Whether the USD 500 million expected to be raised from IPO will save Luckin before the company runs into a cash crunch remains uncertain, but we can at least find signs of improvement to its financial condition.
On May 7, 2019, Luckin Coffee (瑞幸咖啡), widely considered as Starbucks’ archrival in China, updated the F1 Form that it had filed with the US Securities and Exchange Commission (SEC) for its IPO on NASDAQ. It plans to go public on May 17 and looks to offer 34.5 million American Depository Shares (ADS) priced between USD 15 and USD 17 per ADS. If successful the IPO will boost the coffee startup’s valuation between USD 3.48 billion and USD 3.95 billion.
The ADS Luckin offers are 30 million shares initially, but it could be raised if underwriters take up the additional allocation of 4.5 million shares. So, the listing could raise a total of USD 586.5 million if the full offerings are bought at the top of the quoted price range.
In the filing, Luckin also announced that the number of directly operated stores reached 2,370 by March 31, 2019. And it detailed plans to open an additional 2,500 stores in the country by the end of 2019, surpassing Starbucks, which operates more than 3,700 stores in China. Starbucks is the largest player in China's coffee market by sales and market share but its position is far from secure as Luckin Coffee is mounting a formidable challenge to the Seattle-headquartered beverage giant in this region.
However, Luckin Coffee’s fast expansion has hinged upon a cash-burning game involving handing out heavy discounts and subsidies to consumers. This has drawn lots of criticisms because it generated a huge loss in the company’s balance sheet. According to the financial data revealed by Luckin in 2018 and the first quarter of 2019, the company posted a net income of CNY 840 million in 2018, with a net loss of CNY 1.62 billion. Its net income as of March 31, 2019, stood at CNY 480 million, while the net losses amounted to CNY 550 million for the same period.
From the point of store expansion, Luckin Coffee has also announced three types of stores in its expansion system, the Luckin Pick-up, the Luckin Relax, and the Luckin Kitchen. they number 2163, 109 and 98 respectively. The Luckin Pick-up, which accounts for 91% of all the stores, is no more than 60 square meters in size and within a 500-meter radius of densely populated areas. The Luckin Relax (4.6% of the total) is more than 120 square meters, functioning as a brand image promotion store. The Luckin Kitchen (4.1%), which processes delivery orders only, works like a transition-stage store designed to reach out to more customers. The Luckin Kitchen will gradually be replaced by the Luckin Pick-up or Luckin Relax after achieving a higher penetration in the specific region, according to the filing. The Luckin Pick-up, which has a lower store-opening cost and a higher turnover rate, will struggle to decrease the cost in rent, operation, administration, and customer acquisition cost.
Will this USD 500 million expected to be raised from IPO save Luckin before the huge net loss jeopardizes the company's cash flow? We can’t tell for now, but we at least can find some positive developments regarding its financial condition.