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(Bloomberg Opinion) -- China’s Luckin Coffee Inc. hasn’t been having much luck lately. The last thing a retail business in the middle of a breakneck expansion needs is a deadly virus that keeps consumers off the streets and away from malls. What could be more damaging? Perhaps an attack by short-sellers branding your business a fraud.
Shares in Nasdaq-listed Luckin Coffee plummeted 11% Friday after Carson Block’s Muddy Waters Capital tweeted that it has a short on the stock, citing an unattributed 89-page report it had received that alleged the chain has accounting issues and a broken business model. It could have been worse. Luckin shares were down as much as 27% before rival short-selling firm Citron Research defended the company, saying it was long the stock and the coffee chain’s business in China was “on fire.” Luckin called the allegations “misleading and false” in a filing Monday. Its shares closed 3.5% lower.
Whatever the merits or otherwise of the anonymous report — which Muddy Waters said it found credible and Andrew Left’s Citron said would “fall short on accuracy” — Luckin faces serious challenges from the coronavirus, which has caused some cities in China to impose travel restrictions, manufacturers to halt output and the government to extend the Lunar New Year holiday. At the same time, the coffee chain has a couple of key advantages that should enable it to ride out the disruption.
First is its delivery model. Unlike Starbucks Corp., which prides itself on its cozy seating areas, Luckin mostly sells coffee for consumption outside. As of the end of June, 2,741 of 2,963 outlets were “pick-up stores.” Just 123 were so-called relax stores where buyers drink on the premises, and the rest were delivery kitchens.
In an environment where authorities are telling people to stay at home to avoid spreading the virus, such a business may prove more resilient than one like Starbucks, which sells coffee partly as a social experience. Seattle-based Starbucks has closed more than half its 4,292 outlets(6) in China because of the viral outbreak. Luckin, which overtook Starbucks with 4,500 stores across the country by the end of last year, hasn’t given comparable figures.
Second is Luckin’s financial position. Founded less than three years ago, the company has been expanding at a furious pace, almost quadrupling its number of stores from 1,189 in the third quarter of 2018. Such a rapid build-out is financially draining — especially when the company has a strategy of sacrificing profits by offering discounts to lure customers. That makes Luckin’s January fundraising look particularly fortuitous.