MILAN – Luckin Coffee’s stock has fallen as much as 24% from a peak of over $50 reached in mid-January amid concerns that the ongoing coronavirus outbreak in China would curb the coffee chain’s sales growth. The virus has claimed more than 80 lives in China so far and infected nearly 2,900 people in the country as of this writing. Wuhan and more than a dozen other cities are on lockdown to stop its spread.
With the number of cases rising, there is some concern that restaurants and coffee shops will remain closed for a prolonged period. Market traders seem hellbent on punishing Luckin Coffee stock in particular. And this slide seems to have coincided with the unfolding of coronavirus news.
Starbucks’ Chinese rival has proactively closed its stores in Wuhan throughout the Lunar New Year holiday and has strict nationwide policies in place to monitor the situation, according to a company spokesperson.
“While holiday travel has likely accelerated the virus’s spread, the timing of the Chinese New Year has been a mitigating factor for Luckin Coffee as 70-80% of the company’s footprint is typically closed during that period,” Keybanc analyst Eric Gonzalez wrote in a note to clients on Monday.
Luckin’s aggressive expansion enabled it to surpass Starbucks in total number of Chinese stores at the end of 2019. Research company Thinknum Alternative Data claims that Luckin ended the year with about 4,500 stores, compared to roughly 4,300 Starbucks stores.
However, Luckin’s massive expansion increased its exposure to coronavirus-stricken areas. Luckin doesn’t offer an updated map or store count for its Chinese locations, but it reached over 40 major cities in early 2019.
Luckin noted that its coffee stores mainly serve first- and second-tier cities, while its tea stores “cover the whole country, including fourth- and fifth-tier cities.” It stated that its coffee stores would mainly be company-operated, while its tea stores would mainly be operated by partners or franchisees. Wuhan, the epicenter of the coronavirus outbreak, is a “new tier one” city that rests between the first and second tiers.
According to The Motley Fool “Transportation restrictions and fears of infection should cause more customers to stay at home after the Chinese New Year, which could throttle the growth of Luckin’s larger and more capital-intensive “relax” stores. Tighter travel restrictions could also choke Luckin’s delivery platform, which gave it an early edge against Starbucks. Couriers for top food-delivery platforms like Alibaba’s Ele.me and Meituan-Dianping are already being closely monitored for exposure to the coronavirus, and tighter rules could result in fewer and slower deliveries”.
“If the coronavirus outbreak matches the scale of the SARS outbreak in the early 2000s, it could last for nearly two years before being contained. If that happens, it could be difficult for Luckin’s new stores to generate year-over-year comps growth — which would spook investors and prevent its franchisees and partners from opening new stores”.
