Russia’s Detsky Mir: buoyant sales of children’s goods prompt IPO plans

A contraction in Russian economic growth is taking a toll on consumer confidence. But while Russian shoppers are spending more carefully, it appears they can’t say ‘no’ to their kids. Detsky Mir, the country’s biggest children’s goods retailer, is anticipating a double-digit increase in revenues in 2013 for the second year in a row and is confident enough about the outlook to begin planning for an initial public offering.

Detsky Mir (‘Children’s World’), controlled by Sistema, the Russian oil to telecoms and retail group, announced plans on Friday to pay dividends for the first time in five years after sales surged to Rbs 27.75bn ($893m) in 2012. Turning round a Rbs 217m loss in 2011, the company reported net profits of Rbs 456m in 2012.

On the back of the strong performance, Detsky Mir will recommend shareholders to approve a 2012 dividend payment of Rbs 420.5m, or 142,240 per share, at the annual general meeting in June. If market conditions remain favourable Sistema plans to take Detsky Mir public.

“Now Detsky Mir is profitable we see an excellent opportunity to grow further and quickly with a view to a potential IPO in 2015,” Chris Baxter, senior vice president at Sistema told beyondbrics. “ It is very satisifying to produce another dividend-paying company from the portfolio of Sistema.”

Rising living standards together with an uptick in the Russian birth rate are driving rapid growth in the children’s goods market, according to Antonina Tsitsulina, head of the Moscow-based Association of children’s goods industries. Sales of toys in Russia rose by 25 per cent last year to reach Rbs 164.9bn ($5.5bn) accounting for about a quarter of the total children’s goods market.

Detsky Mir has exclusive marketing agreements with leading international toy makers such as Hasbro and Mattel of the US, and has boosted its profile in the children’s educational goods market by acquiring the franchise last year for the Early Learning Centre from the UK’s Mothercare. Responding to Russia’s rising birth rate, the company stocks a wide range of baby cots and diapers in its stores as well as push chairs, children’s clothes and school stationary. The company’s network of 196 stores commands about 7 per cent of the Russian children’s goods market.

Frothy consumer spending has been driving economic expansion in Russia since the country pulled out of recession following the global financial crisis. But the outlook is not altogether encouraging. Although the retail industry is still buoyant compared to that in debt-laden Europe, sales growth has been slowing and fell to 4.1 per cent in April from 7 per cent in the same month of 2012, according to Russia’s state statistical service.

The big question for companies like Detsky Mir is how long children’s goods can continue to defy the downward trend. The rising birth rate will help, according to research by Euromonitor, which notes that “increasing numbers of new borns are boosting demand and ensure a growing number of pre-schoolers” in the years ahead.

Improved living standards have encouraged Russians to revise their prerogatives from price to quality and buy more branded and licensed goods for their children.

While going back to buying cheap Asian and Chinese imported toys and games that still dominate the market is an option, parents everywhere tend to put their children first and won’t want to stoop to that.

Baxter says that demand for children’s goods is less elastic than consumer segments because kids constantly grow. “It’s very difficult to say ‘no’ if you need a new pram for your child or a new bicycle when the old one is too small.”

Related reading:
Guest post: Russia’s economy is constrained by its growth model, beyondbrics
Russia’s post office: can’t keep up, beyondbrics
Russia online retail ‘to hit $25bn’, beyondbrics
Russians on holiday shopping spree, beyondbrics (Jan 2012)