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Review by the President and CEO:

Towards a unified K-Group – for shopping to be fun

2015 was a significant year for Kesko: in May we published our new strategy, which provides guidelines for our operations for years ahead. A successful strategy is based on the value that guides all our operations: ”The customer and quality – in everything we do”.

The long recession, public-sector cuts and increasing unemployment have reduced consumers’ purchasing power in Finland, our main market area. Despite the difficult market situation, we can be satisfied with strategy implementation and the financial result in 2015. In the grocery trade, market position remained stable and profitability was good. In the home improvement and speciality goods trade, profitability improved significantly and market share strengthened especially in Finland. In the car trade, Volkswagen was again the market leader.

In terms of Kesko's growth strategy, it was essential to make an agreement on the acquisition of Suomen Lähikauppa in November 2015 and on the acquisition of Onninen announced in January 2016. With the acquisition of Suomen Lähikauppa, Kesko's neighbourhood retail services will improve significantly. The acquisition of Onninen, for its part, will materially strengthen Kesko's position in the building and technical trade. Both of the acquisitions will enable strong growth and more customer oriented services as well as significant synergies.

Kesko Group's financial position is very strong. At the end of 2015, liquid assets were €887 million and the equity ratio stood at 54.7%. The return on capital employed excluding non-recurring items rose to 11.7%. In addition to financing the acquisitions, the strong balance sheet enables a €2.50 dividend per share to be proposed to the General Meeting to be held in April 2016.

Changing operating environment requires a readiness to change

The operating environment in the trading sector is undergoing a major change: e-commerce, multi-channel services, social media, the sharing economy and the awareness of the impacts of consumption on the environment are changing customers’ purchasing behavior.

The rapid development of digital services enables customers to make and pick up their purchases via multiple channels irrespective of time and place. International retail groups that specialise in one product line are challenging local operators, which have to further increase the efficiency and quality of their operations.

For the K-Group, success in a tightening competitive situation requires a readiness to change and promote changes with determination and speed. This calls for focus, a clearer corporate identity, the highest priority on customer experience and quality, and digital services being launched more rapidly than before.

Kesko’s strategy proceeds

Over the course of 2015, the determined implementation of the strategy proceeded in all of our strategic growth areas: the grocery trade, the building and home improvement trade, and the car trade.

In the grocery trade, the main strategic objective is growth in the Finnish grocery trade. In the building and home improvement trade, our objective is to be one of the three largest operators in Europe. In the car trade, the objective is to strengthen market leadership in Finland.

In March 2015, Kesko divested the department store chain Anttila Oy to the German investment fund 4K INVEST. The transaction supports our objective of being an increasingly focused operator in the future.

In June 2015, Kesko Corporation, AMF Pensionsförsäkring AB and Ilmarinen Mutual Pension Insurance Company set up a joint venture named Ankkurikadun Kiinteistöt Oy. The joint venture owns store sites primarily used by Kesko Group.

In November 2015, Kesko agreed to centralise its building and home improvement trade operations in the Baltic countries in Senukai, its Lithuania-based subsidiary. This will provide us with better opportunities to accelerate profitable growth in the developing Baltic and Belarusian markets.

In the grocery trade, one of the focus areas is increasing and renewing the network of neighbourhood stores. We want to enhance the availability, quality and price competitiveness of the neighbourhood retail services that are suitable for Finnish consumers. The acquisition announced in November 2015, in which Kesko agreed to acquire Suomen Lähikauppa Oy, contributes to this objective.

In the home improvement and speciality goods trade, Kesko’s strategic objective is to increase the building and technical trade, which will be significantly strengthened by the acquisition announced in January 2016, in which Kesko agreed to acquire Onninen, which specialises in the HEPAC and electrical products trade.

In the car trade, the autumn was overshadowed by the negative publicity resulting from the software adjusting nitrogen oxide (NOx) emissions detected in EA 189 series diesel engines of  Volkswagen Group. Remedial measures for the affected cars have been confirmed in Europe and a recall campaign will begin in Finland over the course of 2016. Read more in the GRI report. 

Attention to the appreciation of Finnish production

Price competition in the food business has increased in Finland during the past year and the consumption of imported food has increased. It is important to understand that the fates of the Finnish trading sector and producers are connected. We cannot afford to lose any more jobs in our domestic food chain. We have publicly highlighted the need to ensure that price competition does not negatively affect the quality of Finnish food or the vitality of food production and the food industry. By introducing the ‘Thank the Producer’ operating model, we want to draw attention to the position of producers and the appreciation of Finnish production.

For shopping to be fun

The key success factor of Kesko and the K-Group has been K-retailer entrepreneurs, who are strongly present in consumers’ daily lives.

Store-specific, tailored services are constantly being created in K-stores. Growing services for customers include click and collect services, parcel lockers and postal services. The first K-rauta Express was opened in Helsinki in August and the first Starbucks coffee shop was opened next to a K-citymarket in Espoo in September.

In November 2015, we opened K-Myllypuro, the K-Group's test store where Kesko, in cooperation with the retailer entrepreneur, will boldly experiment with various food store concepts and models. The test store also takes customer-orientation to a new level ─ customers will decide how the store, its product selections and services develop in the future.

As part of the implementation of the strategy we will create new digital services for customers. The K-food mobile application published at the beginning of October provides personal benefits and store-specific special offers, a smart shopping list that recommends products frequently bought by the customer, and nearly 6,000 recipes with instructions.

Responsibility provides the basis for our operations

In accordance with our mission, we create welfare responsibly for all our stakeholders and society as a whole. Kesko is a significant tax payer that always pays taxes on operating income and assets to the operating country in compliance with local legislation and regulations.

In 2015, Kesko’s responsibility work in other operating countries was promoted systematically and the local companies in each of the countries prepared their own responsibility objectives in support of Kesko’s responsibility programme.

Kesko is included in the world’s major sustainability indices. For two years in succession, Kesko has been the most sustainable trading sector (Food and Staples Retailing) company in the world on the Global 100 Most Sustainable Corporations in the World list. Kesko ranked fifth in 2015 and 15th in 2016. In November 2015, Kesko was included in CDP's Climate A List for the first time. The list consists of 113 selected companies that are considered to be operating in an exemplary manner with regard to mitigating climate change.

Over the course of 2015, Kesko continued to assess human rights related impacts in accordance with the UN Guiding Principles on Business and Human Rights. As part of the human rights assessment we listened to our stakeholders’ views on matters such as how they feel about human rights in sourcing chains and customer situations.

Kesko aims to identify the entire supply chain of products, while also ensuring that the ingredients are responsibly sourced. Work to assess the origin of the ingredients in own brand groceries – Pirkka and K-Menu products – was carried out in 2015.

Kesko’s systematic work to mitigate climate change is bearing fruit. As much as 97% of the savings target set in the trading sector energy efficiency agreement for 2016 has already been achieved. The most recent energy saving method is the cooperation started by Kesko’s grocery trade, Gasum, Myllyn Paras and Wursti in September: biogas produced from inedible organic waste that is collected from retail stores is utilised as energy in the manufacture of new Pirkka products.

Thanks to Kesko employees, K-retailers and stakeholders

2015 was my first year as Kesko’s President and CEO. I have had a chance to meet countless skilled retailers, Kesko people and business partners during the year. What we all share is prioritising the customer and quality in everything we do. I would like to thank all Kesko employees, K-retailers and their staff, our shareholders and our partners for good and fruitful cooperation.

Mikko Helander
President and CEO