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Chinese customers divided over Luckin Coffee fraud scandal

Luckin Coffee, the multibillion-dollar Chinese coffee startup, has never made a mystery of its intent to disrupt China’s coffee retail market by providing cheap beverages, aggressive discounts, and affordable delivery. For a few glorious years since its establishment in 2017, the chain attracted a large number of thrifty coffee drinkers who always thought the deal was too good to be true. That did not deter investors who pumped money into the company’s Nasdaq-listed stock. Well, it turns out the deal was actually too good to be true.

On April 2, in a filing submitted to the U.S. Securities and Exchange Commission (SEC), Luckin Coffee announced an internal investigation into the conduct of former chief operating officer Liú Jiàn 刘剑, who is believed to have inflated 2019 sales by about 2.2 billion yuan ($310.5 million). The stunning disclosure comes after a damning report published by short-seller Muddy Waters in January, in which the coffee chain was accused of fraud and operating a “fundamentally broken business.” Following this week’s accounting scandal, Luckin’s shares sank over 75% in Thursday trading, which pushed the company further to the brink of collapse.

Interestingly, despite the overwhelmingly negative perception of Luckin among U.S. investors and policymakers, the revelations didn’t seem to have an adverse impact on its business in China. According to The Paper (in Chinese), reporters who visited a few Luckin stores in Shanghai today found out that the number of orders was as high as usual. In some locations, it was even busier than ever before.

The rise in sales appeared to be partly driven by the fear that the company was on its last legs, which made customers worry that their Luckin coupons and vouchers would soon be useless. Meanwhile, some customers told The Paper that they felt obliged to show support for the chain after being on the receiving end of its largesse for so long. “I decided to place orders after seeing the news. I hope it will get through this difficult time,” one customer said.

Online orders experienced an astronomical rise, too. As per the Beijing News (in Chinese), on April 3, Luckin’s app servers received at least three times as many requests compared with a normal day. The traffic was so heavy that the online platform was out of service for most of the day.

On Chinese social media, most individuals — especially loyal customers of the coffee chain — were unfazed by the scandal, saying that they would appreciate every second of Luckin while it lasts. “As someone living on a limited budget, I don’t care about whether the company’s financial practices are illegal or not. I just don’t want to lose an affordable alternative to Starbucks,” a typical Weibo comment reads (in Chinese).

Some proponents even came to Luckin’s defense, arguing that a Chinese company scamming American investors for the benefit of Chinese consumers was actually a “noble” idea. “What Luckin has been doing is basically exploiting the flaws of American capitalism to build Chinese communism. It also created hundreds of thousands of jobs. It will be missed if gone,” a Weibo user wrote.

But not everyone saw the news in the same sympathetic light. “This is embarrassing. What they did was illegal! It seems like some people are so caught up in their anti-American patriotism that they have lost the ability to distinguish between right and wrong,” a Weibo user commented (in Chinese).

Most media outlets, as well as a small cluster of social media users, also pointed out that Luckin’s issues were likely to weigh on other Chinese companies seeking overseas initial public offerings in the future. In a short commentary (in Chinese) published on Weibo, the People’s Daily wrote, “Luckin not only harmed the interest of investors, but it hurt Chinese firms’ reputation abroad. We should have a zero-tolerance attitude toward fraudulent public companies.” (See Bloomberg for reporting on this in English.)

In a rare case of dissent against the Communist Party’s house newspaper, the top three most upvoted comments under the People’s Daily post all disagreed: “You buy a cup. I buy a cup. Let’s make Luckin’s stock price go up again,” the most liked comment reads.

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Jiayun Feng

Jiayun was born in Shanghai, where she spent her first 20 years and earned a bachelor’s degree in journalism at Fudan University. Interested in writing for a global audience, she attended the NYU Graduate School of Journalism for its Global & Joint Program Studies, which allowed her to pursue a journalism career along with her interest in international relations. She has previously interned for Sixth Tone and Shanghai Daily.

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