How Luckin Coffee is challenging Starbucks success in China

Luckin Coffee reported Q2 2022 total net revenue of 3.2987 billion yuan, up 72.4% year over year from 1.9137 billion yuan, and operating profit turned positive. The chain added a net 615 stores in the quarter, reaching 7,195 locations, and same-store sales at self-operated stores rose 41.2%. Store count now exceeds Starbucks China.

The result contrasts with Starbucks, whose China same-store sales fell 44% and net revenue dropped 40% in the quarter reported on August 2, as pandemic controls hit food and beverage. Luckin's store-level margin reached 30.6%, and the company also announced senior management changes as attention turns to a possible board transfer.

Luckin Coffee's Q2 2022 financial report continued the strong momentum from the previous quarter: total net revenue grew by more than 70% year-over-year, operating profit successfully turned positive, and the store network expanded further, forming a sharp contrast with Starbucks' performance in China. Against the backdrop of the pandemic's impact on the food and beverage industry, Luckin not only narrowed the revenue gap with Starbucks, but also announced senior management changes, and the market is paying close attention to its prospects for a board transfer. This article will break down in detail the key figures behind Luckin's impressive financial report, the pace of store expansion, changes in revenue structure, and the competitive landscape it will face in the future.

For a long time, outsiders were used to calling Luckin Coffee the "Starbucks of China." But since achieving profitability for the first time in the first quarter of this year and surpassing Starbucks China in total store count, Luckin has taken the position of China's largest coffee chain brand. Another quarter has passed, and the company's performance remains eye-catching.

On the evening of August 8, Luckin Coffee released its Q2 2022 financial report.

The pandemic led some cities to implement stricter control measures, and the food and beverage industry therefore suffered a considerable impact. Starbucks' Q3 financial report released on August 2 is a microcosm of this: same-store sales in China plunged 44%, and net revenue shrank 40%, showing how heavy the blow to the food and beverage market was.

However, Luckin's Q2 report achieved a "counter-trend rise," not only further narrowing the revenue gap with Starbucks in the previous quarter, but also turning operating profit from a loss to a gain.

According to Luckin's new financial report, all major performance indicators maintained steady growth last quarter. Total net revenue reached 3.2987 billion yuan, a sharp increase of 72.4% from 1.9137 billion yuan in the same period of 2021; a net increase of 615 stores during the quarter; operating margin continued to climb; same-store sales at self-operated stores grew 41.2%; and store-level margin reached 30.6%.

In terms of store scale, as of the end of the second quarter, Luckin had a total of 7,195 stores, including 4,968 self-operated stores and 2,227 partnered stores. The pace of opening a net 615 stores in one quarter was far higher than the 107 new stores opened by Starbucks China last quarter.

On the revenue side, although the second quarter was affected by pandemic-related adverse factors, the average number of monthly transacting customers still reached 20.7 million, up 68.6% from the same period in 2021; revenue from self-operated stores was 2.3311 billion yuan, up 52.4% year-over-year; same-store sales at self-operated stores grew 41.2%; store-level profit at self-operated stores was 712.2 million yuan (about US$106.5 million), with a store-level margin of 30.6%, while in the same period of 2021 these two figures were 353.2 million yuan and 23.1%, respectively.

Turning to partnered stores, revenue in the second quarter was 777.5 million yuan, a sharp increase of 178.4% from 279.3 million yuan in the same period of 2021.

The financial report also showed that under U.S. GAAP, operating profit in the second quarter was 241.6 million yuan (about US$36.1 million), with an operating margin of 7.3%, compared with a loss of 47.5 million yuan in the same period of 2021. After excluding share-based compensation expenses, operating profit under non-GAAP was 342.6 million yuan (about US$51.2 million), with an operating margin of 10.4%.

Although Luckin's performance is advancing rapidly, the historical burden left by its previous financial fraud still needs to be repaid. The financial report disclosed that in the second quarter the company paid 276.8 million yuan in provisions for equity litigation parties and paid 101.8 million yuan in income tax expenses. Some industry insiders pointed out that expenses such as equity litigation are one-time items and have limited impact on Luckin's overall business.

Judging from this financial report, Luckin's main business has basically returned to the right track, and the market is paying close attention to its board transfer issue. Industry sources told the media that a board transfer requires meeting several basic conditions, including net assets, market value, tradable shares, a minimum share price of US$4 for 90 consecutive trading days, more than 300 shareholders, and at least three market makers. At present, Luckin already meets these conditions.

In addition, while releasing its financial report, Luckin also announced senior management changes: Ms. An Jing was appointed chief financial officer. Guo Jinyi said at the subsequent conference call that he looked forward to An Jing's joining in pushing Luckin's development to a new level.

The space in China's coffee market is indeed very broad, but as domestic coffee consumption education matures, local brands large and small are growing rapidly. With Luckin's return this time, its competitors are no longer only established players such as Starbucks, Tims, and Costa; it must also compete for the market with brands that already have scale, such as Manner and Seesaw.

Image source: Internet

For more coffee bean information, please follow Coffee Workshop (WeChat public account: cafe_style) For professional coffee knowledge exchange, please add WeChat ID kaixinguoguo0925

The above content is compiled by CoffeeHunters, a coffee news website.