Impact of prolonged inflation and rising interest rates on costs and consumer behaviour (growing short-term and medium-term risk)
The rise in energy and raw material prices is reflected in rising production chain costs, impacting the purchase costs and prices of products. If prolonged, inflation will result in rising overall cost levels and wages. Rising interest rates would impact consumer purchasing power and consumer behaviour, thus leading to even tighter price competition.
The impact of rising sourcing costs will be mitigated by shifting costs to sales prices and effective cost management programs will prepare for the increase in the overall cost level. The intensification of price competition is being met by taking care of price competitiveness and offering customers not only quality but also cheaper products.
The Covid-19 pandemic (short-term risk)
The continuation of the Covid-19 pandemic and changes in infection rates continue to pose risks on business continuity, personnel health, and global supply chains. Large numbers of sick employees in the logistics centres or stores and key members of personnel getting sick could endanger the continuity of K Group’s critical operations. The pandemic will also result in further disruptions in global supply chains, creating challenges for product availability and delivery times. Significant changes in the prices of some product categories pose challenges for inventory management and product pricing.
The safety of personnel is ensured by following the established internal safety guidelines and procedures based on the instructions and recommendations of the authorities and health experts. Business continuity and product availability are ensured through the effective implementation of business-specific continuity and contingency plans. The availability of products is ensured by increasing the storage of certain product groups and the pricing of products follows aligned solutions.
Cybercrime (short-term risk)
Growing professional cybercrime has increased the risk on business continuity and loss of critical information. Targets of cyber-attacks may include, for example, data systems critical for business continuity, or personal data. Cyber-attacks may result in disruptions in sales, loss of customer trust, or fines imposed by authorities.
Essential to the protection of critical information is the continuous monitoring of security threats and the proactive development of security, the comprehensive training of personnel and the maintenance of the security of systems throughout their life cycle. Critical service providers are required to have a high level of information security for their services, as well as continuity and recovery plans in the event of disruptions. To ensure business continuity, continuity plans have been prepared for critical functions and the disruption management process has been standardized. The ability to act in disturbance situations is maintained through continuity exercises.
Employee retention and availability (growing medium-term and long-term risk)
The implementation of strategies and the achievement of targets require competent and motivated personnel. The Covid-19 pandemic has made the workforce more mobile and lowered the threshold of changing jobs. Challenges related to the availability of skilled personnel in logistics and retail are also more pronounced.
In connection with the strategy work, the skills required to implement the strategy are identified and personnel plans are drawn up. Personnel research plays a key role in the development of personnel management. The recruitment process has been developed and staff are offered diverse training opportunities and career paths. The well-being at work and coping at work are promoted through Kesko's well-being development program. Kesko's employer image is developed through planned stakeholder cooperation and internal and external communication.
Climate change (growing medium-term and long-term risk)
The medium-term and long-term risks for Kesko caused by climate change are assessed based on selected scenarios, and are mainly related to increasing regulation and extreme weather phenomena. Increasing regulation necessitates changes in business operations and leads to additional costs. Increase in extreme weather phenomena can impact product availability and cause disturbances in logistics and the store site network. The impacts of Kesko’s operations on the climate, in turn, are related to Kesko’s energy solutions and emissions, and the lifecycle impact of products and services sold in the whole supply chain.
Kesko's goal is to be carbon neutral in 2025 and for emissions from its own operations and transportation to be zero by 2030. One key action to achieve zero emissions is to increase the share of electricity and heat produced from renewable energy. Climate risks are assessed in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Climate risk assessment utilises selected future scenarios to identify and assess transition and physical risks and opportunities that are significant to the strategy. In addition, the K-Group focuses on measures to reduce emissions throughout the supply chain and customers. The goal is for two-thirds of Kesko's direct suppliers' emissions to have reduction targets set by 2025.
Geopolitical risk (growing short-term and medium-term risk)
Heightened tensions in European security and tightening of military and economic rivalry between superpowers could have a significant impact on the global economy and business environment.
Risk management is based on by constantly monitoring changes in the geopolitical situation and assessing their possible effects on Kesko's operating environment. In case of escalation of risks, alternative procurement and delivery channels are identified and the necessary plans and measures are prepared for changes in the general economic or security situation.
Product safety (short-term risk)
A failure in product safety control or supply chain quality assurance could result in financial losses, loss of customer trust and reputation, or, in the worst case, a health hazard to customers.
Kesko's quality and product development unit monitors the quality of products and ensures the product safety of its own branded products. Retail stores self-monitoring programs ensures compliance with food regulations. The product recall procedure allows defective products to be quickly recalled from sale.
Legislation and agreements (growing medium-term risk)
Changes in legislation and authority regulations could 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, as well as loss of trust and reputation. The EU General Data Protection Regulation has placed more importance on the need to protect personal data.
Individual compliance programs have been established to manage the most significant legal risks. In general, legal risks are managed by monitoring changes in legislation, training staff, conducting audits and self-assessments, and developing technical security and data protection. Contractual risks are managed by harmonizing contracts and contract processes and by electronic contract archiving.
Store sites and properties (medium-term and long-term risk)
In terms of 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 plots. Considerable amounts of capital or lease liabilities are tied up in properties for years. As a result of urbanisation, changes in the market situation, growing significance of e-commerce, or a chain concept proving inefficient, there is a risk that a store site or a property becomes unprofitable and operations are discontinued while long-term liabilities remain.
Risks are managed through long-term store network planning, careful preparation of each store site investment decision, long-term cooperation with landlords, and building management solutions and a sale-leaseback operating model. When Kesko acts as a builder, the aim is to be able to change the space solutions and use of the store site flexibly if necessary. The needs of a multi-channel business are taken into account when designing new facilities and renovating existing facilities. In rental properties, flexibility and continuity are ensured in leases with extension options.
Responsible operating practices and reputation management (growing medium-term and long-term risk)
Various aspects of corporate responsibility, such as ensuring responsibility in the purchasing 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 could result in negative publicity for Kesko and cause operational and financial damage. Challenges in Kesko’s corporate responsibility work include communicating responsibility principles to customers and ensuring responsibility in the supply chain of products.
The K Code of Conduct has been implemented for all personnel and partners. Kesko's responsible sourcing is guided by the ethical principles of purchasing, the observance of which is ensured by continuous training of purchasing personnel. Responsibility for procurement is also maintained by ensuring the existence and timeliness of suppliers' product safety systems and self-monitoring plans. All of Kesko's operating countries use the SpeakUp reporting channel, which is intended for reporting suspected criminal and misconduct related to Kesko's operations.
Reporting to market (short-term risk)
In its investor communication and financial reporting, Kesko follows the disclosure policy approved by Kesko’s Board of Directors. Kesko's objective is to produce and publish reliable and timely information. Disclosure follows the principle of providing all market participants information in a timely manner and non-selectively to form the basis for the price formation of Kesko’s financial instruments such as shares. If any information published by Kesko proved to be incorrect, or communications failed to meet regulations in other respects, it could result in loss of investor and other stakeholder trust and in possible sanctions. Significant business arrangements, tight disclosure schedules and the dependency on information systems pose challenges for the accuracy of financial information.
Risk is mitigated through effective internal control, careful scheduling and guidance of the process, and ensuring the right resources, clear responsibilities and adequate expertise.
Risks of damage (short-term risk)
Accidents, natural phenomena and epidemics can cause significant damage to people, property or business. In addition, risks of damage may cause unpreventable business interruptions.
The financial consequences of damage risks are insured in accordance with the principles approved by Kesko's Risk Management Steering Group. The Kesko Group has international insurance programs that cover e.g. property, business interruption and liability damages. The Group's risk management centrally directs the implementation of the Group's insurance programs.
Risk management actions in 2021
Due to the Covid-19 pandemic, the Group preparedness management team continued to operate and coordinate the situation, decide on measures and direct their implementation. The health and safety of personnel and customers and business continuity continued to be the focus areas. In risk management, separate risk assessments were initiated in cooperation with the Group Legal Affairs regarding data protection, competition law, consumer protection, and corruption, to support the planning of the compliance programmes decided. A separate extensive study and assessment of occupational safety was conducted in Finland; the results will be used to develop and assess occupational safety in all operating countries. Instructions and tools for managing business continuity were updated, and an update of continuity plans for logistics initiated in accordance with the new model. An analysis of alternatives for Group insurance coverage was initiated in an effort to reduce challenges related to the cyclical nature of the insurance markets. We continued to improve the efficiency of security technology and security services by concentrating acquisitions and developing the lifecycle management of security and real estate systems.
Risk management focus areas in 2022
Focus areas for risk management include the further development and expansion of integrated risk management. In continuity management, we will expand the implementation of the new steering model and make changes to management reporting. The structures for insuring Kesko Group will be examined based on the results of the analyses conducted, and if necessary, changes will be made to insurance cover on a risk-basis. In terms of risks related to climate change, risk assessment for grocery trade will be deepened based on TCFD recommendations. We will continue to improve the efficiency of security technology and security services by concentrating acquisitions, developing the lifecycle management of security and real estate systems and preventing related cyber threats. Special measures for the protection of personnel and customers and for securing business continuity in relation to the Covid19 pandemic will continue.