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Workers make coffee at a branch of the Chinese coffee chain Luckin Coffee in Beijing, China, in May 2018. Luckin is now valued at $1 billion as it takes on Starbucks.
EPA-EFE/Roman Pilipey
National champion.
TALL ORDER

Luckin Coffee, China’s Starbucks rival, is getting a nationalist boost amid a huge fraud scandal

Jane Li
By Jane Li

China tech reporter

Luckin Coffee, the US-listed Chinese coffee chain that exploded in popularity in just the space of a few years, dropped a major bombshell last week when it said that its employees had been fabricating sales. Some of Luckin’s fans, however, are jumping to aid the company in a time of crisis.

The Beijing-based startup revealed on April 2 that an internal investigation found that its chief operating officer and other employees may have forged sales in 2019 of as much as 2.2 billion yuan ($310 million). The company said it has suspended the relevant employees for further investigation, and formed a special committee to look into the matter. Shares of the Nasdaq-listed company plunged nearly 80% following the revelation.

Known endearingly in China as the Little Blue Cup, Luckin—which went public last year—grew from a small chain with nine stores at the end 2017 to over 4,500 by the end of last year, according to an announcement (link in Chinese) in January. In comparison, Starbucks has over 4,200 stores in China. Luckin has touted its success as the result of its tech-driven retail model, which uses data generated from customers to analyze their behavior. In reality, its rapid growth was likely more to do with its heavily discounted prices, where a cup of coffee could be sold at around five to 10 yuan cheaper than at Starbucks.

A day after the announcement of the fraud, Luckin posted a cartoon (link in Chinese) featuring smiling employees on social network Weibo with the caption, “Today is a day that especially needs vitality. Let’s add oil!” referring to a phrase of encouragement in Chinese. Those comments were echoed by (link in Chinese) chairman Lu Zhengyao, who posted “Add oil, buddies!” on social network WeChat. On April 5, Luckin directly mentioned the scandal in a Weibo post (link in Chinese) when it issued an apology for the fraud and the “bad social influence” it has caused. Lu took a more subdued tone that day, and said on social media that he was “ashamed” and promised to do his best to recover the losses.

WEIBO/SCREENGRAB
Luckin posted this cartoon on Weibo on April 3, a day after the scandal broke.

It appears that the scandal hasn’t dampened Chinese customers’ love for the company, seen by many as a home-grown challenger that can rival the world’s biggest coffee chain. In an online survey (link in Chinese) initiated by news portal Sina Tech, more than half of the 80,000 or so respondents chose the option “I accept Luckin’s apology, it is still a national champion as long as it corrects its mistakes.”

The sentiment could also be magnified by a broader feeling of acrimony against the US in China which started with the onset of the trade war, and has been further exacerbated by the coronavirus outbreak. One widely cited comment on Weibo likened the US-listed company to an “emotionless harvester of American investors,” and called it the “glory” of China as it continues to offer cheap coffee in its home market.

To be sure, not everyone who is rallying to get a cup of Luckin coffee is doing so out of any feeling of national pride. Many of the people who have flocked to Luckin’s stores in recent days, or downloaded its app, are also doing so out of fear that should the company fold under the fraud investigations, their coupons won’t be redeemable in the future, according to interviews with customers (link in Chinese) published in Chinese media.

Luckin did not immediately reply to a request for comment.

In the near term, support from Chinese customers could help tide Luckin over a difficult period as the company deals with not only the fraud investigation, but slowing sales at home as the pandemic dampens consumer spending. But the company is already facing a number of class-action lawsuits from US investors, and its troubles are likely to get much worse—and perhaps even hae a knock-on effect on other US-listed Chinese companies as the scandal heightens long-standing worries over accounting standards at such companies.

Even government mouthpiece People’s Daily has cautioned against (link in Chinese) consumers flocking to buy from Luckin, calling such behavior “shameful” and reminding people that there should be “zero tolerance” of financial frauds. Luckin’s actions not only harmed investors, the newspaper added, but also the “reputation of Chinese companies overseas.”

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