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Economic impacts

Economic performance

201-1 Direct economic value generated and distributed

Kesko's operations generate economic benefits for the different stakeholder groups in Kesko’s operating countries and market areas. Key stakeholder groups include shareholders, customers, personnel, retailers, suppliers of goods and providers of services, and society. Kesko promotes the growth of welfare throughout its supply chain, including developing countries.

The following tables show cash flows between Kesko and its stakeholders, as well as the distribution of economic value added between stakeholder groups. The most important cash flows comprise revenue from customers and retailers, purchases from suppliers of goods and providers of services, dividends to shareholders, salaries and wages paid to personnel, taxes and capital expenditure.

In April 2016 Kesko acquired Suomen Lähikauppa Oy, in June 2016 Onninen Oy and in December 2016 Oy Autocarrera Ab. Suomen Lähikauppa Oy (currently K-Market Oy) has been consolidated into Kesko Group as of 12 April 2016, Onninen Group as of 1 June 2016 and Oy Autocarrera Ab as of 1 December 2016.

In March 2015, Kesko sold the department store chain Anttila Oy. Anttila Oy is consolidated into Kesko Group until 16 March 2015. In 2016 Kesko disposed of the Russian grocery trade and the Russian Intersport business. The Russian grocery trade business is included in the figures until 30 November 2016. Further information on the structural changes is available in note 3 to the financial statements.

The consolidated income statement, the consolidated statement of financial position and the consolidated statement of cash flows can be read in full in the financial statements section.

Economic benefits from Kesko’s operations to stakeholder groups
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Economic benefits from Kesko's operations to stakeholder groups
€ million 2016 2015 2014
Customers1 Revenues 10,879 9,479 9,800
Value added generated 10,879 9,479 9,800
Distribution of value added:
Suppliers Goods, materials and services purchased -9,839 -8,593 -8,828
Employees Salaries, fees and social security expenses -723 -545 -614
Payments to providers of capital Net finance income/costs -2 -7 -6
Owners Dividend -1992 -248 -149
Public sector Taxes3 -49 -92 -54
Community investments Donations -2 -1 -1
Development of business operations 67 -7 147
The data is based on audited figures.
1 Incl. net sales and other operating income
2 Proposal to the General Meeting
3 Incl. income taxes, real estate taxes and net worth taxes

The division of the economic benefit generated by Kesko and K-retailers to Finnish regions is presented at 203-2.

Dividend policy

According to its dividend policy, Kesko Corporation distributes at least 50% of its comparable earnings per share as dividends, taking into account, however, the company’s financial position and operating strategy. Kesko’s Board of Directors proposes to the General Meeting to be held in April 2017 that a total dividend of €199 million be paid for the year 2016, which would represent 201.3% of earnings per share and 99.5% of comparable earnings per share. In 2016, Kesko distributed a total of €248 million as dividends for the 2015 profit, which represented 243.8% of earnings per share and 146.7% of comparable earnings per share.

Further information on the financial statements' indicators and Kesko shares and shareholders can be found in the financial statements section.

Economic benefits from Kesko’s operations by market area in 2016
€ million Purchases Capital expenditure Salaries and share-based payments Social security expenses Taxes¹ Total
Finland 5,661 630 428 99 777 7,595
Other Nordic countries 905 3 53 19 51 1,032
Baltic countries and Poland 453 25 70 7 97 653
Russia and Belarus 265 85 35 10 14 409
Other countries 1,305 1,305
Total 8,588 743 587 136 940 10,994
¹ Taxes include income taxes, real estate taxes, value-added taxes, excise duties, car taxes, customs duties, net-worth taxes and withholding taxes
Store network

Kesko operates in the grocery trade, the building and technical trade, and the car trade. Kesko has over 2,000 stores engaged in chain operations in Finland, Sweden, Norway, Estonia, Latvia, Lithuania, Poland, Russia and Belarus.

The K-food store network is comprehensive and there are K-food stores in nearly all Finnish municipalities (see the table below). The K-food stores are visited by around 1.2 million customers every day.

A multi-channel approach is becoming increasingly important in retailing. The growth of e-commerce and electronic services coupled with a comprehensive store site network are a key competitive factor for Kesko. Read more about the importance of a multi-channel approach.

At the end of 2016, Kesko had over 1,080 independent K-retailer entrepreneurs as partners. Kesko’s sales to retailer entrepreneurs accounted for 45.4% of total sales in 2016.

Kesko and K-retailers form the K Group, whose retail sales totalled around €12.5 billion (VAT 0%) in 2016. The K Group employs around 45,000 people.

K-food stores in Finnish municipalities (as at 31 Dec. 2016)
Number of K-food stores Municipalities in 2016 % of all municipalities
10 or more 29 9.3
7–9 20 6.4
5–6 25 8.0
3–4 44 14.1
2 67 21.4
1 95 30.4
0 33 10.5
Municipalities total 313 100.0
Employee benefit expenses
€ million 2016 2015 2014
Salaries and fees 575 440 497
Social security expenses
pension costs 78 55 64
social security expenses 57 43 47
Share-based payments 12 6 6
Total 723 545 614
In 2016, foreign operations accounted for €159 million of total salaries and for €36 million of total pension costs and other social security expenses.
In 2016, the Kesko Group employed an average of 22,476 (18,955) people, of whom 10,714 (8,300) were located in Finland and 11,762 (10,655) outside of Finland. The personnel increase was due to the acquisitions completed during the year. At the end of the year, the number of personnel at Suomen Lähikauppa was 3,129, at Onninen it was 3,068 and at AutoCarrera it was 37.
Kesko's community investments
€ 1,000 2016 2015 2014
Non-governmental, environmental and other organisations 412 555 474
Sports (adults) 891 721 556
Youth sports and other youth work 56 64 244
Science, research and education 67 61 65
Culture 14 32 36
Health 270 12 11
Veteran organisations and national defence 3 5 4
Political parties and organisations - 8 5
Total 1,713 1457 1,395
In addition, Veikkaus Oy contributed an estimated revenue of €60-65 million to the Ministry of Education and Culture, generated from the sales of games by Veikkaus points of sale located at K-stores. The calculation is based on the average breakdown of each euro spent on games in 2016. The estimate has been calculated by Veikkaus Oy. The Ministry of Education and Culture distributes the total proceeds to Finnish arts, sports, science and youth work.

More detailed information on donation recipients is available in the responsibility programme

201-2 Financial implications and other risks and opportunities for the organisation’s activities related to climate change

One of the key objectives of Kesko’s responsibility work is mitigating the progress of climate change. Kesko has committed to set emission targets in line with two degree climate warming and approved by the Science Based Targets initiative. The work to calculate the targets began in December 2016.

Kesko’s operations are surveyed regularly by risk assessments, which also cover changes that may be necessitated by climate change. The Group’s risk map, the most significant risks and uncertainties, as well as changes in and management responses to them are discussed by the Kesko Board’s Audit Committee when the interim reports and financial statements are handled.

Read more about risk management and control practices.

Climate change presents physical and regulatory risks and opportunities as well as risks and opportunities affecting reputational factors

Physical impact

  • Extreme weather phenomena, such as storms and heavy rains, have consequences for the built environment. Physical risks are related to both the physical store network and logistics. Unusual weather patterns can cause interruptions in operations or problems in the availability of products and changes in sales, particularly in the building and technical trade.
  • Climate change can affect the procurement sources and availability of products both within and outside Europe. Due to drought and desertification, water has become less available in many countries, reducing the productive potential of local economies. Agricultural production will suffer if desertification and rising sea levels reduce the arable land area. Drought or floods may destroy agricultural harvests. Intensifying competition for raw materials may lead to higher prices.
  • The availability of energy sources and emission limitations may affect energy prices.
  • Accidents and epidemics resulting from natural phenomena can cause damage or business interruptions that cannot be prevented.


Regulation

  • Climate change may have an impact in terms of risks involved in regulation, such as various permit procedures, or costs arising from emission pricing and taxation.
  • The implementation of the EU and Finnish Government climate and energy policy will affect energy solutions and may increase energy prices, adding to pressures for energy savings and energy self-sufficiency.


Customers

  • Customers are paying increasing attention to issues related to climate change. Environmentally friendly products, corporate responsibility communications, retail stores’ K-responsibility concept and package labelling can help customers make purchasing decisions that mitigate climate change. Any failures to implement responsible practices in this area may weaken Kesko’s reputation.
  • Kesko contributes to the development of circular economy by providing recycling services in conjunction with stores, and by taking part in circular economy trials, such as the Kinkkutemppu campaign and the Liiteri trial.
  • The K-maatalous Experimental Farm tests the suitability of crop varieties for the Finnish climate. The aim is to help customers choose optimal varieties and cultivation methods for Finnish conditions, also as the climate changes.


Opportunities and risks related to climate change are also described in the report’s our operating environment / opportunities and risks section.

201-3 Coverage of the organisation's defined benefit plan obligations

The Group operates several pension plans in its different operating countries. In Finland, statutory pension provision for personnel is organised through pension insurance companies and voluntary supplementary pension provision is mainly organised through Kesko Pension Fund’s department A. At the end of the year, the number of employees eligible to receive supplementary retirement benefits from department A was 2,717.

The statutory pension provision organised through a pension insurance company is a defined contribution plan. The supplementary pension provision organised by Kesko Pension Fund is a defined benefit plan. As at 31 December 2016, the plan obligation was €300.4 million (€266.1 million in 2015), which is fully covered. Calculated under IFRS, the surplus amount was €164.1 million as at 31 December 2016 (€176.4 million in 2015). Calculated under IFRS (the Pension Fund’s insurance premium is based on a defined benefit plan), the Group’s total premium represents 13.6% of the amount of salaries (12.5% in 2015). Read more in the financial statements section, note 17.

In the other countries, pensions are arranged in compliance with local legislation, and there are no defined benefit plans, except in Norway. The number of employees eligible to receive supplementary retirement benefits in Norway is immaterial in proportion to the whole Group.

201-4 Financial assistance received from government

In 2016, the Group received financial assistance of €0.9 million from the public sector. This amount mainly consists of assistance received from Finland (€0.6 million) and from Sweden (€0.3 million).

Indirect economic impacts

203-1 Development and impact of infrastructure investments and services supported

Especially outside growth centres, retail stores can offer community services which may otherwise be scarcely available. In 2016, the following were located in connection with K-food stores:

  • cashback service at more than 1,000 stores
  • over 325 Posti service points
  • over 140 Posti automatic parcel pick-up points
  • over 560 Matkahuolto parcel pick-up points
  • over 25 DHL’s automatic parcel lockers

For several upcoming years, Kesko’s most significant store site project will be the new shopping centre, Easton Helsinki, being built in Itäkeskus, Helsinki. The capital expenditure of the first phase is valued at €100 million. Its employment impact is about 250 person-years for a period of two years. The first part of Easton Helsinki will open to customers in autumn 2017. The next part is estimated to be completed in 2019. The capital expenditure of the whole complex is valued at over €200 million.

In addition to statutory waste recycling obligations, K-stores provide the following recycling services:

  • collection of impregnated wood
  • collection of clothing

Waste statistics are presented under 306-2 Waste.

Kesko’s community investments are presented under 201-1 Direct economic value generated and distributed.

203-2 Significant indirect economic impacts, including the extent of impacts

Kesko is a service sector company which has significant indirect impacts related to the production, use and recyclability of products.

Purchases by Kesko and the retailers have economic impacts on the suppliers and service providers, such as an increase in the number of jobs. Furthermore, purchases from local producers affect regional business activities. The salaries, taxes, employee benefit expenses and capital expenditure paid by Kesko and retailers have impacts on regional economic wellbeing.

Kesko operates in nine countries in which it is engaged in both retail and wholesale. It is one of Kesko’s principles that taxes on operating income and assets are always paid to the respective operating country in compliance with local laws and regulations.

Kesko is a significant tax payer. In 2016, the income taxes paid by Kesko to Finland were €31.2 million and to other countries €10.1 million. The Group’s effective tax rate was 21.6%. Kesko paid €3.5 million in real estate taxes and net worth taxes to Finland and €4.2 million to its other operating countries in 2016.

Kesko collects, reports and remits also indirect taxes, such as value-added taxes and excise duties. Kesko remits value-added taxes to tax recipients in its capacity as a company selling goods and services. In 2016, Kesko remitted value-added taxes in Finland to the amount of €380.3 million, and €110.5 million in other countries. Kesko remits car taxes and excise duties on, for instance, confectionery, alcohol and soft drinks. In 2016, Kesko remitted excise duties in Finland to a total amount of €66.9 million.

Kesko’s measurable indirect impact on society, such as its employment impact, increased municipal tax income, or income in the producer and supply chain, should be evaluated case-by-case, in connection with the establishment of a new store, for example.

Taxes payable 2016

Taxes remitted in 2016

Taxes by country in 2016

Economic benefit generated by Kesko and K-retailers to Finnish regions in 2016
Region

€ million
Kesko's purchases of goods K-retailers' direct purchases of goods Kesko's and K-retailers' capital expenditure1 Salaries paid by Kesko Salaries paid by K-retailers Taxes paid by K-retailers Total
Åland 32.2 - 0.0 0.1 - - 32.4
Southern Karelia 6.8 13.7 6.2 6.2 11.0 0.6 44.4
Southern Ostrobothnia 237.7 30.8 4.9 6.3 12.8 0.7 293.1
Southern Savo 41.9 13.7 9.3 5.3 11.4 1.1 82.8
Kainuu 5.8 7.3 1.7 1.8 6.2 0.4 23.2
Kanta-Häme 52.3 25.7 3.3 7.4 11.2 1.3 101.2
Central Ostrobothnia 53.4 13.6 5.3 2.2 5.0 0.5 80.0
Central Finland 61.2 25.5 7.8 11.7 18.1 1.2 125.6
Kymenlaakso 43.5 15.7 3.8 7.8 10.8 1.3 82.9
Lapland 20.6 24.5 14.4 8.7 18.7 2.0 88.9
Pirkanmaa 262.2 33.0 32.7 34.7 33.2 2.7 398.5
Ostrobothnia 161.5 11.2 2.8 6.7 9.5 0.7 192.4
Northern Karelia 29.1 26.0 2.2 5.3 11.6 1.6 75.8
Northern Ostrobothnia 139.4 43.8 10.1 19.4 26.4 2.4 241.5
Northern Savo 180.5 34.5 5.7 12.0 19.8 1.5 254.0
Päijät-Häme 147.3 25.9 7.8 11.7 12.1 0.8 205.7
Satakunta 160.5 27.0 4.3 8.1 15.3 1.0 216.2
Uusimaa 3,296.7 162.4 604.72 287.8 120.9 12.5 4,485.1
Varsinais-Suomi 688.5 67.4 11.1 30.2 35.3 4.1 836.7
Total 5,621.2 601.5 738.0 473.8 389.4 36.4 7,860.4
1 Incl. increase in lease liabilities of K-retailers' equipment
2 Incl. acquisitions in 2016 (Suomen Lähikauppa, Onninen and AutoCarrera) €445.5 million
The figures are for those K-retailers whose accounts and payroll are managed by Vähittäiskaupan Tilipalvelu VTP Oy, representing around 85% of K-retailers’ total business volume.

Procurement practices

204-1 Proportion of spending on local suppliers

Kesko assesses the economic benefit it generates by reporting its purchases by operating country and the company’s country of domicile. Kesko also reports K-retailers’ direct purchases of goods in Finland.

Most of the economic benefit generated by Kesko’s operations – approximately 84% of Kesko’s net sales – flows to suppliers of goods, from which purchases were valued at €8.6 billion in 2016.

In 2016, Kesko had around 24,600 suppliers and service providers from whom purchases were valued at a minimum of €1,000 during the year. Of these, around 11,900 operated in Finland, around 10,200 in Kesko’s other operating countries, and around 2,500 elsewhere.

The ten largest suppliers accounted for 24.3% (24.2% in 2015) of the Group’s purchases of goods, and the 100 largest suppliers for 54.4% (53.1% in 2015). Seven out of the ten largest suppliers were Finnish food industry companies, one import company operating in Finland and two German car manufacturers.

The purchases of all Kesko companies from suppliers operating in Finland totalled €5,661 million, accounting for 65.9% (67.2% in 2015) of the Group’s total purchases.

The purchases of goods by Kesko Group’s Finnish companies totalled €6,928 million. Of these purchases, 81.1% were from suppliers operating in Finland and 18.9% from other countries. It should be noted that because some of the suppliers operating in Finland are import companies, reliable statistics cannot be compiled on the origin of goods supplied by them.

Kesko actively increases the amount of local purchases and encourages K-retailers to include products from nearby producers in their selections. In 2016, K-retailers’ direct purchases from Finnish regions totalled €602 million.

In 2014–2016, Kesko and Ruokatieto ry, an association that promotes Finnish food culture, organised Local Food Date (Lähiruokatreffit) events that brought together local food producers and K-retailers. The purpose was networking as well as improving the supply of local products in the K-food stores in the area and thereby supporting Finnish work.

The 'Thank the Producer' operating model provides customers with an easy way to support Finnish food producers. K-food stores sell 12 Pirkka ’Thank the Producer’ products for which K Group pays an extra support directly to producers.

Kesko's purchases by operating country in 2016
Suppliers of goods and services in operating country Purchases from suppliers of goods Suppliers of goods and services in other operating countries Purchases from suppliers of goods
number € million % number € million %
Finland 11,609 5,621 81.1% 2,304 1,307 18.9%
Sweden 1,573 207 85.1% 238 36 14.9%
Norway 1,434 529 98.2% 100 10 1.8%
Estonia 1,048 65 52.1% 442 59 47.9%
Latvia 764 23 34.5% 467 44 65.5%
Lithuania 384 94 31.3% 189 206 68.7%
Poland 1,263 99 94.6% 61 6 5.4%
Russia 1,657 194 95.9% 30 8 4.1%
Belarus 734 48 61.0% 305 31 39.0%
Total 20,466 6,880 80.1% 4,136 1,708 19.9%
Kesko's purchases by company's and supplier's country of domicile in 2016
Company's country of domicile Supplier's country of domicile
€ million Finland Sweden Norway Estonia Latvia Lithuania Poland Russia Belarus Other
countries
Total
Finland 5,621 142 10 51 4 9 12 1 1 1,077 6,928
Sweden 13 207 5 1 0 0 0 - - 16 243
Norway 0 9 529 - - - - - - 0 538
Estonia 15 1 1 65 6 3 6 - - 28 124
Latvia 4 0 0 7 23 1 2 0 - 29 68
Lithuania 6 1 0 9 24 94 33 1 3 129 300
Poland 0 0 - - 0 - 99 - - 5 104
Russia 1 - - 1 - - 0 194 - 7 203
Belarus 0 0 - - 0 1 - 16 48 13 79
Total 5,661 361 545 134 58 109 152 212 52 1,305 8,588
Capital expenditure

In 2016, Kesko’s capital expenditure totalled €743 million (€219 million in 2015), or 7.3% of net sales (2.5% in 2015). Capital expenditure in store sites was €216 million (€167 million in 2015). Capital expenditure in foreign operations accounted for 15.2% (40.2% in 2015) of the total capital expenditure. Duting the financial year, Kesko Group acquired Onninen Oy, Suomen Lähikauppa Oy and Oy Autocarrera Ab. The total capital expenditure on the acquisitions was €445.5 million.

In addition to Kesko, K-retailers make capital expenditures in the fixtures of stores used by the K-Group. These figures included, the total capital expenditure in Finland was around €738 million in 2016.

Kesko’s capital expenditure has a positive financial impact on the operations of building firms, building sector service companies, and suppliers of fixtures, equipment and information systems, for example.

Anti-corruption

205-1 Operations assessed for risks related to corruption,

205-2 Communication and training about anti-corruption policies and procedures,

205-3 Confirmed incidents of corruption and actions taken

Risks related to corruption are discussed as part of Kesko Group's risk management. Key risks, including risks related to corruption, are identified, assessed, managed, monitored and reported regularly as part of business operations  at the Group, division, company and unit levels in all operating countries.

Kesko’s anti-corruption principles are included in the K Code of Conduct guidelines updated in 2016. The guidelines and website have been published in the languages of all our operating countries. Kesko employees and business partners have their own versions of the K Code of Conduct.

Kesko has prepared a mandatory eLearning package for its employees to smoothly internalise the K Code of Conduct.

Kesko arranges annual Value Discussions on the K Code of Conduct in its companies. In 2016, a Value Discussion event was organised in Suomen Lähikauppa and two Russian subsidiaries. They mainly focused on issues related to corruption and malpractice.

In 2016, one of the focus areas in Kesko’s risk management and corporate security function was the prevention of malpractice. During the year, individual cases of suspected malpractice came to our knowledge. The Risk Management and Corporate Security Unit assisted in investigating them.

Towards the end of 2016, Kesko introduced the Group-wide SpeakUp channel through which employees and business partners can report any violations of the K Code of Conduct. In 2016, six incidents were reported via the SpeakUp channel.

In 2016, no corruption related lawsuits against any Kesko Group company came to our knowledge.

Anti-competitive behaviour

206-1 Legal actions for anti-competitive behaviour, anti-trust, and monopoly practices

In 2016, there were no legal actions, fines or other sanctions relating to anti-competitive laws and regulations.