Kesko's year 2007

Year 2007
Economic value added formula:
Operating profit excluding non-recurring items
less operational taxes
less return requirement for average restricted capital
+/- other adjustment items
Divisions The Group
Financial
statements
Further information
The objectives for the Group's solvency and liquidity are set with the purpose
of securing the Group's liquidity in all market situations, enabling
the implementation of investment programmes based on the Group's
strategy and maintaining the shareholder value. Objectives have been set
to equity ratio (target 40–45%) and interest-bearing net debt/operating
margin (target < 3). The calculation formulas for these indicators are presented
in the financial statements, p. 130. The Group's interest-bearing
debt include covenants, whose terms and conditions have been taken
into account in the target levels. The Group does not have a credit rating
given by any external credit rating institution.
The above target levels set for consolidated financial indicators are
revised annually as part of the Group's strategy process and changes are
submitted for approval to the Group's Board of Directors.
Target level 2007 2006
Return on equity 14% 12%
Return on invested capital 16% 12%
Equity ratio 40–45% 40–45%
Interest-bearing net debt/operating
margin < 3 < 3
Note 45
Risk management
Kesko's risk management policy
The risk management policy approved by the Board of Directors guides
risk management in the Kesko Group. The divisions have assessed the
risks in connection with the strategy cycle and have updated their risk
assessments quarterly. Separate risk analyses have been made for major
projects. Also the Group units have analysed the risks threatening the
objectives and their management.
On the basis of the Divisions' and Group units' risk analyses, the Corporate
Risk Management Unit has prepared summaries of major risks
and their management on a quarterly basis for Kesko Corporation's
Board of Directors' Audit Committee. Kesko's Corporate Management
Board has analysed and prioritised the major risks of the Group.
Risks and their management
The Kesko Group's risk analyses have, for example, addressed the following
risks and their management in 2007.
Delivering the customer promise
The price-quality ratio is a key competitive factor. If Kesko does not succeed
in this competition, it will not achieve the sales targets. The general
cost development can also endanger the implementation of objectives.
Enhancing price competitiveness calls for improvements in the efficiency
of operations throughout the supply chain from the supplier to
the store shelf.
125
Product safety and quality of the supply chain
Kesko's goal is to provide safe products for its customers. A failure in the
quality assurance of the supply chain or in product control may result in
financial losses, the loss of customer confidence or, in the worst case, a
health hazard. Product research, the trading sector's self-control and
manufacturer audits ensure the quality and safety of the products sold.
Store sites
Store sites are a strategic competitive factor. Considerable amounts of
capital are tied up in store properties for decades. Local competitive situations
can change fast and there is a risk that operations at the store site
will become unprofitable. The risk is managed by long-term planning of
the store network, by careful preparation of each store site investment
decision and by applying a sale and lease back approach.
The acquisition of new store sites can be delayed not only by shortage
of sites, town planning and permit practices, but also by the price trends
of sites and construction. Different countries also have their specific features.
Online sales are growing, which affects the store network. Success
in e-commerce requires a completely new kind of business expertise,
logistics and information security solutions.
Suppliers and distribution channels
In business divisions that are strongly dependent on individual principals
and suppliers, changes in a principal's or supplier's strategy concerning
the product selection, pricing and distribution channel solutions
can mean a reduction in competitiveness or sales or loss of business.
Good market shares, growing sales and development of operations create
a basis for long-term cooperation.
Shrinkage
Shrinkage is a significant problem in the retail trade. Shrinkage can
result from spoilage or breakage of goods, theft or other malpractice, and
unsuccessful purchasing, for example. The most important loss prevention
activities include uniform measuring and monitoring of shrinkage,
and the consequent development and introduction of new management
methods.
Internationalisation
Internationalisation aims at growth either through business acquisitions
or expanding the existing store network. Success in international
growth requires careful planning of acquisitions and expansion projects,
resources and risk management. Challenges include different cultures,
local business practices, authorities' actions and fast-changing operating
environments. Finnish retail trade operating processes and control practices
cannot always be introduced as such outside Finland. The efficient
steering of operations and the achievement of synergy benefits require
implementation of common practices and information systems across
country and organisational boundaries.
Personnel
Competition for skilled employees has intensified in the labour market.
Recruiting competent employees and retaining their commitment is
challenging particularly in the Baltic countries and Russia. Implementation
of strategies requires competent and motivated personnel. There is a
risk that the trading sector will not attract the most skilled people. Specialisation
increases dependence on the competence of individuals. In
updating strategies, the competencies required to implement the strat-