Shares in China’s Luckin Coffee have fallen 7 per cent since their initial offering last week, as investors worried about the company’s cash-burning expansion model and whether it can retain consumers without subsidies.
Luckin, positioning itself as a rival to Starbucks in the world’s second-largest economy, soared as much as 53 per cent on its first trading day in the US last week, bucking a trend of weak initial offerings in the US.
The stock has since plunged 39 per cent from that peak.
The company gained a valuation of roughly $4bn less than two years after opening its first outlet in Beijing, on the grounds of rapid revenue growth driven by expansion in its store numbers to 2,370 in 28 cities in China.
It is opening new outlets at a rate of 200-300 a month, putting it on track to overtake Starbucks, which has about 3,700 stores in the country after two decades operating in China.
But Luckin remains reliant on subsidies to spur sales, with heavy spending on discounts contributing to a net loss of Rmb551.8m ($80m) in the first quarter of the year.
Revenue growth slowed significantly in the quarter from the previous three months.
“Previously you would have groups from offices going to buy coffee because of the discounts,” said Shaun Rein, founder of China Market Research Group, a Shanghai-based research consultancy. “But we saw consumers stop going from February, as they decreased subsidies. There is very little brand loyalty to Luckin.”
Other coffee chains have been opening at similar price points in major cities which means “they’ve got more competition”, he added.
Luckin focuses on delivery and most of its stores do not have seating. Nearly all its orders are placed through a mobile phone app.
Starbucks, which had more than 50 per cent of China’s specialist coffee chain market by sales last year, has been forced to accelerate the roll-out of delivery services in its Chinese stores as well as ordering by its mobile app, which the company this week said had 8.3m active users in China.
Scott Laprise, an independent analyst in Beijing, said some investors were concerned about Luckin’s negative cash flow. “They are also worried about new entrants into the market and that Starbucks might wake up,” he added.
Luckin’s 7.1 per cent decline from its listing price of $17 per share is still less than that of other recent IPOs such as ride-hailing service Lyft, which is down 20 per cent from a $72 offering price in late March.
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