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BloombergBusinessweek August 3, 2020longforCartobecomeChina’slargestrentalprovider.In
2013 it confirmeditsdominanceina complexdealwithHertz
Corp.,whichboughtroughlya 20%stakeinthecompanyand
mergeditsownmainlandoperationsintoit.Carwentpublicon
theHongKongexchangein2014.Butby2016,Hertzhadsold
thebulkofitsholdings.Ludidn’trespondtorecentrequests
forcommentamida collapseinCar’sshareprice.
Inlate2017,Luinviteda groupofjournaliststotheBeijing
officesofUcarInc.,a ride-hailingservicehe’dspunofffrom
Car.ThereheintroducedJennyQian,a longtimeexecutive
withCar.Qiantoldthegroupthatherlongworkdayshad
turnedherintoa coffeefanatic—andconvincedherthatmore
Chinesewouldbecomefanaticalaboutcoffee,too,if onlyit
weremoreaffordableandmoreconvenientthanit wasatthat
othercoffeechain.Qianwouldbecomechiefexecutiveofficer
atLuckin,a newventurewhosegoal,shesaid,wasto“defeat
Starbucks”intheworld’smostpopulouscountry.
PersuadingChineseconsumerstodrinkmorecoffee—orany
atall—hasproveda frustratingpursuit.Starbuckshasbeentry-
ingeversinceit openeditsfirstcafeinBeijingin1999.Nowit
operatesmorethan4,000.Butin 2018 annualpercapitacoffee
consumptioninChinahadreachedjustaboutsixcups, com-
pared with more than 200 cups in Taiwan and 388 in the U.S.
Plenty of people would regard those numbers as proof there
would be no easy or fast way to change Chinese preferences.
Luckin regarded those numbers as evidence that there was
plenty of opportunity for growth, citing them in its own pro-
spectus ahead of its initial public offering.
Starbucks had prospered in China by selling much more
than just coffee and offering a comfortable place outside the
home or office to meet friends or study. Luckin did the oppo-
site: Most of its locations are more like kiosks, with little or no
seating. Orders have to be placed and paid for with Luckin’s
app. That was supposed to allow the company to save on
rent and minimize labor costs. It even announced plans for a
“smart vending machine” that would eliminate the need for
stores or staff altogether.
Luckin’s real advantage, though, was supposed to be afford-
ability. Its app constantly pushes freebies and discounts to cus-
tomers, making it difficult to know exactly what it charges. But
it’s definitely far cheaper than Starbucks, where a grande latte
goes for about 32 yuan ($4.57). That kind of discounting requires
a lot of cash—more than what Luckin was saving on headcount
and real estate. In 2018, Luckin disclosures show, its operating
expenses were almost triple its sales.
That same year, Starbucks formed a partnership with
Alibaba Group Holding Ltd., giving it instant access to theretailer’s huge delivery network.Later itintroduced a
ministore format called Starbucks Now designed for speedy
takeout and delivery. So in some ways Luckin was changing,
or at least anticipating, what Chinese customers wanted.
In early 2019, Luckin hired investment banker Reinout
Schakel to be its chief financial officer; he was the only senior
executive who wasn’t Chinese, and he was responsible for
dealing with Western investors. Luckin wasn’t profitable, and
wasn’t sure when it would be. The business plan was to spend
more to keep expanding and offering discounts to increase
brand awareness, as Luckin described in its IPO prospectus.
Schakel’s former employer, Credit Suisse, led the effort
to take Luckin public in the U.S., along with Morgan Stanley
and two Chinese banks. Bank of America Corp. was slated
to be one of the underwriters, but it withdrew from the deal
late in the process after Luckin executives disagreed with its
method for valuing the coffee chain. A spokeswoman for the
bank declined to comment. “We have done what most people
do in 15 or 20 years,” Schakel boasted before trading began
on May 17. After the opening bell, the price of Luckin’s shares
jumped almost 50% from the $17 offer price.C
arsonBlockwatchedLuckin’srisingsharepricewith
skepticism. Block is a short seller whose firm, Muddy
Waters Research, came to prominence a decade ago by expos-
ing fraud at Sino-Forest Corp., a Chinese timber operator that
had gone public in Canada. Now Block wondered if he’d found
another problem company. In the fall of 2019, Luckin reported
an almost sixfold increase in quarterly sales. Block suspected
some of Luckin’s sales weren’t real.
But proving that would be expensive. He’d have to hire a sig-
nificant number of on-the-ground researchers to monitor stores,
aninvestmenthewasn’tkeenonmaking.Theninlate2019,
Blocksays,a fundmanagercontactedhimwithanunusual
proposal. The manager was overseeing a probe into Luckin’s
operations and preparing a research report, but said he didn’t
want to bear the fallout that might come from the company’s
backers for publishing it. Would Muddy Waters release it instead?
In January, just before the novel coronavirus began roiling
China’s economy, Luckin’s stock reached $50 a share, almost
triple its offer price. On the last day of the month, Muddy
Waters shorted the stock and went public with the report it
had received.
The 89-page document was remarkable. It purported
to be the work of more than 1,000 investigators who mon-
itored sales and foot traffic at Luckin locations, gathering
more than 25,000 receipts from customers and providing a“My style may have been too aggressive and
the company may have grown too fast”