Luckin Coffee filed for bankruptcy and here’s why it failed in the US

Luckin Coffee was launched in the U.S. in 2020, and yet it already filed for bankruptcy less than a year after it opened. The Chinese coffee chain filed for Chapter 15 in New York last week and it is to protect itself from lawsuits and creditors.

Then again, Luckin Coffee stores in the U.S. will remain open as it undergoes restructuring and reorganization in China, where its main office is headquartered. The bankruptcy filing will not affect the coffee chain’s daily operations as its stores continue to serve while the management sorts out the issues it faces.

“The company continues to meet its trade obligations in the ordinary course of business, including paying suppliers, vendors, and employees,” part of the statement reads in the filing at Cayman Court and the U.S. Bankruptcy Court.

Luckin Coffee’s troubles

Prior to the filing of bankruptcy, Luckin Coffee faced many controversies that led to the ouster of its chief executive officer and chairman, Jenny Qian Zhiya, and chief operating officer, Jian Liu. They were investigated for sales fraud related to fabricated transactions.

12 other employees who worked with Zhiya and Liu’s scheme were also fired. As for the company, it was fined by both the regulators in the U.S. and China. Luckin Coffee had to pay millions, and as its stocks plunge, it was also delisted by Nasdaq last year.

As per Fox Business, The U.S. Securities and Exchange Commission slapped the Chinese coffee chain with $180 million in December 2020 after discovering that it deliberately fabricated over $300 million in sales from April 2019 to January 2020.

It turned out that Luckin Coffee stated an incorrect revenue, expenses, and operating loss. This was allegedly intentionally done to give investors a false impression that the company is doing really well and displaying exemplary growth. In short, the company’s business in the U.S. seems to be fake as almost everything it presented to the SEC was inaccurate.

Why it the coffee chain failed

When Luckin Coffee was introduced and opened its first stores in the U.S., it was seen as a business that could threaten Starbucks. However, with the management’s dishonesty and probably greed, it was the start of the company’s downfall.

Aside from the executives’ wrongdoings, Luckin Coffee’s strategy and business model was deemed to be ineffective because it was focused on just two things: beating Starbucks in-store counts and the number of cups sold. The company was described as “obsess” with these two points and has done everything to accomplish these goals.

This is why Luckin Coffee opened small shops on college grounds, buildings, and almost everywhere, even in bad locations. It was finally able to beat Starbucks’ 4,123 stores by revealing 4,509 stores by the last quarter of 2019; however, more stores do not mean more profits.

It also started to giveaway cups of coffee to attract more customers, and while this worked, it still failed to achieve what Starbucks had, which is becoming a coffee chain offering “affordable luxury.” Instead, Luckin Coffee has become a very common coffee brand that its competitors can easily copy. With a low value, the company failed to generate income.