Under the great doubt and pressure from the public, Luckin Coffee announced that it has finished its series B+ round of financing of USD 150 million, Blackrock, the leading asset management company lead the funding. After the funding, the latest valuation of this coffee magnate was USD 2.9 billion, which is about CNY 19.4 billion. People are surprised by the fortunate of Luckin Coffee, which could always receive extra money while keeping a staggering speed of losing money and expansion. EqualOcean wants to analyze the possible investment logic of Blackrock, and predict what will happen in the future.
Blackrock invested Luckin Coffee, which is a competitor of Starbucks
A valuation of CNY 19.4 billion is larger than 80% of the Chinese A-share listed companies. According to the latest statistics from Shanghai and Shenzhen Stock Exchange, there are only 576 of 3604 listed companies have a valuation larger than CNY 19.4 billion. Luckin lost more than CNY 800 million to open the stores and sell coffee. In early April, there even a rumor that Luckin would mortgage its coffee machine to pay for the debt. BlackRock, the world’s largest asset management institution, invested USD 125 million in the series B+ financing of Luckin. As the second largest institutional holder of Starbucks, BlackRock owns 820 million shares of Starbucks, representing 6.6% of the total share.
The latest share price of Starbucks is USD 75.12. From that, the total valuation of the Starbucks shares that held by Black Rock is about USD 6.2 billion, which equals to CNY 41.2 billion. BlackRock began to invest Starbucks before 2012. In 2012, the total Starbucks shares held by BlackRock was only 6.4 million. However, BlackRock kept longing more shares and in 2014, this asset management magnate held more than 40 million Starbucks’ shares and became the largest shareholder of Starbucks at that time. Starbucks was listed in Nasdaq in 1992. During the past 26 years, Starbucks’ stock made a great return for investors.
Blackrock focuses on long-term investment. As the largest asset management company in the world, Blackrock manages USD 6 trillion. Headquartered in New York City, Blackrock has 74 offices in 26 countries and its customers come from 60 countries. According to Laurence Fink, the CEO of Blackrock group, China has become one of the most important markets of Blackrock, and in the future, China owns lots of potentials.
Blackrock pays more attention to the Chinese market
It is worth noting that on April 17, 2019, Blackrock appointed TANG Xiaodong (汤晓东) as the chairman of Blackrock China business. TANG Xiaodong would be in charge of the management and development of the Blackrock’s long-term strategy in China. TANG will directly report to Geraldine Buckingham the chairman of Blackrock Asia-Pacific area. TANG said that China has the determination to further open its asset management business industry. Meanwhile, the investors have increasing requirements of the better management of their assets, which provide great opportunities for Blackrock. Currently, with the diversified investment platform, the advantages in information technology and the perfect building of portfolio, Blackrock is well prepared to offer service to the Chinese investors.
TANG used to work in the derivatives department of J.P. Morgan for several years. After that, TANG worked as the managing director of RBS Greenwich Capital. After going back to China, TANG used to work in the international department of China Security Regulatory Commission (CSRC) and Guangfa Securities. With his abundant working experience in both the U.S. and China, TANG is an ideal candidate for Blackrock to work as the chairman in charge of China area.
Blackrock has more than 13 thousand employees all over the world and it has already established a private equity fund in China. According to the Asset Management Association of China (AMAC), Blackrock has established two investment management companies in Shanghai, and offer QDII products to investors. The recent appointment of TANG might be a signal that Blackrock would pay more attention to the Chinese market.
Possible logic of Blackrock’s investment on Luckin coffee
According to statistics from Euromonitor, in 2017, the total market size of Chinese coffee industry was CNY 102.4 billion and the CAGR of this industry was 13% from 2011 to 2017. In the future, with the development of people’s consumption level and the penetration rate of the coffee culture, the market size will keep increasing. Meanwhile, caffeine can easily lead to addiction, which would generate a larger market requirement.
What attracts the capital is always the return ratio. For Blackrock, investing Luckin may not be in conflict with Starbucks investment. After all, the dividends from Starbucks’ stock can almost cover the investment to Luckin. According to Tiger Securities, Blackrock has thousands of funds that focus on different strategies and are operating in different areas. In addition, Blackrock also has a specific fund for the Asia-Pacific area and developing-market. The fund invested Luckin was a PE fund, and that is mutually independent of the fund that invested Starbucks. In terms of compliance, because of the existence of the Chinese wall, the hedge fund would give some research supports to the private equity fund, but they would not join in the decision process of investment.
As a long-term investor, Blackrock would never put all of the eggs in one basket. Comparing the Blackrock’s USD 6.2 billion investment in Starbucks with the USD 125 million investment in Luckin, Blackrock may want to testify that whether the business model of Luckin is doable in China. Starbucks offers brick-and-mortar experience, while Luckin has advantages on the last-mile coffee delivery service. Although Luckin has its own store, it’s used for people to pick up the coffee instead of enjoying it. All of Luckin’s stores are not as big as that of Starbucks and those small stores are targeting busy white-collars. Blackrock’s investment in Luckin is a kind of like sitting on the fence. Whether the Luckin coffee’s business model succeed in the future, Blackrock would not face a great loss.
The potential IPO of Luckin Coffee may be another factor that attracts the investment of Blackrock. According to Reuters, Luckin has already invited investment banks to prepare its possible IPO, including Credit Suisse, Goldman Sachs, and Morgan Stanley. In March, people familiar with the matter said to Reuters that LU Zhengyao (陆正耀), the director of Luckin, used to ask for a loan of USD 200 million from Goldman Sachs and Morgan Stanley. Blackrock, however, has a lot of great and perfect investment strategies in the secondary market. Once Luckin coffee has been listed, Blackrock could make use of its transaction techs in the stock market to guarantee its return. The pre-IPO investment also shows the confidence of Blackrock on Luckin.
Starbucks has successfully educated Chinese market and customers. For Blackrock, the best way to share the Chinese coffee market is by investing more Chinese coffee brands. According to the statistics data, the average number of annual coffee consumption per people in China is less than 10 cups, which is far less than that of developed countries, 200-400 cups. The huge distance shows the great potential of the Chinese coffee market. Although Starbucks has been successful in the industry, more and more other scenarios are waiting to be explored. According to the statistics, Luckin coffee though entered the market in the late time, its store numbers ranked 2nd place. Meanwhile, in the top 5 players of coffee market share, Luckin has the lowest unit price of coffee. Comparing with the consumer structure of Starbucks, Luckin has a younger consumer group. Around 48% of Luckin’s consumers are people under 24. Plus, Luckin’s stores are mainly located in the CBD area.
In conclusion, the fundamental reason why Blackrock invested Luckin is that Blackrock agrees with the Luckin’s Internet + coffee business model, and has confidence in the Chinese coffee market in the long-term. The rapid expansion of Luckin coffee could make it easy to find the targeting consumers – white collars that are always busy and need coffee to be refreshed. Luckin would greatly promote the convenience of coffee orders with the combination of the logistics service.
Luckin Coffee’s strategy: Endless occupying of the coffee market
Luckin spent almost all of its financings on the expansion of its stores. With the subsidy policies and a low-price strategy, Luckin keeps losing money. From Jan 2018 to Sep 2018, the total revenue of Luckin coffee was CNY 375 million, while the net loss of Luckin was CNY 857 million. We could simply do some calculations to judge the loss of Luckin. In the first 9 months of 2018, Luckin sold 85 million cups of coffee which generated CNY 375 million revenue. In this way, after the subsidy policy, the average price of Luckin coffee would be CNY 4.4 per cup. On the other hand, the total cost of Luckin coffee is CNY 27.3, which means that Luckin lost almost CNY 23 by selling one cup of coffee.
On the other hand, Luckin spent a lot of money on opening more stores. According to Luckin, it would open more than 2,500 stores in 2019, and the total store number would be more than 4,500. Then Luckin would be the largest coffee brand in China. On Apr 10, 2019, Luckin published “Xiaolu Tea”, a tea sub-brand of Luckin. The “Xiaolu Tea” is regarded as an important strategy for Luckin to beat Starbucks in the Chinese market.
According to the annual report of Starbuck, by the end of Sep 2018, Starbucks has 3,521 stores in China, while in the world, Starbucks has 15,341 stores.
With Luckin’s endless expansion, the Chinese coffee market would be occupied by Luckin quickly. Currently, Luckin is in a stage of rapid development which requires a large amount of money. With the successful completion of its series B+ financing, Luckin got a strong prop which could support its expansion. Once Luckin opens more than 4,500 stores, the scale effect may bring huge financial profits to Luckin. In this way, the series B+ round of financing is of vital importance to Luckin.
Future: Blackrock, Luckin coffee, and coffee industry
The importance of the series B+ financing of USD 150 million is not only the money itself but also the endorsement from the mainstream investors in the U.S. Though Luckin keeps losing money, but this company becomes more and more active in the U.S. society. The Chinese coffee market has great potential. With its great yearly increasing rate, it is expected that by 2025, the Chinese coffee market would be more than CNY 1 trillion. Pepsi Cola’s experience proves that the entering of another giant player may not split the market but promote it. The increasing coffee market brings a bright future for both Luckin and Starbucks, and we assume that is one of the reasons why Blackrock invested.
Luckin might be the most suitable target for Blackrock to invest. Luckin has a high-efficiency execution team which provides great convenience to the customers. Luckin officially started its business on May 8, 2018. However, with the support of capitals, Luckin has more than 2,000 stores all over the country currently, which let the company exceeded Costa and ranks 2nd place of China. A strong execution team means a lot, especially for start-ups. Meanwhile, after the investment, Blackrock could help both Starbucks and Luckin to improve the efficiency and lower the cost with the better of the upstream and downstream of the supply chain of the coffee industry.
After the B+ round of financing, Luckin still has a long way to go. For one thing, Luckin needs to control the quality of its products and always take users' experience into consideration. For another, it becomes increasingly hard to manage more and more stores. Hence, the operation management of Luckin must be promoted, including the training of new employees, the increasing workload for managing teams, etc.
Luckin’s development changed the situation that Starbucks dominates the Chinese coffee market. Although there’s a great potential of the Chinese coffee market, more and more competitors are entering into this industry, including Hey tea, NAYUKI, and even Red Book. With the competition in the coffee market and more and more different coffee brands, people’s requirements of coffee in different scenarios, different channels, different consumption levels would be met. According to ZHU Danpeng (朱丹蓬), the industrial analyst in China Foods, it is estimated that after 5 years, the Chinese coffee market might enter a relatively stable stage.