Luckin Coffee bags another $150m ahead of US IPO

China's fast-growing coffee chain is clearly on the double espressos. Despite widespread concerns about its cash-burning business model, it has just completed its third funding round in 10 months.

Chinese coffee chain Luckin Coffee bagged $150 million in its latest round of fundraising as the ambitious startup continues to attract investment despite worries about cash flow and the sustainability of its business.

Luckin Coffee's valuation rocketed to $2.9 billion after Thursday’s Series B+ round led by BlackRock’s private equity fund. The US investment giant invested $125 million, the startup said without disclosing other co-investors.

This marks the third round of funding over the last 10 months for the rapidly growing coffee chain. It raised $200 million each in its A and B funding rounds in July and December respectively last year.

The firm is clearly able to attract institutional money despite running an early-stage, non-profitable business, but it also shows how large a pool of capital is needed to support its exponential growth across China.

But can Luckin sustain its aggressive expansion plans and discount offerings?

Since its inception 18 months ago, Luckin has been burning cash to grab market share in as short a period of time as possible. The coffee chain has said that it aims to operate 4,500 stores by the end of the year. This would put it ahead of Starbucks, currently China’s largest coffee chain, with about 3,600 shops.

Luckin's business model has raised questions after a number of other businesses like bike-sharing app Ofo and ride-hailing giant Didi Chuxing ran into problems after overspending.

Ofo has pulled out of a number of overseas markets and is on the brink of bankruptcy, while Didi Chuxing has said that it plans to lay off 2,000 staff as part of a business restructuring after spending massively to lure drivers and offer discounts to riders.

But investors remain committed to the business despite a $128 million loss last year. 

“As an investor, we don’t feel the pressure,” said Gary Liu, executive director of Centrium Capital, in an interview ahead of Luckin Coffee’s fundraising announcement. Centrium Capital invested in its Series B funding in December last year.

“Luckin’s costs are cheaper than that of Starbucks because it spent less on rent, decoration and labour. And it is a business with sufficient cash flow,” Liu said. While Luckin has spent the majority of the funds it has raised on marketing, Liu believes that figure could halve this year thanks to its solid brand among coffee lovers.

Liu also believes that Luckin had adopted the right pricing strategy that differentiates itself from premium brands like Starbucks, as well as low-end products that are sold in convenience stores.

Luckin’s coffee is generally offered at about Rmb20 to Rmb30 ($2.99 to 4.48) per cup, compared to that from Starbucks at about Rmb30 to Rmb40, and mass-market brands sold at convenience store prices at about Rmb7 each.

Liu also values Luckin’s gradual transformation beyond coffee. It now offers snacks, breakfast, tea and light meals in its stores.

According to a source close to the company, Luckin has already concluded its business review with the US Securities and Exchange Commission and is looking for the right window to launch its US initial public offering which is expected to raise $400 million to $500 million.

¬ Haymarket Media Limited. All rights reserved.
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