RESEARCH | Staff Reporter, China

Luckin Coffee's spend on advertising, marketing “may be unsustainable”: Fitch Solutions

The Chinese coffee startup recently announced its plan to raise up to US$510 million in their US IPO.

Should Luckin Coffee acquire the funds it needs in its IPO, it will need to rethink its “high expenditure” on advertising and marketing which may be unsustainable, according to Fitch Solutions.

The market insights company noted that sales and marketing for the Chinese coffee startup makes up the bulk of its operating expenses, accounting for 45% and 31% of total operating expenses in the period of inception to December 2017 and FY18 (ending December 2018) respectively.

“The heavy discounts and promotions do well to initially attract customers but the model does little to help Luckin Coffee maintain its consumer base. Indeed, the number of new transacting customers fell from 6.5m in Q418 (ending December 2018) to 4.3m in Q119 (ending March 2019),” Fitch Solutions explained.

Viewed as Starbucks’s main rival in China, Luckin Coffee is reportedly seeking to raise US$510 million in its US initial public offering (IPO) led by Credit Suisse Group, Morgan Stanley, CICC and Haitong International. The coffee chain also revealed that it expects to offer 34.5mn shares in its IPO at a price range of US$15-US$17.

Luckin Coffee's selling point is its affordability, brought about by discount offers, and convenience resulting from its strategic pick-up locations in China.

Despite Chinese consumers historically favouring tea to coffee, Fitch Solutions forecast coffee sales per capita to expand by 70% between 2019 and 2023, reaching US$11.1 in 2023 up from USD6.5 in 2019.

“Due to growing affluence and demand among young adult consumers (20-39 years) who are adopting more western consumption habits, the popularity of coffee is growing rapidly,” Fitch said.

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