SHANGHAI/NEW YORK -- China’s cafe chain Luckin Coffee is beginning to see its losses balloon during its meteoric rise in popularity as it prepares to go public in the U.S. Nasdaq market.
Known for its free third cup of coffee after the purchase of two, the Beijing-based company has applied for an initial public offering, with the goal of raising up to $100 million.
Disclosures filed this week with the U.S. Securities and Exchange Commission show a young company facing significant financial pressures. As the coffee chain looks to double its store network in a bid to overthrow Starbucks as China's top coffee chain, its costs increased to almost $150 million in the first three months of 2019.
That amounts to almost half what it spent in all of 2018. Luckin ended up with a $241 million net loss last year on $125 million of revenue, and suffered another $82 million in losses in the first three months of 2019.
In 2018, Luckin's first full year of operation, the company's biggest cost was in sales and marketing, as it sought to quickly build brand awareness by launching large-scale promotion campaigns and hiring celebrity brand ambassadors.
As the coffee chain accelerates its expansion, rent for retail space and other operating costs took over as the top expense. Many of Luckin's stores are set up in prime locations to ensure they are close to China's white-collar professionals, its main target customers.
The chain currently has about 2,300 cafes in mainland China, with over 90% operating out of tiny takeout spots. The plan is to add 2,500 locations this year, which would be enough to overtake Starbucks' 3,600 Chinese outlets.
Ever since opening its first cafe in Beijing in January last year, Luckin has grown by leaps and bounds through a combination of discounts and technological innovations. Not only is the coffee cheaper than in Starbucks, but Luckin also offers delivery to customers through a mobile app.
Luckin's aggressive spending has been backed by private investors, who have pumped hundreds of millions of dollars into the less than two-year-old company. Just days before its IPO filing, Luckin announced a $150 million funding round from investors including funds managed by U.S.-based asset management company BlackRock, a major shareholder of Starbucks.
There is a litany of Chinese startups that face financial hardships after listing, mainly due to ill-fated investment decisions. Luckin appears to be exhibiting those same patterns, and it remains to be seen how well the company can improve same-store profitability.