Most significant risks and uncertainties and risk management responses
The following describes the risks and uncertainties assessed as significant and related risk management responses:
Continued intense price competition in the Finnish grocery trade
Competition in the food trade has intensified in recent years and stores have lowered their prices in order to increase market shares. Continued intense price competition could weaken profitability for Kesko's grocery trade and retailers. Kesko develops store selections, services, store concepts and the store network in a customer-oriented manner in order to provide customers with the best customer experience in the trading sector in stores and digital channels.
Integration and synergies in the building and technical trade
The integration of business operations and the creation of uniform operating models still involve risks that can make the achievement of the operational and financial objectives and targets set for the arrangement more difficult. The organisation structure has been adjusted to support the new operating model and strategy implementation. The realisation of the targets set for the integration is ensured with sufficient resourcing, a uniform management and reporting model, and the prioritisation of development projects.
Business interruptions and information system failures
The trading sector is characterised by increasingly complicated and long supply chains and a higher dependency on information systems, data communications and external service providers. Disruptions can be caused by e.g. hardware failures, software errors or cyber threats. Extended malfunctions in information systems, payment transfers, or in other parts of the supply chain can cause significant losses in sales and weaken customer satisfaction. Contingency planning is used to ensure failure-free operation of critical functions, operation during failure and sufficiently fast recovery from a serious failure. Agreements and audits are used to ensure the continuation of external services and the preparedness of service providers. Regular testing of contingency plans is done to ensure the plans are viable and up-to-date, and exercises are used to maintain management ability in crisis situations.
Compliance with laws and agreements
Changes in legislation and authority regulations may necessitate significant changes and result in additional costs. Compliance with laws and agreements is an important part of Kesko's corporate responsibility. Non-compliance can result in fines, claims for damages and other financial losses, and a loss of trust and reputation. The implementation of the new EU general data protection regulation will require changes in the procedures for personal data processing and information systems. The changes will result in significant costs and require development resources to ensure compliance. The risk is managed through the monitoring of changes in legislation, personnel training, and audits and self-assessments. Contractual risks are managed by harmonising agreements and the agreement-making processes and by electronic agreement archiving.
Data breach or critical information falling into the wrong hands
Crimes are increasingly committed through data networks and crime has become more international and professional. A failure, especially if it affects the security of payment transactions and personal data, can cause losses, claims for damages and reputational harm. The confidentiality of customer and personal data is ensured by improving administrational and technical data security and with audits. Cybercrime is fought with the help of technical tools, information, training and by introducing more efficient instructions and controls.
Product safety and supply chain sustainability
A failure in product safety control or in the quality assurance of the supply chain can result in financial losses, the loss of customer trust and reputation or, in the worst case, a health hazard to customers. The risk management responses include the Product Research Unit’s quality control of grocery trade products, and product safety management of the companies manufacturing own brand products. Self-control ensures compliance with foodstuffs regulations. Defective foods can be quickly withdrawn from sale using the recall procedure.
Strong change in the trading sector caused by digitalisation
As retail undergoes a major transformation, the achievement of business objectives requires an active approach and strong expertise in the development of digital services and online stores that are attractive to customers, and the use of a multichannel approach with supporting customer communications. Challenges in developing online food stores include the cost efficiency of logistical operating models and the suitability of existing store sites for online sales of food. According to its strategy, Kesko’s objective is to offer the best digital services in the trading sector. This includes digital interaction with customers in all channels, targeted and personalised digital marketing, innovative e-commerce solutions, as well as customer-oriented mobile services. In order to achieve the objectives, Kesko has, among other things, recruited more digital business specialists.
Employee competencies and working capacity
The implementation of strategies and the achievement of objectives require competent and motivated personnel. There is a risk that the trading sector does not attract the most competent people. The acquisitions carried out as well as other significant business and development projects, coupled with an increased need for special competencies, increase the key-person risk and the dependency on individual expertise. In connection with the strategy work, the competencies required in strategy implementation are identified and personnel plans are drawn up. Personnel surveys play a central role in the development of human resources management. Personnel members are provided with a variety of training opportunities and career paths. Employee wellbeing and working capacity are promoted with Kesko’s wellbeing at work development programme. Kesko’s employer image is developed through systematic cooperation with stakeholders, as well as internal and external communications.
Store sites and properties
With a view to business growth and profitability, good store sites are a key competitive factor. The acquisition of store sites can be delayed by town planning and permit procedures and the availability and pricing of sites. Considerable amounts of capital or lease liabilities are tied up in properties for years. When the market situation changes, the business is rearranged, the significance of e-commerce grows, or a chain concept proves inefficient, there is a risk that a store site or a property becomes unprofitable and operations are discontinued while long-term liabilities remain. The management responses to these risks include long-term store network planning, careful preparatory work preceding each decision to invest in a store site, long-term cooperation with lessors, as well as management solutions and the sale and leaseback operating model. In cases where Kesko is the property developer, the aim is that the space solutions and use of the store site can be changed flexibly as necessary. The needs of multichannel business operations are taken into account when new premises are designed and existing premises are modernised. Flexibility and continuity are ensured with extension options included in lease agreements.
Responsible operating practices and reputation management
Various aspects of corporate responsibility, such as ensuring responsibility in the supply chain of products, fair and equal treatment of employees, the prevention of corruption, and environmental protection, are increasingly important to customers. Any failures in corporate responsibility would result in negative publicity for Kesko and could cause operational and financial damage. Challenges in Kesko’s corporate responsibility work include communicating responsibility principles to suppliers, retailers and customers, and ensuring responsibility in the supply chain of products. The K Code of Conduct operating guidelines have been introduced to the whole personnel and to business partners. Kesko’s responsible purchasing is guided by ethical purchasing principles, the compliance with which is ensured by continuous training of purchasing personnel. Responsibility in purchasing is also maintained by ensuring the existence and timeliness of suppliers’ product safety systems and self-control plans. The SpeakUp reporting channel, intended for reporting suspected criminal offences or misconduct, is in use in all Kesko operating countries.
Climate change presents physical and regulatory risks and risks affecting reputational factors. Climate change will increase the risk of extreme weather phenomena, which may cause damage or business interruptions that cannot be prevented or covered with insurance. Droughts, desertification and rising sea levels may impact agricultural production and the availability of raw materials and products. Possible emission limitations and taxes may affect the energy markets. Kesko participates in mitigating climate change by increasing the purchase of renewable energy and its own energy production and by promoting energy efficiency. Since the beginning of 2017, all electricity purchased by Kesko in Finland has been renewable. Kesko has made significant investments in building solar power plants in recent years.
Reporting to market
Kesko's objective is to produce and publish reliable and timely information. If any information published by Kesko proved to be incorrect, or communications failed to meet regulations in other respects, it could result in losing investor and other stakeholder trust and in possible sanctions. Significant business arrangements, tight disclosure schedules and the dependency on information systems create challenges for the accuracy of financial information. The risk is mitigated by careful process scheduling and instructions and by ensuring the right resources, explicit responsibilities and sufficient competencies.
Risks of damage
Accidents, natural phenomena and epidemics can cause significant damage to people, property or business. In addition, risks of damage may cause business interruptions that cannot be prevented. There is also a risk that insurance policies do not cover all unexpected accidents and damage, or that covering them with insurance is not profitable. Financial consequences of damage are insured in accordance with the principles confirmed by Kesko’s Board of Directors. Kesko Group has international insurance programmes that cover, for example, property damage, business interruption losses and liability damage. The Group’s risk management has centralised control of the implementation of the Group’s insurance programmes.
Financial risks are described in note 4.3 to Kesko’s 2018 financial statements (pages 88-95)