The barbarian at the door of Luckin

Produced | Tiger Sniff Commercial, Consumer and Mobile Group

The author | Miao Zhengqing

Editor| Dong Xiaochang

The caption | Visual China

After several delays, at 21:00 on September 7, Luckin Coffee finally released the Third Report of the Joint Provisional Liquidators to the Cayman Islands Grand Court (hereinafter referred to as the "Report"). According to the report, thanks to the increase in the number of trading users and the further enrichment of the high value-added product portfolio, Luckin Coffee achieved strong growth in revenue and net profit, and the overall operating level gradually improved.

Along with this optimistic report came the dark war over the stake pledged by the Lu Zhengyao family.

Informed sources revealed to Tiger Sniff that in early September, the affiliated entities under Wumart founder Zhang Wenzhong were trying to negotiate with creditors such as Barclays and Morgan Stanley to obtain no more than 10% of Luckin's equity. "Wumart founder Zhang Wenzhong and Lu Zhengyao had contact a year ago."

The "less than 10% Luckin equity" is the US$518 million Luckin equity pledged by the Lu Zhengyao family shortly after the Listing of Luckin (a total of 515 million Class B common shares and 95.445 million Class A common shares). After the Luckin fraud incident in 2020, due to the "forced liquidation system", there was a gap of 300 million US dollars in this pledged equity.

Another person familiar with Luckin's financing process said that the 300 million yuan of "debt" has nothing to do with Luckin. "Lu Zhengyao mortgaged his personal shares, he took the money from the bank himself, and where the money went to Ruixing Company did not know, this is completely a personal act."

Luckin does not actually control the eventual flow of this "personal debt" and its associated equity. In July 2020, the BVI court ruled that KPMG would act on behalf of all creditors (Barclays, Morgan Stanley, etc.) to "escrow liquidation", and KPMG was free to choose the assignee under the relevant terms. According to relevant insiders, the related entities under Wumart founder Zhang Wenzhong and KPMG did not negotiate, and then turned to direct dialogue with creditors.

According to the above-mentioned person, this "Lu Zhengyao personal debt" is related to "less than 10% of Luckin equity", and since the beginning of September, two related entities under China Everbright International Investment Co., Ltd. and Wumart Zhangwenzhong have expressed their willingness to "take over".

People familiar with Luckin's financing process said that the current management of Luckin has very little equity. Dabo Capital is currently the majority shareholder of Luckin Coffee and has the most voting rights: after completing the subscription of US$240 million worth of convertible preferred shares in April this year, Dapu Capital's shareholding in Luckin Coffee reached 17.2% and its voting rights were 45.2%. This means that even if the affiliated entities under The founder of Wumart, Zhang Wenzhong, take "less than 10% of the equity of Luckin", it will not have a real impact on the control of Luckin.

According to another person familiar with Lu Zhengyao, "Lu Zhengyao has been busy looking at projects recently, and he is mainly looking at projects related to the noodle and surface industry chain. A person who witnessed the history of Luckin's establishment since its inception said: "At present, Lu Zhengyao has little interest in returning to Luckin, and solving the problem of personal debt is the top priority. If this debt is solved, you can go to the primary market more calmly to get money, and now many institutions dare not directly invest in him. ”

On September 6, Tiger Sniff verified with Wumart Group that "Wumart Zhang Wenzhong is preparing to acquire part of Ruixing's debts", and Wumei said that "the news is not true". On the evening of September 7, Tiger Sniff once again verified with the US side that "Zhang Wenzhong and Lu Zhengyao had contact a year ago", but the other party had not replied as of press time.

In fact, it is not only the above parties that are interested in Luckin equity. Informed sources revealed to Tiger Sniff that in early August, Five Star Holding Group's industrial capital investment platform Star Naher Capital also tried to invest in Luckin, but Luckin eventually rejected this investment intention. Another partner of a domestic leading VC also told Tiger Sniff that Luckin is currently super undervalued, and some foreign investors have begun to re-raise funds to prepare for investment.

Since its delisting, Luckin's price in the powder market has risen by more than 530%, and as of September 7, Luckin's stock price in the powder market is $14.48. (Pink Sheet: Pink Sheet, the pink sheet trading market has been incorporated into the nasdaq's lowest level quotation system, its role is to provide trading liquid quotation services for those who choose not to be listed on the New York Stock Exchange or NASDAQ, or do not meet the listing conditions.) ）

From the performance of Luckin, we may be able to see the logic behind the "investment in Luckin hit drama": why has this company, which was once scandal-ridden and whose stock price fell to $1, become the prey of all parties?

What happened to Luckin?

The Luckin that rushed on the road to store expansion disappeared.

According to the report, as of the end of July 2021, Luckin's total number of stores was 5259 – even less than the number of stores at the end of 2019. (As of December 31, 2019, the total number of Luckin stores was 5334)

The wave of store closures in 2020 was a key factor in the decline in luckin's store volume, and Luckin closed about 830 stores (including self-operated and franchised) in 9 months. People familiar with Luckin revealed to Tiger Sniff that there are two reasons for this wave of store closures: the expiration of the store lease period and Luckin's store optimization action.

According to the person, in the core markets of Luckin such as Beijing and Shanghai, the lease period of some stores began in 2017, when the founding team of Luckin "circled points" in large quantities in China, which was different from the "point scarcity" situation after the rise of new coffee forces in 2021, and the points in 2017-2018 were relatively sufficient and low in price.

An indirect factor led to Luckin's "taking the store cheap" at that time: the Korean coffee forces, which were mainly coffee with you, man coffee, and zoo coffee, collectively encountered Waterloo in the Chinese market from 2017 to 2018. At that time, Korean coffee stores fell into a wave of closures, and a number of local brands focusing on "Korean coffee" entrepreneurship were also on the verge of winter, and the cold situation of this coffee circle was very different from the hot scene of the coffee track from 2020 to 2021.

The direct result of the difference in track heat is a huge difference in store rents. According to the person, some of the Luckin stores that close in 2020 are not in a bad state of income, and even belong to the middle and upper circles of Luckin stores across the country, but after the lease expires, the new rent level will directly eat away at the store's profits - and low-profit and negative-profit stores are the "work" focus of Luckin's store optimization action.

After the new management team took over from Luckin in 2020, the team re-counted the profitability, passenger flow level, and new ability of stores across the country. It is reported that the management team even activated special researchers in some areas to obtain real data, and with it, some stores with low efficiency were directly included in the shutdown process.

But efficiency is not the only "store closure evaluation dimension". From 2018 to 2019, Luckin regarded the coverage rate as the key direction of expansion, and people familiar with luckin's offline expansion at that time said that Starbucks' early expansion model provided ideas for Luckin's management at that time: under Schultz's leadership, Starbucks opened stores in high-density areas with high crowds, and even opened two Starbucks "door-to-door" on both sides of the same road. This high-density model of expanding coverage allowed Starbucks to quickly establish a brand mentality in the core cities of North America.

After entering the expansion period in 2018, Luckin also adopted the same strategy in some cities in China. From the point coverage, the coverage area of some Luckin stores is overlapping. Under the tide of store closures in 2020, the number of stores covered by this overlap is reduced. In addition to some core business districts in Beijing and Shanghai, which still retain overlapping stores, Luckin has almost suspended this expansion model in the rest of the region. Under the tide of store closures, the number of Luckin stores hit a "new low" at the end of November 2020, when the number of Luckin stores nationwide was only 4792.

After entering 2021, Luckin has not returned to the road of high-speed expansion. Taking self-operated stores as an example, from November 2020 to the end of July 2021, in the 8-month period, luckin's total net increase in the number of self-operated stores was only 120, which is not only a significant gap with luckin with an average monthly net increase of 166 stores in 2018, but even less than Manner, which entered the expansion period after May. It is not difficult to see from the distribution that these new self-operated stores of Luckin are mainly high-tier cities, and are generally distributed in areas where Luckin's coverage rate was low before.

If the store strategy is the change of Luckin in the light, then the adjustment of the supply chain system is the change of Luckin in the dark. In April this year, Luckin's raw coconut lattes were out of stock due to insufficient supply of raw materials. To this end, Luckin added two additional factories in May to make coconut milk. Some people who did not want to be named said that since April 2021, Luckin and its upstream partners have also negotiated with some "coconut plantations" to try to lock up production capacity from upstream.

In the supply chain, Luckin's changes are not just as simple as increasing factories and locking in coconut production capacity. After the new management took office in 2020, Luckin's suppliers were greatly replaced, and a group of suppliers with deep connections with the former management team disappeared from Luckin's supply list. At the same time, Luckin adjusted the SKU research and production model.

At present, Luckin's market response ability is faster than in 2020, in addition to some classic SKUs within Luckin, most of the SKUs are provided for a limited time, and each SKU will gradually expand the user base through "grayscale testing" before it is officially listed. One person, who did not want to be named, provided Tiger Sniff with more precise data: "When Luckin develops an average of 22 products, only 1 ends up in the mass market. ”

Two reasons for this change.

The first is the emergence of more coffee and tea competitors, which has led to Luckin having to react quickly to the market. Taking raw coconut lattes as an example, when Luckin's raw coconut lattes appeared in april, some coffee and tea brands have launched similar competitors within a week.

Another reason is that Luckin executives are trying to get rid of "single product dependence". On the one hand, Luckin is trying to reduce its dependence on "ready-made coffee", and in 2019, ready-made coffee drinks accounted for 83% of Luckin's total revenue, and in 2020, this proportion has been reduced to 75%. In addition, after the sale of raw coconut lattes, Luckin also held meetings internally to discuss the potential risks of "relying too much on raw coconut lattes" and tried to reduce the dependence of "raw coconut products" through other flavored products.

Also changing are subsidies and marketing. Since 2020, Luckin has significantly reduced elevator advertising and cancelled the subsidies that frequently appeared in 2018-2019. Between March and May this year, "Luckin price increase" even appeared on the hot search.

An industry insider who did not want to be named revealed that the cost of coffee raw materials will increase significantly in 2021, and coffee stores that rely on the takeaway model will also face the pressure of rising performance costs, which will eventually lead to a general increase in the price of coffee in stores. In starbucks earnings report released in July this year, Starbucks directly pointed out two key influencing factors for the Chinese market: fierce competition and rising raw material prices.

And these changes are eventually intertwined into another kind of Luckin today: stores shrink and expansion slows down, subsidies disappear and prices rise – which is very different from Luckin, which once used low-price + high-speed expansion of stores as a dual-core strategy.

How much is Luckin worth?

At an internal coffee track investment salon in July this year, two investors in the circle talked about the investment fever of the coffee track in 2021, and one of them suddenly asked, "If Luckin is a company that appears in 2021, how much is it valued?" ”

When he asked the question, Manner, M Stand, Santo and a Half, and Seesaw Coffee had all been financed in 2021, and public information showed that Manner Coffee's valuation had reached $2.8 billion, M Stand Coffee's valuation was about $4 billion, Three Half's Valuation was nearly $4.5 billion, and Seesaw Coffee's valuation was nearly $1 billion.

A key indicator for coffee track investors is the "single store valuation", taking The current highest valuation of Manner Coffee as an example, as of June this year, Manner Coffee's single store valuation has exceeded "2.54 million US dollars / store", when Manner Coffee has about 110 stores in operation. If you simply estimate in this way, Luckin currently has 5259 stores and a single market valuation of about $4 billion, and the valuation of a single store is only "$760,000 / store".

"Luckin's valuation system at that time was different from today's coffee track investment valuation system." At the panel, another investor said. In the view of this investor, in the era of the rise of Luckin in 2018~2019, the investment circle is still the idea of "looking at the model" when looking at the entrepreneurial project of the coffee track, and today the investment circle is already an obvious "gambling track" for the coffee track.

The interesting detail is that in 2018-2019, when Luckin's rapid rise, M Stand coffee and Manner coffee already exist. (The first M Stand coffee store was born in 2017, Manner coffee was born in 2015)

A well-known investor in Beijing,017 who read Manner Coffee's project book, revealed that in 2017, many investment institutions had Manner Coffee's information on their desks, but few people dared to invest at that time.

"Manner coffee at that time would feel like a craftsman's coffee shop. Frankly speaking about Manner coffee before 2018 and this Manner coffee today... It's very different. According to the investor, the local coffee entrepreneurs in China at that time often had strong coffee feelings and coffee dreams, and they were very much like craftsmen. At that time, Luckin appeared in a completely different posture: when everyone was talking about coffee beans and coffee culture, Luckin's founding team talked about conversion rate, ping effect, private domain traffic...

"Luckin has nurtured this market." In her view, it is lucky's high subsidies and store expansion after 2018 that have allowed the subdivision of "ready-made coffee" to gain a large number of new users. With the upgrading of consumption, the demand of this group of users has gradually transitioned from "ready-made coffee" to "specialty coffee", which is the underlying logic behind the rise of a number of local specialty coffee stores since 2020.

The same view expressed by these investment circles is that the "stock price" of Luckin in the powder single market has risen since 2020 because the value of Luckin has been seriously undervalued after the financial fraud incident in 2020. This is also regarded as the core motivation behind the "buy bonds into shares" incident.

But not all investors are highly recognized by Luckin. An investor who specializes in the U.S. stock market told Tiger Sniff that the perception of Luckin in the primary and secondary markets is likely to be different. "The primary market may look at the actual value of Luckin more rationally, but the secondary market may be impressed by the counterfeiting case."

In fact, there are many challenges in front of Luckin, for example, after Luckin entered the "contraction cycle" of stores, more coffee players are choosing to expand rapidly. In the case of Manner, for example, from 2019, Manner has only opened 50 stores in 4 years, but in the past eight months, it has expanded nearly 100 new stores. It's not just Manner that has entered the era of expansion, Tencent-invested Tim Hortons has announced plans to open 1,500 new stores, while McDonald's has announced that it will build a McCookie "area" in more than 4,000 stores. Even online brands are starting to move offline. San-And-a-Half has already planned to land an offline concept store in Shanghai, and in November last year, San-a-Half has upgraded its co-branded store with Cha Yan Yue.

"Coffee is one of the hottest investment tracks in the first half of 2021, which means fierce competition." Shi Songyuan, vice president of Taihe Capital, told Tiger Sniff.

Liu Bin, a U.S. stock analyst, believes that for Luckin, which is driven by the dual core of "store pickup + online takeaway", the key indicators are new user growth, retention rate and repurchase rate. Although the relevant data Luckin has not been publicly disclosed, the previous data shows that "the average monthly consumption of Luckin Coffee is declining and the growth rate of registered users is slowing down, which means that in today's coffee market, consumers are facing more choices." ”

Competitors are even more "Luckin" than Luckin in some ways. For example, in the ping effect control, Manner also adopts the concept of "small shop high ping effect", and even it is more extreme than Luckin, compared with luckin's 20 square meters of small store area, Manner has compressed some of the store area to less than 10 square meters.

The participation of more competitors in the competition has directly brought about the scarcity of points, raw materials, and foundry capacity. Thousands of investors who continue to pay attention to the coffee track believe that all coffee brands today are very concerned about point acquisition. "Quickly build brands through regional-intensive store openings and influence consumer minds." In first- and second-tier cities, the "points" suitable for opening stores are limited.

A commercial real estate investment consultant said that the "point" competition in the Shanghai coffee market can already be called "fierce". With the "small shop high ping effect" model being selected by more brands, this position suitable for opening a coffee shop is extremely sought-after. "Before the epidemic, Luckin had optimistic about some positions in Shanghai, and now some of the points have been occupied by other brands."

In the face of competition, turning its attention to the incremental market may be a new choice for Luckin, after all, most of the competition of new coffee forces revolves around high-tier cities.

Data from the "Report" shows that compared with the slow growth rate of self-operated stores, the growth rate of the number of franchise stores of Luckin is significantly faster. In November 2020, the total number of franchise stores retained by Luckin was 894, while the number of franchise stores at Luckin reached 1241 as of July 2021, a net increase of 347 stores in 8 months.

The secret behind the rapid growth in the number of franchisees is the sinking market. Luckin has clearly distinguished the market positioning of self-operated stores and franchised stores, and franchised stores are mainly in areas with third to fifth lines or even more sinking. According to the franchise details released by Luckin in January 2021, it is not difficult to see that most of the 157 cities that have opened to join are based on third- and fourth-tier cities, and even only two provincial capitals are allowed to join (Changchun, Hohhot).

Some people who are more familiar with the sinking market of Luckin's layout revealed that in 2019, Luckin's sub-brand Xiaolu Tea was mainly based on the franchise model, and the core target market of Xiaolu Tea at that time was the sinking city. But Xiaolu Tea has not become the absolute trump card of Luckin in the sinking market - Xiaolu Tea has encountered sinking opponents such as Mi xue ice city, although the number of stores of Xiaolu Tea has once expanded to 282, but eventually this brand has fallen into a "contraction period".

According to the person, Luckin's senior management adjusted the positioning of Xiaolu Tea, and an obvious detail is that some products of Xiaolu Tea will appear directly in Luckin stores after 2020, which is regarded as an important measure for the strategic adjustment of the two brands. In 2021, some Deer Tea franchise owners have been allowed to upgrade their stores to Luckin Coffee stores, and as of May this year, there are only 77 pure Deer Tea stores in China.

It is worth noting that the sinking market has contributed only limited to Luckin so far.

According to data previously released by Luckin, all franchised stores will contribute less than 5% of their revenue in 2020. In fact, the sinking market of coffee is by no means a golden market: Michelle Ice City, which has risen in the sinking market, once launched its coffee brand Lucky Coffee, but finally opened only 200 stores in 3 years. The number of Starbucks stores in third-tier cities and below is even less than 5% of Starbucks' total stores in China.

"The penetration of the sinking market will be a protracted battle." Shi Songyuan believes that it is not preferred to directly copy the playing style of coffee stores in first-tier cities to the sinking market. "The coffee market in the sinking city needs to make more innovations at the product level that meet the preferences of local consumers."

Cheng Ming, who has continuously started a business in the coffee field in a third-tier city, said that in the sinking city, the influence of coffee brands is limited. "Consumers are more price-sensitive here, and taste and brand are not decisive factors."

But low prices may not be the best thing Luckin is doing today.

Since 2020, Luckin has raised the price of some products on the takeaway platform, and in some of Luckin's secondary stores, some head products have also experienced price adjustments. At the same time, Luckin has also changed its previous subsidy strategy, which is different from the previous idea of "ultra-low prices and even free products to obtain customers", and now Luckin's subsidies are often combined coupons.

"This means that the appeal point has changed, previously to quickly obtain customers to complete the conversion, and now to improve the repurchase rate." An analyst who did not want to be named said that slowing down the speed of store opening, changing subsidy schemes, and closing inefficient stores is essentially based on a judgment: the end of the high growth cycle - Luckin has formed its own user base disk, and the follow-up needs to achieve effective new additions while deeply cultivating core users.

At present, there are still many problems that Luckin needs to solve. For example, after experiencing financial fraud and delisting storms, how to win trust again and return to the capital market? And in today's continuous rise in raw material prices, how to further control costs through supply chain upgrades.

And these exam questions left for Luckin's "answer time" will not be very long, after all, the coffee track is in full swing.

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