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Annual report 2013

Trends in trading sector operating environment

Several megatrends affect Kesko’s operating environment.

Changes in population structure
  • Decrease in family size
  • Ageing of population
  • Urbanisation
  • Sufficiency of labour
Rapid development of digital services and multi-channel approach
  • Ease of shopping
  • Access to services 24/7 irrespective of place
  • Life cycles of products and services are shorter
  • Targeted marketing based on customer databases
Increase in customer expectations and product awareness
  • Transparency of selections, prices and availability
  • Importance of social media channels: information, exchange of experiences and interaction
  • Product origins and responsibility are important selection criteria
  • Quality and healthiness of food
  • Retailers’ own brands increase the diversity of selections
  • Supply of customer-oriented services
Mitigation of climate change
  • Attention to the environmental impacts of the entire production chain and during the product life cycle
  • Improving transportation efficiency and providing energy efficient solutions for stores
  • Offering eco-friendly options for customers
Slow economic growth and consumers’ price consciousness
  • Decrease in consumer demand
  • Low-priced products are preferred for shopping baskets
  • Sales of retailers’ own brands increase
Requirement for openness and reliability in business operations
  • Good corporate governance
  • Responsible working principles
  • Open communications
Kesko's value chain


Opportunities and risks related to the operating environment: 

Multi-channelling is increasingly important in the retail trade

E-commerce and digital services are increasingly popular in consumers’ shopping behaviour. E-commerce increases price transparency and consumers’ choices. Purchasing and marketing of products and services are more individualised and more often than not, take place on the web.

Opportunities Risks
  • E-commerce and digital services coupled with a comprehensive store site network provide a basis for excellent customer service in Kesko’s different business operations.
  • Kesko aims to serve customers as well as possible at different stages of the buying process irrespective of time and place.
  • The change in the divisional structure begun in 2014 is aimed to offer customers an easier multi-channel shopping experience at physical and online stores.
  • Kesko develops targeted electronic customer marketing based on buying behaviour and increases online availability of product information for improved customer satisfaction and increased sales.
  • Challenges to e-commerce profitability include cost effectiveness of logistics models and the suitability of the existing stores sites for e-commerce logistics.
  • Continuous and rapid changes in e-commerce and digital services present special challenges to the development of new services.
  • The acquisition of store sites can be slowed by town planning and permit procedures and the availability and pricing of sites. When the share of e-commerce grows or the market situation changes, there is a risk that the operations of a chain relying on physical stores or those of a store site become unprofitable.

 

Economic operating environment

Kesko’s objective is to achieve profitable growth. Its achievement requires customer-driven operation and good cost efficiency in all of Kesko’s business operations. From the perspective of growth, capital expenditure in the grocery trade in growth centres in Finland and Russia, expansion of the building and home improvement store network in Kesko’s operating area, as well as the development of e-commerce and online services are essential.

Opportunities Risks 
  • The competitive strategy emphasizes customer orientation in selections, quality and service, in addition to competitive prices.
  • Kesko’s strong financial position and net debt-free balance sheet provide excellent possibilities to develop operations.
  • Kesko sees Russia as an opportunity in the long term and continues to make capital expenditure in Russia.
  • The weak outlook for the Finnish economy and increasing unemployment weaken purchasing power and consumer confidence. This has negative repercussions on the purchasing behaviour and demand in all of Kesko’s divisions.
  • Kesko’s market performance varies greatly from one country and division to the next.
  • The level of uncertainty around economic development in Russia is high and political and country risks in Russia have risen significantly during the past year. 

Purchasing chains

The transparency and responsibility of purchasing chains have become increasingly important.

It is necessary to provide customers with increasingly detailed information on the origins and manufacturing methods of products. Care must be taken that responsibility is realised in all operations and throughout the supply chain. Product safety management shall also be without gaps and traceable across the whole supply chain.

Opportunities Risks
  • Diversified networking with suppliers of goods and providers of services requires that all operators in the supply chain adopt the same values, objectives and operating practices and are committed to international sustainability assurance procedures.
  • Responsibility communications, stores’ K-responsibility concept and product labelling can be used to help customers make responsible buying decisions.
  • Careful and traceable product safety control and quality assurance strengthen customers’ confidence in the K-Group.
  • Non-compliances in the management of social or environmental responsibility within the supply chain cause human rights violations, environmental damages, financial losses and the loss of customer confidence while negatively impacting the credibility of responsibility communications.
  • A failure in the product safety management can result in financial losses, the loss of customer confidence or, in the worst case, health hazards to customers.

Impacts of climate change

Climate change causes risks and opportunities impacting both habitats, regulations and reputation factors.

The emissions from the production of electrical and heat energy of properties represent a significant part of Kesko’s and the K-Group stores’ environmental impacts. In accordance with Kesko’s environmental and energy policy, the real estate functions work in cooperation with business partners to develop solutions for the new building, repair, concept changes, maintenance and use of real estate properties with the aim of reducing the consumption of materials and energy during the life cycles of these properties. Kesko also helps its customers find energy-efficient solutions.

Opportunities Risks
  • Kesko efficiently recovers waste heat, such as condensation heat generated from cooling stores' refrigeration units, for heating using the latest technology.
  • Kesko actively examines the use of renewable energy sources. Among other things, the use of soil and water as sources of heat and cooling, as well as solar energy, will increasingly be potential alternatives as the technical solutions become more sophisticated.
  • Products and services offered by the building and home improvement stores make it easy for customers to improve the energy efficiency of their homes and to find solutions that support sustainable development.
  • Climate change increases the risk of extreme weather phenomena. Extreme phenomena can cause damages or business interruptions which cannot be prevented. There is also the risk that insurances do not cover all unexpected accidents and damages caused by extreme phenomena.
  • In case energy source policies prove wrong, they may cause unpopularity among customers and financial losses.

CASE: CLICK&COLLECT SERVICE SPEEDS UP SHOPPING

 

Rautakesko’s K-rauta, Rautia, K-maatalous and Byggmakker chains provide their customers with comprehensive electronic services that cover their entire operating area. Such services include store-specific product, price and availability information, electronic design programmes, demand calculators, videos on work instructions and online stores.

The click&collect service was introduced in 2014, making shopping easier and quicker for customers. Over the course of 2015, the service will be extended to include B2B customers and home deliveries. All stores in Rautakesko’s chains will have launched an online store by the end of 2015.

Click&collect sales of food will also increase. Customer groups include families with children, consumers seeking easy, convenient everyday shopping, senior citizens and corporate customers.

K-food retailers opened several click&collect online stores across Finland over the course of autumn 2014.

In September 2014, K-supermarket Hämeenkylä in Vantaa launched an online food store that allows customers to place orders online and then collect them from the store. Tanja and Harri Rinkinen, who live in Espoo, have good experiences with the service.

”We use the click&collect service of K-supermarket Hämeenkylä at least once a month. Every time it feels great to drive through the crowded yard to the collection point and get the shopping sorted in bags into the car boot in just a few minutes. It feels especially good on holiday eves. Placing orders online is easy and we have our basic shopping list recorded in the service,” say Tanja and Harri Rinkinen.

 

 

ADDRESS: GOOD CORPORATE GOVERNANCE IS IMPORTANT

 

From an investment perspective, Kesko has many of the attributes that we hold high at Solsten. The most important and encompassing attribute relates to sound corporate governance. To us, this means that the elected Board of Directors and management team act in the best interest of the company’s shareholder base, including minorities, in order to maximize shareholder value over time.

Good corporate governance is especially important, and likewise difficult to uphold, when a company’s operating environment is challenged by both structural and cyclical headwinds. This has been the case for the Finnish retail industry in 2014.

Kesko has of course not been immune to these headwinds, but nevertheless taken a proactive stance to mitigate them. Measures include successful cost cut programs, started as early as 2012, the restructuring of loss-making Anttila, incl. Kodin1 department stores, and the planned reorganization of various divisions. Albeit tough decisions to make, it displays a resiliency and ability to adapt to changing retail conditions. As a result, both margins and return on capital employed have remained stable despite falling sales.

Going forward, we are excited about Kesko’s planned divestment of real estate assets which we think will create shareholder value. We also hope that strategic options are being evaluated for Anttila and that countermeasures are taken for Intersport with regards to XXL’s aggressive expansion into Finland.

We at Solsten look forward to yet another year of good company transparency and open shareholder dialogue.

Harald Havnen is a partner and an investment analyst at Solsten AS, Norway.