Barely just a few months after its US$200 million Series A financing round, Luckin Coffee, a Chinese local coffee upstart, bags the same amount in its Series B round announced today at a US$2.2 billion valuation, doubling from the $1 billion price tag post the Series A round raised in August.
Investors behind the new financing round include the China International Capital Corp Ltd, Singapore sovereign wealth fund GIC, Joy Capital, and Centrium Capital amongst others.
Two rounds of hundreds of millions financing at such short intervals probably speaks to one thing: Luckin’s heavily discounts and subsidies based business model requires constant fresh capital injections to sustain its business.
Since its inception in January, the firm has quickly expanded to up to 1,700 stores (link in Chinese) across 21 Chinese cities. However, this fast entry into the Chinese coffee market comes at a huge price; high costs have to be attributed to grant discounts to get more coffee drinkers onboard.
Specifically, since launching its trial operation in Jan 2018, the firm has spent a minimum of RMB100 million (US$14 million) in terms of subsidies to capture the Chinese market. While no exact figure was given, the company admitted that a significant portion of its expenditures was on subsidies.
During Luckin’s early days, Qian Zhiya, Luckin’s founder, insisted that adopting massive discount packages is the way to go to build its brand as a new entrant. Its burgeoning sales numbers seemed to justify the move.
The new funds are going to be used towards R&D, technology innovation and business development to improve user experience and increase productivity, signaling a possibility it is now time for Luckin to pivot its strategy into a more sustainable model and to consider profitability.
Editor: Ben Jiang