Kesko

Healthy, profitable growth

Objectives include a sales growth exceeding that of competitors and increasing the shareholder value

Kesko's key strategic objectives in all store chains include achieving a level of customer satisfaction and sales growth that exceeds the level achieved by competitors. The shareholder value is increased by long-term profit improvement. Objectives also include maintaining good financial standing and liquidity in all market conditions. The target return on equity is 12%, while the target return on capital employed is 14%.

Kesko implements a strategy of selective internationalisation

The objective is to invest in healthy, profitable growth, while taking the market situation and customer demand into consideration.

Investments in the food trade are directed at expanding and refurbishing the store network in Finland. In addition, expanding business to the Russian and Baltic markets is studied.

In the building and home improvement trade, the international network will be expanded mainly in Russia in the next few years. In addition to investments in new store sites, business growth may also be achieved through acquisitions. The Russian market in particular is considered to offer significant long-term growth potential in the home building and improvement trade. Support for growth is provided by investments in the joint enterprise resource planning system and centrally directed logistics network and by leveraging economies of scale in sourcing and purchasing.

Sales and services to consumer-customers

Customer satisfaction exceeding that provided by competitors

The strategic emphasis lies on sales to consumer-customers. The objective is to achieve a level of customer satisfaction and sales growth that exceeds the level achieved by competitors. Success in the consumer-customer trade requires clear customer and brand promises and the delivery of these promises at every visit to the store. Customer promises are delivered with high-quality and competitively- priced products, a comprehensive store network and good service.

Kesko has dozens of successful chain and product brands. The extensive development of brands and marketing, started in summer 2007, continues. The objective is to increase the value of Kesko's brands and to improve the efficiency of marketing. Focuses include the brand and marketing strategies of various chains and their implementation in stores. At the chain level, this work has started with a pilot project in the K-supermarket chain. The lessons learnt in the project will be used in the development of brands and marketing throughout the organisation. Creation of customer-driven selections and targeted marketing are supported by the K-Plussa customer loyalty system, whose reward and payment card features have undergone major reforms in recent years. The objective of the system is to offer significant product and service benefits to customers, encouraging them to centralise their purchases in the K-Group. Use of customer information has increased considerably in key business areas. Chains and stores leverage customer information, for example, in their selection planning, pricing and marketing.

Customer-driven business models

The business models applied in Kesko's sales to consumer-customers are retailing through retailer entrepreneurs and Kesko's own retailing. Kesko is also engaged in B-to-B sales.

1) Retailer entrepreneurs' retailing

The principal business model in the Finnish market is the chain business model, in which independent K-retailers run retail stores in the chains managed by Kesko. In Finland, for example, all food and building and home improvement stores in the K-Group are run by retailer entrepreneurs. With its chain operations, Kesko provides a first-class setting for its retailer entrepreneurs to serve their customers as well as possible. The K-retailer entrepreneur is responsible for his or her store's customer satisfaction, personnel and profitability of business. Good service and knowledge of customers' needs provide the K-Group with a competitive edge.

At the end of 2008, Kesko had 1,305 K-retailer entrepreneurs as partners and, in addition, about 250 other retailer partners in the Asko, Sotka, Byggmakker and Senukai chains. Kesko's sales to retailer partners accounted for 49% of net sales in 2008.

2) Kesko's own retailing

Kesko acts as a retailer in business operations where the competitive advantage is based on the centrally managed chain concept. Kesko's own retail stores in Finland include the Anttila and Kodin Ykkönen department stores. In addition, Kesko is also responsible for retailing home and speciality goods in the K-citymarket chain. Kesko's own retailing is also the model mainly used in expanding business operations outside Finland. In 2008, Kesko's own retailing accounted for 26% of net sales.

3) B-to-B sales

Kesko is engaged in B-to-B sales in those business operations that support consumer-customer sales. Typical business customers include building companies, agricultural entrepreneurs, the manufacturing industry, institutional kitchens and the public sector. In 2008, Kesko's B-to-B sales accounted for 25% of net sales.

Electronic customer communications and e-commerce

The importance of electronic customer communications in trading has increased continuously. Kesko is developing online customer communications and the chains' online trading sites. The objective is to improve customer satisfaction and to increase sales. Kesko has gained a strong position in online sales of home and speciality goods through the NetAnttila and Kodin1.com concepts. In addition, Konebox.fi, an online store for home technology goods, was opened in autumn 2008 and the Budget Sport online store will open in spring 2009.

Responsible and cost-efficient business models

Sustainable development and responsible operating practices

The principles of sustainable development and responsible operating practices are a central part of Kesko's and its chains' daily activities. Consumer-customers require the trading sector to bear responsibility for products' safety and healthiness, and for the environmental and social impact of business operations. The results of responsible operations are reported annually in Kesko's Corporate Responsibility Report.

Efficient combination of retailer entrepreneurship and chain operations and leveraging economies of scale

The strategic objective is an efficient combination of K-retailer entrepreneurship and chain operations. K-retailers are responsible for customer service, local selections and delivering the customer promise in their stores.

Kesko's efficient chain operations and joint processes provide support to retailers. Chain operations offer the retailer a joint business concept which includes, among other things, chain control and business management support related to chain selection, pricing and marketing. Joint chain operations carried out by retailers and Kesko are further intensified by developing increasingly better tools and business models for the stores. The most important of these are regional and store-specific selections and pricing guidance as well as tools for customer relationship and store personnel management.

Kesko participates in international purchasing cooperation in various product lines, which increases purchasing volumes and efficiency. The most important partnership organisations in which Kesko participates include AMS Sourcing B.V. in the grocery trade, tooMax-x in the building and home improvement trade, Intersport International Corporation in the sports trade and Electronic Partner International in the home technology trade.

Work and productivity programme

Cost-efficient operations build price competitiveness and customer satisfaction in the retailing sector. They are also a basic requirement for increasing Kesko's profitability and shareholder value.

The key objective of the work and productivity programme launched is to increase employees' work productivity in Kesko and chain stores. The most important tools for improving productivity include increasing personnel competence and the efficiency of operating practices. Promoting the wellbeing of empoyees has also become an increasingly important factor. Retail stores also focus on enhancing the productivity of store space and capital.

Electronic and automated processes

A project to automate processes and routines has been started with the purpose of improving cost-efficiency. One area is the shared service centre, K-talouspalvelukeskus Oy, the duties of which include determining uniform and efficient operating practices for the Group's financial management processes. The project to replace paper invoices with electronic ones will contribute to this automation. The aim is to receive all suppliers' purchasing invoices in electronic form starting from 1 October 2009.

More detailed information about each division's strategic emphases and projects is provided in the division-specific presentations starting from page 16.