A lot of time has passed since we last heard from Luckin Coffee (OTCMKTS:LKNCY) stock. After a scandal-ridden 2020, perhaps the company felt it best to keep a low profile. However, I don’t think that it’s a recipe for success for Luckin stock.
People are hungry for news. In July, the company appointed Alvarez & Marsal as its provisional liquidator. Thereafter, we haven’t heard a peep regarding the restructuring process. The “light touch” provisional liquidation allows breathing space to implement a restructuring without displacing management and ultimately continue as a going concern.
Normally, the lack of news is not a cause for concern. But we’re talking about a company that was caught cooking the books. Investors need clarity on these matters. A prolonged silence is not a good sign, especially when you can’t rely on the financials for accurate information.
On top of that, competition in China is ramping up. Two of the world’s biggest companies – McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) – are making inroads into the market. So, as Luckin licks its wounds, other more significant players are taking away valuable market share.
Clash of the Titans
What a difference a year can make. In 2019, co-founder and (now ex-) chairman Charles Zhengyao Lu had plans to surpass Starbucks as the biggest coffeehouse chain in the world’s second-largest economy. Fast forward, and now Starbucks is the lone man standing, and not because of anything it did.
Luckin Coffee shot itself in the foot after a sales fraud scandal emerged that implicated its top executives. An independent investigation found that the Chinese coffee chain’s 2019 sales were inflated to the tune of about $311 million. Unfortunately, that was the tip of the iceberg. As we gained further insight into what was happening behind the scenes, the company was forced to contend with multiple fronts. Executives left, and fines were levied.
Meanwhile, Starbucks consolidated its position. Granted, the novel coronavirus pandemic did a number on Seattle’s best. But if the latest quarterly results are any indicator, the company is recovering well. Although foot traffic remains down, earnings per share came in at 51 cents, adjusted, versus 31 cents expected. Revenue also beat estimates, $6.2 billion versus $6.06 billion expected.
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In China, Starbucks’ second-largest market, same-store sales dipped by just 3%. The company remains the largest coffeehouse chain globally, with around 4,700 stores in the market after opening 259 shops as per the most recent quarterly results. But it’s about to get some competition.
McDonald’s Throws Down a Challenge
While homegrown rival Luckin is on the mat, Starbucks must have felt it had a clear path to Chinese supremacy. However, McDonald’s had other plans. It will spend about heavily over the next three years on a major expansion of its store-in-store McCafe in China. If everything goes according to plan, the fast-food giant will have 4,000 McCafes on the Chinese mainland by the end of 2023.
Starbucks, the market leader, charges a premium, with coffee typically averaging approximately 30 yuan per cup. McCafe is a cheaper option for the burgeoning Chinese middle class.
At present, McDonald’s has about 3,600 restaurants in China, meaning less than half have McCafes selling coffees, costing no more than 20 yuan. With cash of $3.68 billion, McDonald’s has a solid war chest to fuel its expansion strategy. As Phyllis Cheung, CEO of McDonald’s China, said, “Our goal is clear: Where there is McDonald’s, there is McCafe.”
What About Luckin Stock?
Coming back to Luckin, there isn’t much to expand what hasn’t already been said. We don’t have any clarification regarding how the coffeehouse chain is faring for some time now. Meanwhile, the fight for supremacy continues in China. With the kinds of resources the companies doing battle have at their disposal, Luckin will be tough to siphon off any market share once it gets back on its feet. A development for which we have no timeline as of yet.
Regardless, the bottom line is this: Luckin stock, even though it’s up 117.8%, is still not a viable option for any investor that values fundamental strength. It is not even a stock that is good for day trading. The major issue to grapple with now is whether the company can continue as a going concern. Considering its books’ fraudulent nature, we can’t rely on the figures given in those documents.
China is still not a huge coffee drinking market at the moment. But it’s getting there. Market data firm Frost & Sullivan forecasted the market to triple from 2018 to 2023. As of June of the coffee crop year 2019/20, the Chinese population drank roughly 3.25 million 60-kilogram bags of coffee. Even though you can’t compare the numbers to the United States, it’s still a sizeable market.
But if you have to invest in any company, it’s better to put your hard-earned capital in Starbucks, considering it’s a cheaper option than MCD stock. Luckin stock is not an option at this stage.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.