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Review by the President and CEO

The modernising K Group is stronger than ever

For us at K Group, 2016 was a year of strategy implementation and renewal. The most significant events in terms of our growth strategy were the acquisitions of Suomen Lähikauppa and Onninen. Our strategic objective in all divisions is to strengthen the customer experience for consumers and businesses, both in-store and in digital channels.

  • In 2016, net sales returned to significant growth and profitability improved
  • Comparable return on capital employed rose to 11.9%
  • K Group is one of Finland's biggest employers and taxpayers

 

Every person is different and every K-food store is different

Our focal area in the grocery trade is modernising and expanding K Group's neighbourhood store network. We aim to improve the availability, quality and price-competitiveness of neighbourhood store services as these qualities are valued by Finnish consumers. Thanks to the acquisition of Suomen Lähikauppa, K Group offers Finland's most comprehensive and service oriented neighbourhood store network. 

The integration of Siwas and Valintatalos into the K-Market network will continue in 2017, and all of the stores will be transferred to K-retailers by 2018. At least 400 Siwas and Valintatalos will become K-Markets. Footfall and sales have increased significantly in the stores that have already been converted into K-Markets. In some of the Siwas and Valintatalos, it was necessary for us to investigate whether it is possible for the operations to continue as part of the K-Market network in a profitable way. As a result of cooperation negotiations, the retail operations of 51 Siwas and Valintatalos will be discontinued.

We will modernise all of the K-Citymarkets by the end of 2018. Our aim is to create 81 different K-Citymarkets with product selections and services that reflect their customer bases.

We aim to improve the availability, quality and price-competitiveness of neighbourhood store services as these qualities are valued by Finnish consumers.

The grocery chains have been modernised in a genuinely customer-oriented way. Our aim is to offer our customers the most inspiring stores in the grocery trade. For us, there is no such thing as an average customer, as each customer, place and encounter is different. That is why every K-food store is different and is tailored to the demands and profiles of local customers.

We will sharpen our focus on the Finnish grocery trade. We sold our grocery trade business in Russia to Lenta, a Russian company, in November 2016. Expanding the business would have required considerable additional capital expenditure.

Business customers are accounting for a growing proportion of the building and technical trade

Kesko operates in the building and technical trade in nine countries and is the fifth largest operator in the European building and home improvement trade market. Our strategic objective is profitable growth and a further reinforcement of our position in Europe.

The acquisition of Onninen, a company specialising in HEPAC and electrical products, was completed in June 2016 and will reinforce B2B sales in particular. Onninen and Kesko represent a unique combination in the building and technical trade, offering business customers in the construction sector the most diverse selection of products and services on the market. Approximately 65% of sales in the building and technical trade come from business customers.

Consumers are becoming less likely to carry out projects related to building and renovation themselves. Building and renovation are becoming more technical and are increasingly the domain of professionals. As the population ages and becomes wealthier, more services are used. Responding to this market shift is one of our key strategic objectives. The K-Rauta Remonttimestari service is a good example of new services in this area: it helps consumer customers to successfully carry out renovations in areas such as kitchens, from planning all the way to completion.

Electric and hybrid vehicles enter the car ranges

VV-Auto is the market leader in Finland. At the end of 2016, we expanded our collaboration with Volkswagen Group by acquiring the right to represent and import Porsche vehicles. Adding Porsche to the selection will increase sales and improve the profitability of the car trade.

Volkswagen Group will launch 30 new fully electric vehicles by 2025, and various hybrid versions are constantly introduced to product ranges. We believe that sales of electric cars may account for 20–25% of all passenger car sales in Finland within 10 years.

We already offer an extensive network of free-to-use charging points for electric cars for customers of K-stores. All of K Group's new construction and renovation projects on store sites either include the construction of a vehicle charging point or are earmarked to include a future charging point.

 

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Competitive advantage through digital services and utilisation of customer data

The internet and globalisation are breaking down barriers in trading methods, between lines of business, in people's mobility and in customers' mindsets. The border-free world introduced by digitalisation and the shift in distribution channels gives rise to entirely new opportunities for trading. The traditional boundaries between customer segments are becoming blurred, leading to a need for increasingly personalised and more diverse solutions.

In all divisions, our objective is to offer K Group's customers the best digital services. The smart functionalities of the K-Ruoka mobile application makes it easier to plan a shopping list and visit a store. We are developing a shared online store solution for the building and home improvement trade's and Onninen's B2B customers. An entirely new online store for used cars – Caara.fi – operates online without traditional showrooms.

The border-free world introduced by digitalisation and the shift in distribution channels gives rise to entirely new opportunities for trading.

K Group's strategic focal area – a personal approach – will also play an instrumental role in developing our marketing. In 2016, we expanded K Group's targeted marketing using customer data and began carrying out programmatic marketing relying on our own team of experts. By utilising our own customer data and digital technologies, we will develop more customer-oriented marketing and lay the foundations for marketing in the future.

The digital revolution requires new expertise and, in 2016, we recruited dozens of new professionals to develop mobile services, analytics, process automation and modern online store solutions.

We aim to be a frontrunner in corporate responsibility

Responsible business activities are crucial in achieving good and sustainable financial results. All of our operations are built on trust between Kesko, the K Group stores, our customers and partners. Corporate responsibility manifests itself in our everyday activities and our stakeholders require this of us.

We operate in several countries and purchase goods from suppliers all over the world, so our operations are subject to several international conventions and recommendations. In November 2016, we published the website 'UN Sustainable Development Goals and Kesko' to explain how we are promoting the 17 UN Sustainable Development Goals. We carried out a human rights impact assessment in compliance with the UN's Guiding Principles on Business and Human Rights, and we published a human rights commitment in September.

Our long-term inclusion in sustainability indices provides impartial evidence of our responsible operations and facilitates investment decisions. Kesko ranked 25th in the Global 100 Most Sustainable Corporations in the World list published in January 2017. In autumn 2016, Kesko was awarded a grade of A– in CDP's Climate Change Disclosure survey.

It is of the utmost importance to ensure that the principles of corporate responsibility are fulfilled every day in all of our operations and all of the countries where we operate. In 2016, we updated our K Code of Conduct, and we require all Kesko employees and all of our partners to commit to complying with it. Our new SpeakUp channel is intended for reporting suspected crimes and abuses when the information cannot for some reason be passed on directly to the Kesko employee in charge.

It is of the utmost importance to ensure that the principles of corporate responsibility are fulfilled every day in all of our operations and all of the countries where we operate.

Since the beginning of 2017, all electricity purchased by Kesko in Finland is renewable. By purchasing renewable electricity we promote the production of renewable energy and support the objectives of K Group's climate work. We purchase renewable electricity that has the Renewable Energy Guarantee of Origin (REGO) from the Nordic countries. In 2017, we will take the approach in our electricity purchasing that focuses on Finnish bioenergy.

We have spent a long time investigating the opportunities for utilising forms of renewable energy in our store site projects. Finland's largest property-specific solar power plant was completed in June 2016 on the rooftop of K-Citymarket Tammisto. We will significantly increase our use of solar energy, and 16 solar power plants will be in use on the rooftops of K Group stores by summer 2017. Thanks to the new investments, K Group will become Finland's largest generator and user of solar energy.

I would like to thank the personnel, K-retailers and our stakeholders

2016 was a busy year of modernisation for us. Kesko and the K-stores will work increasingly strongly as a unified K Group. This will enable us to offer our customers even better services and operate efficiently – For shopping to be fun.

I wish to extend my warmest thanks to all Kesko employees, K-retailers and their staff, our shareholders and our business partners for their good cooperation.

Mikko Helander
President and CEO