Luckin Coffee (LKNCY) stock price has retreated in the past few days, moving from this month’s high of $28.80 to $23.35. It has dropped by about 40% from its highest level in 2023 and is 54% below the 2019 high.
Cotti Coffee is a big threat
Luckin Coffee is a leading Chinese coffee chain that has had spectacular growth in the past few years.
It has moved from just a few hundred stores a few months ago to over 20,000 of them today, helped by its franchise model.
The challenge, however, is that the sector is becoming highly competitive, fuelled by many local and international stores.
Starbucks, the biggest coffee chain in the world, is one of its biggest threats. It has a well-recognizable global brand and over 6,000 stores in the country. It hopes to ultimately get to 9,000 stores in China by 2025.
The biggest threat to Luckin Coffee, however, is a company known as Cotti Coffee, a chain that was started in 2022 by its former employees.
Cotti gained more popularity in 2022 when it became a big sponsor of Argentina’s national team at the World Cup.
Less than three years later, the company has opened 10,000 stores by following Luckin Coffee’s strategy. It has achieved substantial success by focusing on the quality of its stores, substantial innovation, and low costs. Also, the company has spent heavily in marketing.
Luckin is also facing more competition from companies like Tim Hortons China, Costa Coffee, Nowwa Coffee, and Coffee Box.
Additionally, there is rising competition from popular tea companies like Tenfu Group, Nayuki, Heytea, and Master Kong.
A key challenge for these companies is that competition is rising at a time when the Chinese economy is not doing too well. In a statement on Tuesday, the IMF downgraded China’s GDP estimate 4.8% even after Beijing announced major stimulus measures.
Read more: Starbucks gets a rare sell call despite leadership change
Competition and pricing
The most recent earnings showed that Luckin Coffee’s business was doing well even as pricing concerns remained.
Its revenue rose by 35.5% to RMB 8.4 billion in the last quarter, helped by a big increase in the number of stores. The firm added 1,371 stores during the quarter, an impressive number. 13,000 of its stores are self-operated, while 6,900 of them are franchises.
The results also showed that the company was starting to grow its business outside China, where it now has 37 stores.
Revenue from its partnership stores rose from RMB 778 million in Q2’22 to RMB 1.85 billion in Q2’24, while its self-operated revenue rose from RMB 2.4 billion to RMB 6.27 billion.
Most importantly, Luckin Coffee is seeing more customers in its stores. It served 69.7 million customers in the last quarter, up from 43.1 million a year earlier.
However, this growth is partly because of the promotions and its pricing strategy. This view was confirmed by the sharp decline in its operating margins, which moved from 18.9% in Q2’23 to 12.5% in the quarter.
The pricing pressure will likely continue in the coming months as competition in the country escalates. Additionally, the company will face the pressures of higher coffee prices globally.
Fortunately, Luckin Coffee has a solid balance sheet as it goes through a challenging period. It ended the last quarter with $493 million in cash and short-term investments.
Read more: Luckin Coffee stock still at risk as revenue growth accelerates
Luckin Coffee stock analysis
Luckin Coffee chart by TradingView
Luckin Coffee is a good brand that has grown substantially in the past few years. This growth could continue if Donald Trump wins the presidency since it will lead to a trade war with China.
A consequence for this is that some people in China will embrace their nationalistic hat and move from Starbucks to local brands like Luckin and Cotti.
The company also has more room to grow internationally, especially in countries like Europe, Asia, and South America.
The daily chart shows that the Luckin Coffee share price peaked at $28.82 after China announced a big stimulus package. It has now pulled back, in line with other Chinese companies like Alibaba and JD.com.
The stock has dropped below the 38.2% Fibonacci Retracement point. It also moved below the key support at $23.91, its highest point on June 20th, and the neckline of the double-bottom pattern.
On the positive side, the stock has moved above the 50-day and 100-day Exponential Moving Averages (EMA).
Therefore, the stock will likely bounce back in the next few weeks as bulls target the key resistance point at $28.82, its highest point this month. A move above that level will point to more gains in the longer term.
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