Note 45
Risk management
Kesko's risk management
Risk management in the Group is guided by the risk management
policy approved by the Board of Directors. The divisions
assess the risks in connection with the strategy cycle and prioritise
them according to their criticality and management
level. Risk assessments are updated quarterly. Also Group units
have assessed the risks threatening the Group objectives and
the risk management. Risks and their management responses
have been discussed by the division parent companies' and the
Group's management. Separate risk analyses have been made
for major projects.
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. The
resulting risk report has been handled by Kesko Corporation's
Board of Directors' Audit Committee. Based of the divisions' and
Group units' risk assessments, Kesko's Corporate Management
Board has assessed and prioritised the most significant risks
faced by the Group. The resulting Group-level risk map has been
handled by the Board of Directors.
The main risks and uncertainties have been reported in the
interim financial reports.
Main risks and uncertainties and risk management responses
The international financial crisis and its impact on economic development, consumer confidence, and availability of finance and investment readiness have greatly added to uncertainties in Kesko's operating environment, especially in the building materials, car and machinery and home and speciality goods trade in Kesko's operating countries. Consumer demand has weakened especially in Latvia and Estonia. With regard to consumer demand in Russia, the price of crude oil is a key factor.
The effects of the recession on Kesko
The recession has caused consumers' confidence about their
own finances to fall. Consumers are increasingly careful about
buying especially more expensive products. This is also
impacted by difficulties in the availability of finance. As the
recession continues and consumers' buying power weakens,
price becomes an increasingly important factor when buying
decisions are made.
In addition, risks relating to the profitability and financing
possibilities of business customers and retailers increase as consumer
demand weakens. This affects negatively on Kesko's sales
development and adds to the default risks.
The keynote issues with respect securing the profitability level
and financial position are the adaptation of business operations
to the market situation by more efficient operations and capital
turnover and by adapting costs and investments. Kesko has
launched several initiatives to lower the cost level and improve
working capital management in addition to a Group-level work
and productivity programme. In a weakened market situation,
Kesko's strengths are its strong balance sheet and multi-sector
operations, which help mitigate the impact of the recession.
International growth
Kesko also aims to achieve growth through international expansion. Failures related to these projects may jeopardise growth. In the present economic situation all risks involved in investments are examined extremely carefully. On the other hand, given the prevailing market situation, acquisitions of businesses and store sites from abroad may be easier to complete and under better terms.
Price competitiveness
Price plays an important role in customers' decision-making, especially in recession. The use of the Internet has also made customers more price conscious. The price-quality ratio is a key competitive factor. If Kesko does not succeed in this competition, it will not achieve the sales targets. Enhancing price competitiveness calls for improvements in the efficiency of operations throughout the supply chain from the supplier to the store shelf. In order for an improved cost-efficiency of the chain of operations and the overall control, several programmes are being implemented for the purpose of better price competitiveness and customers' satisfaction with the stores' offer and service.
Store sites
Store sites are a strategic competitive factor. Considerable
amounts of capital or lease liabilities are tied up in store properties
for years. The coincidence of Kesko's ongoing extensive
investment programme with a cyclical depression can endanger
the planned return on the investments. On the other hand, it is
possible to make more advantageous store site investments
when the economic cycle is weak.
As a result of the recession or changes in local competitive situations,
the operations in a store site can run risk of becoming
unprofitable. Such risks are managed by long-term store network
planning, careful preparation of each store site investment
decision and the sale-leaseback system. In cases where Kesko
manages the construction, the aim is to design a store site that
can be modified for different uses. In the case of leased
premises, the flexibility requirement is taken into account in the
lease agreements.
The acquisition of good store sites can be slowed by scarcity of
plots, zoning and permit procedures and trends in plot prices.
In addition, each operating country has its special characteristics
with respect to, for example, legislation and the authorities.
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.
Suppliers can have increasing difficulties of delivery as a result
of the recession. There is also a growing possibility of bankruptcies.
In order that substitute products can be offered to customers,
it is increasingly important that the financial situation and
delivery accuracy of the major suppliers be monitored and substitute
suppliers be examined.
Continuity of operations and information security
The trading sector is characterised by increasingly complicated
and long supply chains and their dependency on information
systems, telecommunications and external service providers.
Disturbances in the supply chain can cause major losses in sales
and profit. These problems may be reflected to the customer in
that there are no products available in the store or the store is
closed. Kesko has prioritised the most critical information systems
with regard to business operations, and the continuity
management projects underway are aimed to secure undisturbed
critical operations and a sufficiently fast recovery after
a serious disturbance.
The importance of information in business operations is
increasing all the time. The requirements of stakeholders and
the legislation to safeguard the handling of information in case
of accidents and misuse have grown especially in connection
with personal data and card payments. Confidentiality of customer
and employee information, payment transactions and
business secrets is protected with appropriate practices and
information security solutions.
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, efficient product recall practice and manufacturer audits ensure the quality and safety and ethicality of the products sold.
Shrinkage
The retail trade involves a high risk of shrinkage. Shrinkage can
result, for example, from spoilage or breakage of goods, theft
or other malpractice, and unsuccessful purchasing. Shrinkage
management actions and the development of reporting were
the key issues in 2008. The Group continuously examines and
develops new methods and tools for more efficient shrinkage
management.
Recession entails a growing risk of financial malpractice. Preventive
measures have included communications, controls and
guidelines. Information technology is also being increasingly
used to prevent and reveal malpractices.
Personnel
Implementation of strategies requires competent and motivated personnel. There is a risk that the trading sector will not attract the most skilled people. The recession is likely to temporarily improve the availability of labour. Specialisation increases dependence on the competence of individuals. In updating strategies, the competencies required to implement the strategy are identified, and personnel plans are drawn up. The efficiency and flexibility of retail operations can be improved by investing on employees' multiple skills. Personnel surveys play a central role in the development of HR management. Kesko's employer image is redefined by systematic internal and external communications and stakeholder cooperation.
Legislation, agreements and ethical principles
Compliance with legislation, agreements and Kesko's ethical
principles is an important basic value. Non-compliance may
result in fines, compensation for damages and other financial
losses, and a loss of confidence or reputation. The Group has
specific Compliance programmes to avoid this. Self-assessments are made in matters concerning competition legislation. Contractual
risks are managed by harmonising agreements and the
processes of entering into agreements. An essential issue in the
chain agreements between Kesko and the retailers is finding
solutions for the high-quality delivery of customer promises
and commitment to the chain business. In international operations,
different interpretations and procedures concerning,
among other things, taxation and official regulations constitute
a further challenge. Kesko revised the guide “Our responsible
working principles”, the implementation of which was one of
the responsibility issues in 2008.
An essential issue in the chain agreements between Kesko
and the retailers is finding solutions for the high-quality delivery
of customer promises and commitment to the chain business.
The efficient steering of chain operations is, to some
extent, complicated by interpretations of competition
legislation.
The goal of Kesko's corporate communications is to produce
and publish reliable information at the right time. If some
information published by Kesko proves to be incorrect or a
release fails to meet regulations, this may result in investors
and other stakeholder groups losing confidence and in possible
sanctions.
Litigations
No major litigations are pending, and the Board of Directors is not aware of any other legal risks relating to the Group's operations that would have a material effect on the Group's performance.
Other risks
Damages, accidents and crimes are prevented with uniform
practices and cost-efficient safety precautions. Financial consequences
of damage are covered with insurance, in accordance
with the policy defined by the Kesko Board of Directors. The
Kesko Group uses international insurance programmes to cover,
among others, property, business interruption and liability
risks.
Further information about the risks, uncertainties and management
responses relating to Kesko's operating activities, and
about Kesko's risk management system and principles is available
on the company's website at www.kesko.fi.