​“We are in a sweet spot right now. Lease rates are way down and the competition are weak. We need to make the most out of the situation. Now is the time to invest into the shoe business.”

Anton Titov is irrepressible and his enthusiasm is infectious. We first met in 2013 when he travelled from his native Siberian city of Novosibirsk to try and IPO his company. Titov was still a kid when the Soviet empire collapsed and his father set up a shoe store, Titov told bne IntelliNews in 2013 in an exclusive interview when the company first tried to float.

Today dubbed the “Magnit of Shoes,” Obuv’s distinction is to be – like the supermarket and long-time investors’ darling – focused almost exclusively on Russia’s regions, virtually ignoring the Russian capital that has a local population larger than most Central European countries. In the last five years Obuv’s retail network has doubled to more than 500 stores in 140 cities across the breadth of Russia, but it still only has two stores in Moscow.

Titov was still in his thirties when he first tried to do an IPO. In 2013 Russia’s economy was sliding into recession, as it ran up against its structural constraints. The conflict with the West following president Vladimir Putin’s aggression in Ukraine just made everything worse. GDP had been running at around 6% for almost a decade, but as the economy slowed, interest in Russia’s equity market shrivelled and the IPO was called off. 

Now Titov is back for a second attempt. Obuv has taken in a new investor, oligarch Mikhail Prokhorov, who made his initial fortune running the metallurgical giant Norilsk Nickel. Titov would not give many details, but said that Prokhorov was a purely financial investor and has a stake of around 25%.

Titov retains his boyish charm and ebullient nature – as well as his laser focus on the footwear business.

“The potential for growth in the Russian market is still very high,” Titov told bne IntelliNews in an interview from his headquarters in Novosibirsk. “Shoes wear out and have a life cycle of about two years. Russia’s economy is recovering now so people have more money to pay for things like shoes. In the last two years the public were suffering from a price shock [following the sharp devaluation of the ruble at the end of 2014] but they are starting to recover from that shock now.”

The company declined to discuss details of the upcoming IPO, but bne IntelliNews' market sources say the float should happen in October and Obuv will sell about 30% of its shares.

These boots were made for sellin’

Financially Obuv has been growing very fast. Sales have recovered from the recent crises and are now growing by about 11% a year, according to Titov. Over the last five years revenues grew by a compound annual growth rate (CAGR) of 31%, the ebitda CAGR has been even faster at a rate of 44%, while the ebitda margin is 25.5% for 2016.

The company had a small setback in August when it reported its first ever fall in retail sales in January-June 2017, thanks to a colder summer than usual that hurt the entire country (although total revenue was still up 1.6%, thanks to significant growth in the company’s wholesale operations).

Originally Obuv moved its production to China where eventually the company found partners that could make high quality, low-cost shoes that could compete in Russia on both counts against the expensive imports and the domestically produced shoes. Obuv has the mid-market price range as its niche.

But here too things have changed dramatically in recent years. The deep devaluation that followed the collapse of oil prices at the end of 2014 means the costs of labour in Russia are now less than the cost of Chinese labour. Titov has not moved all the production back to Russia, despite building a second factory in Russia.

“We decided to outsource to China and 90% of our shoes used to be made there as we needed a diversified product range,” says Titov. “We have five retail formats and five main brands. It is not possible to make all these different kinds of shoe in the same factory. So we use the Chinese partners to make many of our shoes.”

Eighteen months ago Obuv built a second Russian facility and doubled its production capacity to one million pairs of shoes a year, although it is currently producing about 500,000 pairs a year. With ample capacity in hand Titov says there is no need for any capex in the near future.

“We could make a million shoes a year if we just hired more workers,” Titov told bne IntelliNews. “We don't need to invest in new capacity.”

Bags and boots

Women make up eight out of 10 of Obuv’s clients so over the last five years the company has invested in expanding its value offering by adding matching handbags and other accessories to the product lines.

But sales in Russia are lagging behind Western countries. Russian women buy on average two pairs of shoes a year, down from the three pairs a year pre-crisis. And even that was below the five pairs a German woman buys or market leaders the UK and USA, where women buy an average of eight pairs a year, according to data from Euromonitor. Titov says Russia’s sales should be close to Canada’s because of the similarities in the weather, around 4.5 pairs a year.

Another problem the company has to deal with is that relative incomes in Russia are much lower than in the West and sales are far more seasonal because of Russia’s extreme climate. A mother needs to buy shoes for her whole family in the spring and autumn, which can put a strain on household finances, so the company launched a pay-by-installments plan five years ago that has proven to be hugely popular.

Together with local banking partners, Obuv allows customers to pay for purchases in 10 instalments. Today more than half of the company’s customers buy their shoes using these interest-free loans (although a small percentage was introduced after the 2008 crisis). Titov says that the instalment plan also boosts loyalty and 80% of the customers using the scheme come back to buy more shoes next season.

Obuv has focused on Russia’s regions where incomes are a fraction of those in  Moscow and St Petersburg, but the two crises of 2008 and 2015/6 have had a very different impact on the company’s business.

“The 2015/16 crisis hit the whole country, but didn't have a particular impact on the regions. Incomes fell uniformly everywhere,” says Titov. “The 2008 crisis was different. The so-called mono-cities [cities where one giant enterprise dominates the local economy] were especially hard hit, while cities with a more diversified local economy did much better.”

About one in 10 Russians live in a monocity, which means the bulk of the regional market is unexposed to these problems. All Obuv is waiting for now is for people to feel the general economic revival that clearly started at the beginning of this year.

“The regional potential is huge,” says Titov. “We are in all the big cities and ones down to about 100,000 inhabitants. But that is part of why we haven’t pursued the high-end brands as they are too expensive for the regional market.”

The final step will be when the leading companies start to consolidate the sector. The chaos of the 1990s means Russia’s market remains high fragmented across the board. Some sectors are starting to consolidate now like telecoms, banking and supermarkets, but shoes is not one of them.

“The market is not consolidated. The top 10 players account for only 13% of the market. In Germany the top 10 make up a 43% market share,” Titov says. In 2014, Obuv bought rival Rossita adding 83 stores to its network and clearly over the coming years more of these deals are in the pipeline.