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China's largest coffee chain has arrived in the United States. Should Starbucks be worried? Over the counter shares we jargon bust pink sheets and more. And retail investors Next Frontier a role in excellence governance for Tuesday, September 16, it's blue markets Daily and I'm Ann Berry. More market details to come. But first, big moves today in the world of shareholder activism. With energy giant ExxonMobil rolling out a plan that would change how retail investors engage in company decision making. Now, nearly 40% of Exxon shares are owned by retail investors. Yet only about 1 in 4 of them vote during proxy season, meaning they are not making their voices heard on topics ranging from mergers and acquisitions to who sits on the board of directors. By the way, the CEO reports to the board. Now voting rates among institutional investors are generally about 80%. That's not just for Exxon. It's across all major US public companies. Nevertheless, that's about two and a half times higher as a voting rate than we see with individual investors. Now, Exxon received a green light from the securities and Exchange Commission to offer individual shareholders a new option. That's an auto voting program. That means if you opt in, your vote on shareholder proposals will follow management's recommendations. So if you don't like that, meaning you want to disagree with management, you would have to opt out and vote yourself. Now, although Exxon is marketing the message that this is, quote, leveling the playing field, personally one person's view, I highly doubt it's doing this out of the goodness of its heart to be the great defender of the retail investor. It is motivated instead to find a way to rally votes as a way to defend itself against activists. And there are several circling Exxon. And that's been true for a long time. The $490 billion market cap, oil and gas leader has seen activists push proposals with regards to climate change, sustainability and social governance issues. But Exxon has resisted many of these, arguing some are too burdensome, especially when it comes to proposals tied TO so called Scope 3 emissions, which are those from their customers burning fuel. On that, Exxon argues that being held responsible for clients use of products is unrealistic. Now Exxon's new auto voting program could substantially increase the number of votes that align with management's position, making it harder for environmental or activist proposals to gain a foothold. And, and it's actually pretty clever. The logic here would be that if a retail investor has already chosen to hold the stock today, then perhaps they're less likely to be mindful or concerned with the issues that the activists are coming after Exxon. For now, Exxon plans to offer the program via brokerages with reminders and a choice to opt out. And there are massive implications of this for corporate governance broadly. Look, this is the first time a non financial public company has been allowed to run such a program under U.S. securities law and if it works, many others could well follow. And another personal view here, this does raise the stake for executives at publicly traded companies to find ways to reach and inspire and rally their retail investor bases. Just look at what's been going on with Opendoor. We've talked about that a lot on this show. So media training, active engagement on social platforms, sheer force of personality are likely to become, in my opinion, more desirable and necessary attributes for CEOs and CFOs who are most frequently the faces driving corporate corporate communications. We're going to keep watching this and meanwhile for Exxon investors, write in and let us know how your experience getting onboarded with this program goes. I'm very curious to see what that looks like. Coming up, China's largest coffee chain has entered the US Market. We test the product and assess the challenge to Starbucks. But First Brew Markets Daily is sponsored by Public for folks ready to take investing seriously. Before the show today, our producer John mentioned a feature he recently found on Public.
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That's right. Of course you can build your own investment plan on Public, which consists of up to 20 assets, but you can also choose from themes in their marketplace. I saw healthcare, cyber security and energy transformation, really helpful ways to discover new investment ideas. With either an investment plan you create yourself or one of their pre made ones, you can automatically contribute to those assets on a recurring basis.
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And if you have questions about your investments, Public has Alpha, that's an AI powered research assistant that can help you find the answers you're looking for. Alphabet will not only tell you the stock is moving, but why it is moving. So get started at public.com brewmarkets that's public.com Brew Markets paid for by Public.
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Investing, Full Disclosures and Podcast Description well.
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You may not have heard of it yet, but Luckin Coffee, which overtook Starbucks as the top chain in China, has recently opened up five locations in the United States. And we wanted to assess if it might also be a threat to Starbucks right here in Starbucks backyard in the U.S. well, last week John and I reviewed the first full year tenure of Starbucks CEO Brian Nicholl and the way in which he was brought in to revive the slumping chain. And in that discussion, take a look at the episode we looked at Starbucks plan to bring back the coffee house vibe that it had brought to the masses. And a key anchor of the plan to do that is bringing back premium personalized service. That's handwriting the customer's name on the cup. It's making sure that baristas greet customers with eye contact, where it's really focusing on human interaction. That is labor intensive, but it's elevated. Well, Luckin Coffee is taking a bit very different approach, at least in its first couple of stores, all of which are here in New York. And so John witnessed firsthand on a store visit earlier today what it was like for the Luckin experience.
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That's right. I went and I had a good experience. And we'll get into that. But first, let me tell you a little bit about Luckin, the company. They started in China in 2017 and they experienced rapid growth. That's going to be the theme here. They opened 1300 locations in the first year and then they opened 10 to 20 locations a day, day over the next two years. So they were listed on the NASDAQ in 2019. But 18 months later, they were delisted after a short seller blew the whistle on fraud. And an investigation found that over $310 million in 2019 sales were fabricated. They were reporting profits, but in fact, the company was running at a loss. So the company declared bankruptcy. They bought in a whole new leadership team. And by 2023, they continued the expansion and opened more locations in China and they surpassed Starbucks. Here are the numbers today. And Luckin reportedly has 26,000 locations in China today, compared to Starbucks, 7,000 in China. And then in the U.S. starbucks has roughly 17,000 locations.
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Incredible. So let's, let's put in the context, John, of the share price. Right? So 2017, Luckin Coffee's got 1300 locations within its first year of operations. Today, 26,005. Now in the United States, the share price of Luckin, let's take a look at that. Up nearly 105% over the past year. Those of you watching on YouTube, we've pulled up the chart. Those of you listening on audio, you see this chart up and to the right, even more so. By the way, if we were to roll this chart back five years, you would see Luckin Coffee share price up 1300%. Now, for American investors, it is possible, it has been possible to buy Luckin shares on the OTC market. And we're going to unpack in our next segment what that actually involves, what market means, because it's a little bit different from the New York Stock exchange and NASDAQ listed securities we spend much more time talking about. But here's why this is so interesting, because we're really trying to figure out what on earth does this mean for Starbucks. Right. And Luckin is defined by fast, aggressive growth. And when you actually unpack the numbers, which we did do, we, we nerded out. If you go and look at Luckin Coffee's investor relations website, there's actually a lot of information on there, a lot of disclosure. It's clear that the chain is more focused, just a big volume of transactions. Right. It's looking for scale over perhaps margins, though it does generate a decent amount of cash. And actually there's research from Bernstein and an analyst at Bernstein who says that when you look at the performance of Luckin's first stores here in New York, it feels as though generating cash is not a priority. Right. Right. At this point. And it seems to be that the stores are running at a loss. And it feels as though it's a bit more experimental. Right.
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They might be collecting data, they're getting to know their customers, getting to know their price points. And that's the whole thing, is that it's a digital experience. And.
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Right. Talk to me about that.
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Okay. So I wanted to go get us some coffee at Luckin, by the way.
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Thank you. I'm holding up my coffee. So John was very sweet. I came into the office and here is my coffee in my plastic cup with a sticker saying, hi, John, it's.
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The shoulder season and got you an icy hot drink.
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Thank you, I appreciate it.
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And so the first step to order that drink was to download the app. Every engagement with the with with Lookin is through an app.
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You hate downloading apps.
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I don't like it because I don't want my information. No, I know you know, it's all out.
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You're paranoid about this.
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So I did it anyway for the show, for the sake of reporting. And so the thing that struck me about the app, first of all, is it only had 26 reviews in the app store. So that lets you know how nascent Luckin is in this.
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The Starbucks are 7 million.
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7 million just to compare. And so. But what struck me about the app is I immediately was bombarded with coupons. You get 25% off because you're a new customer. If you're a student, register your edu and you get additional coupons. If you come twice in a week, you get coupons. Coupons, coupons. And so it turns out that the relative what I would Call sticker price of the drinks Starbucks compared to Luckin is similar. Maybe it's six or seven dollars for that drink, but no one's paying that price. When they go to Luckin, there's probably always a coupon or a code and that's what they're doing to get people into the door.
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And these are big discounts. These coupons are saying 30% to 50% discounts off the top line price. And this is so different, John, from what we discussed Brian Nichols is doing as the CEO of Starbuck. He is really focused on the premium offering of coffee here in the US and is actually explicitly saying we don't want to discount, we don't want to lower our prices. That to be premium is to be undiscounted.
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That's right. Last October he even got rid of coupons in the Starbucks.
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Got it. Well, let's talk about what this all means potentially for Starbucks. And just to put this in the context of the sizes of these businesses as public companies, Luckin's market cap is about $11 billion. Today, Starbucks is about $96 billion. And there's a real question mark here around what it is exactly Luckin is playing for. And so we went back and we pulled up the transcript from Luckin Coffee's earnings, most recent earnings call through the period end of June, Just going to read year, they actually say in their call, quote, the U.S. is a highly developed coffee market and we remain in the early stages of exploration. Our approach will be disciplined and deliberate with a focus on validating consumer response to our brand positioning, digital ordering experience, product portfolio and pricing strategy. So John, this is all totally consistent with what you just experienced.
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That was my experience and very different than Starbucks because when I went to pick up the drink, I had no human interaction. The drink was right there and I took it off the counter and walked out. So very different experience.
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And I'm curious, it robotic, Was it a machine dispensing your coffee? What was the actual barista quote experience?
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I could see that there were people, humans creating the drinks and the beverages in the back, but I didn't have any interaction with them.
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Interesting. Well, one thing that really caught our eye on this is that the whole coffee market is seeing a lot more entrance into it here in the United States. It is a mature market. Starbucks being one of the elder statesmen of the market. But the cheaper end of the market in particular is seeing a lot more competition. John. We've seen fast food restaurants like Taco Bell trying to expand into coffee. We're seeing McDonald's trying to do more in coffee. We've seen players like Dutch Bros. Expand into coffee at a different, slightly higher price point. And it feels as though the cheap and cheerful area that Luckin's going after isn't necessarily what Starbucks is trying to dominate.
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No, I don't think that they're coming for Starbucks in that way. It'll be interesting to see because right next door to the Luckin was a 7 11. And I know they don't have as many fancy drinks at 7:11, but, but it is a quick cheap option if you're looking for a cup of coffee.
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You know, it's we, we did see. Again, back to the analysts saying that these early five stores seem to be losing money. Luckin again, it's got a ton of cash on its balance sheet. It can afford to take these losses to learn something about this market. And we're actually going to come back to Luckin in late October, which is when the business announces its latest earnings. And we're going to see what they have to say then on how this US Strategy is working out for them and what it means for Starbucks. Let's take a quick break and when we come back. John, you down with otc?
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Yeah, you know me.
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We jargon bust over the counter trades with our sense of humor intact. Well, we just talked about Chinese firm Luckin Coffee, which has shares available in the United States as over the counter pink sheets. That's a lot of words. So we're going to take a moment to jargon bust this term. Now, when you think of stocks, you probably picture the New York Stock Exchange or nasdaq, the big, long established exchanges with images of tickers rolling across massive screens. But not every stock trades on these. Some instead trade over the counter or otc. Now, OTC stocks don't meet the requirements to list on a major exchange. Maybe the company's too small. Maybe it doesn't want to pay hefty lifting listing fees. Instead, these shares change hands directly through a network of broker dealers outside the traditional exchanges. So here's how it works. Instead of a centralized marketplace, broker dealers connect buyers and sellers through electronic platforms such as the OTC Markets Group. So yes, you can buy them in your regular brokerage account. It's just that these trades are not handled in the same way as on the New York Stock Exchange or the nasdaq. And not all OTC stocks are the same. So this is really important. There are three main tiers. The top one is otcqx, which is where larger and more established international companies often trade with stricter reporting standards. And one example of that is Roche, the Swiss pharma business. Another tier is the otcqb. Lots of letters, lots of acronyms, sometimes called the venture market. And typically it's aimed at smaller or new companies that still meet basic transparency rules. Now the OTC space has thinner liquidity than the major exchanges. So price swings as a result can be more accentuated. And then there's the lowest tier in the OTCs. That's the pink sheets. These tend to be startups or companies with very limited disclosure. Now Luckin Coffee is a pink sheet. But I will say again, if you go the Luckin Coffee investor relations website, have to say there's a pretty comprehensive set of materials on there which is unusual actually for this sort of pink chic stocks. So here's an important point. Unlike companies on OTCQX and OTCQB that must regularly provide audited financials and disclosures to stay listed, pink sheet companies face no such requirement. And that's why investors often see them as the riskiest part of the OTC world. We're going to keep watching for chances to jargon bust market terminology and if there's anything that you want us to jargon bust for you write on in. We'd love to hear from you. It's 4:00pm on the east Coast. The markets have closed and we don't have a ticker tape. But we're going to throw it over to our human ticker, our producer John, Thanks.
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The major indices retreated from their record setting runs. The S&P 500 was down a tenth of a percent. The Dow finished down a quarter of a percent and the NASDAQ was down nearly a tenth of a percent. Some market headlines. Shares in Webtoon Entertainment were up over 33% today after word that Disney plans to take a 2% stake in the company as the 2i, a new digital platform for Disney's Marvel and Star wars brands. And Ann Webtoon came on our radar earlier this summer when a partnership with Disney was first announced. Webtoon's stock rose 80% that day. Two big spikes in share price in the last two months and Webtoon's current market cap is over $2.6 billion. And finally, shares in Dave and Buster's Ticker play were down 17% today after an earnings report that featured another quarter of lower same store sales. The arcade company has a new CEO and he's looking to turn things around.
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Well, as John just said, we did see the major indices tick down today. Looked as though investors were taking in profits. We've had unbelievably strong runs across the markets taking in profits. They're selling a little bit ahead of the highly awaited Federal Reserve interest rate decision. The Fed Met started meeting today. It's a two day Fed meeting and it is expected to result in announcement tomorrow of a rate cut for the first time since since December. Now, when we look at tools that indicate the probability of what the Fed may do, currently interest rate futures are pricing in a hundred percent certainty of at least a quarter point rate cut. So look, this is what investors are looking for. They want to make sure that their expectation of that rate cut is confirmed. They want to see that 25 basis points come in and that they're going to be listening very carefully to what Fed Chair Jay Powell has to say about two countervailing features of the market right now. Number one is inflation is still running hotter than the Fed's target. On the other hand, there have been signs with data that has been noisy that the labor market is softening and the dual mandated Fed is going to signal very strongly to the markets which one of those matters more right now. So come back, come back tomorrow because we're going to be staying very current with what is going on and also importantly, we're going to be unpacking what the Fed indicates about possible cut for the rest of the year. That's it for today's brew markets daily.
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Brew Markets Daily is hosted by Anne Barry and produced by John Croteau, Tarka Delatif and Emily Milian. Our technical director is Uchena Waugu and Alex DeSalvo runs audio. The president of Morning Brew Inc. Is Devin Emery. If you'd like to get in touch, send an email or voice Memo to brewmarketshoworning brew.com Wake up tomorrow with the.
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Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. We'll see you back here tomorrow, same time, same place. Sam.