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Retail in Ukraine: Strategies and Updates in New Market Realities
There is no doubt that the retail sector has been largely affected by the global pandemic, and Ukraine is no exception. Stores are being closed during lockdowns, product patterns and customers preferences are changing, buying power is falling and generally not stable, and other irregularities are taking place. Although the situation may change further as the pandemic is expected to slow down with time, this has already become a new reality which retailers must learn to accommodate.
Interestingly, retail is one of those business areas which isn’t subject to overly strict government regulation, which gives it the benefit of low level interference by the state. This factor, in addition to all the efforts of marketing and other business people, helps retailers to develop and address various challenges with a remarkable level of flexibility, at least in comparison with some other businesses. As a matter of fact, this seems to be true even in the current turbulent period caused by pandemic and other issues that most industries are facing. For example, many retailers have reported positive sales results in 2020, either maintaining some growth or keeping any falls at the low end.
The way retailers act in these circumstances suggests that they are effectively mixing two business strategies.
Firstly, an all-times strategy that historically has been inherent in retail business implies a central role of location for the operation of retail stores. Real estate factors are, therefore, essential for this strategy, so many successful retailers have built up strong expertise in real estate development and related matters. As we see it, this strategy remains in place and we will point out some of the relevant legal updates below.
Secondly, as commonly known, many if not all retailers have started or expanded their online presence by launching e-commerce operations. Although this strategy is not entirely new, it has certainly become trendier over the last year and continues to grow. Going online is mostly a marketing and logistical challenge, and less legal. However, one should remember that it is no longer a grey area, which is why we consider it important to summarize in this article as well.
Major Real Estate Updates Relevant to Retail Business
While real estate is certainly a separate topic, there are several factors that have a significant impact on retail business at the present time.
Impact of Pandemic on Property Leases
Since the initial outbreak of the pandemic in March 2020, tenants and landlords in Ukraine have been in regular negotiations with regard to their lease terms. Typical issues raised are: whether rent and other related payments (utilities, marketing and other services) must be paid by tenants during or between lockdowns (as their possibility to use the leased premise is limited) and what are the concessions that tenants are entitled to in these circumstances. While this applies to almost any industry, retailers and their respective counterparties (shopping malls, etc.) are among those who have been affected most.
To the best of our knowledge, the vast majority of lease negotiations, driven by the above-mentioned issues, have been successful, in the main leading to temporary discounts or other concessions agreed by the parties. So prevailing practice suggests that amicable solutions to such situations have become quite common and that parties are generally willing to avoid further implications by starting legal proceedings, etc. (although exceptions are not uncommon).
It should be noted that Ukrainian legislation is not very clear with regard to the impact of various restrictive measures taken by the government on property leases. Initially, when the pandemic began, parties could rely only on general concepts provided by the Civil Code, including material adverse change and full or partial impossibility to use leased property. Also, there were numerous attempts to invoke force majeure clauses in such cases, but such practice has not developed much.
Several sets of amendments to laws were introduced then, in order to make the applicable rules more specific and essentially protect tenants, whose position was largely seen as weaker in the new circumstances. The latest amendments were introduced by the Law of Ukraine No. 692-IX On Amendments to Certain Legislative Acts of Ukraine Concerning State Support of Culture, Creative Industries, Tourism, Small and Medium-Sized Businesses in Connection with the Restrictions Related to Spreading of Coronavirus Disease COVID-19 of 16 July 2020. This law provides that, with regard to immovable properties in lease, the sum of rent shall be reduced during the entire period when the property could not be used in the tenant’s business in full as a result of the restrictions and (or) prohibitions caused by COVID-19. Furthermore, in such cases, the sum of rent shall not exceed the total amount of costs that the lessor has borne or will have borne for the relevant period to pay for land, real estate taxes (other than land plot) and utility bills.
As a matter of fact, this law has led to a number of further uncertainties. For example, there is no clear criteria for determining “full” or “not full” use of leased property, while in practice there are a lot of “middle-ground” situations where operation is restricted in part (e.g., restaurants being closed for visitors, but operating in “take out” mode, etc.). Another example is the issue of retrospective application of the law, especially in cases where the parties have already agreed on the specific lease terms during quarantine. Under this law such cases fall into a grey area.
Nevertheless, this law has helped tenants and given them additional arguments to demand concessions from landlords.
New Zoning Regulations Ahead
As mentioned, retailers often interact closely with developers, or act as developers themselves. In this context, apart from the widely discussed reform of the State Architectural and Building Inspection (which deserves separate coverage and is intentionally not covered here), an interesting effect might be expected from the Law of Ukraine No. 711-IX On Amendments to the Land Code of Ukraine and Other Legislative Acts on Land Use Planning of 17 June 2020 (set to come into force on 24 July 2021).
This law addresses a number of problem areas with regard to formal designation and use of land, privatization and lease of state and municipal land, as well as some other issues. The key takeaway from this law is that, unless its implementation is jeopardized by political or other issues, it should facilitate commercial real estate development both within and outside urban territories by eliminating a number of technical and formalistic burdens that currently exist. Moreover, this law goes in line with the policy, which was launched earlier, to raise the significance of planning and zoning documentation at all levels. All together, these factors should lead to economically-substantiated and socially-oriented urban construction and development.
More specifically, retailers may expect more commercially sensible locations to appear on the market in the future, including as a result of re-development of former industrial and otherwise outdated territories into modern mix-use or similar solutions.
New Opportunities from Potential Concessions and PPP Projects
The start of concessions and PPP projects is another hot topic in Ukraine. Retailers should keep an eye on these matters as well, since many such potential projects entail commercialization of infrastructure objects with a huge retail potential. For example, pilot projects have been announced with respect to railway stations, roads and airports, and are currently at different stages of preparations.
Obviously, concession and PPP projects of this kind are, at this stage, mostly of interest for specific industry operators and investors, so retailers will probably come next once the projects actually start. However, we would expect major market players to consider preliminary arrangements with future bidders to ensure a presence at the most interesting locations.
Digital Transformation in Retail Business
The complex economic environment currently compels retailers to respond quickly to the challenges caused by the pandemic and generate effective solutions such as e-commerce. Businesses that were able to adapt to digital platforms showed financial performance, while traditional retailers with weak online strategies exited the market.
To stay on the radar, sellers constantly interact with customers in the virtual space to offer the most comfortable conditions for shopping and provide services online. This is usually attained by using the following tools.
Email marketing is one of the most effective ways to promote products or services while developing relationships with potential customers and increasing sales. When sending marketing emails, retailers must adhere to the rules of Ukrainian e-commerce legislation. These rules include providing customers with direct and simple access to information about the retailer’s company, as well as a clear way to unsubscribe from further receipt of such communications.
Social networks are another effective tool for approaching potential customers. Retailers may introduce identification on their websites using the visitor’s ID from a social network and then process its network history to issue personal recommendations given the preferences of the profile.
Data privacy and security remains a hot issue, especially for online buyers who fear that they are going to be scammed out of money or share their personal information online reluctantly. Therefore, it’s vital here to display a commitment to the security of website visitors. In particular, retailers must ensure protection of personal data, including payment cards data, which became known to them in the course of electronic transactions.
Online stores are closely connected with the delivery of orders to customers. In this respect, if sellers use the services of third party couriers, they have to make sure that the customer’s consent allows them to provide such couriers with information about the customer’s order and location.
In the event that retailers transfer personal data to countries other than EEA countries or member states of the Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data, they shall have a separate customer’s express consent, which is normally included in general consent mentioned above.