Once a red-hot growth firm that was challenging blue-chip giants, Luckin Coffee (OTCMKTS:LKNCY) supposedly proved that homegrown Chinese brands could compete with America’s best. At one point, the meteoric rise of Luckin stock gave Starbucks (NASDAQ:SBUX) executives something to think about.
Later, however, it was all revealed to be a fraud.
I’m not going to waste time bashing the company for a crime that has been covered from every conceivable angle. Rather, I will emphasize that while the accounting fraud occurred in the past, it doesn’t mean that Luckin will get off scot-free. Again, this is a growth firm that lied about its growth. The lie is central to the core reason why Luckin stock was so popular in the first place.
Don’t get me wrong – I’m not suggesting that the company lying about a secondary component of its business is acceptable. However, what I am saying is that you shouldn’t be too quick to forgive and forget.
Further, Luckin stock has serious complication implications. As you know, the U.S. is not on the best terms with China. If you had a chance to watch the first night of the Republican National Convention, it went as well as you might have thought. There were some hits and some wild swings and misses.
But throughout the eventful evening, one common theme stood out among the rest, China. Or more specifically, that China is the source of our pain with the novel coronavirus. And that the nation represents an existential threat to freedom and opportunity.
It was typical President Donald Trump. Frankly, though, incidents like Luckin’s accounting fraud doesn’t help matters, hurting potential investor capital inflows for Chinese companies.
Speculators May Be Asking the Wrong Question
Despite the obvious challenges facing China’s disgraced barista, speculators may be tempted to gamble on Luckin stock. After all, shares have erased more than 90% of their market value prior to regulators freezing the security. Overall, LKNCY has treaded water, denying those looking to see it plummet into perdition.
But despite this sign of life, I believe speculators are looking at Luckin stock the wrong way. The underlying company was never going to challenge Starbucks as it lacked a critical attribute: premium western branding.
As you might surmise, marketing consumer goods in China is a complex affair. But it’s evident that the nation’s emerging, socially mobile young consumer loves western brands for its high-status symbolism. For instance, going to McDonald’s (NYSE:MCD) is for most of us, a matter of convenience (or perhaps psychological illness). But for Chinese consumers, it’s a status symbol.
Certainly, cheaper alternatives exist. But those cheaper alternatives don’t allow customers to show off. As JingDaily.com contributor Adina-Laura Achim states:
…luxury goods are more than the peripheral status symbols they are in the West; they’ve become badges of success. For affluent buyers, the fastest and easiest way to convey their role as a winner in society is through luxury consumption.
But as Time points out, Luckin misses this critical element. First, its products cost roughly half that of their Starbucks equivalent. Second, Luckin emphasizes convenience, not social status. Indeed, the reason why the average consumer buys coffee from Luckin is to get a quick, no-hassle caffeine fix. That is so proletariat.
As well, competitors can easily duplicate the convenience factor. However, Starbucks’ premium association – let’s face it, its products are expensive for us Americans – has been crafted over decades. You can’t just duplicate that out of thin air.
Real Political Problems
As I mentioned above, the scandal impacting Luckin stock will almost surely affect future investment decisions. According to the Pew Research Center, Americans’ view of China shifted sharply negative during the coronavirus outbreak. And that negativity has sustained, with a majority blaming China for the spread of Covid-19.
Genuinely, I believe that Trump has a strong chance of winning reelection because of this single issue. When you drill down into the details, you’ll recognize that anti-China sentiment cuts across the political aisle. Moreover, Trump’s insults have stuck very well generally speaking. But his China comments do stick and that might be the end of it for former Vice President Joe Biden.
I mention this because Luckin will have trouble courting American investors again. But as InvestorPlace contributor Faizan Farooque argues, it will be tough for the company to pacify local investors. LKNCY stock has always been a mess since exposure of the fraud. But recent political developments make it that much more unappealing.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.