Luckin Coffee, which claims to be the direct rival of coffee veteran Starbucks, was in hot water last week after Muddy Waters received an 89-page anonymous report alleging the company with several instances of fraud and the firm said that it finds the evidence credible.
The report was posted by the investment firm last Friday and said it finds credible, claims the number of items per store was inflated by at least 69% in Q3 of 2019 and 88% in Q4. The document said its evidence is supported by more than 11,200 hours of videotaping. According to the writers of the report, they used 92 full-time and 1,418 part-time staff to run surveillance and record traffic in 620 stores.
In response to the allegations, the company said in a press release yesterday that “Luckin Coffee firmly stands by its business model and is confident that it will benefit from the strong growth of China's coffee market in the future." It further added that "Luckin Coffee's pioneering business model has enabled the Company to become the leading and fastest-growing player driving coffee consumption in China."
Shares recouped some of their losses, to close down 10.7% after Muddy water research rival firm Citron Research said it also received the report but expects that it will “fall short on accuracy.”
After shares fell 3.3% to 31.43% on the stock market yesterday, Luckin Coffee rose as high as 35.06 USD intraday. The IPO stock is highly unprofitable but is still showing tremendous sales growth.
Luckin Coffee stock fell 10.7% on Friday and 20% for the week, well below the 50-day and 10-week lines, a strong sell signal.
The drops come at a time when China is being struck with the coronavirus epidemic, which has weighed on the broader market, hitting Chinese companies hard.
Luckin was founded in Beijing in 2017 and went public after two years, in May 2019, raising roughly USD 571.2 million in its IPO. The coffee chain aims to reduce cashier-customer interaction by handling the entire purchase process through its apps. More than 90% of its units are pick-up stores around office buildings, and universities to target its millennial customer base.
Figures from the company show that it has rapidly expanded its small store footprint, taking the market towards online ordering, across China. This month, Luckin said it had 4,507 ‘self-operated’ stores at the end of 2019, whereas Starbucks had 4,292 stores in China as of the end of the fiscal fourth quarter.
With thousands of shops closed, Starbucks warned that the coronavirus outbreak could hurt future results. Its stock fell by 7.8% last week.