Luckin Coffee fires CEO, COO as part of fraud investigation

UPDATE: May 12, 2020: Luckin has fired its CEO Jenny Zhiya Quian and COO Jian Liu and demanded that they resign from the board, according to Restaurant Business. Liu was suspected of fabricating the false transactions and was previously recommended for a suspension. Luckin also suspended or put on leave six additional employees involved in or aware of these transactions. These decisions were made after a special committees' investigation. Jinyi Guo, board member and SVP, has been appointed as interim CEO.

Dive Brief:

Luckin Coffee's stock fell nearly 80% on Thursday after the company admitted that it is investigating fabricated sales totaling more than $300 million, according to Investor’s Business Daily. The affected transactions were reported between Q2 2019 and Q4 2019.
The company has assembled an independent special committee to conduct the investigation. Luckin suspended its COO Liu Jian and additional employees implicated in the fraud.
A class action lawsuit has already been filed against Luckin and members of its executive team for securities fraud.

Dive Insight:

Luckin Coffee has been making a splash in the news for its meteoric growth, but its success appears to have been artificially inflated by members of the company who engaged in processing fake transactions. Three months ago, a Muddy Waters report expressed doubt about the brand’s operational metrics and questioned the integrity of its reporting. Luckin has yet to file its financial report for Q4 2019, which will no doubt undergo heavy scrutiny.

Although this is grave news for the chain, Starbucks may see the turn of events as a win. Considered Starbucks' biggest rival in China, Luckin filed its IPO in April 2019, seeking a proposed max offering of $100 million. It went on to raise $561 million at $17 per share. But some of the banks involved with the offering are now reviewing their work.

China is the Luckin's fastest growing market, but it operates stores across 50 countries. Part of Luckin's marketing platform has been branding itself as the anti-Starbucks, focusing on affordable menu items (roughly 30% cheaper on average), a cashless format, and leaning heavily on delivery or pickup by placing stores in high-traffic areas. It launched a Middle East and India expansion in July 2019.

While COVID-19 continues to sweep the globe, Starbucks stated that the virus's impact is already subsiding in China where it was first identified. It predicted that the pandemic will ding profits by as much as 18 cents a share, with sales falling 50% in China. Back in February, Luckin expressed an optimistic view of weathering the COVID-19 storm, confident that customers would return once the pandemic passed. It launched a "Buy 10/Get 10" offer as customers returned to work to help stimulate sales. The company also offered appeal to wary consumers through its scaled-down format that relies on pickup and delivery with minimal contact between workers and employees.

But whether Luckin can recover from the fraud scandal remains to be seen. Consumers may be so distracted by COVID-19 that they take little note of the fraud or find forgiveness in its decision to take responsibility for the situation and conduct an internal investigation. Even so, the brand has garnered such aggressive momentum among consumers that it may be able to keep secure footing despite the negative press. Although a positive brand halo has proven to be important to many consumers, convenience and price still reign supreme. Luckin has built its company largely on the premise of convenience and tailoring offerings to consumers’ needs.