Starbucks Rival Gets Roasted
Starbucks’ main Chinese rival, Luckin Coffee, has taken a turn for the worse after a blockbuster IPO that had investors smiling from ear to ear. So what went wrong?
Luckin has marketed itself as the next starbucks in China, with the goal of overtaking the global giant in its domestic market – and it’s trying pretty hard! The firm has launched more stores in the past two years than Starbucks has in a whopping 20 year period. But why is it falling out of bed then?
The share soared 53% on its first day of trading, giving investors the impression that they had hit the jackpot, only to turn tail and plummet 39% soon after. The problem relates to its strategy and the global environment.
Luckin has opted for a relatively riskier cash-burn strategy at a time when escalating tensions between the US and China are weighing on global markets and investors’ risk appetite. Incurring lots of debt to fund a higher rate of expansion is a risky strategy for a startup, and Luckin is no exception to the rule.
Despite its recent fallout, the mere fact that Luckin opened higher at the start is a potentially good signal for long term future gains. How it manages its cash burn rate will ultimately determine how long it takes for the company to start chasing down the global coffee super power that is Starbucks. But Starbucks is certainly taking notice…As it should be.
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