AGM 2008: Speech of Heikki Takamäki
Dear shareholders, ladies and gentlemen
Last year was a good one for the trading sector. Private consumption in Finland increased by nearly 4 percent, although the rate of growth slowed down towards the end of the year. We have already had more than ten years of good growth. Despite some claims made in public, it seems that this year will also be a good one in terms of growth. Although Finnish economic growth is estimated to slow down slightly, consumers' confidence in their financial situation is high.
According to the forecasts by the Federation of Finnish Commerce, this year's growth in the Finnish commerce may almost equal the level of last year. Purchasing power is expected to continue to increase and retail trade to grow by 4-5 percent. The best growth is expected for car trade, grocery trade and furniture trade.
2007 was a record year for Kesko. We are particularly pleased with the good results of our two largest divisions. We are glad that the sales in the food trade have taken an upward turn and the international success has continued in the building and home improvement trade. Retailer entrepreneurship has retained its appeal; last year as many as 118 new retailers started in the K-Group.
Kesko's success in the international market continued. Growth in consumption remained strong particularly in Lithuania and Russia, and the outlook for the current year is also promising. It is forecast that this year private consumption will grow in Russia by as many as 10 percent and investments by over 20 percent. It is estimated that economic growth and consumption will slow down in the Baltic countries, particularly in Estonia and Latvia. Still, private consumption is estimated to increase by around 6.0% in Estonia, by 7.0% in Latvia and by 14.0% inLithuania. This is in line with Kesko's growth targets, because our objective is to expand our main divisions to the fast-growth markets.
In a moment, President and CEO Matti Halmesmäki will give you more details on the operations and key figures of the Kesko Group during the past year.
Ladies and gentlemen,
It has given us a particular pleasure that the K-food stores have been successful and finally managed to increase their market share last year. The most important factor behind this success has been the good implementation of chain operations.
When we started the strong reform of our chain operations back in 2001, our objective was their strong development in order to ensure the K-Group's competitiveness, particularly in food retailing. The results achieved in recent years prove that we have succeeded in this. Profit performances of both Kesko and K-retailers and the stores' market shares have shown a positive development.
According to the survey we made, the objectives set for the implementation of chain operations have mainly been achieved or their implementation has progressed considerably. In some areas, implementation has been slow and there still remains room for improvement in the management of the quality of operations. Quality differences between the best and the worst quarter of the stores remain too big. Our obvious challenge is to raise the quality level and competence of the worst stores closer to the best ones.
Ensuring the availability of competent staff and continuous development of employees' skills are keys to ensuring the quality. We keep on investing in building our employer image and improving the competencies of our current employees. I doubt that pay rises in the trading sector don't present a problem for us after all. The most essential thing is increasing profitability and using the expertise of our skilled staff.
Dear participants,
Recently the concern for efficient competition in grocery retailing has been expressed in many discussions. The Finnish Competition Authority is currently investigating the competitive situation in the grocery trade and whether the groups have been misusing their power. Business acquisitions have changed the market into a more centralised direction over recent years and several operators have left the market. Authorities have also accepted these acquisitions.
Despite this centralisation, competition in grocery retailing is really hard. This is revealed by the major changes in the market shares last year and in the long run. In 2007, the K-Group's grocery retailing grew by 2 percentage points more than the market growth. During the past 10 years, the market share of the K-Group has dropped by 4 percentage points, whereas the market share of the largest competitor has grown by 15 percentage points. Local changes may have been even bigger.
The K-Group's retailer entrepreneur model tends to increase competition. K-food stores are run by 920 and the stores in other divisions by 370 independent K-retailer entrepreneurs. This business model combines retailer entrepreneurs' knowledge of the local circumstances and efficient chain management to the benefit of consumers. Our retailer model promotes diversified competition and local approach.
In the retailer business, chain management aims at efficiency and lower prices for consumers. However, competition legislation sets strict limits to chain management in retailer business. Instead, single-owned chains can make all decisions on a centralised basis and, for example, determine that the same fixed prices are applied in all their stores without any restrictions by competition legislation.
From the perspective of competition, it would be important that all operators in the trading sector had the level playing field. Rules should be the same for all irrespective of the structure and the form of ownership. Retailer operators should have an equal competitive basis with single-owned chains. We don't want any special treatment but we have to be able to use the same tools to increase the efficiency of operations and to fulfil customer promises as those used in single ownership models.
Last year, Professor Paul Dobson, a well-known expert in European competition, published a research on the competitiveness of retailer business in the EU. According to the research, the retailer business model promotes small entrepreneurship, local approach, the diversity of competition, and innovation. According to Professor Dobson, the current competition legislation and its interpretation need to be amended quickly. Before long, the current situation will impair the competitiveness of the retailer business model. The number of independent retailer chains has already decreased in Europe, while large single-owned chains have penetrated the market.
The EU has also become concerned about the power of supermarket chains operating across national boundaries. The EU Parliament stated that retailing is more than ever controlled by a few supermarket chains throughout the European Union.
However, there are no such big European-wide store chains in Finland that the EU Parliament refers to in its statement. Finnish trading groups are small compared with many international giant operators of, say, the Central and Southern Europe. Finland is a small country in terms of population, and no high volumes can be sold in the Finnish market.
A strict difference must be made in discussions between global operators and companies operating in small markets. No company can be punished for the fact that it operates in a small market, but everyone must be allowed to grow and develop its operations. It makes quite a difference if a company holds a 30% market share in Finland or in Germany, for example.
Also, Finnish trading groups are not big in comparison with large, globally operating suppliers. Finnish retail chains have not much market power in relation with such global players.
Authorities or any other parties should not restrict the conditions of the K-retailer business model too much. It is precisely the K-retailer entrepreneurship that enhances competition and local approach.
In this connection I particularly want to emphasise that I disagree with some influential people in the Finnish politics on the trading sector's power to decide on Finnish consumers' eating habits. Our some 1,000 food retailers take care that local products are included in their stores' selections and the tens of thousands of products offered by the chains offer plenty of choice. Because of the structure of K-Group, small producers also have really good opportunities to have their products sold by K-stores unlike by a centrally-run chain.
Ladies and gentlemen,
On the behalf of Kesko's entire Board of Directors, I want to thank all our shareholders, the management and staff of the Kesko Group, K-retailers and all our partners for successful cooperation.
President and CEO Matti Halmesmäki, please convey respectful thanks of the Board of Directors to the whole staff of the Kesko Group both in Finland and other countries.
The Annual General Meeting is also intended to serve as a forum for active discussion between shareholders and the Board of Directors. The General Meeting is a right and natural place for such an exchange of ideas.
Once again, I wish you all warmly welcome to the Annual General Meeting of Kesko Corporation!
