Coronavirus implications for Tallinna Kaubamaja Grupp AS business

On 12 March, the Government of the Republic declared an emergency situation due to the global pandemic spread of the coronavirus, which causes the disease known as COVID-19, the detection of the spread of the virus within Estonia and the high probability of its further spread, and the resulting risk of mass infection. As of 27 March, additional restrictions were imposed on the freedom of movement in commercial enterprises under the order of the head of the emergency situation of 24 March. The measures will remain valid until the order is amended and their necessity is assessed at least every two weeks. At this time, it is not known when the shopping centres can be reopened for business in their entirety.

The various measures established to prevent the spread of the COVID-19 virus led to abrupt changes in the current organisation of life and in the economic environment and affected the daily work of the companies of Tallinna Kaubamaja Group. Tallinna Kaubamaja Group monitors the developments related to the outbreak closely and diligently implements the instructions of the WHO, the Government of the Republic, and the Health Board.

The end of the first quarter of 2020, which began at a good pace for both the Estonian economy as a whole and Tallinna Kaubamaja Group, was hit hard by the coronavirus crisis, which has had a serious impact on the economy. The coronavirus crisis began at the end of the first quarter and as such, its impact will not be fully reflected in the results for the first quarter of Tallinna Kaubamaja Group. According to the unaudited financial results for the first quarter of 2020, published on 13 April, the Group’s sales revenue was 175.5 million euros (an increase of 7.4% compared to the first quarter of 2019) and the net loss for the accounting period was 1.7 million euros due to the income tax on dividends (the loss in the first quarter of 2019 was 2.2 million euros).

In connection with the virus threat, the Group immediately took measures to ensure the safety of both its customers and employees. To ensure the safety of customers, the Group’s retail units were equipped with hand disinfectants and instructions for their use at store entrances. In addition, signs and warning lines are used to make sure that people keep a two-metre distance from each other in the stores and the number of people in the store at one time is limited. Security staff and store employees instruct customers to make safe purchases. Corresponding instructions are also distributed via speakers and on the digital screens in the stores. Customers are encouraged to use self-service checkouts, which also ensure a safe distance between customers. To protect the health of store employees, safety glasses have been installed at checkouts and protective visors and masks have been distributed to personnel who come in direct contact with customers.

If, despite all the measures taken, an employee of a sales unit catches the coronavirus, crisis exercises have been carried out in stores to deal with such cases and action plans, a work environment disinfection plan, and a staff replacement plan have been prepared, which ensures a quick reopening of the sales unit.

Proceeding from the order of the Government of the Republic, all stores of the Group’s footwear trade segment, the industrial goods departments of the Kaubamaja segment, and I.L.U. shops have been closed since 27 March. The Tartu Kaubamaja department store, Viimsi Shopping Centre, and the historical Kaubamaja building, mainly used by the Kaubamaja segment and located in the centre of Tallinn – all managed by the Group’s real estate segment – are also closed.

Closing the stores has led to an enormous growth in the popularity of the Group’s e-stores. Their performance could not immediately keep up with the sharp increase in demand. However, solutions were quickly found to improve the assembly capacity of e-shops. The employees of closed sales units were reassigned to e-shops; temporary additional staff was recruited. Fast and efficient solutions are constantly being sought to increase supply and technical capacities.

Despite the significant increase in the sales volumes of the Group’s e-channels, the sales revenues of the Group in the coming months will be lower than in 2019. The negative impact is less pronounced in the supermarket segment, as food and convenience stores remain open. A larger decline in sales revenues is expected in the footwear, Kaubamaja and car trade segment. In addition, the changes concern the Group’s real estate segment due to the closure of properties managed by it. The business of the Group’s real estate segment is characterised by a large share of intra-group turnover, which is why the decrease in rental income due to the closures has a smaller impact on the Group’s consolidated financial results.

In the changed situation, the entire Group's cost base is critically reviewed. Various measures have been used to reduce labour costs, including the reduction of wages and the use of state aid measures, to deal with the surplus of labour due to the reduction of workload related to the slowdown in the economic activities of the Group companies. Negotiations are underway with lessors to reduce the rental costs of closed sales areas.

In conclusion, the ability of the Group to adapt quickly and react flexibly is crucial. The Group is constantly monitoring its changing risk assessments and analysing the effects of the virus on an ongoing basis. It is highly probable that the change in consumption behaviour, the loss of revenue of closed sales units and the additional costs incurred to prevent the spread of the virus will put pressure on the Group's profit. The duration of the movement restrictions and other measures are unknown and the overall impact of the pandemic on the Group's financial results cannot be objectively predicted at present. We estimate that the economic changes caused by the virus will not affect the Group's sustainability.

Raul Puusepp

Chairman of the Executive Board

Tel.