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Top Questions for Retailers in China Amid COVID-19

Retail Did You Know?

August 27, 2020

While retailers in China have been permitted to reopen, required steps to do so include health and sanitation measures. Some local governments are also considering extending the weekend in order to stimulate consumption and promote economic recovery.

The People’s Republic of China has come a long way in the fight to contain and control coronavirus (COVID-19). After experiencing the unprecedented lockdown of millions of people in Wuhan City in Hubei Province, the prompt closure of physical retail establishments—with the exception of those deemed “essential”—required immediate adjustments as patrons diminished significantly and the cost of having the lights on often outweighed the cost of closing.

China has only just lifted some of its final restrictions. Interprovincial tourism was only again permitted and museums and tourist attractions, which harbor significant numbers of retail outlets, were only able to reopen—at just 50% capacity—as of late July 2020.

How have retailers in China managed reopening?

Many retailers needed to manage remaining open while protecting themselves, their personnel, and their customers from potential infection. A shortage of masks, gloves, and other protective equipment, in addition to the decrease in people shopping in physical outlets, caused financial distress for many retail outlets. Retailers had to find a balance between protecting their personnel—so that they would have staff to reopen the stores as soon as the lockdowns were lifted—and reducing overhead, which often meant a reduction in pay and/or hours for many employees. Many employers that wanted to protect their reputations in the future job market waited as long as possible before reducing pay and hours, in order to be remembered for taking a more compassionate and humane approach toward their employees.

However, the experience of retailers has not been uniform. Many retailers scrapped and revised their business models to enhance the online shopping experience. As physical stores were closed, many retailers reinvented themselves online, ensuring they protected their brand and kept it front and center for consumers. Many retailers that did not have sophisticated online platforms needed to react and modernize their systems quickly.

Against this previously unexperienced challenge for retail, the significant reduction in foot traffic for more metropolitan areas served as a catalyst for change in consumer behavior and offerings, as consumers adapted and embraced online shopping. Those retailers that were able to adapt to ecommerce quickly and efficiently could weather the storm far better than those who were not as agile. Some creative restaurants, for example, immediately turned their wait staff into delivery personnel and/or organized curbside pickup and takeout so they remained relevant and busy.

What were the required steps for reopening?

Most retailers that survived the forced closure of operations are now open. The rules for reopening and remaining open are subject to different measures across the country, but by and large, the following steps were required:

  • Building management, whether it be a retailer operating a standalone building or building management for a mall, must (1) conduct temperature checks on visitors, which is often done with contactless infrared temperature scanners; and (2) have all visitors scan a QR code on their phones for a local “health kit” application that provides color-coded ratings for individuals. Only those visitors with green ratings are permitted entry, while anyone with a yellow (caution) or red (restricted) rating will be prohibited from entering.
  • All visitors and employees who wish to enter any indoor retail establishments are required to wear face masks and should maintain social distancing of one meter (three feet). In some jurisdictions, if the ventilation is poor or the location is relatively crowded and social distancing of one meter cannot be maintained, face masks are required.
  • Building management and individual retail tenants should maintain good ventilation and conduct regular disinfection in all high-traffic areas, including interiors of elevators, elevator buttons, escalator railings, door handles, etc.

Retailers in China have also benefited from the widespread use of electronic payment systems, namely, WeChat and Alipay. With these systems, retailers are able to operate without employees needing to touch cash or interact as closely with customers. Rather, customers can scan a QR code for payment or the retail staff can scan the customer’s phone to secure payment. In this way, payment is quick and further minimizes the human interaction, thereby reducing the chance of infection.

Did China experience any layoffs in the retail sector?

China’s employment system and salary payment regulations placed a heavy burden on employers as they continued to accrue labor costs, often at full wages, while their businesses may have shut down completely, or significantly, during the outbreak period. New regulations issued during the COVID-19 outbreak provided welcome flexibility for employers to address this burden.

With respect to staffing levels, generally, public policy does not encourage layoffs in China, and the pandemic did not create an exception. Rather, in response to the inability of many retailers to operate fully during the lockdown period and thereafter, local governments issued regulations around shutdowns that are a unique construct in China and are akin to layoffs in the United States, but critically the employees remain employed and covered by social benefits and entitled to a significantly reduced salary for not performing any services.

A shutdown may involve all or a part of a retailer’s business operations. If an employer does decide to shut down all or part of its operations at one location or across the country, the employer is required to consult with its employees. In a shutdown situation, the employees are entitled to receive their full salary for the first full wage payment cycle. After the first full wage payment cycle, if the employer cannot resume regular operations, then the employer can pay employees the local minimum wage, or the applicable percentage of the minimum wage (based on local regulations). A full wage payment cycle is usually one month, but it is shorter for part-time employees who are required to be paid biweekly.

The shutdown process allowed many retail establishments the ability to maintain staff at reduced cost until they could resume operations or redeploy the employees to another location.

What policies and relief measures does China have in place?

In response to the severe financial impact caused by COVID-19, the central government and local governments implemented numerous monetary policies, financial aid, and tax relief measures to support companies and the public.

Some local provincial governments (such as those in Jiangsu, Jiangxi, and Anhui) introduced plans to implement a 2.5-day weekend to stimulate consumption and promote economic recovery, particularly in the tourism and retail sectors. That said, how the plan will be implemented in practice will largely depend on the negotiation between employers and employees, as retailers are generally not able to reduce a full-time employee’s hours unilaterally without employee consent.

In addition, the central government announced a series of measures reducing taxes for companies and individuals, as well as a reduction in social insurance contributions, after these payments were subject to deferral during the height of the pandemic in China. Some local governments have also announced the postponement of monthly tax filings and corporate income declarations. These measures aim to lower the costs for companies and alleviate their fiscal pressures to some extent, and the retail sector has been a significant beneficiary of these measures.

The most significant challenges that retailers in China will face in the next three months will likely continue to be economic in nature. While the pandemic is currently under control in China, pre-COVID-19 levels of consumption and physical shopping are not likely to return soon. With a weaker economy, consumers are spending less and are more cautious about spending time in stores, when they can shop just as easily and with less risk from their homes. In addition, physical retail outlets face higher operation costs to ensure regular disinfection and other pandemic prevention and control measures.

Finally, as Beijing witnessed a second outbreak in June 2020, the government acted swiftly and closed down parts of the city, including retail establishments, to curtail the contagion. The uncertainty of whether another outbreak may take place and again force retailers to close their doors provides additional challenges.

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Contacts

If you have any questions or would like more information on the issues discussed in this Retail Did You Know?, please contact any of the following Morgan Lewis lawyers:

China
Lesli Ligorner
Yuting Zhu