The full effects of the coronavirus pandemic are currently unpredictable. At the same time, some industries have been the first to experience downturns and must now respond very quickly and proactively to the situation.
All over the world, state and local governments have made difficult and unpopular decisions to ban the operation of foodservice, retail (except pharmacies and grocery stores), entertainment establishments, hotels, etc.
Socially responsible companies made the relevant decisions a few days earlier and switched to remote work even before the “official” full-on closure.
Ukraine does not remain aloof about the relevant regulatory restrictions. The Cabinet of Ministers’ Resolution No. 215 of 16.03.2020 bans the operation of business entities, which provides for the reception of visitors, in particular by catering establishments (restaurants, cafes, etc.), shopping centers, other entertaining establishments, fitness centers, cultural institutions, retail and consumer services, except retail trade in food, fuel, hygiene products, medicinal products and medical devices, means of communication; banking, insurance, trading and catering activities with the use of targeted delivery of orders, provided that their personnel has individual protective gear.
Under these conditions, certain businesses will be able to at least partially resume their operation remotely through technical and logistical solutions (delivery of goods, service industry, etc.). For some businesses, the measures taken will mean only one thing – the complete (temporary) closure of businesses (hotels and entertainment industry) with the relevant negative consequences, or complete restructuring of the operation format of their establishments and their adaptation to the needs of today – there are practices in the world where hotels are given a new format to operate as healthcare institutions.
It should be noted that the ban on trading activity applies not only to tenants but also to property owners, who are not allowed to keep their areas open for trade.
All of the mentioned businesses have one thing in common –their main expenditure items are mostly the staff and the lease of premises. Therefore, these are the items to be reviewed urgently.
Restructuring of the terms of lease agreements, bank obligations, other agreements:
Given the drop in sales, the expected sharp fall in the national currency exchange rate, and the fact that most leases are pegged to the US dollar, most tenants will not physically be able to pay the lease.
This automatically means that the obligations to other partners, in particular banks, are impossible to fulfill and will entail the inability to fulfill obligations to creditors and defaults on bank loans.
Retailers operating on a turnover lease (оборотної орендної плати) base with a small basic lease will feel a little better and have a little more time to resolve the situation, as their financial obligations under lease agreements are tied to their actual financial performance. Thus, such companies are actually in the same boat with the lessors.
In turn, agreements with hotel and restaurant operators (hotel management agreements, franchise agreements etc.) should also be reviewed, in particular in terms of fixed regular payments and other costs that are independent of project performance.
Personnel:
The current developments will also obviously entail the need for internal restructuring, staff lay-offs and redundancy. The trade unions being quite active, staff redundancy may be a difficult and painful process for both parties (Please read the special ARZINGER alert to know more about the specific aspects of applying Ukrainian quarantine labor legislation).
Banking retail:
We expect exciting developments in banking retail. It is no secret that traditional banking with numerous branches is gradually fading away, and new players are aggressively gaining market shares through new software solutions, reformat their operations and switch entirely to the online mode. We believe that the current situation will be instrumental in the further development and strengthening of the "new banking" and thus accelerate the disappearance of traditional formats. Those banks that will make timely decisions to reduce the number of branches and drastically restructure their operation format will be able to come out strong. Unfortunately, we all understand that the main players’ conservatism is quite high in this market and that rapid structural reforms are impossible (not least due to the regulatory constraints as well as the clients’ mentality, for whom the banking institution and its stability are associated with a physical branch only). Therefore, we will shortly observe the gradual decline of traditional players, while the current crisis will accelerate the redistribution of shares in the relevant market in favor of modern banking representatives.
Ethical business practices and potential regulatory penalties
We are already experiencing a shortage of some goods on store shelves as well as a radical increase in the prices for some services and products. Disruptions in the logistics chain caused by quarantine as well as the potential devaluation of the national currency will probably exacerbate these developments and cause a further increase in prices for most goods and services. We are already anticipating the emergence of quite aggressive technology for the market promotion of goods, such as unfair advertising, as well as the appearance of substandard goods. We also know very well from experience that crisis phenomena lead to cartel conspiracies in different markets, as resources are scarce and some businessmen are unsoundly eager to make a profit by abuse of the situation. All these circumstances may be of interest to the consumer protection authorities as well as to the Antimonopoly Committee of Ukraine and could result in significant time input and financial losses in the form of fines.
New Chances and Business Opportunities:
At the same time, the relevant market situation will have a rather positive effect on the growth of e-commerce, thus significantly increasing the demand for services related to the development and operation of appropriate solutions as well as delivery services. Given that Ukraine is a recognized player in the global development market for various software solutions, we expect a boom in the relevant market, reduced startup time for the relevant projects, a significant increase in the online competition, and a dramatic increase in e-commerce. We do not exclude that banks will also be actively involved in these processes as customers ordering new solutions. These trends will continue to influence the estimation of rented space needs in relation to trading on e-platforms, and the extension of own logistic premises.
After all, we expect a significant number of transactions related to business consolidations for the sake of using synergies. Businesses that will be unable to quickly adapt to new realities will lose their market share and will either go bankrupt or be sold to other more systemic and powerful competitors.
What are the next steps?
- Review the existing agreements (leases) for the force majeure reservation and its wording, discuss the format of the appropriate regime for the quarantine period with the partner;
- Carefully review the financial and other commercial terms of the lease agreement, the actual mutual obligations of the tenants and landlords, and urgently discuss the further developments with the partners, sign annexes to the lease agreements, which should provide for financial aspects of the partners’ activities for the duration of the situation (waiver of pegging to foreign currency / or fixing the US dollar exchange rate, restructuring of payments, finding middle-ground solutions through e-commerce, etc.);
- Check the possibility of compensation for losses by the insurance company for the business disruption period, if insurance agreements are in place;
- Review employment agreements with employees as well as the company’s internal documents for possible redundancies and launch immediately the appropriate processes aimed at the correct termination (suspension) of employment relations;
- Start discussions with financial partners on the terms of restructuring the respective loan agreements and sign the relevant documents;
- Pay particular attention to business practices that catch the interest of the Antimonopoly Committee of Ukraine and cause additional business problems related to investigations and potential penalties;
- Start preparing for the transition of your business to online trading format (through own solutions or external trading platforms);
- Depending on the partners’ reaction, prepare for the negative developments and the potential transition of the dispute resolution process to the judicial plane.
ARZINGER experts are always ready to help you answer any questions you may have about the situation to allow you to focus on your business.