A high-growth coffee chain based in China announced yesterday that it "fabricated" $300 million in sales during 2019. This figure represented roughly half of the company's sales for a 9-month period.
Interestingly, an anonymous report about the coffee chain publicized earlier this year, questioned the company's accounting. The report's author claimed to use an astounding 1,500 full-time and part-time employees to record many thousands of hours of store traffic. Needless to say, the scale of this type of effort is very time consuming and expensive.
Luck is running out for Starbucks’ challenger in China. The implosion of Luckin Coffee should offer investors a few lessons. The Chinese coffee chain—which claimed to be the largest in China with more than 4,500 stores, ahead of Starbucks—said Thursday that several employees, including its chief operating officer, fabricated much of its reported sales in 2019. Luckin said the fake transactions amounted to 2.2 billion yuan ($310 million) from the second to fourth quarters of last year—or in other words, for every quarter it has reported or issued guidance on since listing on Nasdaq last May. It hasn’t yet reported fourth-quarter numbers but had a forecast. That means nearly half of the reported or forecast sales for those nine months were fictitious.