REVIEW BY THE PRESIDENT AND CEO
A year of strong growth and transformation

In 2018, Kesko and K Group continued to transform intensely. All our businesses – the grocery trade, building and technical trade, and car trade – increased their sales and improved their profitability. Our strategy of profitable growth, sharper focus, and “One unified K” has paid off.

• Net sales grew in comparable terms by 3.5% and comparable operating profit rose to an all-time high of €332 million.

• Comparable net sales grew in the grocery trade and in the building and technical trade. In all divisions, profitability improved in comparison to the previous year.

• Return on capital employed achieved our target level of 14%, thanks to successful strategy execution.

A strong year of transformation in the grocery trade

In 2018, net sales for the grocery trade grew by 5.1% in comparable terms. Comparable operating profit rose to €228 million, i.e. to 4.2%, which is a good level also by international standards. Our strong transformation efforts boosted growth in sales and market share.

The Suomen Lähikauppa acquisition has been a success, and has lifted K Group to clear leadership in the neighbourhood market. The integration was completed and synergies were obtained sooner than anticipated.

We have determinedly transformed our store network and continued the implementation of store-specific business ideas. Increasingly customer-oriented services and the recovery in consumer purchasing power have resulted in significant growth in sales and customer numbers in all K-food store chains. Customer satisfaction is also markedly higher. We now have the widest and most comprehensive store network in Finland. For the most part, these stores’ selections and brand have been renewed. Robust growth also continued online, and more than 150 K-food stores offered online sales of groceries by the end of the year.

Kespro is the market leader in foodservice wholesale in Finland. In 2018, we strengthened Kespro’s competitiveness by acquiring the leading Finnish fresh fish and meat providers, Kalatukku E. Eriksson and Reinin Liha. Kespro’s strong performance is underpinned by the trend of eating out, which is vigorously growing in Finland too.

For many Finnish farmers, 2018 was a difficult year. K Group quickly took concrete action to support the position of Finnish food, first doubling the sum paid in support of producers of the 'Thank the Producer' products, and then expanding the product range. The operating model has so far resulted in additional support of €1.5 million for food producers. We have expanded the model also in 2019.

Implementation of country-specific strategies improved profitability in the building and technical trade

Our building and technical trade division operates in eight countries, and our objective is to become an increasingly significant operator in Northern Europe. We made significant changes to the division’s management model at the start of the year, and our increased country-specific focus resulted in improved competitiveness and profitability. We also enhanced profitability through acquisitions and the streamlining of operations. Net sales for the division grew by 2.7% in comparable terms, and over half of it came from outside Finland. Comparable operating profit grew to €98 million despite the impact of divestments carried out in 2017.

The acquisition of Onninen in 2016 has strengthened our market position and B2B sales in building and technical trade. Onninen’s net sales grew by 1.7% and its comparable operating profit rose to €40 million. Sales and profit grew especially in Finland, the Baltics and Poland.

In the first half of the year, we further focused our operations by completing the divestment of our building and home improvement trade operations in Russia. In the summer, we carried out two acquisitions in Norway, and consequently 29 retailer-owned Byggmakker stores became part of Kesko. We completed a third acquisition of Byggmakker stores in January 2019. These strategically important acquisitions create a good basis for further growth in upcoming years. In October, Kesko Senukai acquired the online player 1A Group, making Kesko Senukai one of the leading e-commerce operators in Estonia, Latvia and Lithuania.

Car trade brings new mobility services to the market

Overall, the year was good for the car trade division, although new WLTP emissions testing caused significant disturbances in European car trade in the latter half of the year. We had an 18.5% market share in passenger cars and vans, and with our extensive brand portfolio, we are the market leader in Finland. Porsche’s performance was especially strong, while market shares also grew for SEAT and Volkswagen. Sales in the car trade division decreased by 1.8%, but the comparable operating profit grew to a total of €34 million.

The entire car sector and the concept of mobility are rapidly changing, and we need to constantly develop our operating models, services and technologies. In 2018, we introduced new consumer and corporate leasing products and car sharing services.

The Volkswagen Group intends to focus strongly on electric cars going forward. We want to take part in the shift towards electric cars, and are building a nationwide electric car charging network at K-store locations in Finland during 2018 and 2019.

Sustainability is the foundation of our operations

Our sustainability work is based on long-term, concrete actions in various areas. Key issues for us are transparency in sourcing and environmental care as well as extensive value creation throughout society. We want to enable a sustainable lifestyle for our current and future generations of customers, in the areas of food, mobility and living. Investors are also increasingly taking account of environmental, social and governance (ESG) factors alongside financials when making investment decisions.

Kesko is included in prestigious global sustainability indices, such as the DJSI World and DJSI Europe. In January 2019, Kesko ranked 88th on the Global 100 Most Sustainable Corporations in the World list, and was once again the most sustainable trading sector company in the world. In CDP’s Climate questionnaire, Kesko received an A– score.

We are committed to international climate summit goals regarding the mitigation of global warming, and have set ambitious emission targets for our operations and supply chains. K Group is reducing its emissions through the use of renewable energy, energy efficiency at the stores, and efficient logistics. Since the beginning of 2017, all electricity purchased by Kesko in Finland has been produced with renewable energy based on hydropower or bioenergy. We have also installed solar power plants on the rooftops of over 30 stores, and are the biggest producer and user of solar power in Finland.

Promoting the sustainable use of natural resources and circular economy is a central aspect of our responsibility programme. In our updated plastics policy, we set tighter objectives for plastics recycling and for reducing and avoiding the use of plastics.

In autumn 2018, we took part in Plan’s Girls Takeover event, and made the promotion of gender equality part of our responsibility programme.

Thanks to our personnel, K-retailers and stakeholders

K-Kampus, our new headquarters in Helsinki’s Kalasatama, will be completed in spring 2019. It will bring together some 1,800 K Group employees in the greater Helsinki region and offer us entirely new types of operating premises, along with new possibilities in terms of ways to work. Our personnel have actively taken part in the planning and implementation of the changes, and we are eager to test our great new environment and new ways of working in practice.

I’m very happy with our cooperation at K Group. I wish to extend my warmest thanks to all our Kesko employees, K-retailers and their staff, our shareholders and our business partners for the valuable work you have done towards our success.

Mikko Helander
President and CEO