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. Last Updated: 07/27/2016

Sistema Plans $250M Detsky Empire

MTLandmark store Detsky Mir is to be at the heart of Sistema's expansion program.
Financial holding AFK Sistema plans to spend $250 million on renovating Moscow's Detsky Mir store and opening another 22 regional Detsky Mirs nationwide over the next two years, Sistema vice president Levan Vasadze said Tuesday.

Speaking at an investment seminar organized by the American Chamber of Commerce, Vasadze said the children's clothing and toy store's sales grew by 60 percent last year.

The holding, which has interests in banking, media, oil, telecommunications and real estate, intends to use some of its own money for the expansion and to attract investors, he said.

Ksenia Deich, spokeswoman for the Lubyanskaya Ploshchad store, said it had been the nation's No. 1 children's store for the past 46 years and had no strong competitors.

"In the next six years, we plan to open a chain of 48 trading stores throughout Russia. They will be new trading centers of a European standard," she said in a telephone interview.

After the store opened in 1957, it became the headquarters of a national network of state-owned children's stores; before perestroika, there were 26 stores with the Detsky Mir brand in Moscow alone, Deich said.

"There was one in practically every large city," she said.

In perestroika's wake, the system broke down. Today, Sistema-controlled AO Detsky Mir, which runs the Moscow store, has relationships with only three stores bearing the name, she added.

Vasadze said AO Detsky Mir had no intention of fighting a brand war with other stores using the Detsky Mir name throughout the country.

Deich said that not all of the current store is used well and that the reconstruction -- expected to cost $60 million to $80 million -- would result in the retail space being expanded from 20,000 to 55,000 square meters.

Maxim Karbasnikoff, associate director and head of retail at Jones Lang LaSalle, said Detsky Mir had a very successful business with approximately 10 million visitors per year.

"The reason for their success is clear -- there are few players on the market and Detsky Mir is very big," he said Tuesday in a telephone interview.

Last week, AFK Sistema announced that in order to carry out the reconstruction, it had cut a deal to buy the building from the Moscow city government. No details of the deal were released.

Alexander Obukhovsky, retail analyst with Colliers International, said it was likely that City Hall owned the store because it was obliged to provide services to children, whereas most shops in Moscow were owned by the company that ran them. The sale was likely to involve some payment for the building as well as a commitment to carry out the reconstruction, he added.

Inez Astakhova, spokeswoman for Sistema's real estate arm, said five foreign firms had been invited to bid in a tender for the architectural redesign of the building. She declined to name the firms.

Vasadze said Detsky Mir would continue to trade during the reconstruction, which will include the creation of a mini amusement park, several entertainment centers and children's food and drink outlets, Interfax reported.

Obukhovsky said Sistema should not have trouble attracting investors in its projects. Karbasnikoff agreed.

"We know a lot of people who would be interested," he said. "The place is really attractive and it has a lot of potential to improve. Investors are familiar with the project."

But while the store's location was a good one, it might attract a broader clientele and be more profitable if it were turned into a general department store, Obukhovsky said.

"I doubt whether using more than 50,000 square meters solely for children's goods is economically justifiable."