PE-backed Luckin Coffee files for US IPO

It comes only days after the company received $150 million in its latest private funding round at a valuation of $2.9 billion. BlackRock committed $125 million on its own, in what is said to have been a move to hedge its exposure to Starbucks. The asset manager has a 6.58% stake in Starbucks, which has 3,600 stores in China. Luckin wants to supplant it as the market leader by the end of 2019.

Founded in 2018 by Zhiya Qian, formerly COO at car rental business CAR and chauffeured car service spin-out Ucar, Luckin operated 2,370 stores across 28 cities in China as of March, up from just 290 a year earlier. All stores are owned and operated by the company. It has more than 16.8 million customers. A total of 90 million items were sold in 2018, of which about 30% were non-coffee products, according to the IPO prospectus.

Luckin's rapid expansion is built upon a combination of affordability and technology - a strategy described as a “new retail” approach. On average, it charges 30% less than Starbucks for a latte, while customers are encouraged to place orders via an app and pay through Tencent Holdings-owned WeChat Pay or a native mobile wallet. The company claims to offer a 100% cashier-less environment.

Luckin operates three types of stores, with a focus on pick-ups and deliveries. It often expands into new cities by establishing a large delivery kitchen, which can be set up quickly with low costs, before opening multiple pick-up stores. These pick-up stores - that have limited seating and are found in high traffic areas - currently account for more than 90% of total locations. Luckin claims this approach has facilitated rapid expansion with relatively low rental and decoration costs.

Nevertheless, the company's battle for market share has come at considerable cost. Revenue reached RMB840.7 million ($125.3 million) in 2018, while operating expenses topped RMB2.44 billion, with RMB746 million spent on marketing and RMB576.2 million on renting and operating stores. The net loss for the year was RMB1.62 billion.

In the first three months of 2019, Luckin incurred a net loss of RMB551.8 million. Revenue for the period was RMB478.5 million - three-quarters of it from the sale of freshly brewed drinks - while marketing and store rental expenditure came to RMB168.1 million and RMB282.4 million, respectively.

Luckin secured $200 million in Series A funding within six months of its inception last year led by Centurium, which contributed $100 million. Joy, GIC Private, and Legend Capital also participated. In December, these investors re-upped for a $200 million round that also featured China International Capital Corporation (CICC). Centurium is understood to have contributed $80 million to the second round, making it the largest institutional investor with an 11.9% stake. Joy is second with 6.75%.

The size and pricing of the offering have yet to be established. The proceeds have been earmarked for store network expansion, customer acquisition, research and development, and improvements to the company's technology infrastructure.

Alongside the IPO, Luckin will also sell $50 million in shares to Louis Dreyfus through a private placement. Earlier this month, the agribusiness giant agreed to form a joint venture with Luckin that will build a coffee roasting plant in China.

The country's freshly brewed coffee market was worth RMB39 billion in 2018, according to Frost & Sullivan. It is projected to grow to RMB157.9 billion by 2023, with per capita consumption rising from 1.6 cups to 5.5 cups.

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• Topics
• IPO
• Greater China
• Consumer
• Technology
• China
• TMT
• IPO
• BlackRock
• Centurium Capital
• Joy Capital
• GIC Private
• Legend Capital
• CICC