Kesko faces the recession head-on

The financial environment in the trading sector quickly deteriorated during 2008. As a result of consumer prudence, construction and other major household acquisitions in particular declined. In the current cyclical conditions, it is an advantage that the steadily developing grocery trade accounts for nearly half of our business.

More for our customers
The K-Group stores are visited daily by about one million customers.

Success in the consumer- customer business requires that the customer and brand promises are delivered at every visit to the store. Kesko has several successful chain and product brands. Brand development work is a key to future success. In practice this also means increasing the efficiency of marketing and developing measurement methods.

The importance of electronic customer communications is increasing in the trading sector. Customers visit web sites to look for product information to support their purchasing decisions. Various online services and interactivity are increasing. Kesko and its subsidiaries develop electronic customer communications and online store sites. Kesko holds a strong position in online sales of home and speciality goods with its NetAnttila and Kodin1.com concepts. In autumn 2008, we launched Konebox.fi selling home technology and in spring 2009, we will open the Budget Sport online store.

Year of reorganisations and investments
In 2008, Kauko-Telko, Tähti Optikko and K-Rahoitus were divested and real estate transactions were completed. The gain on the disposals totalled approximately €180 million. Thanks to the excellent profit performance and well-timed company and property disposals in recent years, Kesko's liquidity is strong and solvency is high. The cost-effectiveness of investments is assessed more carefully and they are postponed, if necessary. Our aim is to maintain the good financial position and benefit from lower construction costs when building new store sites.

Work and productivity
Kesko's strategy focuses on healthy growth, sales and services provided to consumer-customers, and responsible and cost-efficient business models.

Kesko carried out major organisational reforms during 2008. A decision was taken to divide Kesko Agro, joining it partly with Rautakesko and partly with Konekesko. A decision was also taken to intensify cooperation of Anttila, K-citymarket's home and speciality goods and the other home and speciality goods chains particularly in goods purchasing, management and customer relationship management. The activities aim at costefficiency and improvements in customer service. The divisions implemented several cooperation negotiations aimed at cutting the number of employees.

The trading sector wage solution made in 2007 will increase labour costs over several years. As growth expectations are weakening, various rationalisation activities will be necessary. We will be opening new stores and will also recruit new employees for them. Availability of labour force is improving at the moment, but competition for skilled personnel will, in the longer run, intensify.

In order to maintain our competitiveness we have to be able to increase work productivity. The work and productivity programme covering Kesko and its chain stores was launched at the end of 2007. The aim of the programme is to strengthen our competitiveness by increasing employees' work productivity. There are extensive projects underway concerning the automation of activities and processes. We continue the systematic enhancement of employee competencies and are looking for new, effective forms of training. Our units have also started projects focusing on improving wellbeing at work.

Steady development in the grocery trade
Kesko operates in many product lines and markets at different stages of development in several countries. In the weakening business environment, the stability of Kesko's grocery trade in particular contributes to levelling cyclical changes. In addition, Kesko's business model, in which retailer entrepreneurs are, to a large extent, responsible for retailing, is competitive even in hard market conditions. Retailers' creativity and responsibility have proved to be strong attributes in the changing operating environment. In 2008, the growth of the Group's net sales slowed down as a result of the more difficult business environment. Operating profit excluding non-recurring items decreased on the previous years' record results, but remained at a reasonable level.

A pioneer in corporate responsibility
Kesko has been a trading sector pioneer in corporate responsibility for years and been recognised internationally for this work. We have drawn up a new responsibility programme for the years 2008– 2012. The programme sets concrete targets for the areas of fighting climate change, responsible purchasing and employees' wellbeing. We have, among other things, signed a trading sector energy-efficiency agreement and committed to saving more than 65 GWh of energy by the end of 2016. The agreed savings target is significant, as it corresponds to the annual consumption of about 2,600 one-family houses at the annual level.

Attitude and competence in customer service
Kesko and the K-Group stores have around 50,000 employees in eight different countries. Most of them work in customer service duties, in which competence and the right attitude are decisive. We want to ensure the best customer satisfaction and our future competitiveness. In 2008, the Kesko Group recruited some 12,000 new employees and K-instituutti, the K-Group's own training centre, had some 25,000 participants in its training events.

I wish to extend my warmest thanks to all Kesko employees for their diligence and commitment to our objectives. I would also like to thank our shareholders, K-retailers and their employees, and all our partners for their trust and cooperation during 2008.


Matti Halmesmäki
President and CEO