growth stage. Modest profitability for a young promising chain can become more meaningful as marketing & G&A are leveraged by the larger Revenue base. With this broad template, you can now see how far the operations of Luckin to date vary from the rough parameters of a successful restaurant chain.

Pay attention now: in Q1’19: Cost of goods was 57.6% of revenues, down from 63.3% for all of calendar ’18. (our template calls for 30%) Store Rental and Other costs (no cashiers but someone has to open and close and keep supplies in the right places) were 59.0%, down from 68.5% (template calls for Labor and Other to be 50%). Sales & Marketing was only 35.1%, down from 88.7% (template calls for under 5%). G&A was 36.1%, down from 45.2% (template calls for 12-15%). Pre-opening (with only 297 locations opened in Q1’19) was 4.7%, down from 11.6% (template calls for 3-5%, closest on this one). The loss of 110.2% of Revenues was emphatically lower than the 190.1% loss for all of ’18 (template calls for roughly breakeven). You read that right: The loss before taxes in ’18 was $238M against Revenues of $125M. In Q1’19 the loss before taxes was only $78M on revenues of $71M. (Maybe Luckin Coffee could merge with Uber.)  Talk about a “leap of faith”.

What’s going on here? These are almost entirely cashless pickup locations. Dividing $71M of sales in Q1’19 by an average of 2225 stores gives quarterly revenues of $32k or $128k annualized. I couldn’t find (yet) the average investment per store but $180M has been spent in capex between inception and 3/31/19 to build 2370 stores which is about $75,000 per store. This is a long way from Starbucks. This is more like a vending operation than a retail facility. It’s already being speculated that the rapid growth of Luckin will impact Starbucks comps in China. I like to travel, but it’s a long haul to Beijing, so I’ll speculate for now that the Luckin cashless pickup or delivery “experience” is a lot different than at Starbucks.

There are lots of details provided in 200 pages of a prospectus, including details about the growth in coffee consumption in China and management makes the point that the apparent cost of customer acquisition is coming down over the last fifteen months. The 54% retention rate of customers who try the product is encouraging as well. On the other hand, I divided the $125M of sales for all of ’18 by the average number of stores for the year, which I calculated at 785 (almost 900 opened in Q4) and that calculates to average annualized sales of $159k, versus an average annualized rate of $128k in Q1. There is a chart in the prospectus that seems to confirm that the customer retention rate is somewhat lower now than at first.  My estimates could be off, especially with unknown dates of opening and Q1 could be seasonally slow, but it doesn’t look like sales per existing store are accelerating. Granted: this is so early in the process that it is impossible to know what the long term model looks like. It is a sign of the times that this uncertainty hasn’t discouraged the private equity investors (at $3 billion) or the IPO underwriters with an apparent $5 billion valuation..

Getting back to unit level economics, aside from the investment per store, it doesn’t matter how small the capex/store, or even what your sales/store are, if your CGS is anything close to 57%, if your lease and other costs are anything close to 59%, if your sales and marketing are anything close to 35%, and obviously if your G&A is close to 36% (all of which will no doubt leverage to a degree with the inevitable growth).

Suffice to say: the jury is out on this one. I can’t know what the likelihood of success of this “concept” is. The Chinese like to construct residential towers, shopping malls, and cities that have almost 100% vacancy rates, planning to fill them out over time. Perhaps customers will fill out these vending facilities or retail stores (whatever you choose to call them) over time.

In terms of the valuation: Look at it this way. If the IPO valuation is about $5 billion, and we think about an aggressive valuation of 50x earnings, it would require $100M of after tax earnings to justify the IPO price. Considering that Luckin lost $78M pretax in Q1’19 and that rate of loss is no doubt going to accelerate as 2500 stores are going to be opened in calendar 2019, safe to say that it will be quite a few years before hundreds of millions of dollars of losses turn into $100M of after tax profits. Would you say: at least five years?  So the IPO valuation will be at least five years ahead of the fundamentals and that is assuming that the whole process is successful, and of that there is at least a little doubt. Of course, markets sometimes go to extremes, and momentum driven growth stock investors could take Luckin higher after the IPO and there could be some quick money made by nimble traders. But: be careful out there.  Case in point: Shake Shack, well managed with a far more predictable model than Luckin Coffee, came public in early 2015, at $21, a ridiculous valuation at the time, and ran to almost $100/share before it retraced to $30 where it sat for almost three years before the fundamentals caught up with the valuation, and those fundamentals have generally come through as planned.

One additional caveat and further sign of the times: There will be two classes of stock here. You wouldn’t expect that the Chinese would allow US shareholders to have equal voting rights, for their $700-800M capital contribution, as the Chinese founders, would you?

Conclusion: As you might suspect, we’ll follow with interest, but pass on the investment opportunity.  Harvard Business School should do a case study on this one 🙂