China-based Luckin Coffee Inc has been making an aggressive move to compete with Starbucks but this week it looks like they are not going to have it very easy. While based in China, Luckin is listed in US stock markets with a debut in May after issuing earnings on its first run as a public company. Unfortunately, the trade war between the United States and China—coupled with a slowing Chinese economy—has been taking its toll on the coffee chain.
Specifically, shares of Luckin sank 17 percent, to $20.44 in New York, on Wednesday. It is important to keep in mind that shares were up 44 percent through close of day on Tuesday, on the heels of the $17-per-share initial public offer price.
Now, the plunge in share value is not something to take lightly but it does not exist in a vacuum. The slip came on the same day that global recession fears have certainly weighed down on markets. Still, Luckin Chief Financial Officer Reinout Schakel attests the company remains on track to break even, at least at its individual locations, by the end of the year. He also adds that the firm might even benefit from a lower price if trade tensions continue, as this will weaken the Chinese economy, which ultimately benefits consumers.
Actually, Schakel noted, in an interview, “With the proposition we have around affordability, we’re well-positioned to weather that storm.”
Of course, Luckin did post a net loss of 681.3 million yuan. This is equivalent, approximately, to $97 million. In addition revenue was about 909.1 million yuan, which is definitely in line with analyst estimates of 909 million.
Referring back to the Starbucks reference. Luckin wants to overtake Starbucks in China with the explicit purpose of opening more stores in the next two years than they have in their entire 20 years of business. The endeavor is quite ambitious and investors continue to question the company’s strategy of sacrificing profits to invest in more ways to lure new customers through programs like discounts, even at a time when the Chinese economy is moving at the slowest pace in thirty years.