Universal Business School, Karjat Mumbai recently published its first Case Research Journal for the 2022-23 academic year. Written with the need to address more “current and relevant” business challenges in mind, these case studies cover topics such as green technology, responsible business, traditional mining, electric vehicles and liability. social. One of the cases is titled, “Making Sales at Luckin Coffee: Is the COO Solely to Blame?”
This case study examines business ethics, a very critical current discourse. Considered one of the fastest growing coffee chains in China, Luckin Coffee Inc. (Luckin) was dubbed “Chinese Starbucks”. From a single test store in 2017, the company grew to 2,370 stores in 18 months, and in May 2019, thanks to its impressive business progress, the company’s shares were listed on the NASDAQ stock exchange.
However, less than a year after its IPO, in April 2020, Luckin was hit hard by rumors of accounting fraud. An internal company investigation, launched in response to the allegations, found that Luckin’s chief operating officer and numerous employees reporting to him were involved in an accounting misconduct that caused his stock price to plummet by nearly 76% on April 2, 2020, eliminating billions of dollars of shareholder wealth as well as mutual, pension and hedge funds.
As the coffee chain scripts its takeover, the question on everyone’s mind was ‘Who should be blamed for the accounting fraud at Luckin? Was the COO solely responsible, or did senior management, internal and external auditors or market regulators play an equal role in the catastrophic collapse of Starbucks in China? »
What causes QSRs to fail?
Luckin Coffee is by no means the first QSR to struggle. And while the QSR industry has traditionally not been plagued by accounting fraud, Unnat Sharma, managing partner at AIM Corporate Services LLP, an expert in forensic auditing and risk consulting, cautions,
“Nothing is as good or as bad as it seems. Statistics suggest that anywhere from 60% to 90% of QSRs drop out before they even reach cruising speed. There are various reasons for this like
a. Embezzlement: Internal thefts and embezzlement of staff funds create loopholes that restaurant management can track, only a little too late. The owner of the Darbar restaurant in Abu Dhabi served as a money laundering front for PFI (a jihadist organization). Tamar India Spices Pvt Ltd also used to blanch products in accordance with ED.
a. Unreasonable rents: Restaurant rent should never exceed 10% of your total income. Adyar Ananda Bhavan, had to close eight branches where rents are quite high in 2021. The other extreme could be “sweet deal” rentals. Entrepreneurs are tempted if a location looks good to them, if there is no competition and they go for it.
a. Lack of perspective: QSR owners either jump in the frame and become front-line workers, or they are so far removed from the picture that they leave all operations to the staff. Not knowing the company can be fatal; such as the case of Goli vada pav, which recently ceased operations. It was started by an investment banker, whose job was to help aspiring entrepreneurs raise money for their business by providing loans. Every day his job was to listen to the stories of entrepreneurs and their dreams, which eventually led him to start his own business with his colleagues at the age of 38. As a business owner, you need to be “out of the frame” to best see the picture, but should “hold it the right distance” to make the right strategic choices.
a. Under-analyzing or over-analyzing: If the entrepreneur doesn’t study the performance of the restaurant and has no tools to determine what the performance statistics look like, he will never know what is working and what is not. does not work. Additionally, an investor may push the entrepreneur too far in reporting and MIS; the real focus shifts from the passion of running a QSR to excel sheets and unrelated expansion.
a. Overambitious projections: young people dive into entrepreneurship for assessment. Passion gets compromised along the way and expectations become unreasonable. For instance; Johnny Rockets opened their first store in India in 2014, they had big plans to build 100 restaurants in 10 years, it expanded to six outlets but couldn’t go any further. Ditto for the Burger Barcelos chain which suffered from poorly planned expansion.
Key lessons for QSRs
Judging from the Luckin Coffee case study and other post-pandemic developments in India, building a QSR is a game of patience. Fortunately, in one of its reports, ICICI Securities said, “Prospects for growth and margins remain attractive for the QSR sector, unlike the rest of the consumer space, where uncertainty reigns.” Sapphire Foods RHP, owner of KFC and Pizza Hut, reported that each person in India spent just $122 on foodservices in the year 2019. That’s far less than the $2,239 spent per person. in the United States and the 684 USD spent per person in China. An Edelweiss analyst wrote about Westlife specifically, but applicable to all, “we believe a more efficient supply chain and better product mix would help it improve its margin profile and revenue ratios even further. yield.”
Tarun Anand, the president of the Universal Business School that published the Luckin Coffee report, said, “The case study comes at an important time when QSRs are reassessing themselves in India. This is important documentation that can serve as a guide for QSR companies in the future. »
Luckin Coffee itself is in the midst of a difficult but promising turnaround. A great reminder that far from focusing on making quick money by manufacturing sales and mindlessly expanding under pressure from investors, the secret to a good QSR is the ability to stay grounded and gain client trust.