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Review by the President and CEO

2012 was characterised by the deterioration of the general economic situation and consumer confidence and the Kesko profitability programme that was launched in response. The role of e-commerce and services became more pronounced as consumers expect an increasing number of multi-channel services from the trading sector. The most significant projects were the Veturi shopping centre in Kouvola and the first grocery store of the K-ruoka chain in St. Petersburg, Russia. During the year we updated our responsibility programme, which sets both long and short-term objectives for Kesko and the entire K-Group.

 

Profitability programme to generate savings and improve efficiency

The deteriorating economic situation and the higher cost levels in 2012 called for strong measures to ensure Kesko’s competitiveness and to improve cost-efficiency. Kesko started a Group-wide profitability programme aimed at securing sales growth, implementing costs savings of €100 million and enhancing the efficiency of capital use by adapting capital expenditure and improving stock turnover rates. Most of the targeted cost savings are expected to be achieved during 2013.

Store network expands into new markets

One of Kesko’s largest retail projects, the Veturi shopping centre was opened in Kouvola in September. In addition to Finland, an important area of growth is Russia, where the market develops rapidly. In December, the first grocery store in the K-ruoka chain was opened in St. Petersburg, Russia. The objective is to open three new K-grocery stores in the St. Petersburg region and a third K-rauta in Moscow during 2013.

Crucial preconditions for expansion include success in the acquisition and building of good store sites, in the development of store concepts, in purchasing and logistics and in the recruitment and encouragement of motivated and skilled personnel.

The trading sector’s operation is subject to many kinds of international and national regulations. During 2012, there was a lot of discussion on the proposed amendment to the Finnish Competition Act regarding dominant market shares. Kesko opposes the proposed change, because we believe it would limit open and fair competition, raise prices, reduce the range of goods on offer and increase imports. The amendment does not take into consideration the fact that K-food retailer entrepreneurs compete not only with other companies in the food trade but also with one another.

Responsibility is a strategic choice

Responsibility is an inherent part of daily work at Kesko and K-stores. It is also essential for achieving good financial results and building trust between Kesko, the K-stores, customers and business partners.

In 2012 we updated our responsible working principles that guide the work of employees at Kesko and K-stores. It is especially important to ensure that all employees in the eight countries where we operate, as well as our partners, commit themselves to working in line with Kesko’s values and responsibility guidelines.

Services adopt multi-channel approaches

Customer needs and purchasing habits change rapidly as new online services and quickly-developing technologies are introduced. The importance of electronic transactions and multi-channel services has grown in the past few years.

The increase in electronic services and online shopping provides customers new purchasing opportunities and forces the trading sector to develop new operational models and logistics solutions.

Kesko has started a Group-level project that aims to greatly increase electronic transactions, services and interaction provided by stores and chains. Achieving the objectives requires for the development projects to progress quickly enough and for us to offer interesting electronic services and online stores to customers.

Our participation in combating climate change

In the spring of 2012, Kesko joined the Climate Partners network, a joint organisation formed by businesses and the City of Helsinki that aims to find new ways to combat climate change.

The Kodin1 department store for interior decoration and home goods in Raisio, scheduled to be completed in May 2013, will be the first passive retail store building in the Nordic countries. With a waste recovery rate of nearly 99% at Anttila’s logistics centre in Kerava, almost no waste ends up in the dump.

Energy solutions currently in use include the K-store freezer lids and doors, condensate heat recovery, refrigerated units that use carbon dioxide, and adjustable and targeted lighting. Keslog transport emissions are reduced through economic driving, route planning and two-tier trailers.

The Energy Expert service at K-rauta and Rautia stores aims to make it easy for customers to improve energy efficiency in their homes.

We are also looking into the use of renewable energy sources: using the ground and water as sources of heat and cooling as well as using solar energy are increasingly often possible alternatives as technical solutions become more sophisticated.

The responsibility programme updated

The Kesko Board of Directors accepted the updated Kesko responsibility programme in December 2012. When working on the programme and setting its objectives, we took into account the future changes in our operating environment and the expectations of our stakeholders. The updated responsibility programme contains both short- and long-term objectives for Kesko’s and the whole K-Group’s operations up to 2020. The responsibility programme covers all divisions and it is important to ensure that it is adopted as a part of all our operational processes.

Our customers must be able to trust the quality and safety of the products we sell and be confident that when they enter a
K-store they will make a responsible and sustainable choice. The new K-responsibility concept will be adopted in all K-food store chains during 2013, and it aims to make responsible actions visible and easy to make for our customers.

Kesko remains in the most important indices

The demand for responsibility has emerged as an important criterion for institutional investors when deciding where to invest. Kesko has established its position in comparative studies that measure responsibility and serve as tools for investors when making investment decisions.

In 2012, Kesko was again included in the most important sustainability indices, such as the Dow Jones indexes DJSI World and DJSI Europe, the FTSE4Good index and the Nordic Climate Disclosure Leadership Index. Kesko has been included in ‘The Global 100 Most Sustainable Corporations in the World’ list every year since the list was set up in 2005.

Kesko participates in the UN Global Compact initiative and is committed to observing ten generally accepted principles related to human rights, labour standards, the environment and anti-corruption in all the countries where it operates.

International initiatives and sustainability indices set a high standard for
Kesko’s responsibility. In the future, we have to take even better care that
responsibility is implemented without exceptions in all our operations.

I wish to extend my warmest thanks to all Kesko employees, retailers
and their staff, and our business partners for our fruitful cooperation.
Let’s continue to do good together.

 

Matti Halmesmäki

President and CEO