Kesko Capital Markets Day: six strategies for growth

Date : 07 December 2020

Harriet Cohen

Senior Retail Analyst

Finland's Kesko has grown its market share by 5% since 2014 and has doubled its operating margin during the same period. In this article, we share insight and videos from its recent virtual Capital Markets Day on what’s driving its outperformance and its strategic priorities.

Six key market trends

President and CEO Mikko Helander began the Capital Markets Day event by highlighting that Kesko’s strategy has performed well a fast-changing environment, characterised by the following:

Source: Kesko

Operating margin doubled to 5.0% since 2014 as grocery business over-indexes

Ari Akseli, President of the Grocery Trade Division delivered the next part of the event. He described how Kesko has steadily improved both operating profit and margin since 2014. Its operating margin in Q3 2020 was 5.0%, versus 2.6% in 2014. The retailer emphasised that less than half of its profit is coming from the pandemic, signalling that strategy works well even under exceptional circumstances.

For the rolling 12 month period to September 2020, Kesko’s grocery business achieved an operating margin of 6.2%. At a Company-wide level, Kesko has set new financial targets, including delivering an operating margin of 5.5%.

Market share: +5.7% since 2014

Kesko has grown its grocery business by an additional €1.4bn in net sales since 2014. Its market share has risen by 5.7% to 37.6% during that period (according to its own estimates).

Outperforming the market, hypermarkets powering performance...

Between January and October 2020, Kesko’s grocery sales has increased by 9.6%, versus the market at 8.8%. All formats enjoyed growth, with the strongest performance in hypermarkets, where sales increased by 12.7%.

...While outperformance strongest in neighbourhood stores

Kesko’s smaller neighbourhood stores saw the strongest growth versus the market, with sales increasing by 7.4%, versus the market at 5.6%.

#1 profitability driver: increased sales per square metre and clear organic growth

The long term driver of Kesko’s increased profitability is increased sales per square metre. Kesko’s retail sales have by 12.2% between 2016 and 2019, while sales per square metre increased by 10.2% during the same period. This is despite Kesko operating 14% fewer stores, demonstrating clear organic growth.

COVID-19 driving more shoppers online, Kesko responded by doubling participation

Kesko's food retail sales have grown significantly as people have stayed at home, driving increased demand for online grocery. Over 450 Kesko stores now offer an online grocery service, 200 more than last year. The retailer has also helped older people shop in grocery stores and has stocked products from restaurants in-store too.

Six key drivers of Kesko’s grocery growth strategy

These are:

1. ‘Most customer-oriented food stores with store specific business ideas’
2. ‘Development and renewal of the store network’
3. ‘Seamless omnichannel customer experience’
4. ‘Maintaining price competitiveness and price image’
5. ‘Developing entrepreneurship as a competitive advantage’
6. 'Strong growth in the foodservice business'

1. Customer satisfaction is closely linked to sales performance

Kesko has improved its Net Promoter Score (NPS) to 65.2 in the first ten months of 2020, versus 54.9 in 2017.

The slide below shows how Kesko’s stores with a high NPS score are outperforming the market:

Source: Kesko

NPS is also highest in the retailer’s online business, with scores of over 80.

Watch this video from Kesko’s Chief Digital Officer, Anni Ronkainen, to hear how Kesko’s digital services are driving growth and improving the customer experience:

Source: Kesko

Store-specific business ideas based on data to drive growth

Kesko also attributed its success to store-specific business ideas based on data to respond to the needs of local areas. This includes the building of store specific ranges and price optimisation.

‘By choosing a product recommended by Kesko’s handheld selection tool generates sales 4x higher than the sales from other products that haven’t been recommended.’

Watch the video below to hear from Store Owner Petri Putila of K-Citymarket Paavola. Sales have increased by 40% under his management.

Source: Kesko

2. 2021 investments: €120m in 20 new supermarkets and neighbourhood stores, 100 refurbishments

Kesko has invested nearly €1bn in stores in the last five years, with the biggest investment in integrating the Suomen Lähikauppa business.

In 2021, the retailer plans to invest €120m in stores, including 20 new openings. New stores will be mainly supermarkets and neighbourhood stores in growth areas and cities. A further 100 stores will also be refurbished.

3. Online grocery sales growth of 400% this year, focus is on profitability

Kesko’s online grocery sales to October this year have grown by 400%, while the it has an online grocery market share of 55% according to its own estimates. The online channel and its profitability are key priorities.

4. Maintaining price competitiveness: private label share: 20% with potential to grow

Private label now accounts for over 20% of sales, with Kesko using the range to drive differentiation and positive price perceptions. It sells over 3,000 different private label products, with a third made in Finland. Private label share of sales is lower than other European markets, demonstrating the potential of this area.

Premium private label sales: +20%, entry level range is also a priority

Premium private label sales have increased by 20% this year, while Kesko is looking to enhance its entry level private label range, K-Menu further too.

5. Developing entrepreneurship: exclusive and world food-inspired meal solutions

A further growth driver is the stocking of exclusive products. This has introduced new customers, driven differentiation and grown average basket sizes. It also delivers improved margins and supports store-specific business ideas.

One such exclusive range is the ‘Classic Pizza Bake Home’ range from the Finnish pizza restaurant chain of the same name. The price level of this exclusive range is €8, with the quality being high and repeat purchase frequent. Standard frozen pizzas may be around €3-4 and so the exclusive range has the potential to double sales.

Source: Kesko

In recent years, new products from restaurant brands have been introduced successfully, including ‘Naughty Brgr’ and ‘Jim Lim by Farang’.

‘The value of shopping baskets with Jim Lim by Farang products is €58, 34% higher than the value of baskets with similar products.’

Watch this video to see how Kesko is partnering with these companies to ‘drive growth through differentiation’:

Source: Kesko

New successful partnership with Finnair

Kesko has also collaborated with national airline, Finnair to introduce business class-inspired ready meals amidst the Coronavirus (COVID-19) pandemic. The range, ‘Taste of Finnair’, ‘aims to feed travellers’ nostalgia while also securing the jobs of its catering staff, who have been called back from furlough to launch the experience’.

The menu is a fusion of both Finnish and Asian cuisine. It changes fortnightly, offering two courses and an additional starter at weekends. Dishes have included ‘include a starter of roasted carrot and blue cheese mousse with hazelnuts for €5.90, followed by smoked char and chanterelle risotto or teriyaki beef with spring onion and rice – both priced at €12.90’.

Source: Finnair

Initially the partnership piloted at K-Citymarket Tammisto, in Vantaa, near Helsinki airport. Finnair’s development kitchen is also located nearby. The range has since been expaned to other locations including Helsinki and Espoo.

During the Capital Markets event, Kesko said that the partnership has been a huge success and has made headlines internationally in 56 countries.

6. Foodservice to return to growth after the COVID-19 pandemic

Although this year has been challenging for the foodservice market, Kesko believes growth will return after the COVID-19 pandemic.

Watch the video below to hear from Mika Halmesmäki, Vice President of Kespro to hear how the foodservice division is 'Investing and looking beyond':

Source: Kesko

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