Luckin’s Q2 Surge Narrowed the Gap With Starbucks China

This is an English adaptation of a FoodBud historical article originally published on August 8, 2022.

On August 8, 2022, Luckin Coffee released its second-quarter 2022 results. While Starbucks China was reporting a steep decline, Luckin continued to grow quickly. One investor quoted by FoodBud said the numbers “did not look like those of a mature company.”

Luckin’s Revenue Was Approaching Starbucks China

Luckin reported second-quarter revenue of RMB 3.3 billion, up 72.4% year on year.

By comparison, Starbucks China had been under heavy pressure. From the fourth quarter of the prior year, its revenue had declined for three consecutive quarters, falling by nearly half. Starbucks China’s second-quarter revenue was USD 540 million, equivalent to about RMB 3.6 billion, leaving Luckin close to catching up in revenue scale.

Store Expansion Continued Despite Temporary Closures

Luckin added a net 615 stores in the second quarter. By the end of the quarter, it had 7,195 stores in total:

• 4,968 self-operated stores
• 2,227 partnership stores

COVID-related restrictions still disrupted operations. In April and May, Luckin temporarily closed around 900 stores per day on average. As restrictions eased, average daily temporary closures fell to about 152 stores in June and about 96 stores in July.

For Starbucks, the immediate management focus was still on reshaping the U.S. business, including employee relations, organizational management, and front-store upgrades. Founder Howard Schultz had also said on an earnings call that pandemic conditions in China made it difficult to judge the market’s trajectory for the second half of the year.

In China, Starbucks’ new-store growth remained weak, while local coffee chains continued to expand. Beyond Manner and other coffee brands, many tea-drink chains were also entering coffee, intensifying competition in the category.

Debt Restructuring and Management Changes

After completing its debt restructuring in the first quarter, Luckin made material progress on overseas shareholder class-action matters. Its U.S. federal class-action settlement had recently received final approval from a U.S. federal court, releasing most of the potential risk tied to overseas shareholder litigation.

Luckin also appointed An Jing as its new CFO. Former CFO Reinout Schakel moved to the CSO role after completing what FoodBud described as his historical mission. Before joining Luckin, An Jing served as CFO of 58 Daojia from 2016 to 2022.

Q2 Operating Highlights

Self-operated store revenue reached RMB 2.33 billion in the second quarter, up 52.4% from RMB 1.53 billion in the same period of 2021. Same-store sales at self-operated stores increased 41.2%, while Starbucks China’s comparable-store sales fell 44%.

Store-level profit at self-operated stores was reported as RMB 712 million in the second quarter, with a store-level margin of 30.6%. In the same period of 2021, store-level profit was RMB 350 million, with a 23.1% margin.

Revenue from partnership stores was RMB 780 million, up 178.4% from RMB 280 million a year earlier.

Product Sales

Product sales revenue was RMB 2.5 billion in the second quarter, up 54.3% year on year. Freshly brewed drinks generated RMB 2.26 billion, accounting for 68.4% of total revenue, down from 76.1% in the same period of the prior year. Other products contributed RMB 116 million.

The Coconut Cloud Latte, launched in April, sold more than 24 million cups during the quarter and contributed RMB 400 million in store revenue. The Coconut Latte series had sold more than 100 million cups cumulatively. Luckin averaged 35 new product launches per quarter, and nearly 30 products had each sold more than 10 million units.

Average monthly transacting customers reached 20.7 million in the second quarter, up 68.6% year on year.

The sharp increase in partnership-store revenue was mainly driven by RMB 500 million in raw-material sales to partnership stores, RMB 100 million in sales commissions, RMB 89.4 million in equipment sales, RMB 77.5 million in delivery services, and RMB 5 million in other services.

Costs, Impairment, and Capacity

Second-quarter raw-material costs were RMB 1.26 billion, up 66% year on year. Store rent and other operating costs were RMB 660 million, up 41.8%. Depreciation and amortization were RMB 97.2 million, down 14.8%. Delivery expenses were RMB 300 million, up 67.4%.

Long-term asset impairment losses were RMB 220 million. FoodBud attributed this mainly to management’s strategic update for Luckin’s unmanned coffee-machine business, “Ruijigou,” which was considered underperforming and therefore fully impaired.

Luckin had previously built its first roasting plant in Fujian. In the second quarter of 2022, it began building a second roasting plant in Kunshan. The article states that both plants were designed with daily capacity of 30,000 tonnes.

At quarter-end, Luckin had RMB 4.47 billion in cash and cash equivalents.

Note: IPO, litigation, forward-looking and financial figures are historical, based on the August 8, 2022 article.