As Debenhams and Topshop look set to disappear, will Covid make UK high streets go digital?

It will surely rankle with Sir Philip Green, the erstwhile “king of the high street”, that the front-runner to buy what's left of his stricken fashion empire is Asos.

Back in 2012, before Sir Philip’s reputation lay in tatters, he accused the young pretender of piggy-backing on his success by selling second-hand Topshop clothes on its website.  

Asos would never be allowed to sell new Topshop clothes, he vowed. Fast-forward to 2021 and it now looks like Asos could soon be the only company selling Topshop clothes. The brand Sir Philip built through lucrative partnerships with the likes of Kate Moss looks set to disappear from high streets altogether if Asos’ purchase goes through.

As a successful online operator, Asos understandably only wants the brands, not the messy expensive stuff like 400-odd stores and thousands of staff.

It would be tempting to see the this as a changing of the guard, a handing over of power from the analogue retail world to the digital, especially as news of the talks arrived on the same day that online upstart Boohoo sealed a deal for Debenhams which will see all of the 242-year-old chain's stores close.

It will certainly mean another few hundred boarded-up shops, adding to almost 20,000 retail closures last year. According to property firm Savills, one in eight of the UK's shops now lies empty, leaving 142 million square feet of vacant retail space.

But are we really heading for a virtual high street? Or will other, more prudently managed businesses emerge from the coronavirus pandemic to strong enough to rebuild in bricks and mortar?

With the benefit of hindsight, it is simple enough to plot the decline of Debenhams and Arcadia . Had you predicted it back in 2006, however, few would have listened to you.  

Debenhams’ private equity owners floated the department store chain on the stock market for £1.7bn while Green became Sir Philip, knighted for services to retail, just months after he paid his Monaco-based wife Tina a record-breaking £1.2bn dividend.  But beneath the juicy profits, problems had already been set in motion.

The trio of funds – CVC Capital, Merrill Lynch and TPG – who had bought Debenhams three years earlier netted huge windfall profits from a company they had saddled with £1bn debt and too many long, inflexible leases.  

High fixed costs and dwindling sales meant money was not available to invest in the stores that remained profitable or to transform the business for the internet age.

Similarly, Arcadia failed to update its image, became less relevant to the young shoppers that made Sir Philip his fortune, and failed to adapt to a shift in online shopping thanks largely to its famously technophobic owner.

Both companies were hamstrung by a way of doing business that extracted short-term profits at the expense of long-term value.

While they may have been particularly poorly equipped to make the inevitable shift to online they will certainly not be the last retail casualties of the pandemic.

UK retail sales were unexpectedly weak in December and a further 200,000 jobs are forecast to go this year as the furlough scheme and business rates holidays come to an end, leaving businesses with tough decisions to make.

While it is undeniably the most difficult of balancing acts, Next, which has a benefited from its heritage as a catalogue retailer, has shown that it is possible to do both online and offline sales well.  

And there will be buyers for Arcadia and Debenhams stores in the best locations. Mike Ashley’s Frasers Group are among those rumoured to be interested.

However, there is a looming problem that requires a solution. Exiting the pandemic, retailers will be saddled with billions of pounds of debts taken on to pay rent and bills for stores that were forced to shut.

Meanwhile, their online-only rivals have enjoyed a sales boost without the dead weight of stores with no customers. A playing field that already offered tax advantages to e-commerce over traditional shops will be further tilted. Boohoo, Asos and others are ready to hoover up bargains.

As the woes of Debenhams and Arcadia show, retailers that don’t invest boldly in the online transition can soon slip into inexorable decline.

But there is a key difference here. Most businesses’ current problems don’t stem from greedy owners sucking out cash to buy a new yacht but from the cost of public health measures required by law. As far as possible, businesses should not be held back by debt they took on because of government actions.

To prevent irreparable damage to Britain’s already beleaguered town centres requires some level of debt forgiveness, government equity stakes in businesses, or a more ambitious bailout.

For policymakers to shrug their shoulders and leave firms to the whims of the market when their problems are the result from a massive state intervention would be grossly unfair.